Grand Committee
Arrangement of Business
The Deputy Chairman of Committees (Baroness Pitkeathley)
Good afternoon, my Lords. As your Lordships will know, if there is a Division in the Chamber while we are sitting this Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
Local Government Finance Bill
(12 years, 5 months ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord McKenzie of Luton
“( ) paragraph 6 (regulations about non-domestic rating income);”
Lord McKenzie of Luton
My Lords, I shall speak also to Amendments 2, 3 and 4. At the start of our deliberations, it might be helpful if I set out our approach to these Committee proceedings. This is a framework Bill. A tremendous amount is being left to regulation-making powers in the Bill—at least a couple of dozen powers on my count—which comprises just 19 clauses. We accept that the framework has been filled in in part by recent statements of intent and that there is a plethora of technical and other papers, but that is not the same as having a complete set of draft regulations. We will therefore use the opportunity of this Committee to probe the detail of what is intended and get as much as we can on the record. We will also seek to insure, where appropriate, that those regulation-making powers give the maximum opportunity for parliamentary scrutiny, hence these amendments.
Clause 1 introduces new Schedule 7B, which contains the nuts and bolts of the business rate retention scheme. It provides, among other things, for certain of the new regulations to be by way of the affirmative procedure and the rest by the negative process. This group of amendments adds to those that should fall into the affirmative category.
Amendment 4 concerns paragraphs 37 and 38 of the schedule. The Delegated Powers and Regulatory Reform Committee recommended that regulations made by virtue of paragraph 39 should be subject to the affirmative procedure because they impose a liability on a billing authority. This is what the amendment seeks to achieve. Paragraph 39 refers to regulations under paragraphs 37 and 38, and it is presumably those that should be subject to the affirmative procedure. Although we will want to discuss the detailed provisions later in our deliberations, we assume that the Government accept the Delegated Powers Committee’s recommendations on this matter, even if not our precise wording.
Amendment 1 deals with paragraph 6. This requires, following a local government finance report, payments of the central share of non-domestic rates to the Secretary of State. However, the regulation-making power includes the power to define what non-domestic rate income is and what adjustments can be made to amounts payable. We will discuss some of the detail of this later, but the power to define what income is for the purposes of the local/central split, including judgments about authorities acting diligently, is, we suggest, significant and should be subject to the affirmative procedure, at the very least on its first use.
Amendment 2 seeks to bring the provisions concerning payment on account under the safety net arrangements within the affirmative procedure. Again, we argue that this is much more than a mechanistic provision concerning calculation. It is potentially very significant for some authorities. It covers the circumstances in which safety net payments might come about. We welcome the fact that other regulations relating to the levy and safety net are to be subject to the affirmative procedure and consider that the same should apply to paragraph 26. So far as we can tell, the issues around payment on account are not covered in the statement of intent or in the government response to the resource review consultation. The consequences of catastrophic reductions in year of a business rate base, likely to be accompanied also by an upsurge in eligibility for council tax support, need serious consideration and should be subject to the affirmative procedure.
Finally, Amendment 3 focuses on paragraph 30, which deals with transitional protection payments. These are existing arrangements designed to dampen the effect of changes to business rate liabilities arising from revaluation. This could have a significant implication for the business rate retention scheme, and it is proposed to take the effect of this outside of the scheme. This requires regulations concerning calculations of a billing authority’s deemed rate in income and actual rate in income, including judgments about whether an authority has acted diligently. This is, again, a very significant provision, which should be subject to the affirmative procedure. We are in uncharted waters over lots of these areas, on a range of key issues, and we should do all we can to strengthen the parliamentary scrutiny. I beg to move.
The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Hanham)
My Lords, as the noble Lord, Lord McKenzie, said, this is framework legislation—as indeed is Local Government Finance Act 1988, which precedes it. It is therefore to be expected that there will be a number of detailed matters which will be dealt with in regulations. The appropriate level of parliamentary scrutiny for each set of regulations will differ depending on the precise subject matter at hand, and we have carefully considered the appropriate level of scrutiny for each of them.
This is why provision is already made for a number of regulation-making powers in the Bill to be subject to the affirmative procedure, as the noble Lord acknowledged. Regulations under paragraphs 8, 20 and 23, for example, which all deal with the calculation of various payments under the scheme, will be under affirmative order. The Government have made these regulations in particular subject to the affirmative procedure in recognition of the need for the highest level of parliamentary scrutiny over such types of finance provisions, given their significance and impact within the rates retention scheme.
Similarly, the tariff and top-up payments that will flow to and from local authorities will be determined by the local government finance report for a year, which must be approved by resolution of the House of Commons. That again affords the appropriate level of parliamentary scrutiny over key payments within the scheme.
All other regulation-making powers in connection with the non-domestic rating in the Bill are subject to the negative resolution procedure, as the noble Lord said. This is in line with the approach that is currently taken in the existing Schedule 8 to the Local Government Finance Act 1988, and also reflects the more technical or administrative nature of those powers. These include the regulations specified by the noble Lord in his Amendments 1 and 4.
The Delegated Powers and Regulatory Reform Committee, as the noble Lord has acknowledged, has carefully considered the Bill in advance of our debate today. The fourth report of the Committee, published on 21 June, considered that not only is the balance in new Schedule 7B between provision in the Bill and provision in delegated legislation “about right”, but also that the level of parliamentary control over regulations set out in the Bill is, subject to one exception which I will come on to in a moment,
“appropriate according to the relative significance of the various powers conferred”.
Noble Lords will not therefore be surprised when I say that I agree with the conclusions of the Delegated Powers and Regulatory Reform Committee on this point and therefore cannot accept their amendments.
We have carefully considered what the appropriate level of parliamentary scrutiny should be for each regulation-making power in the Bill, and our approach is supported by the findings of the Delegated Powers and Regulatory Reform Committee, whose responsibility it is to consider such issues. However, I hope that the noble Lord’s disappointment in my response will be tempered by my confirmation that we will bring forward an amendment at Report to make those regulations made by virtue of paragraph 39 subject to the affirmative procedure. I think that that is what the noble Lord was looking for. This is the exception to which I referred earlier, and in line with the recommendations. With those explanations, I hope that the noble Lord may feel able to withdraw the amendment.
Lord McKenzie of Luton
My Lords, I thank the Minister for her reply. Of course, I will withdraw the amendment given where we are. I am pleased that the Minister has confirmed that government amendments will be tabled to deal with the recommendations from the Select Committee. But I shall dwell for a little on two provisions to try to explain further why we believe that their significance is such that they should be subject to wider parliamentary scrutiny.
On payments on account of the safety net, the provision was put in the Bill, as the Minister knows, to give local authorities that are suffering in year from a significant downturn in their business rates an opportunity to get support during the year rather than wait until after the year, which is the general structure of the scheme. In the circumstances in which those opportunities present themselves, it is of crucial importance to local authorities to know what the rules of that provision are. I would have thought that it was also important for our scrutiny of something of that magnitude, which is not simply an issue of narrow accounting but an issue of real substance as to how a key part of the business rate retention scheme will work. I shall not dwell further on the paragraph 6 issue, other than to say that this is not just about accounting for the debits and credits; it is about a definition of income for the purposes of these provisions. I am sure that I will not manage to change the Minister’s view on the matter this afternoon, but we would like to reflect on it because these are significant provisions that deserve wider parliamentary scrutiny. I beg leave to withdraw the amendment.
Lord McKenzie of Luton
Lord McKenzie of Luton
My Lords, in moving Amendment 5 I shall also speak to the other consequential amendments—Amendments 55, 57, 58 and 60—in this group. The amendments would defer the introduction of the business rate retention scheme for at least a year, as determined by a resolution of Parliament. We recognise that the Secretary of State already has power in the Bill to defer its introduction until a later year, but all the indications are that he has no intention of doing so. The Minister will no doubt confirm that.
