Motion made, and Question proposed, That this House do now adjourn.—[Mr. Ainger.]

I am pleased to have the opportunity to open this debate, and I am grateful to the Financial Secretary for joining me in a debate about a financial fraud that discloses some glaring inadequacies in financial regulation and that leaves investors and anyone who writes a cheque worryingly exposed. I have attended a number of Adjournment debates recently in which the Minister's winding-up speech has had a slightly depressing ring to it. I do not accuse the Financial Secretary in that regard, but I am looking for a serious reply on a very serious issue that affects many people who have had money stolen and raises wide public policy implications.

The fraud came to light about two years ago, when an independent financial adviser, Michael Hart, delayed returning funds due to one of his investors on a maturing investment, so much so that the investor, a constituent of mine, raised the matter with Hart's employers, Lucas Fettes, who called in the police. I have five constituents who have been victims of this theft and have had money stolen from them in amounts ranging from £10,000 to £90,000. This was part of a widespread fraud involving a total of 22 investors over 12 years, mostly in East Anglia. My hon. Friends the Members for Cities of London and Westminster (Mr. Field) and for Mid-Norfolk (Mr. Simpson) also have constituents who were affected and they send their apologies that they cannot be here this evening.

In total, Michael Hart stole some £1.7 million, most of which he has spent. Last November, he pleaded guilty to 14 specimen charges and was convicted of theft and other offences, and he is now serving a six-year prison sentence. The fraud was a simple one that has astonished all who have heard about it. In recent years, the fraud mainly involved Abbey National, because as it turned out, it was the most lax and the easiest to use to perpetrate the fraud. There are also some cases, including those involving my constituents, which involved the Norwich and Peterborough building society, and others involving the Leeds and Holbeck building society.

Michael Hart, working for a respected firm of financial advisers, Lucas Fettes, persuaded investors to take out Abbey National and other investment products such as individual savings accounts. He told them to write out crossed cheques payable only to the financial institution, for example a cheque made payable to "Abbey National" or to "Norwich and Peterborough Building Society", precisely so that their money was safe; at least, that is what he told them. He then took the cheques to an Abbey branch in Norwich or to the Norwich and Peterborough building society and so on, where he paid them into his own personal savings account in the name of Michael Hart. Even though some of the cheques were for up to £50,000, Abbey and other financial institutions did not ask the cheque signatories whether the bank had their permission to divert the money into Hart's account; they just paid it directly to him. This happened 25 times in the last two years of the fraud.

Three of the big unanswered questions to this day are as follows. Why would anyone who had wanted to pay money to Michael Hart make his or her cheque payable to Abbey National, to the Norwich and Peterborough building society or to the Leeds and Holbeck? Why would the bank and building societies involved assume that the victims did want to pay money to Hart? How did Abbey and the others know that the payment was not intended to reduce the cheque writer's mortgage, for example?

Certainly Abbey and the building societies have no answer to those questions, but they have refused to compensate victims, in the case of Abbey saying to some that since it paid the money into a fraudster's account, the victims were not even technically customers of the bank.

Hart's Abbey pass book for the two years before he was caught shows that in that time alone he paid cheques worth some £1,030,000 into that account. Hart laundered the money so fast that in all that time it earned just £60 in interest. Despite regularly inspecting Hart's pass book and auditing the account five times, Abbey saw nothing suspicious. To this day, neither my constituents nor any other victims have had their money back.

For its part, Abbey said it was satisfied with its security arrangements and that it had merely followed industry practice on processing cheques. However, it had not followed industry practice—section 90 of the Bills of Exchange Act 1882 states that cheques crossed and marked "account payee" cannot be paid into an account other than that of the named payee. At the very least, Abbey should have held the money in its own account until it found out the payee's intentions.

The legislation's intentions are highlighted in the Association for Payment Clearing Services' "Definitive Guide to Cheques and the UK Clearing System", which states:

"if a cheque is crossed a/c payee only, it can only be paid into the account of the named payee. The crossing cannot be deleted, nor can the cheque be endorsed over to a third party."

That is common knowledge or, at least, people think it common knowledge. The irony is that APACS itself is made up entirely of the clearing banks, including Abbey National. When the Hart case came to trial, the Crown court judge, the Crown Prosecution Service and the police were extremely critical of Abbey National and its regulator, the Financial Services Authority. Indeed, the police and the CPS have written to the FSA about the abuses that they saw.

