Letter from the Economic Secretary to the Treasury to the Chair of the Committee
I am writing in response to the Committee’s report of 24 June 2021 on the Financial Conduct Authority’s (FCA) regulation of London Capital & Finance Plc (LCF). I would like to thank the Committee for the report and note that the Government has fully considered the points and recommendations made throughout.
I would like to take this opportunity to restate, as I did during my evidence session with the Committee, my sympathy for LCF bondholders, and my gratitude to Dame Elizabeth Gloster for her thorough and comprehensive report. The Government welcomes the FCA’s apology to bondholders and its commitment to implement all of Dame Elizabeth’s recommendations. I would also like to reiterate the Government’s commitment to act on Dame Elizabeth’s recommendations, to ensure our regulatory system maintains the trust of the consumers it is there to protect.
I attach an annex which sets out the Government’s response to each of the Committee’s recommendations for the Government. The Committee’s text is in bold, and the Government’s response is in plain text. Paragraph numbers refer to those in the Committee’s report.
Economic Secretary to the Treasury
19 August 2021
ANNEX: The Government’s response to the Committee’s recommendations
97. We therefore reiterate a recommendation made by a previous Treasury Committee, that the FCA be given the formal power and remit to be able to recommend formally to the Treasury changes to the perimeter of regulation, where that would enhance its ability to meet its objectives, in particular to prevent consumer harm. The FCA should set out any costs, both to firms and consumers. It would then be for the Treasury to consider such a recommendation promptly. All such recommendations and Treasury responses should be publicly disclosed.
The Government considers that the existing arrangements for examining and, where relevant, amending the regulatory perimeter are effective. These arrangements have led to a number of important changes to the scope of FCA regulation in recent years, which have served to improve consumer protection in the financial services sector.
In response to the recommendation by the previous Treasury Committee, we have established an annual meeting between the FCA Chief Executive and the Economic Secretary to the Treasury to discuss the contents of the FCA’s annual Perimeter Report. A summary of that meeting is published to promote transparency. The Treasury also engages with the regulators on perimeter issues outside of this annual process where needed.
The Government also notes the FCA Chief Executive’s oral evidence to the Committee in which he stated that he is “not sure that a formal power, as such, would add very much”.
Ultimately, decisions on which activities should sit within the perimeter of regulation should be for ministers, with the approval of Parliament.
For the reasons set out above, the Government does not consider it necessary to provide the FCA with a formal power to recommend changes to the regulatory perimeter.
105. Any changes to the perimeter must be matched with appropriate changes in the FCA’s resources, and the FCA should republish its priorities. The Treasury should publish a policy statement on how it will analyse changes to the FCA’s perimeter and what factors it will take into account.
There is often a fine balance between the potential costs and benefits of bringing an activity within the perimeter of regulation. When considering changes to the perimeter, the Government carefully analyses a range of factors, with its decisions guided by the specifics of each case.
In general, the factors considered may include the scale and nature of the consumer detriment that regulation is seeking to address, the cost of regulation for the firms conducting the activity in question (including how these costs may be passed onto the consumer), the extent to which extending the perimeter would be a proportionate course of action, the alternative approaches that could be taken to address the harm or potential harm that is occurring (e.g. tools such as codes of conduct), and the nature of the protections that currently exist for consumers, amongst other things.
The Government consults on any proposed changes to the perimeter, including with the FCA, and any proposed changes are then subject to parliamentary approval. Those consultations seek stakeholders’ views on the case for extending the perimeter, to inform the Government’s decision making.
125. There may be scope for the Government to consider whether the FCA should be given more powers to enable it to investigate fraud and financial crime.
The Government takes fraud very seriously. The Treasury continues to work closely across Government, and with industry, regulators and law enforcement, to close down the vulnerabilities that fraudsters exploit and ensure members of the public have the information they need to spot a scam and stand up to fraudsters. As part of the Government’s ongoing work to tackle fraud the Home Office is developing an ambitious Fraud Action Plan, which will be published after the 2021 Spending Review. The plan will consider any potential legislative or regulatory change required to ensure we can effectively tackle fraudulent activity in the round.