My noble friend Lord Smith’s Amendments 6 and 7, which we support, are very much an alternative formulation. If passed, they would require the Secretary of State to defer the introduction.
This is not about seeking to wreck the proposal or to kick it into the long grass. We support a localist approach and the concept of a business rate incentive scheme, so why should we defer? First, and very importantly, we do not yet have legislation; it will be October or even November this year before the Bill becomes law. I am bound to say that it seems somewhat discourteous of the Government to prejudge what might come out of your Lordships’ deliberations. To be clear, we are intent on proper scrutiny of the Bill but are not trying to slow it up. The Localism Act, of which I am sure we all have fond memories, ended up in a completely different place after it had been through your Lordships' House. I do not predict quite the same rate of change on this one. However, it seems to me that we should wait to see the final shape of the legislation—to pre-empt it would be unfortunate.
Lord Smith of Leigh
My Lords, I will speak to the amendment in my name. I am glad to follow my noble friend Lord McKenzie and support the arguments that he used. Before I come to the detail, I declare my interest in this matter. I am leader of Wigan Council, chair of the Greater Manchester Combined Authority, vice-chair of SIGOMA and vice-president of the LGA. I can see that I am not alone in that.
Looking in detail at the Bill, Clause 1(7) clearly gives the Secretary of State some flexibility to defer introducing the Bill. Therefore, I tabled my amendments for two purposes. One was simply to try to understand—and I hope that the Minister can help me in her response—under what circumstances and when the Secretary of State may use the power under this clause. More importantly—again, I want to follow up the points raised by my noble friend—if local authorities want to change the funding system, they want to do it well. However, we have to accept that if we do not let them know what the new system of funding is by a certain point during this year, it will be difficult or impossible for them to implement it by 1 April next year.
I have chosen 30 November as the cut-off date as that gives local authorities four months in which to plan and make sure that computer programmes and so on are able to cope with the technical aspects of the Bill. Those are not yet in place and cannot be until all the details and statutory instruments are available. If we leave it much later than that, we will be getting towards the end of December, although as far as government is concerned the middle of December will probably be the latest date because Christmas will intervene and not much will be done then. If we respect the fact that local authorities will have work to do on this part of the Bill, and probably more informally on some of the later parts of the Bill, then we need to be honest, say that we cannot achieve what this House needs to achieve by a certain date and not go forward.
Lord Jenkin of Roding
My Lords, before my noble friend replies to the debate, I should like to add a word. The noble Lord, Lord McKenzie, quoted a passage from London Councils’ briefing, which we have all received. I and my noble friends have tabled a number of amendments—to which we will come later and to some of which the noble Lord has added his name—which recommend a marked change in the structure of this division of the business rate. London Councils—I should declare an interest as one of its presidents—has indicated to me that on balance, with regard to this part of the Bill dealing with the business rate retention scheme, it would be a little upset if the date were postponed.
A lot of work is being done on this by London Councils and there has been a good deal of discussion about the pooling arrangements that may be appropriate. Although it is not put as a very firm and immutable point of policy, its view is that 2013 for this part of the Bill is right, and I think it would regret it if the date were changed. I draw a very clear distinction between this and the later part of the Bill dealing with the council tax, where there is still an enormous amount of anxiety that councils will simply not be ready with their own local schemes. However, we shall come to that later. I think that I should let the Committee and my noble friend on the Front Bench know that on balance London Councils would regret a postponement of Part 1.
Lord Tope
My Lords, I suppose that I, too, should begin by declaring an interest. I am simply a councillor in the London Borough of Sutton. I am not a vice-president of anything, or at least not yet—I see that the noble Lord, Lord Beecham, is disappointed with that declaration.
I listened to the noble Lords opposite making the case, with which I am sure many in local government would have some sympathy. I think that all of us, on both sides, would wish to be a little further ahead than has proved possible. However, I suspect that as we will say time and again with this Bill, we are where we are now and we have to consider the question of postponement. My noble friend Lord Jenkin is right to draw a distinction between postponement of the business rate retention proposals and a possible postponement in implementing the localisation of council tax support, to which we will come later. There will be many in local government who have sympathy with what has been said on the other side of the Committee and perhaps more so when we get to council tax support.
As a councillor, I have thought quite hard about this in respect of my own authority and more generally. I do not support postponement. I would rather we were not where we are. Until relatively recently, it was expected that this Bill would be enacted by the end of this month but clearly that will not happen until much later. I hope that, in reply, the Minister will be able to give us a clear and firm commitment that by Report stage, in October, all that is required to be published will have been published, albeit in draft form. I take the point that until the Bill is enacted, it cannot be in an absolutely final form. However, if local authorities know all that they need to know by October at the latest, and I hope a little before that, and if the Minister is able to give a reassurance, I believe that most local authorities will share my view on business rate retention that we are so far down the road and there is so much expectation that this will happen—there has been so much wish that it should happen and we shall come to that later—that postponement now would not be welcome, particularly to me. I hope, with some confidence, that the Minister will resist these amendments.
Lord Beecham
My Lords, my noble friend Lord McKenzie alluded to some of the difficulties that surround next year’s council budgets, to which these amendments refer. In particular, he mentioned reserves and the uncertainty about the timetable, as well as general uncertainties that are leading councillors to take a more conservative view about the level of reserves that should be held. I declare an interest as a member of Newcastle City Council and as a vice-president of the Local Government Association, a position that I hope to share with the noble Lord, Lord Tope, as soon as possible. The president is here, so perhaps he can take that message back to the association.
In my council, we have been accustomed to running on a very modest level of reserves. The treasurer is concerned about the degree of uncertainties not only because of legislation and the general financial situation but also because of the growing number of outstanding valuation appeals in the commercial sector. Of course, that goes very much to the heart of what the business rate will deliver. It seems that these appeals are growing in number. The noble Earl, Lord Lytton, mentioned to me recently that they are taking about two years to be settled. I am not suggesting that the programme be held for two years, but it is an indication of the growing levels of uncertainty about what might ultimately be the yield, let alone about how the Government would handle the business rate when it is collected. In addition to that, a new category effectively of precepting authorities will arise in November when a handful of electors up and down the country will choose their police commissioners, who will have responsibility for 11% of the council tax. Clearly, that will relate to the business rate income. That is another element of uncertainty. In my submission, all this suggests that it would be sensible to ensure that the legislation is firmly in place, is absolutely clear and takes into account these other factors.
I suspect that we shall be debating at some length, as the noble Lord, Lord Jenkin, has pointed out, the position arising in relation to council tax benefits or council tax support, as it will be known, and the new systems that will apply. I would have thought that it would make more sense to take those together against the background to which I have referred, a background that the Secretary of State apparently referred to at the LGA conference last week, when he made what he described as a jocular reference to tackling councils’ reserves. By the word “tackling”, I take it that he means requiring that they should be used. Against the kind of uncertainties that we are talking about, such an approach would surely be highly risky and damaging.
I do not know whether the Minister is aware of quite what the Secretary of State said; if she is not, I would not ask her to respond at this point. However, I would be grateful if the situation could be clarified, perhaps by a letter to Members of the Committee—and perhaps wider than that, because it will also send a shiver up many a treasurer’s spine, on top of all the other uncertainties that we have. We will certainly be pressing hard for a deferment of the council tax benefit side, as it seems sensible for the system to change at the same time and not in parts, particularly given the other uncertainties that I have mentioned in relation to the amendments before us.
Lord Palmer of Childs Hill
My Lords, may I pick up on the point made by the noble Lord, Lord Beecham, about reserves? I hope that when the Minister replies to that point, as she was asked to do, she will include within it how the strong reservations of the accountants’ organisation CIPFA about how much local authorities should hold in reserves will fit in with what the Secretary of State has apparently said. I hope that she will talk about specific reserves as well as unallocated reserves. It would be great if this could be clarified at some stage.