Few people believe that their cheques are vulnerable in the way that that case has exposed or that banks and building societies can avoid their obligations. However, despite the intervention of the police, the Crown Prosecution Service, three Members of Parliament, the financial ombudsman service and the media, none of the victims has received a penny in compensation.

Direct appeals to Abbey and to the other institutions have fallen on deaf ears, and the financial ombudsman service has been ruminating on the case for more than six months, held back from issuing a ruling by delaying tactics from the financial institutions. Money that could have been spent compensating victims has been invested in a QC to help defend the institutions' position. Even direct appeals by Abbey victims to Lord Burns, the chairman, and by some of the other victims to the chief executives of the building societies involved have amounted to nothing. During Abbey's sale to the Spanish business Banco Santander last year, victims urged the new owners to set compensation aside during the due diligence phase, but nothing has been heard since.

As a result, those who lost money set up the Abbey National Victims Group to urge the FSA to intercede in order to alert the public to the abuses of the crossed cheque system, to introduce better safeguards to protect the public and to right the wrongs that the victims have suffered. Those points apply equally to the victims of the scam whose cheques were made payable to the Norwich and Peterborough building society and to the Leeds and Holbeck building society, and the group includes others in addition to Abbey National victims.

The FSA was established to maintain confidence in and to promote understanding of the financial system, to secure the appropriate degree of protection for consumers and to reduce the extent to which it is possible for a business carried on by a regulated person to be used for a purpose connected with financial crime. Since the fraud came to light more than a year ago—it is five months since Hart was convicted—the FSA has done nothing; the public remain unaware of the dangers that they face; the banking regulations have not been changed; the victims have not been compensated; and the FSA has issued no directions.

However, this is the same FSA which, less than six months before the Hart fraud came to light, fined the same Abbey National £2.3 million for money-laundering offences. In a press release on 10 December 2003, which is still on the FSA website, the FSA fined Abbey National companies £2,320,000. The FSA director of enforcement, Andrew Procter, stated:

"The failure by Abbey National to monitor compliance with FSA Money Laundering Rules demonstrated a marked lack of regard for its regulatory obligations. Abbey National failed to ensure that suspicious activity reports were promptly considered and reported to the National Criminal Intelligence Service and to identify customers adequately. Both these controls are fundamental to the UK's Anti-Money Laundering regime's effectiveness. Their failings also reflected the fact that the overall control environment, particularly compliance monitoring, has been weak across the group over a prolonged period."

That is a fairly damning indictment.

In fairness, the FSA expressed confidence that Abbey would fall into line, but it is quite clear that the bank did not do so, because the Hart money-laundering offences were committed during the FSA's investigation and for months afterwards. Hart was not stopped by the FSA's or Abbey's new checks and controls, but by one of my constituents who had suspicions about a maturing investment that he believed he had purchased through one of the other institutions—the Norwich and Peterborough—and raised his concerns with Michael Hart's employer.

The FSA was partly responsible for that fraud being able to continue for so long. Its duties include authorising people to be fit and proper financial advisers. It is the only financial authority with access to criminal records to confirm an adviser's suitability and failed to spot that Hart had a criminal record for theft, or to pass that on to his employers. Yes, that is right: Michael Hart already had a criminal conviction. About 20 years ago, he was convicted of stealing money from his employer, an insurance broker, and was given a two-year suspended sentence. After that, he continued to work in the financial services industry, with jobs at Norwich Union, Clerical Medical, CE Heath & Co., an insurance broker, and Lucas Fettes, an independent financial adviser.

Last December, disgusted by eight months of inactivity on the FSA's part, the victims group lodged a formal complaint with its chief executive John Tiner. Nearly four months on, the FSA has not even begun its investigation. Its excuse is that it is unable to investigate a complaint while its own inquiries are continuing. A whole year to investigate the background to a simple fraud, to alert consumers and to change the regulations is excessive. The authority has still reached no conclusions.

Unfortunately, the story gets worse still. When the FSA broke the news of the delayed investigation into the complaint, it revealed that it would not be investigating failings of the crossed cheque system. Its reasoning shocked the victims and still shocks me today. Despite having asked the banking industry to set up a committee to review problems with the cheque clearing system, the FSA said:

"Cheque payments are not in themselves a regulated activity in the UK. Therefore this aspect of the matter is not a direct responsibility of the FSA. The standards for cheque payment activities are in the main set by APACS."

