Clause 30 - Maximum sentences for insider dealing and financial services offences

Financial Services Bill – in a Public Bill Committee at 10:15 am on 1 December 2020.

Alert me about debates like this

Question proposed, That the clause stand part of the Bill.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

Clause 30 concerns the penalty for criminal market abuse. Market abuse undermines integrity, reduces public confidence and impairs the effectiveness of the financial markets. Market abuse is comparable to other types of economic crime, such as fraud, so it should carry an equivalent penalty.

The clause will increase the maximum prison sentence for such crimes from seven to 10 years, demonstrating that the Government take criminal market abuse offences just as seriously as other types of economic crime offences. In 2015, the findings of the fair and effective markets review were published jointly by the Treasury, the FCA and the Bank of England. This report assessed market standards in the financial services industry, looking for ways to improve fairness and effectiveness in fixed income, currencies and commodities markets. The report contained 21 recommendations to improve market standards assigned to a number of public bodies. The Government are committed to delivering the improvements to the body of financial services legislation that were recommended in the report, and the clause follows the recommendation of the report. I therefore recommend that the clause stand part of the Bill.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

The clause before us increases the penalty for insider dealing, and I do not think any Opposition members of the Committee will have a problem with that. The obvious point to make is that sentencing is effective only if there is a reasonable chance that someone will get caught, and if there is a proper and effective system of enforcement of the rules, as well as an overall regulatory system that properly polices such activity.

The Financial Times reported last year that the FCA had prosecuted only eight cases of insider dealing, securing just 12 convictions over a five-year period between 2013 and 2018. There is a big contrast between the prosecutions and the investigations, because the same newspaper, reporting on the figures ending in March this year, said that there were a relatively high number of ongoing investigations—more than 600. However, only 15 resulted in financial penalties or fines.

There are few prosecutions and few fines. Why does the Minister think so few of those 600-plus investigations lead to any kind of punishment? Can we conclude that, after all, there is little insider dealing and only a handful of people do it? Alternatively, would the conclusion be that there are flaws in the investigatory process or, perhaps, resource issues that make it difficult to pursue a case to an unquestionable conclusion?

We should acknowledge that the regulator’s task is difficult, because the people doing insider dealing will be clever, and will take every step they can to cover their tracks. For example, they might not trade in their own name. They might trade in a relative’s name. They might set up a company to trade, and register it either here or somewhere else, which would make the paper trail all the more difficult for the regulator to follow. They might try all sorts of things to blow the regulator off the scent.

There is no problem with increasing the sentence from seven to 10 years, but it strikes me the relevant provisions of the Bill might be too narrow in scope for the problem that we are dealing with. It would be a big mistake to think that approving the clause is job done on insider dealing, and we can tick the box, thinking it will make a big difference. The low rate of prosecutions suggests that there is a need for a much deeper look under the bonnet.

Does the Minister accept that general premise, and will he undertake to carry out that deeper look? Will he make sure that the increased sentences are matched by the resources that the regulators need and, probably more importantly, by other changes in their powers or the regulatory system or the legal basis? That will ensure that more cases are brought to some sort of action at the end and that we do not carry on with such a huge contrast between the number of investigations launched and the small number resulting in a fine or prosecution.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

I want to come in briefly, on the back of what the right hon. Member for Wolverhampton South East has said. What analysis have the Government done on whether the increase will be any more of a deterrent than the current seven-year maximum? I note that that is a maximum, and relatively speaking not a huge amount of time, given the severity of some of the crimes that may have been committed. What is the average sentence handed out at the moment? Is it closer to seven years, or is it closer to a couple of years and just a slap on the wrists?

As the right hon. Gentleman mentioned, few cases get to that stage anyway. To help increase the number of people who are prosecuted, what additional resourcing will be put into the policing of financial crime? It is clearly an area that needs significant expertise. If we are going to catch people who are looking to circumvent the system, we need to have people at least as good on the other side of the balance sheet to make sure that they are catching up with them. What recruitment schemes are being put in place to attract the kind of people who will be able to investigate, prosecute and see processes through to the end, to make sure that there is a proper deterrent and people feel that they are going to get caught, fined and locked away? There needs to be sufficient expertise to make sure that that really does happen.