Lord McKenzie of Luton
My Lords, before the Minister replies, perhaps I might return to the reference made by the noble Lord, Lord Jenkin, to London Councils. I accept entirely that London Councils has changed its position on deferment of the business rate component of this Bill—the briefing that we had a month ago certainly put us in a different slot—and I was not seeking to suggest otherwise. However, I was seeking to relay what is still its current view, as I understand it, which is that the scheme needs to be urgently revamped if it is to produce the radical shift in the structure of local government funding that the Bill proposes. I do not know what process the noble Lord might feel there is to achieve that if there is no deferment of the Bill. Are we going to follow up with an amendment Bill next year? How is it actually to come about? What is there within the Bill that would enable that radical restructuring that is apparently wanted? I do not know whether that is what the noble Lord supports.
Lord Jenkin of Roding
I am grateful to the noble Lord for giving me an opportunity to explain. I referred a few moments ago to the number of amendments tabled on the first part of the Bill that would make quite substantial changes, particularly about the division between the central and local shares of business rates revenue. That would be a change that, if my noble friend Lady Hanham could persuade her colleagues that it might be accepted, would go a long way towards meeting the concerns not only of London Councils but of the Local Government Association and local authorities generally, which are anxious to see a faster process of the localisation of business rates revenue. I will no doubt have an opportunity to talk about this a little later, but I do not think that the questions of timing and of the changes that we are proposing are in any way inconsistent. As my noble friend Lord Tope said, there would be some regret if this were to be delayed. I think that both he and I were making that point. Perhaps that is a way of explaining to and satisfying the noble Lord, Lord McKenzie, that there is no inconsistency in what we were arguing.
The Earl of Lytton
My Lords, the noble Lord, Lord Beecham, made a perfectly correct reference to some comments that I put to him. Indeed, I have made comments in the context of this Bill before. Before I go any further, I ought to declare various interests: as a practising chartered surveyor, a member of the Rating Surveyors’ Association and a member of the Institute of Revenues, Rating and Valuation, which explains my interest in the valuation aspects of business rates.
There is a growing issue that creates a greater than usual level of uncertainty with regard to the yield of business rates. I referred previously to the number of outstanding non-domestic rating appeals. I believe that the current total is around 144,000 or 146,000. Even if you get rid of the repetitious ones, the true total probably sits at around slightly more than that—so, 80,000 or 90,000 appeals. Some of these go back to the 2005 rating list.
Business rate payers are getting increasingly concerned that access to justice is effectively being denied to them. A typical lead-in period from the time when an appeal is lodged to the time when the Valuation Office Agency is able to make any sort of substantive comment, I am advised, is in the order of two years—and that is not to the time when it actually gets before the valuation tribunal, when the valuation officer can actually open his book and address the issue. I do not blame the Valuation Office Agency for that. I think that the Committee should be aware that this is fundamentally to do with the agency being starved of the necessary resources. It is being starved of the personnel and starved of the resources to upgrade its computer technology; its computers do not interleave with the valuation tribunal’s computers, and so on and so forth.
Businessmen are particularly concerned because the non-domestic multiplier—that is, the multiplier that is applied to the rateable value in order to provide, as it were, the gross amount of the rates payable before transitional relief and other things—contains an element for potential losses to the tax base arising from successful appeals. So businesses up and down the country are bearing the cost of this contingent risk factor which is implicit in the fact that we are dealing with a system that is lacking in the necessary resources.
My point in raising this on Second Reading was to outline that this is the nature of the animal that is about to be bestowed—or, rather, its risks are about to be bestowed—on to billing authorities. I think that this needs to be addressed. I do not know how this relates to whether the Bill should be brought into force in 2013 or subsequently—I make no comment about that. I just say that there is an in-principle issue about the maintenance and management of the tax base that, if you do not get it right, will be in the nature of passing the buck, an issue that the noble Lord, Lord Beecham, raised on Second Reading. This is a risk factor. I think that it would be entirely wrong, although— I declare another interest as president of the National Association of Local Councils—that does not make me unaware of the risks that are being imposed on the principal authorities, which are represented here by their president, my noble friend Lord Best. I think that it is right that, when we are dealing with these matters of principle, we actually address them at this stage. This is part of the tapestry—the backdrop—over which an awful lot of the other bits that we discuss will have to be viewed.
Baroness Hanham
My Lords, I thank everybody who has contributed. I particularly thank my noble friends Lord Tope and Lord Jenkin, who have broadly said what I will say. I do not think that local government really wants us not to proceed at this stage. This has been in the offing for some time; people are well aware of what is coming about and there have been many discussions with them. Therefore, the suggestion that local government will not be able to implement the rates retention system from 2013 is not correct. Local government will have all the information that it needs to implement the rates and retention scheme effectively, before it has to do so. We will be publishing draft regulations before Report in October. Other information in terms of consultation of the technical detail of the scheme is going to be available over the summer and there will be draft secondary legislation in the autumn before the draft local government finance report is due. Therefore, by autumn, all the information necessary for the implementation of the business rates scheme will be out, even if some of it is in draft. Other information will then be available tying in to the local government finance report, which has to be laid, as it is part of the whole system.
The noble Earl, Lord Lytton, has raised a question that I hope we may defer, because he has tabled a major amendment about it for later in the debate. Indeed, some of the points raised by the noble Lord, Lord McKenzie, are also the subject of amendments. We might have a better opportunity to discuss them later. While I understand the noble Earl’s views that this is, or should be, part and parcel of the scheme, we think that that could and should be dealt with separately. As I said, we will come to points on appeals later on, but in setting up the retentions system we will make an adjustment to reflect the cost to local government of outstanding and future appeals, so there will be some amelioration.
We have worked pretty collaboratively with local government throughout the development of these proposals. In March 2011, we published the terms of reference of the local government resource review and in doing so we clearly set out the aims and the scope of our proposed reforms, as well as the timetable for implementation. We have since consulted local government on numerous occasions. In July 2011, we published a consultation on the design of the rates retention scheme and, in August 2011, we published a further eight technical papers to provide more details on these proposals.
We have listened to what local government has said. This was evident in our response to the consultation published in December 2011 and, indeed, that consultation continues today. The Bill that we are debating is the product of this attentive engagement and consultation. It has, of course, received pretty considerable scrutiny—perhaps unlike the Localism Bill—in the other place and there has been a gap since then for people to think about it and to ask for any information that they do not have.
We will continue to work with local government as we proceed. First, there is our working group made up of local government representatives, including the LGA, which is contributing to the policy and technical debate for the information that will be coming out shortly. There is a further consultation later this month on the technical details underpinning the scheme. There is plenty going on still to shape the legislation going forward.
In terms of our approach to the implementation, we believe firmly that the existing timetable should be adhered to. Before the new rates retention scheme is introduced in April 2013, local authorities will be consulted on their baseline funding before the end of this year, and after a debate in the other place they will receive their final settlement in early 2013. That follows the normal practice that has existed for years. I can remember discussions on local government finance taking place: we always thought that it was a bit tight, but it has always been at the end of the year, sometimes in December. That will be there. This means that the timescale for agreeing baseline funding in advance of April 2013 will be the same as happens currently for the first year of a multi-year settlement. Local authorities will be able to use that information to inform their local budget setting in a timely manner, as they always have done.
I strongly believe that we should be able to implement the rates retention scheme from 1 April and that it is desirable to do so, because local government is expecting it. Moreover, the Bill contains provisions to amend the date of introduction to a subsequent financial year should this be absolutely necessary, although I do not think that noble Lords should hang on to the coat-tails of that. It seems inevitable that such a clause would be included in legislation; there often are clauses in case the absolutely extreme happens. I do not expect the extreme to happen over business rates; I expect them to be implemented by 2013 for all the reasons that I have given noble Lords about the consultation, the discussions and the information that has been presented. Broadly, unless there are major changes to the draft regulations—and I suspect that, even if there were changes, we would be able to cope with them—we will be able to proceed as I propose and get there satisfactorily by the beginning of the next financial year.