139. The Treasury should proceed with its analysis as soon as the consultation on the regulation of non-transferable debt securities closes, and it should aim to publish the outcome by the end of September 2021. In publishing its response, it should also publish a way forward that can be implemented rapidly.
The Treasury’s consultation on the regulation of non-transferable debt securities (NTDS) closed on 21 July 2021. As the Committee’s report alludes to, this consultation is the culmination of a review into the regulation of mini-bonds that the Government announced in May 2019 and delivers on one of the recommendations made in Dame Elizabeth Gloster’s report. The Treasury is aiming to publish its response to the consultation and bring forward plans for legislation in the autumn.
159. We note that there are other ongoing discussions and channels by which LCF bondholders can seek compensation, such as through the FCA complaints scheme and through LCF administrators. The Treasury and the FCA should ensure that these discussions and channels are coordinated to the best extent possible, in order to prevent any detriment to customers.
The Treasury is progressing work on the LCF compensation scheme rules, in close collaboration with the Financial Services Compensation Scheme (FSCS) who will administer the scheme. The FSCS is committed to ensuring that payments are made to all eligible LCF bondholders within 6 months of securing Royal Assent of the Bill currently before Parliament. The Treasury is ensuring the Government scheme is coordinated with the administration process and the FCA complaints scheme, to the best extent possible.
159. The Government should ensure that it is satisfied that the FCA’s complaint scheme is working appropriately.
The design and operation of the complaints scheme is a matter for the independent regulators, who are required by law to maintain that scheme. The Government acknowledges the challenges the FCA has faced in its handling of complaints in recent times, which the FCA itself recognises have seen its complaints handling performance fall short of expectations for some complainants.
The Government notes the FCA’s improvement plans in this area, and the substantial investment it has made to deliver those plans. Further details are provided in the FCA’s response to the Complaints Commissioner’s Annual Report and Accounts 2020/21. The Government will continue to monitor the delivery of those improvements.
180. The Treasury should—as a matter of priority—re-evaluate the Financial Promotion Order exemptions to determine their appropriateness and consider what changes need to be made to protect consumers.
The Government continues to keep the legislative framework underpinning the regulation of financial promotions under review. This includes arrangements for financial promotions communicated by authorised firms, as well as the effectiveness of the exemptions that form part of the regime.
As part of this the Treasury has already commenced work with the FCA to review exemptions to the financial promotions regime for high net worth individuals, self-certified and certified sophisticated investors.
The Committee’s report also noted the Treasury’s ongoing work to create a regulatory gateway for the approval of financial promotions. The Government published the response to its consultation on 22 June 2021. The response sets out the Government’s intention to bring forward legislation to establish the gateway through the imposition of requirements on firms when parliamentary time allows. This change, once in place, is designed to strengthen the regime by ensuring that the firms able to approve financial promotions are limited to those with the relevant expertise to do so, and that the FCA will be able to better identify when a financial promotion has breached the restriction and take action accordingly.
192. We recommend that the Government should include measures to address fraud via online advertising in the Online Safety Bill, in the interests of preventing further harm to customers being offered fraudulent financial products.
The inclusion of fraud in scope of the Online Safety Bill will have a real impact on protecting people from the devastating impact of scams posted on social media and dating sites. Furthermore, the Government is considering tougher regulation of online advertising, including regulations designed to tackle fraud online. DCMS has set out that it will consult by the end of this year on proposals related to its Online Advertising Programme.
As part of our departure from the EU the UK Government removed an exemption to the financial promotions regime available to online platforms for incoming electronic communications from the EU. As a result of that change, the FCA is looking at the operations of the major online platforms to determine whether their communication of financial promotions is subject to the financial promotion restriction and, if so, whether they are compliant. Where they are not, the FCA will take action to ensure consumers are protected. The Treasury will support the FCA in these conversations going forward, as part of the Government’s ongoing efforts to protect consumers from fraud online.
The Government is continuing to explore additional legislative and non-legislative solutions to tackle fraud in the round. This work is led across Government by the Home Office, in collaboration with industry, regulators and consumer groups. The Home Office is developing an ambitious Fraud Action Plan, which will be published after the 2021 Spending Review.