Photo of Angela Eagle Angela Eagle Labour, Wallasey

My concerns mirror the comments that were made by my right hon. Friend the Member for Wolverhampton South East and by the SNP spokesperson, the hon. Member for Glasgow Central. Financial crime and fraud are areas of crime that have been under-played and under-resourced for enforcement in recent years. We know about the effects of Action Fraud and its almost minuscule levels of successful prosecutions over the years. It is one of the areas that I feel most worried about as a constituency MP. When constituents come to me with issues of fraud, they have often been given the run-around for many years and I know that, realistically, justice for them is often very far away.

Financial crime is somehow regarded as less worrisome than other forms of crime. It seems always to be at the back of the queue in terms of enforcement resources. It is almost as if some people think, “If you can get away with it, more power to your elbow.” That introduces attitudes and approaches to the rules, regulations and law that are, at the very least, unfortunate and, probably more accurately, dangerous. It is particularly worrisome given the size of our financial services sector and the number of jobs associated with that sector, and the impact if it were to be destabilised by that kind of attitude getting a grip. It is extremely important that, as a jurisdiction, we clamp down on these crimes.

Is the Minister as worried as I am? Is he satisfied that this form of levy approach is the right one? It makes it look like the state does not worry so much about financial crime—that it does not worry enough to finance the prosecution and policing of it, and that the industry has to somehow pay for its own policing and prosecution. That is an issue.

We would all welcome the increase in sentencing from seven to 10 years that clause 30 contains, but is not the real deterrence to be found in much more rigorous enforcement and financing of enforcement, rather than simply increasing the likely sentences if someone is caught? If people feel that there is not much of a chance that they are going to be caught, an increase in sentencing from seven to 10 years is not really much of a deterrent to bad behaviour. The other thing that worries me is that the risks to those individuals who might be tempted are quite small, when we consider the number of prosecutions, but the rewards, should they get away with it, can be huge. Such a risk-reward assessment does not exactly imply the sort of the deterrence that we all want to protect the integrity of our markets.

The snapshot reaction is to increase the criminal sentence by three years, but we should also consider what goes on in a more dynamic manner. Someone who is tempted to insider deal or to abuse market regulations may not behave as such at the beginning of their tenure in a company. But what if they subsequently see others getting away with that, or hear rumours that such stuff goes on, is not regulated and the authorities do not come down on people like a ton of bricks? What if they see others flaunting the profits derived from such behaviour? Let’s face it, the City can sometimes be a bit like that, although not at the moment because all the bars are closed. The Minister knows what I am talking about. In those circumstances, over time the temptation grows and the deterrence is not enough. The enforcement needs to be beefed up.

Will the Minister outline the reasons for clause 30, and why and how the Treasury plan to change the balance of the risk-reward assessment? If enforcement is to be stricter, how will deterrence be strengthened? If we got answers to those questions, many of us would feel better than we do about how market abuse will be regulated in future.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury 10:30, 1 December 2020

I thank Opposition Members for the last three speeches. I think that they expressed a broad understanding of and agreement with the measure, but more general concern about the capacity for implementation and the need to ensure that the issue is addressed more broadly. I am happy to try to respond to those points.

The right hon. Member for Wolverhampton South East started the conversation about enforcement and prosecution. The terms of the clause will help to ensure that market abuse is recognised as serious misconduct in the same way as fraud is currently judged, and that will send a clear message to individuals who break the law: they will be held to account.