For all those reasons, I reject the amendments. I am conscious that I have not commented on the intervention of the noble Lord, Lord Smith, but perhaps I can pick up those points later.
Lord Smith of Leigh
My Lords, I welcome the Minister’s reassurances that information will be in the hands of local authorities—we will test that on Report in October when we can see what happens. I do not think that I ever said that I wanted this provision to be deferred; I simply made the point that a stage will come when it is too late. The Minister herself said that, in using the word “extremes”. I would be interested to know what those extremes might be that would delay the provision from 1 April. She also thinks that there could be circumstances that lead to delay. My point was very simple: as long as the information is available so that we can put it into place, that is fine. But we will obviously be able to test that out.
Lord McKenzie of Luton
My Lords, I thank the Minister for her response to the amendment, which I will in due course withdraw. I follow on from the wise words of my noble friend Lord Smith, who has incredible practical experience of leading a major council. I was unclear from the Minister’s reply whether we had the assurance that all draft rates will be available by the time we get to Report, or all the information needed. There is not necessarily a position on that; all the information that somebody needs is one thing, but seeing it in terms of regulations that will, we hope, in due course go through the parliamentary process is something else. The Minister said that the timeframe is consistent with the current timeframe of the local government financial settlement. Well, yes—but this is not a routine local government finance settlement. It is a significant change, so aligning it timewise is not necessarily appropriate. The noble Lords, Lord Tope and Lord Jenkin, both said that there would be disappointment if there was a deferment. That may be the view of some but I know that it is not the view of everyone.
I am not sure that we fully covered the issues raised by my noble friend Lord Beecham and the noble Lord, Lord Palmer, about reserves, particularly the issue around CIPFA advice. It would be good if the Minister covered that before we put this matter to bed.
The noble Earl, Lord Lytton, again made a very powerful point. I was struck by his contribution at Second Reading. Summarising the concerns, he said that risks are about to be bestowed on billing authorities but the maintenance of the tax base is with central government. That mismatch is a real issue. Later in our deliberations we will come to some amendments that may enable us to go into that, but I am not sure that there is not a broader issue about having the ability to test the appropriateness of the rating system to bear the weight of this new way of dealing with local government finance. However, we will have to see when we get to those amendments.
Perhaps the noble Baroness would deal with the issue of reserves and clarify whether we are talking about draft regulations or about information in another form. We have had lots of statements of intent, which have been very helpful, but they do not amount to fine detail. If we have draft regulations by Report, when is it expected that they will come into effect? What is the rough timetable?
Baroness Hanham
My Lords, the regulations that are going to be of significance will be in draft form. I guess that that will be most of them and any that are not will not be worrying us. I think that I can give the Committee an assurance that the draft regulations will be available for us to consider by Report. That is what I would want to happen and I take that on board.
I apologise for not having picked up my noble friend Lord Palmer’s comment about reserves. I shall have to write to him about that, although I ought to know how they are interlocking. Unfortunately, I did not hear the Secretary of State’s speech at the local government conference but I am sure that, whatever he said, he was not getting at local government in any way. However, there are a number of aspects of reserves—main reserves and specific reserves—and perhaps I may write to Members of the Committee before the next stage to give them the information that I think they are looking for. I hope that that will satisfy that aspect of their queries.
Lord Palmer of Childs Hill
While the Minister is on that subject, perhaps I may ask a question, although, first, I should have declared my interest as a councillor in the London Borough of Barnet. I apologise.
Lord Palmer of Childs Hill
No, I am not a vice-president of anything. In addition to the comments that I and the noble Lord, Lord Beecham, made about reserves—specific and non-specific—one also needs to take into account the restrictions imposed on local authorities by external auditors. External auditors used to come under the Audit Commission but now they are a stand-alone operation. They require a certain level of reserves on the balance sheet, and it would be difficult if central government were to impose requirements on those reserves. External auditors say that you have to have £5 million, £10 million or £15 million in reserves to make everyone feel comfortable, but I have always said when making speeches that I think they make people feel too comfortable. However, that is what the auditors say and they will qualify your accounts if you do not do that.
Baroness Hanham
I return to the fact that unfortunately I did not hear, and do not know, what the Secretary of State was referring to. Of course, reserves are part of local government finance and part of control systems in local government. I should like to make some further inquiries about how that interlinks, if it does, with what we are talking about—the business rate retention scheme—so that I do not mislead the Committee. I know that the provision and use of reserves—and sometimes councils have large reserves—could potentially be used to help to ease the current financial situation. I shall not say anything more about that because I do not know what was said but I shall come back to it.
I was also asked about the police authority, and again I apologise for not picking that up. As I understand it, and I shall write if I am incorrect, the police authority will make the precept because it will be in place until November. It would be pretty unreasonable to ask a new police commissioner to come in to sort that out in the short time available. Therefore, what he or she inherits from the police authority will be what goes forward for the first year. After that, the police commissioner will set his or her own precept. I am not being prodded from behind and being told that that is incorrect but I will let noble Lords know if it is not correct.
Lord Smith of Leigh
I am sorry to intervene again, but that contradicts what I was told on Friday. Because of the problems of timing, the police commissioners would want to set the budget for the year from 1 April. In fact, I have just written a letter to the Home Office to ask whether we can do something about that because it makes timing very difficult.
Baroness Hanham
If there is a disagreement on that then I must make sure that we know the answer. I have given the answer that I think is correct.
Lord McKenzie of Luton
My Lords, I thank the noble Baroness for her further explanations on that. I propose to withdraw the amendment. In doing so, I would just comment that I did not refer earlier to the comments of the noble Lord, Lord Jenkin, on deferral of the council tax benefit support scheme. I think that that might be more fruitful territory when we reach that provision. I beg leave to withdraw the amendment.
Lord McKenzie of Luton
“Representations from local authorities regarding a re-set of the system
(1) The Secretary of State shall establish a mechanism to allow local authorities to make representations on whether they believe a re-set of the system is required.
(2) The Secretary of State shall, prior to the publication of the Local Government Financial Report in any year, give consideration to any representations he has received, and must lay before the House of Commons a report detailing—
(a) any representations he has received from local authorities on whether it would be appropriate to re-set the system; and(b) his or her decision on such representations and the reasons for that decision.”
Lord McKenzie of Luton
My Lords, Amendment 8 would introduce a new clause concerning a reset of the system. A reset would involve reassessing individual authorities’ baseline funding levels and a recalculation of tariffs and top-ups. The technical paper issued last year on establishing the baseline suggested that a reset might involve a completely new method of assessing relative needs and resources, but the purpose of this amendment is not to stray into that territory. The purpose of this amendment is to cause there to be a mechanism that would allow local authorities to make representations on whether they believe a reset of the system is required. Such a mechanism would include an obligation on the Secretary of State to report to the House of Commons on representations received and decisions made thereon, with reasons.
In their response to the consultation on the business rate retention proposals the Government made clear their aspiration for the reset period to be 10 years, and they have stated that they do not propose to reset until 2020 at the earliest—an aspiration, we should note, that would extend to the end of the next Parliament and beyond. However, they have acknowledged that in exceptional circumstances a reset could be required within the 10-year period. Will the Minister tell us what would count as exceptional circumstances?
We acknowledge that certainty over not only the quantum but the period of an opportunity will enhance the incentive. The longer the period between resets, the greater the likely incentive for business growth, as local authorities will retain the benefit of the growth for longer and it will be more encouraging of longer-term investments. That is notwithstanding the fact that the legislation would permit a reset on an annual basis.
