New Clause 8 - Financial Crime Unit

Financial Services (Banking Reform) Bill – in a Public Bill Committee at 2:00 pm on 16 April 2013.

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‘(1) The Secretary of State shall by order create a new Financial Crime Unit as part of the Serious Fraud Office for the purpose of tackling financial crime, using resources from the proceeds of penalties paid to the FCA.

(2) The Treasury shall conduct a review into the creation of the Financial Crime Unit and consult on its proposals for the Financial Crime Unit’s powers and responsibilities.

(3) The Treasury shall lay its proposals before both Houses of Parliament no later than six months after this Act comes into force.

(4) The orders under subsection (1) may make such amendments to legislation as appear to the Treasury to be necessary or expedient for the purpose of creating the Financial Crime Unit.

(5) The orders under subsection (1) may only be made if they have been laid before and approved by a resolution of each House of Parliament.’.—(Chris Leslie.)

Brought up, and read the First time.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I beg to move, That the clause be read a Second time.

It is a pleasure to join you, Dr McCrea, in this Committee. The proposed new clause seeks to instruct the Secretary of State by order to create a new financial crime unit as part of the Serious Fraud Office, which is currently tasked with dealing with what is called in shorthand “white-collar crime”; that includes financial fraud and corporate fraud more broadly.

The reason for tabling the new clause is obvious. Andrew Bailey, the new chief executive of the Prudential Regulation Authority, was reported in the papers today as saying that it was “odd” that nobody had been locked up as a result of the banking crisis of several years ago. The flaw in the system is obvious. We do not have strong enough investigatory and prosecuting capability to ensure that, where we do have laws to capture serious or systemic misbehaviour, prosecutions are properly brought to fruition.

It is not just a question of the law not being tight enough or not sufficiently well defined. It is important to recognise that when it comes to this sort of offence, pinning down responsibility and making sure that we gather the evidence of causation to the level of proof beyond reasonable doubt is a very difficult task, especially when the investigators are hampered by a lack of resources.

The new clause would create a new unit in the SFO. We have to increase the resources available for tackling financial fraud. As financial products become ever more complex, the new clause would enable the building of expertise in an area where the financial incentives for criminal activity are absolutely enormous but prosecutors and investigators do not have the same level of capacity for capturing exactly what is going on. The total fines that Barclays paid for the LIBOR scandal, although small for Barclays, could pay for the entire budget of the Serious Fraud Office for 10 years; that is the extent of what is happening. The Minister should consider using some of the proceeds of penalties paid to the FCA to help rejuvenate the SFO.

Hon. Members may well have spotted during the spending review announced by the Chancellor back in 2010 that, sadly, the SFO appears to be pencilled in to lose 25% of its budget over the spending review period. Things are going to get tougher for the SFO. In fact, many hon. Members will remember that the Home Secretary originally had plans to abolish the SFO altogether, but was eventually forced to perform a U-turn on those proposals. Now that we know that the SFO is here to stay, let us ensure that we can build it up and enhance it, giving it the powers and resources that it needs. It would be more than self-sustaining if it were able to identify fraud and yield fines income at a level even higher than that which is already, sadly, flowing through.

Fraud is estimated to cost Britain around £73 billion a year, according to the National Fraud Authority. It is a significant area of criminality, but we are not properly equipped to deal with it. LIBOR showed that misconduct in financial services can have ramifications for traders, the industry, shareholders, the reputation of the City, and the criminal law. It is already a criminal offence to attempt to fix LIBOR, but the Government, and the SFO in particular, have struggled to go after those responsible. It is vital that the SFO has the resources necessary to tackle that scandal and any future ones. Our new clause would give Parliament the chance to discuss the creation of a new division in the SFO, sending a firm message to those who might be tempted to engage in criminal conduct in financial services.

Photo of Greg Clark Greg Clark The Financial Secretary to the Treasury 2:15, 16 April 2013

It is nice to welcome the shadow Minister back to his role, although it is fair to point out that it is usually when the hon. Member for Kilmarnock and Loudoun speaks that I am able to make some progress on agreeing with the Opposition, so he may want to reflect on his attendance.

