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Cheque fraud and the case of Michael Hart

This speech was given on 4 April 2005 in the Chamber of the House of Commons as part of Richard's end-of-day adjournment debate

Mr. Richard Bacon (South Norfolk) (Con): 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 in which 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 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.


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