There is, however, another side of the coin. Long periods between resets could lead to circumstances where the baseline funding position of an authority does not reflect its funding needs. Population movements, which the Government themselves identified in their response, could lead to the level of resources diverging significantly from core service pressures. We have a debate next Thursday on funding for adult social care, which is a clear example of pressure on services. Setting needs for a decade based even on an updated formula grant for 2012-13 might not be the firmest foundation.
Absent resetting, how could local authorities address the divergence experienced between needs and resources? With the safety net only being available when the business rate base falls by a certain amount and with restrictions on council tax rises—even if those were possible—where can authorities look? We will soon be debating how the Government intend to deploy the 50% central share of business rate, so I would be interested to know the basis on which that might occur longer term.
This amendment seeks only a modest but formal process for local authorities to propose a partial or full reset of the system. Of course there will always be informal opportunities to press a case, but in the interests of transparency we argue for the amendment. I beg to move.
Baroness Hanham
My Lords, I am grateful to the noble Lord, Lord McKenzie, for introducing this amendment. Within it he raises some other points which we will come to later, particularly regarding the 50% retention issue, which is the subject of later amendments. However, I do not think that this provision is necessary. On a point of principle, the lack of a specific provision for making representations to the Government does not prevent anyone, or any authority, from doing so at any time. Nor do the Government need any particular legislative provision to be able to consider a representation. If an individual authority feels that it is in difficulties, it is perfectly entitled to come to the Secretary of State and say so.
Receiving and considering representations is a fundamental part of the Government’s work and the Government consider and respond to representations from members of the public and from local government every day. Representations constantly take place on local government finance, for example. I therefore do not think that we need this provision. I am not clear that the proposed new clause would bring any additional practical benefit to what will be an already transparent process, and I will explain why.
Under the rates retention scheme, the annual local government finance report will set out the tariff payments that individual authorities in the regime will be required to make to central government and the top-up payments that individual authorities will receive. There will continue to be an annual local government finance settlement and an annual local government finance report. A draft of this report will be shared with local authorities before it is laid before the other place. The report may be implemented only if it is approved by Members of the other place.
The Government intend to fix tariffs and top-ups at the start of the scheme and then link them in future years to the retail prices index. In future, the Government intend to fully reset the scheme only to reflect any reassessment of authorities’ needs, with the exception of the first reset period, at intervals of about 10 years to create the strongest possible incentive effect. I think that the noble Lord supports that view although he is concerned about individual authorities, but I think that I have addressed that point. In years where a reset does not occur—anywhere between one and 10 years—tariffs and top-ups will change only by RPI. At the very least, therefore, it will be clear to all, from the calculation of tariffs and top-ups in the annual local government finance report, whether a reset has taken place. It will be open and clear.
In practice, of course, we would expect to let local government know well in advance when the Government intend to reset the system. We have done this already by signalling the intention to reset the system for the first time following implementation in 2020. That is in seven years’ time. However, it remains the case that in any year, during the course of the debate on the annual local government finance report, Members of the other place would be perfectly entitled to ask the Secretary of State what representations he had received during the course of the year about whether it was appropriate to reset the system and why he had chosen not to act upon them.
Specific provision is not needed here for the Government to be held to account properly about resetting the system. It is an inherent part of the system through the transparent annual local government process. I therefore believe that the amendment is unnecessary and I hope that the noble Lord will withdraw it.
The noble Lord asked what would count as an exceptional circumstance. That is slightly difficult to see until you see it, although such a circumstance could arise if resources became significantly out of line with needs. The noble Lord asked me previously what the safety net will cover. It will cover situations such as a major company collapsing with the consequence that the business rate is wiped out. That goes back to the previous amendment, and I apologise for not picking it up.
I hope that the noble Lord feels able to withdraw his amendment.
Lord Beecham
Will the Minister look again at subsection (2) of the amendment to which she implicitly referred? The amendment would require the report in any year to refer to,
“any representations ... received from local authorities on whether it would be appropriate to re-set the system”,
and to the Secretary of State’s decision and the reason for that decision. The Minister rightly says that people could ask a question or a succession of questions about that. This amendment systematises that process so that it is clear and seen as an integral part of the annual financial report. I cannot see the difficulty in the Government accepting that it should be part of the information base to be considered alongside the whole of the rest of the local government finance settlement at the appropriate time. Would it not be more convenient for Ministers to do it that way rather than to have to reply to a succession of questions, perhaps over a different period, not necessarily tied in to the process of approving the report?
Lord True
I should declare an interest as the leader of a London borough and as a member of the leaders committee of London Councils. I hope that my noble friend will maintain the position that she has just set out. I was encouraged by what she said about not ruling out exceptional circumstances. I shall not weary the Committee with my rather unusual local authority, which will be a tariff authority, as I referred to it at Second Reading.
It seems to me that we have a very open system. In all the years that I have been following local government I have never noticed the noble Lord, Lord Beecham, being slow in coming forward to make representations either public or private. Indeed, many of us in local government have often been very grateful for those representations.
Lord Beecham
Could the noble Lord remind me of any that have been successful?
Lord True
I am sure that the noble Lord, Lord Beecham, was extremely successful in secret with that one Government with whom he had a good relationship once upon a time.
I do not wish to detain the Committee. I would simply say that surely the problem with a system like this one is that you will then have emulous enthusiasm, so that if the authority of the noble Lord, Lord Beecham, makes representations and they are going to be published in a report before Parliament, someone will come to me or to my noble friend Lady Eaton and say, “Why has your authority not made representations?”. So we will have lots of local authorities asking directors of finance to put in their representations so that they can be published and ticked off in a report to Parliament. I do not think that we should bureaucratise this too much until it seems, with experience, that the Government are suddenly not prepared to hear representations on the system. Then we can look at it. However, I think that there is a risk of overbureaucratising this and that it could be a make-work rather than provide a solution. I appreciate the intent with which it is offered but I hope that my noble friend will stick to the position she set out.
Baroness Hanham
Yes, I will. We feel that this would be overly bureaucratic. As I laid out in my response, this can happen. If somebody has a reason or a need for a reset, or they think that they have, they can make representations. I do not think that that requires legislation. I do not intend, unless I am pushed at another stage, to accept that it is necessary at all, as such provision already exists. There is already a process by which that can happen.
Lord McKenzie of Luton
My Lords, I am grateful to the Minister. We have probably aired this enough, at least for this occasion. I am grateful in particular for the acknowledgement that exceptional circumstances exist when issues are out of line with need. That begs a whole range of other questions, but having that on the record is useful. We might want to explore it further at a later stage, but for now I beg leave to withdraw the amendment.
Lord Smith of Leigh
Lord Smith of Leigh
My Lords, I shall also speak to Amendment 17, which is in this group. In tabling Amendment 9, I was intrigued by the language being used in the schedule. We obviously understand what “may not exceed” means but the implication is that it may on occasions be less than that figure. I am intrigued to know on what occasions it might be less and why. What did the Government have in mind in drafting this? If they did not mean it ever to be less then presumably they would have used the words that I use—“shall equal”. This is a probing amendment and I do not want to speak further to it.
Amendment 17 is more substantial. One thing that I think local government has welcomed over recent years is that we no longer do quite the procedure that the Minister outlined, and that in announcing a settlement for a year, Governments have given indications of what the settlements are likely to be in two subsequent years. The benefit of that to local authorities in terms of future planning and what they need to do is very important. In my own authority, under the current arrangements we now have a four-year plan and have to reduce expenditure by £66 million, which is 28% of our budget. It is not easy and we are trying to make sure that it happens. However, we could not take out the expected sum on an annual basis unless we knew what was intended for subsequent years. We have to plan to remove £20 million-odd this year and £18 million next year, so it is really important.
In keeping with the tradition that has grown up in local government, I am asking in this case that when a particular year’s settlement is announced we will be given indicative figures for future years, or at least for the next two years. That would enable us to plan the system much better than if we were simply told on an annual basis. As I say, this has been a real improvement which I think has been welcomed by all sides in local government, and I hope that the Government will maintain it.