APACS, as I have already outlined, is made up exclusively of the clearing banks themselves, so we have a case of the banks policing themselves and failing the consumer.

If the FSA has no responsibilities, what about the Treasury? As the Financial Secretary knows, he wrote to me on 25 January, stating that

"the Government is aware of current concerns relating to cheque fraud".

However, he went on to say:

"Under the Financial Services and Markets Act 2000 the FSA is operationally independent of the Government but subject to a number of accountability mechanisms . . . Accordingly, if your constituents are unhappy about the way the FSA has carried out its functions in relation to the matter, they might wish to use the FSA's complaints scheme."

We find ourselves in a situation where the victims, the FSA and the Treasury all recognise that there is a crisis in the cheque clearing system and that it is failing consumers, but no arm of the Government has the ownership or authority to resolve the problem; instead, it is left in the hands of the banks that created it.

That is a serious failing at the heart of Government and, because of it, consumers are blissfully unaware that the crossed cheque system can leave their money exposed, that no arm of Government is able to warn or protect them and that they, like my constituents and those of other Members, can go unrecompensed. Throughout the UK, people writing crossed cheques across the UK remain at risk because their banks can still pay the money into someone else's account and refuse to compensate them. The FSA has refused point-blank to investigate its failure to regulate the cheque handling system, referring victims to a body made up exclusively of the banks themselves, including of course Abbey. The Government and the FSA have failed to warn the public or to change the system. The Government, the FSA and the institutions involved—Abbey, the Norwich and Peterborough, and the Leeds and Holbeck—have stonewalled both victims and MPs, and refused to compensate victims or be part of a compensation package involving Lucas Fettes and Hart's sequestered assets. The CPS complaints to the FSA about Abbey's behaviour seem to be ignored. The financial institutions are using delaying tactics with the financial services ombudsman, and the FSA is refusing to investigate complaints into its own behaviour until it eventually gets round to taking a decision on Abbey.

Everyone seems to think that it is someone else's responsibility. The Department of Trade and Industry says it is the Treasury's. I have a letter from the office of the Secretary of State for Trade and Industry saying that it is a matter for the Treasury and referring my letter to the Chancellor's office. The Treasury says that it is really a matter for the FSA. Meanwhile, the FSA says that it is really down to APACS, which is responsible for cheque clearing. The FSA says that it has "initiated discussions" with the main trade associations on the banking side

"in the context of seeing if banks might be able to take more measures to guard against fraud".

That is simply inadequate.

The FSA has a statutory duty to safeguard consumers and to act in their best interests. It has an obligation to ensure consumers are compensated where financial institutions have acted negligently. It has the lead role in policing the banking and investment sectors and in setting standards, rules and codes to protect consumers, to eliminate fraud and to prevent money laundering. In the case of Michael Hart, it has failed in each of those areas. People have lost £1.7 million, and as a direct result of FSA inertia, people still do not have their money back.

The FSA has failed to identify the most basic and fundamental weaknesses in the crossed cheque system. It has failed to protect consumers when the flaws were drawn to its attention by victims, so that nearly two years after the danger was exposed and five months after Hart was convicted, customers are still exposed. It has failed to draw wider consumer attention to the weaknesses, thereby allowing consumers generally to be put at risk for longer. It failed to identify that Michael Hart had a criminal record for dishonesty and was simply not a fit and proper person to be an FSA-authorised independent financial adviser.

The FSA has failed to put pressure on the banks and building societies, and the best that it can come up with is the wholly inadequate response that it has initiated discussions. Rather than issuing a direction or holding the most urgent review with the Government, it has merely set up a committee inviting the industry to propose a solution. It has failed to put pressure on banks and building societies to compensate victims or to remind financial institutions of their duty of care obligations to customers. It has failed to monitor Abbey's security failings, even though it had clear early warning of them and had fined Abbey £2.3 million for having a slack regime: a rum world this, where the bank gets fined because it has opened itself to the risk of money laundering, but when it actually occurs, nothing happens.

The FSA has failed to communicate effectively or in a timely manner with Members of Parliament or victims, even taking three months to respond to one MP. That farce cannot continue. I urge the Financial Secretary to do four things: first, to commit the Treasury to undertake a full and fundamental review of the failings of the system; secondly, to recommend changes; thirdly, to publish the findings; and, fourthly, to intercede in this case and tell the FSA to bring its review to a very speedy conclusion and to give the highest priority to compensating the victims of what is plainly a dangerous systemic failure.