The hon. Member for Glasgow Central spoke about the length of sentencing. Since 2009, there have been 36 successful prosecutions for market abuse offences—the average sentence is 1.7 years, and the longest sentence was 4.5 years. To date, no criminal market abuse case has been tried that resulted in a seven-year sentence. That does not preclude the possibility of convictions in future cases that require a longer sentence as a result of aggravating factors, such as a significant breach of trust by senior individuals or sophisticated criminality by organised criminal groups.

In the light of the comments of the hon. Member for Wallasey about the challenges faced, I also want to add that in last week’s spending review an additional £63 million was allocated to the Home Office to boost Action Fraud. I also mentioned the economic crime levy in an earlier response, although that is anti-money laundering specific, and will not cover fraud. But a number of other activities are relevant to the points raised by Opposition colleagues.

A significant amount of work is going into the reform of suspicious activity reporting, where banks highlight transactions that give reasons for concern. That reform will be integral to our response to economic crime, and it is vital in uncovering and combating wider criminal activity. The Home Office is leading on that work.

The hon. Member for Wallasey made a point about the £100 million levy and the outsourcing, essentially, of capacity. It is important that we have joint working between the Home Office, the Treasury and the private sector on this matter. Just last week, I had a conversation with the payments regulator and UK Finance about push payment scams and the need to increase the confidence in the way those matters are treated. They are complex and involve sophisticated fraud against many of our constituents. I completely empathise with the hon. Lady’s frustration regarding the apparent lower prioritisation of this area. Across my 12 broad areas of responsibility, it is this that I find most challenging to move forward on definitively because the nature of the challenge is evolving. However, the work going on there and the payments regulator’s imperative to act, which it will do following the consultation, is significant.

However, with respect to the questions on this particular clause, I hope that the value of that enhanced sentence, which reflects the 2015 report, is understood. We will not bring the broader measures to a conclusion now, but I hope that I have signalled some of the ongoing efforts to try to deal with what is a particularly challenging area.

Photo of Angela Eagle Angela Eagle Labour, Wallasey

To some extent, this is illustrated by the fact that the enhanced sentence was in a 2015 report but we are only just legislating for it now. Five years later, we are still only talking about a sentence that is highly unlikely ever to be used, based on the past record—the Minister just quoted it himself. I wonder whether he might increase the confidence that some of us have that this is being tackled in a coherent way—we will get on to some of this later—by talking about the fragmented supervisory system and what he is doing to help bring that together so that the fragmented regulation of this whole area can actually be done more coherently, so that we can get enforcement on abuse. We all know that, prior to the big bang in the City, this was all done informally anyway, by gentleman in their clubs. It seems to me that we never really got a grip, after the big bang, in dealing with that informal networking that goes on, where a lot of the gaps and a lot of the potential insider dealing actually lurks. Perhaps he could give me a little bit more confidence about that.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

I want to double check something that the Minister said a minute ago. I think he said that there have been 36 prosecutions since 2009.

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

That might illustrate the point that we are making, because by my rudimentary maths, that would suggest—

Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury)

Something between three and four a year, which is hardly the sign of a system that is working, unless we think that only three or four people a year are doing insider dealing. However, for those who do not believe that, and who believe that hundreds of investigations go on but only three or four people are prosecuted a year, that illustrates the point that increasing the sentencing alone will not deal with this problem.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

I would never say that the measure was a panacea for economic crime or the complexity of the evolving and changing nature of the risks that we face in financial services. It is obviously an interconnected world across different jurisdictions. I empathise with the frustration around which of the multiple agencies will get a grip on this. It is necessarily complex because of the sophisticated nature of the way that data flows are reported and the way that different specialist agencies of crime enforcement and regulators need to work together.

I do not think I will give satisfaction to the Committee on this matter. The right hon. Member for Wolverhampton South East makes a reasonable point about the implied annual number of successful prosecutions. It is impossible for me to comment on what is lost, because it is counter-factual; I cannot prove what is not there. However, I recognise that there is more work to be done and that this is one step, amid others in other Departments—particularly the Home Office—to move this forward.

Question put and agreed to.

Clause 30 accordingly ordered to stand part of the Bill.