Lord Jenkin of Roding
My Lords, the noble Lord, Lord Smith of Leigh, has made a point but I am sure he would agree that it is a fairly narrow one, whereas some of the other amendments in this group raise wider issues. Perhaps I may step back for a moment to remind the Committee of what the problem is that we are talking about. There can be no doubt whatever that when the Government published their position paper, Business Rates Retention Scheme: The Central and Local Shares of Business Rates, there was very substantial disappointment on the local government side at the figure of 50% as the split between the local and central shares of the business rates. The arguments were well rehearsed at Second Reading but I will remind the Committee of the two main arguments.
First, it is recognised that the higher the local share, the stronger is the incentive to encourage development and therefore growth and jobs. Indeed, the Government’s document more or less admits that, and the tables they have produced show that that is the case. One is talking here about a broad feature of national economic policy. The second argument is more specific, and is directed at the consequence of the division. As was said by a number of noble Lords at Second Reading, the result is that priorities are still being substantially determined centrally rather than locally. It has increasingly been the declared policy of the Government to achieve more local decision-making and more local control over their affairs and finances. At Second Reading, I warned my noble friend that she might hear some of the same arguments with which she was assailed during debates on the then Localism Bill. We were able to make a certain amount of progress on that. There were a number of quite significant amendments which strengthened the localist case for more local decision-making. I hope that we might perhaps have a similar result here.
There has been a good deal of discussion within the local authority world of how one could change the position to give the authorities the prospect of an increased share in future. A number of proposals were put up, some of which have found their way into other amendments. When discussing this with the Local Government Association—I ought to have declared a long time ago that I am a vice-president of that—
Lord Jenkin of Roding
Surprise, surprise, but there we are. Discussing this with the Local Government Association, it seemed to me that there would be merit in building in some form of escalator. Amendment 12 in this group introduces a limit, as it were, to say that it cannot be less than the previous year. However, that only stops it going down. Amendments 21 and 22, in the names of my noble friends and me, seek to build in a regular process by which the centralised share falls and the localised share rises. I do not for one moment claim that this is the only way of achieving an escalator; obviously, there might be a whole range of different options to do that. With these amendments we are arguing for the principle that the local authorities should be able to look forward over the next few years to a steadily rising proportion, both to increase the incentive to encourage development and more jobs, and to give expression to the increased localism which the Government aim to champion.
Amendment 22 spells out our proposal. I have said that I do not think this is necessarily the only way of doing it, but the proposal is quite simple: one starts at 50%; two years later the central share declines to 45%; two years after that to 40%; and two years after that to 35%. This takes us only up to 2018, and of course one is hopefully looking further forward than that. The corresponding local shares would go from 50% to 55% two years later; then to 60%; and then up to 65%. Therefore, over the period up to 2018, we would move from 50:50 to 65:35. Perhaps we could write this, or something like it, into the Bill. I made it absolutely clear that there are a number of different options for doing this and this was the one that seemed to attract some support in the local authority world. Local authorities particularly want to see some legislative provision setting out that the 50:50 split is not to be permanent or long-term.
As I have made clear—and this is very different from what I said when I was Secretary of State for the Environment in charge of local authorities—I am a huge supporter of the principle of localism. The noble Lord, Lord McKenzie, and others have made the same point. However, I detect the hand of the Treasury in this wish to maintain a 50% share. There is a feeling that it does not want to let go. My noble friend Lord Brooke of Sutton Mandeville and I have both been Treasury Ministers—I was the Chief Secretary at the Treasury—and I recognise that temptation. It seems to me that we have a choice here. Are we really going to encourage an increase in localisation or are we going to maintain a strong central control with some modest shift in favour of localism?
In considering the Bill and this particular proposal for the division of the business rate retention scheme, I hope that the Government will be prepared to accept that their good faith and belief in the principle of localism and localisation would be demonstrated by writing something like this into the Bill. That is what we are looking for. It would give an enormous fillip to the encouragement of local government which would go the whole way back, and local government would come to be seen as a more important area of governance in this country.
There is no doubt that as, over the past 30 or 40 years, the public have seen local government decision-making increasingly being taken over by central government, there has been a great loss of public interest in and concern over lower and lower voting figures. It is to the huge credit of local councillors such as the noble Lord, Lord Smith of Leigh, and others who are here that they have kept the flag flying in these difficult times. We now have a change of direction and I think that this has given local government an enormous boost of encouragement. It can say, “We really do still count. We are still looked to as an important area of government and not just as an instrument of central government”.
To my mind, if we could build into the Bill some form of escalator so that over the next few years there could be seen to be a shift in the percentage from a 50:50 towards a 65:35 split, or whatever it might be in six or seven years’ time, that would send out a very important signal to local government that the national Government are on its side and that they want to make localism work and make it a greater reality. The advantage would be that it would increase local authorities’ incentive to encourage development and so achieve growth and jobs.
If that is not done, it will give the impression that the Government—the Treasury would carry the blame—are giving a higher priority to tight monetary control than to encouraging growth. There has been a huge amount of argument about that over the past year or two but here is one way in which we can fight back on it. I hope that we will be able to persuade my noble friend on this. She will no doubt wish to discuss it not only with her colleagues in the DCLG but with Treasury Ministers—I know that they have a lot of other things on their plate at the moment—to see whether we can do something along these lines. It would be a hugely important signal to send out and a great encouragement to local authorities, as I hope that noble Lords will agree.
Lord Best
My Lords, I would like to speak to Amendment 16, which comes before the amendments in the name of the noble Lord, Lord Jenkin. I declare my interest as president of the Local Government Association. I express thanks to my various vice-presidents, particularly to the noble Lord, Lord Jenkin, for an exposition in very eloquent terms on the point covered by my rather cruder Amendment 16.
The LGA, representing district, metropolitan and county councils of all political hues, as the noble Lord has said, has expressed disquiet that there is to be a division of the business rates that retain so much central control, despite the positive rhetoric of localism. The LGA recognises that central government wants to keep a firm hand on local government finances during the period of deficit reduction covered by the current spending review, not least to impress the international financial markets that deficit reduction is being taken very seriously. The measures in the Bill are likely to last well beyond that deficit reduction timescale and local government at large is keen to ensure that the retention by central government of 50% of all business rates revenues, and indeed 50% of any business rate growth, shall not be maintained after its purpose has been fulfilled.
This amendment calls for central government to discontinue its retention of a share in local government business rates revenue after 2014-15; that is, after the last financial year in the current spending review period. I recognise that the Government may well be keen to extend the period a little longer because their deficit reduction objectives are likely to go on beyond 2015. However, the LGA, London Councils and others representing local government all agree that that top-slicing of business rates revenues by central government needs some clear end date. The 50% top-slicing greatly restrains the ability of local government to benefit fully from its support for any business rate growth and undermines the localism agenda of devolving powers away from the Secretary of State to local government.
In responding, perhaps the Minister could address one aspect of this concept of a central share of all business rates. I know that the Government have stated their intention to return the revenues that they receive through this arrangement to local government. That certainly sounds as though the Government’s intentions are not to redirect resources away from local spending, but it is unclear how the funding received by the Government will be returned to local authorities and what conditions are likely to be attached to it. Clarification on just how that somewhat circular movement of finance will operate would be much appreciated. The underlying point of the amendment is to draw out the Government’s view on just how long this central government control over half the business rates should last. I entirely support the comments on that from the noble Lord, Lord Jenkin.