I very much welcome the fact that Mr. Bacon has secured the debate, and congratulate him on doing so. He has written to me twice on this case and spoken to me informally about it. I am grateful to him for bringing to my attention what is clearly a very important issue. As he said, his constituents and others have lost substantial sums as a result of Michael Hart's activities, and I should like to express my sympathy to Mr. Hart's victims—both the five people in hon. Gentleman's constituency and all the others—for the dreadful distress that they have endured.

The hon. Gentleman accurately describes the fraud that was perpetrated, and as he said, Mr. Hart has since been convicted and is serving a six-year sentence for numerous counts of theft. The Financial Services Authority has been working closely with the firms concerned about how best to achieve compensation for the investors who have been affected.

The hon. Gentleman asks how it was that the banks and building societies involved were willing to pay cheques made out to them into Mr. Hart's personal accounts. A number of people would fairly raise that question. For completeness, in the unlikely event that they have not already done so, I point out that the hon. Gentleman's constituents should complain directly to the firm in question, but I imagine that they have already done so. If they are dissatisfied with the response that they receive, they can take their complaints to the independent financial ombudsman service. From what he says, that may well also have happened. If they are unhappy with the FSA's handling of the matter, they can complain to the FSA directly. He says that that has been done. If they are still dissatisfied, they can complain to the independent complaints commissioner. Of course, they can do so if they are dissatisfied about the time taken to determine their complaints, and I gather from what the hon. Gentleman says that that has been an issue in this case.

It is interesting to note what the Building Societies Association has said about the topic. It pointed out that the current practice is for many banks, building societies and other institutions to accept cheque deposits made by customers that are payable to the institution. It is estimated that 20 per cent. of all cheques deposited are made out as payable to financial institutions. That is a long-standing practice, and although it is clearly of little comfort to the hon. Gentleman's constituents, there have been only a handful of cases of theft of this kind in 150 years. I listened carefully to the good case that he made, but when he referred to a crisis in the cheque clearing system, I thought that he was somewhat overstating the position at which we have arrived. If depositing cheques in such a way was banned, there could be substantial inconvenience, and perhaps financial loss if people who were intended to receive payment were not able to do so.

The FSA is in discussion with the banking industry to identify the scale of the risks relating to the handling of cheques made payable simply to banks or building societies and what can be done to reduce the chances of future fraud of this kind. I await the outcome of those discussions with great interest and hope that they will not be long delayed. The hon. Gentleman referred to the amount of time that has passed, and I agree with him that it is clearly important, from everyone's point of view, that such fraud should not be repeated elsewhere.

Some steps have already been taken. The new edition of the banking code, which was published last month, gives clearer advice to customers about how to reduce the risk of fraud when making out cheques payable to banks and building societies. It might be worth reading to the House what the new edition says at paragraph 12.6:

"When you write a cheque, it will help to prevent fraud if you clearly write the name of the person you are paying the cheque to and put extra information about them on the cheque especially if you are not personally paying a cheque in (for example, because you are sending a cheque by post)."

A little later it says:

"If you are making a cheque payable to a bank or building society, do not make the cheque payable simply to that organisation. Add further details in the payee line (for example XYZ Bank, re J Jones, account number xxxxxx). You should draw a line through unused space on the cheque so unauthorised people cannot add extra numbers or names."

I hope that the new guidance will be widely publicised and that cheque users will heed it. It is clearly of little comfort to Michael Hart's victims, because they have already been victims of fraud, but its observance will make it much less likely that others will be defrauded in the same way in the future. I welcome the change to the banking code and hope that other effective and proportionate ways can be found to reduce the risks of future fraud.

If there is new guidance that is clear, it is obviously welcome. However, none of that alters the fact that the APACS definitive guide to cheques and the UK clearing system states:

"if a cheque is crossed a/c payee only, it can only be paid into the account of the named payee."

That is the guidance now. The Financial Secretary must accept that when people are asked to write a cheque to a financial institution rather than to Michael Hart, for example, they think that that means something.

As I say, I understand that 20 per cent. of cheques are made payable to a financial institution. The long-standing practice has been to permit them to be treated in the way in which they were treated in this case. I certainly hope that the guidance will be widely publicised so that people appreciate the steps that they can take to protect themselves from a recurrence of the problem.

I think that the banking code works well. The Treasury Committee has made the point that

"the Banking Code is a good model of self-regulation."

We should look primarily to the banking code as the vehicle for addressing the issue, although I recognise that it is important to improve the protection that consumers may enjoy.