The whole Committee recognises the importance of tackling financial crime through the criminal law as well as through the regulatory sanctions we discussed previously. It is a stark fact but, following the financial crisis, there were fewer convictions for fraud and forgery in 2009  than there were in 1999. That may be for a number of reasons, but I suspect that it is not because the incidence of those crimes was lower. There is a common concern that the system needs to be more effective in pursuing those people who take advantage of others in the financial system and, indeed, of taxpayers.

New clause 8 would establish a new unit in the Serious Fraud Office, which would be concerned with financial crime. However, much of the SFO's work is on financial crime: fraud tends to be, of its essence, financial for the most part. So to create a further subdivision of a unit that is dedicated pretty much to financial crime is not the best way structurally to deal with the problem, although I accept that the new clause has given us the opportunity to debate these matters.

The other aspect of the new clause concerns the financing of the SFO. Its financing is unconstrained in that if an investigation needs to command more resources, an application can be made to the Treasury to provide for funding from the special reserve. I cannot imagine circumstances in which the determination to undertake an important fraud inquiry would not achieve a satisfactory result. There have been problems with the SFO, to which the hon. Gentleman alluded, but this is a time in its life when changes have been made and are bedding in. From last April, the SFO has had a new director and has brought in a new structure. It is fair to say that the principal problems with the SFO that led to the Home Secretary considering its future were not about resourcing, but about its operational and organisational effectiveness.

New arrangements are in place and we need to keep them under review because the SFO needs to improve. In particular, the Attorney-General will legislate to give Her Majesty’s Crown Prosecution Service inspectorate the power to inspect the SFO, so there will be an independent ability to assess its future performance. Given all that, now is not the time to tinker further with the SFO by creating a unit within it that would cover the dominant part of the function in the first place.

It is also worth recording that the new national crime agency, which is responsible for directing the national response to economic and financial crime, is due to be established under the Crime and Courts Bill, which is currently before Parliament. I think it comes back to the Commons for debate on 23 April. That would establish an economic crime command with a clear remit to reduce the threat from economic and financial crimes, and co-ordinate the work of the SFO with individual police forces and the regulators, including the FCA and the PRA.

All those bodies have been actively engaged in establishing this command during the past months. Subject to Royal Assent being granted, we expect it to be fully operational by the end of the year, and the new national crime agency will be under the supervision and control of an experienced chief constable. The hon. Gentleman spoke about the need to make sure that the measures that we have in place at the moment to deter and punish financial crime are used rigorously in future. Those arrangements are being strengthened. I therefore hope that he will withdraw his new clause.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

It is certainly true that we tabled the new clause to spark a debate about the adequacy of the SFO and its capability of grappling with what has been an  enormous problem in recent years. Members of all parties will recognise that the prosecuting and investigating authorities really struggle to play catch-up with the intricacy and ingenuity of financial crime. These are not the sort of crimes where it is easy for an officer of the law to spot that a crime has been committed. These crimes are often hidden in electronic data, with vast amounts of insider knowledge squirreled away far from the public’s gaze. That can often have a massive effect on the well-being not just of the companies affected, but downstream on our constituents and society as a whole, so it is important that we get a grip on the SFO's capability of dealing with financial crime.

I accept the Minister’s point that there is a debate to be had on whether the right approach would be specifically to have a new subdivision in the SFO in this way, but some sort of dedicated resource that is earmarked for financial services crime, as opposed to corporate crime or fraud more broadly, would be worth while, not least because it could attract more support from the Treasury and across Whitehall in general. Such support has been missing from a lot of the SFO's work in recent years, and considering the public’s interest in seeing prosecutions brought to fruition, we know that the SFO found itself in great difficulties when pursuing some of the Icelandic issues. They were never really brought to fruition and many local authorities and others went through serious financial difficulties as a result. We have to raise the profile of this issue, and one way of doing that would be through a financial crime unit.

I am happy to take away the new clause at this stage, notwithstanding the fact that we want to see more action on the matter. However, the Minister indicated that he is looking at the SFO's ability to call on the special reserve, which was interesting, and I would like to look at that in more detail. I do not have enough granular detail about what has been happening over the most recent years, particularly the level of prosecutions in financial services in which the SFO has been engaged, and it would be worth while seeing some of those data, and data on the level of performance. Perhaps the national crime agency, in its relationship with the SFO, could provide an opportunity to take stock of how well the SFO is doing.

We need more action; things are not good enough as they stand. We made our point as forcefully as we could and we encourage the Minister to take this issue away. We will doubtless want to return to it in future, but I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.