Lord Tope
My Lords, my noble friends and I have added our names to Amendments 12, 16, 17, 21 and 22, which have been very ably spoken to by the noble Lords, Lord Jenkin and Lord Best. I shall not repeat all that they said; suffice it to say that I agree with everything that they said. The noble Lord, Lord Jenkin, made some mention of the disappointment in local government when the 50:50 split was announced. That was profound perhaps because local government was expecting more, given the rhetoric from the Government when the so-called repatriation of the business rate was first announced, something for which all parties in local government have strived ever since my noble friend Lord Jenkin nationalised it some years ago. So there was an expectation. He has repented many times since then—and blessed is the sinner.
Baroness Eaton
My Lords, a key concern of many local authorities, even within the new system, comes from those who are heavily dependent on government funding, the top-up grant or RSG. They are concerned with how that grant will be distributed, what factors are in the formula and whether a damping mechanism will still be retained.
When baseline rates are being calculated, the percentage share will be based on a historic average going back five years, which should help local authorities whose business rates have struggled to keep pace with the RPI. The lower the baseline rate position, the higher the top-up to which the authority will be entitled. There is potentially a small danger that there could be a significant change in an authority’s business rate’s tax base between setting the local share baseline and commencement of the scheme. Has the department recognised that and is it likely to make any allowances for it happening?
Another area of concern is that if only marginal changes are made to the current formula grant distribution model, the formula will not adequately reflect the needs placed on some local authorities, particularly for looked-after children—that is just one example—and local authorities that see a sudden increase in primary school numbers. Those are our concerns. The new RSG gives the Government scope to reduce local authority spending without having to reset top-ups and tariffs. How this reduction will be distributed is not known. For authorities where the RSG element is by far the most important element in their income, not knowing how that mechanism works makes forecasting very difficult indeed.
We have not mentioned what has been referred to on a number of occasions: the suggestion that local authorities should be interested in pooling. In principle, the pros and cons of the impact of pooling can easily be seen. It sounds a very good idea, and it is not hard to judge whether it is going to be good or bad, but if we do not have a mechanism by which to know what the outcomes will be for individual authorities within that pooling, it is very difficult not to have just a clubbing together. If you have more than that, administration and governance matters are going to be of concern because there will be a possibility of risk and reward, and that needs to be ascertained. It sounds a very good idea that we meet as a club to pool things, but the effect will be different on different authorities within that pool, and I would like the Minister to say how the Government think that will work.
Lord Brooke of Sutton Mandeville
My Lords, I am not a vice-president of the Local Government Association.
Lord Brooke of Sutton Mandeville
It is more important that I made the remark that I made a moment ago. I am not rising to move an amendment, and I think I can give the Minister an assurance that I shall stick to that resolution about not moving amendments. I am grateful to my noble friend Lord Jenkin of Roding for reminding me that I was once a Treasury Minister, although for a reason he may not have expected by his reverence—reference.
Lord Brooke of Sutton Mandeville
I will accept the reverence. My noble kinsman was, like my noble friend, Chief Secretary to the Treasury. In fact, he was the first, so he was allowed by Harold Macmillan to invent the title. In those days, the UGC of semi-beloved memory was a Treasury function for which my noble kinsman was responsible. Two decades later, I became Higher Education Minister. When I entered office, the hand of the Treasury was still in evidence in relation to higher education institutions, particularly in relation to the disposal of assets. If a higher education institution disposed of an asset, it had to hand back to the Treasury the entire financial fruit of its decision to so dispose. I was Higher Education Minister for two and a half years. About halfway through that period I persuaded the Treasury that its policy was not conducive to higher education institutions disposing of assets and it allowed higher education institutions to retain 50% of the assets they sold—a percentage that is germane to today’s debate. Before I left office the Treasury had come round—although it did not execute it until just after I left office—to letting higher education institutions have the whole lot. I say this simply to encourage not only the rest of the Grand Committee but even conceivably the Minister that it may be possible that concessions may be made at some stage in the future.
The Earl of Lytton
My Lords, I apologise to the Minister. I would like to follow the point raised by the noble Lord, Lord Jenkin of Roding. Not being a financial expert, but with my experience of the local government finance system, I liken this to that time-honoured competition that used to appear in some newspapers, the spot-the-ball competition, which I am afraid rather dates me. I refer to where the money goes and all these labyrinthine methods of checks, balances, benefits, credits and grants for this, that and the other.
However, I would like to concentrate on the question of the 50% share of the business rates under the business rate retention scheme. I say that as a veteran of development schemes of one sort or another by virtue of my profession. By the time there has been a redistribution to various other precepting bodies, a 50% take of the business rate is hugely unlikely to be any real incentive to a billing authority in terms of encouraging the growth in the tax base. Ultimately, it is the growth in the tax base that is the key to this. Unless the rate of tax per property band or per square foot of business space goes up, with all the consequences in terms of public opinion that that might involve, we have to grow the base. The other thing that will come up later is the question of making the system fundamentally more efficient, on which I have various amendments later on.
The development process represents a great number of hazards in terms of the finance of organising it and, particularly until recently, the growth of the front-loading of all manner of planning applications with a plethora of things related to sustainability and compliance with planning. Local electorates, furthermore, bearing in mind that they tend to be council taxpayers, often view large-scale development, particularly commercial development, in a negative light. So there is a downside to the whole process. A series of political risks has to be underwritten by this, and that requires a careful balance of what the yield will be before one can expect a billing authority to embark on this road with regard to so little a sum as 50%. That has to be reviewed, particularly because I understand that 50% would also apply to new space that comes on stream, so there will be no gain there either unless you happen to be in a son-of-enterprise-zone area, in which case a different set of rules will happen.
One particular question was put to me by the chief executive of the Institute of Revenues Rating and Valuation, a body of which I am a member. I am not expecting an answer to this, but it is worth pointing out at this juncture. The current council tax benefit scheme is financed by the Department for Work and Pensions by way of the subsidy paid to the billing authority. The current amount that I have been given for England is £4.3 billion. That might be for England and Wales and if I have not got the sums quite right, I apologise to the Grand Committee.
Under the new local support for council tax—the LSCT scheme set out in the Bill—the grant for this new scheme is to be paid out of the central share of business rates and the amount is to be the same £4.3 billion less 10%, because we know that the whole process will be scaled back by that amount. If one is doing a spot-the-ball competition, the question is whether and, if so, how will the Department for Work and Pensions reimburse the Department for Communities and Local Government the £4.3 billion—minus the 10% of course—which is being financed by the business rate? I should say straightaway that I do not expect an immediate answer from the Minister.
Lord Greaves
There are one or two brief things that I would like to say. I apologise to noble Lords for not being present at Second Reading, when I was enjoying myself in France. I declare an interest in that I am a member of a district council in Pendle, in Lancashire, and a member of its executive. I am also vice-president of the Local Government Association. Why my noble friend is not is a mystery.
Lord Greaves
The noble Lord was sacked. I think further investigations are required, and we will report back.
I was moved to speak by listening to my noble friend Lady Eaton. I support a great deal of what she said, which was in emphasis a little different from some of the contributions made by other noble Lords. In principle, these amendments are right: 50% is a remarkably low figure to be retained by local government, and certainly not what was expected when the scheme was first announced to the world. However, I want to bring noble Lords down to earth with regard to some local authorities. Retention locally of the business rate will not be a financial bonanza for those local authorities at 50% or at any other higher percentage. Many authorities, as my noble friend said, will continue to need to rely on the rate support grant, if it continues to be called that, because they will have great difficulty not only in finding ways in which to expand their tax base by increasing their business rate but also maintaining them at the present level. This is a fact of life, and the localisation of business rates in these areas, including my own region of east and Pennine Lancashire, does not have the rosy glow around it as it does in areas that will find it easier to grow a commercial base. That is not to say that people will not try to do it, but in areas such as my own it will be a matter of trying to hang on to what is there at the moment.