I accept that the practice is long-standing, but it is directly contrary to the APACS definitive guide. If the practice is leaving people exposed in such a way, perhaps the Treasury and the FSA should get together to review the entire system to ensure that the problem simply cannot arise. I am trying to make the point that when people write a cheque payable to an institution, they think that a safeguard is being rendered to them that would otherwise not exist. They are thus being misled.

The issue is the interpretation of the guidance quoted, and in practice it has been interpreted in the way that I described. Hopefully, the new guidance will make it clear to people what they need to do to ensure that they enjoy the protection that, according to the hon. Gentleman, they have always believed that they enjoyed when writing out a cheque in the name of a financial institution.

Let me say a few words about the more general problem of cheque fraud, which we are determined to tackle. We have established a specific policing unit—the dedicated cheque and plastic crime unit—that works closely with the banking industry to reduce card and cheque fraud, using intelligence provided largely by the industry. In addition, since April last year the Home Office has provided additional funds to enable the City of London police to expand its fraud squad. The Home Office and the Corporation of London each contributed £l million in the last financial year, and the Home Office has also provided capital start-up costs. That significant addition to resources for the fight against fraud will enable the City of London police to take a lead role in that fight, and not just in the square mile.

I understand that one of institutions involved in this case—Abbey, of which the hon. Gentleman was very critical—has said that if, after the legal channels have been exhausted, the investors have still not been fully refunded, it would be happy to offer an ex gratia payment, so that no one who thought that they were buying an Abbey product will be financially out of pocket. I welcome that reassurance, which it is important to put on the record. In the case of another of the institutions involved, I am told that the making of such a payment might be conditional on the FSA's agreeing to undertake an investigation of Lucas Fettes. It is not clear to me that that is an appropriate stipulation to impose. As a matter of policy and because of the confidentiality requirements imposed by section 348 of the Financial Services and Markets Act 2000, the FSA does not normally make public whether it is investigating a particular matter, or, necessarily, the findings or conclusions of an investigation. Of course, if the investigation leads to enforcement action, the FSA will publicise it, as happened in the earlier Abbey case to which the hon. Gentleman referred.

I understand that the FSA has considered the circumstances carefully in the light of the criteria published in its enforcement manual, and it has concluded that it is unable to state whether it is investigating this particular firm; for the same reason I, too, have not been informed. The FSA has, for very good reasons, genuine operational independence from the Government, and I note in the light of the Conservative party's recent policy statement on financial services regulation that there is agreement across the House on the value of independence for the regulatory agency.

To protect investors, the 2000 Act established the financial services compensation scheme in order to act as a safety net and fund of last resort for consumers and small business customers of FSA-regulated financial services firms that are unable, or likely to be unable, to pay claims against them because they have gone out of business or are insolvent. The 2000 Act also established the single financial ombudsman service to adjudicate over customers' complaints against regulated firms. As I set out in my letter to the hon. Gentleman, the FSA is accountable to Parliament, Ministers, consumers and the industry via a number of mechanisms. They include the independent complaints commissioner, who investigates complaints against the FSA; an independent tribunal, which reviews the FSA's regulatory decisions; the requirement for the FSA to submit an annual report to the Treasury on the discharge of its functions; the Government's power to appoint and dismiss the FSA chairman and board; and the independent consumer and practitioner panels, which advise on and represent consumer and industry concerns to the FSA.

I think that the balance is now about right. I note that the shadow Chancellor called last week for consumer protection to be provided in the "least burdensome manner possible". It is right to look to the banking code in particular as a way forward and a means of addressing the problem that the hon. Gentleman has properly drawn to our attention. That would be preferable to introducing new regulations.

I commend the vigour with which the hon. Gentleman has pursued this case and I want to assure him and his constituents—and indeed others rightly concerned about the matter—of the very high seriousness with which the Government regard these issues. The industry also needs to recognise the seriousness with which the House is viewing the matter.

I have no doubt that the hon. Gentleman will, like me, look forward to the outcome of the FSA's talks with the industry, which I hope will reach a conclusion sooner rather than later. I have asked Treasury officials to keep me abreast of progress in those discussions and I hope that their outcome will provide all of us with grounds for optimism that the dreadful experiences suffered by the victims of Michael Hart will not be experienced by others in the future.

Question put and agreed to.

Adjourned accordingly at twenty-nine minutes to Eleven o'clock.