I give an example. A small district might have two or three large mills or factories contributing quite a high proportion of the business rate. It only requires one or two of those to close down and the position will be fairly catastrophic. It is not the same in every kind of area and whatever kind of system we have in future will have to retain a substantial element of redistribution at least for those authorities. I do not know what proportion of authorities that is, but I have heard my honourable friend Andrew Stunell tell me that about 20% will be substantially reliant in future on continued redistribution elements of the grant. I do not know whether the Minister has an idea or can enlighten us after this Committee.
The second thing that causes a certain amount of alarm is the 50%. It is really the argument about what happens to the money that is centrally controlled. How far will this kind of area, which tends to be the old, declining, industrial area—although not all as some are coastal towns that have fallen on bad times, and so on—rely on the traditional kind of government grants, particularly capital grants, for regeneration? We discussed this issue in your Lordships’ House last week in a debate launched by the noble Lord, Lord Mawson.
The noble Lord, Lord McKenzie, and I were making similar points that parts of the country are missing out on the grants that are now available, compared with the past. That is partly as a result of the reduction in funding for capital schemes and the fact, for example, that the regional growth fund is cumulatively less than the regional development agencies used to have available to disperse. It is partly because there is a tendency now to go for growth and to go for the places where growth is easiest and perhaps to go more to the south-east, the Greater London area, the big cities, the city regions and metropolitan areas. There are very exciting and worthy schemes for authorities to work together for economic growth and development in areas such as Greater Manchester. Those places that do not naturally fit into the big city regions risk missing out. I am talking about my own area in Pennine Lancashire, but there are others as well, in the north-east, in west Cumbria, and elsewhere around the country. Our concern is about how much the less fashionable and less sexy areas, or the areas which find growth more difficult and where the return on investment may be less as a percentage, are going to miss out on this 50% redistribution. There are huge questions there.
I ask the Minister whether the Government have an assessment at this stage of how much of this central fund is expected to be used for different purposes. How much of it is expected to be used for council tax issues which the noble Earl, Lord Lytton, was talking about? How much is expected to go on administration? How much is expected to go on straightforward redistribution to the sort of areas I am talking about? How much will go to traditional funds and schemes for capital investment and development around the country? How much will go on regeneration? How the Government will use this money is not clear to me at all. I can see in total the kinds of things it is going to used on, but I do not really know whether they have an estimate of how much is likely to be used for the different elements. I would find it extremely interesting and useful to have that information, if the Government have worked it out.
Baroness Hollis of Heigham
My Lords, I had not intended to come in on this part of the Bill; I was waiting for council tax to come up. However, the points made by the noble Lord, Lord Greaves, have triggered a set of questions for me. Does the department have a “who pays, who gains” outcome as a result of these changes? If so, can the Minister share that with us? I am very unclear.
I am delighted to see that the noble Lord, Lord Jenkin, has been converted from the error of his ways. Let me remind him that before the business rate was nationalised—I think it was the only thing that was nationalised under the Thatcher Government—authorities like my own, which were no longer unitary after the disaster of 1974, none the less received a business rate. This meant that those who lived outside the fringes of the city area and who did not pay the domestic rate, contributed through the business rate to the city’s well-being. This meant that a city could therefore serve as a regional centre while having only the property rate of a rural district council.
More important still, it meant that the leader of the council—myself—or the chair of finance would take great pains with the Chamber of Commerce. Every year, I went with a prospective budget, and it had a very direct influence over how we constructed our budget. As a result, until the nationalisation of the business rate under the noble Lord, Lord Jenkin, and as there was a direct pay-off to our revenues, I was willing to forego rateable value on new property; I was willing to invest in apprenticeship schemes; I was willing to do the environmental works, the roads and so on, to get small enterprises off the ground; and we were willing to help SMEs to develop through local enterprise trusts. We did all that because there was a direct pay-off. I could never understand the huge folly of a Conservative Government, which is above all expected to be business-oriented, cutting that link with the city authorities—admittedly, they largely tended to be Labour authorities at that time—which gave them an incentive to build their business.
After nationalisation of the business rate, the result was—I did the figures—that my local authority was contributing something like £14 million a year in business rate to the Exchequer and receiving back something like £7 million. The adjacent Conservative authorities, which did virtually nothing, were contributing about £2 million and receiving back about £4 million. In other words, they were piggy-backing off the flow of the nationalisation of our business rate to rural areas, because they had never had a concern to develop business in their areas, partly because they had high property values and did not want to be contaminated by it. It also meant that I no longer had any incentive to do something similar. I forgot to declare that I, too, am a vice-president of the Local Government Association.
I applaud this move, even if it does not go as far as I would like. However, I understand the need for an equalisation grant, otherwise Westminster would retain far too large a share and other local authorities would have very little. As a result, it will be really important for us to see what greater equity there will be now in terms of the statistics between who pays in and who gains and what the return is. Some authorities, such as my own, are district councils trying to do a unitary job with district council revenues—thank you very much to the Government for that—and they will be glad to have that money if it allows them to look after their business economy as well as the wider economy, in terms of building tourism and so on for the whole area.
For the sort of authorities that the noble Lord, Lord Greaves, mentioned, which may well need this money but may not receive it, there is a problem, too, of the distribution between those authorities whose money comes from small but highly valued premises—solicitors’ premises and so on—and those that have relied in the past on large physical premises such as factories, which are now closing due to the shift in the British economy. A reason for this request is that we were screwed the last time around and it was a disastrous policy for government, of whatever complexion, as well as for regional economies. I hope that this time around we will get a more equitable and sensible distribution. If the Minister can help us by promising to circulate some of these figures, it would be very valuable indeed.
Lord Beecham
My Lords, my noble friend Lady Hollis makes a very good point about the relationship between local government and business. It is interesting that the London Chamber of Commerce and Industry, in its briefing for today’s discussions, makes the point that more than a quarter of a century after the noble Lord, Lord Jenkin, perpetrated his terrible crime, 53% of London businesses apparently think that councils are currently responsible for setting the level of business rates. It says that that reveals a breakdown in communication between councils and businesses. Some of us might think that it simply betrays a complete ignorance of how local government works on the part of those who really should know a little better. However, that does not mean that the situation should not be improved.
I sympathise with the amendment tabled by the noble Lord, Lord Jenkin, because he seems, rightly, to want to rebalance this position. The Government seem to take a rather Augustinian position in respect of localism: “Lord, give them localism—but not yet”, would be one way of putting it. Another way, perhaps more familiar to the Secretary of State in his earlier days as an enthusiastic Marxist, would be to describe it as a form of democratic localism. Democratic centralism was the vogue under the Stalin regime but this is democratic localism, which is to say that all the orders come from on top and are then applied locally. This division certainly seems to portend something of the kind.
In a way, the game is given away by paragraph 9 of the statement of intent on business rates retention. Having previously said that a number of “specific grants”, which I will mention in a moment, will be included in the business rates system, that paragraph goes on to say:
“As a result, the Government is able to set the local share at 50% which delivers our objectives on growth and localism while allowing for future fiscal control to protect the interests of the taxpayer and the wider economy”.
That is a fairly clear statement that the Government are seeking to use this 50% as a controlling mechanism.
Lord McKenzie of Luton
My Lords, there are a number of propositions on our agenda concerning the local/central share. We welcome the opportunity to probe all of the issues, as indeed we have done in this debate, and I hope to focus on a consensus for the next stage of our deliberations on Report. I am happy to work with the noble Lords, Lord Jenkin and Lord Tope, to try to achieve just that.
The central share and its application is one of the more troubling aspects of this part of the Bill. It is troubling in the sense of lacking considerable detail, certainly beyond the early years of the scheme. It may be that all of this detail is tucked away in the plethora of documentation provided to us, and doubtless the Minister will point us in the right direction if it is. But there is not much light shed on the subject in the revised statement of intent of last month. Our concern, which has been echoed today, is that the central share will be used in whole or in part to fund matters that would otherwise have been funded by central government. Another concern is clearly the basis on which the central share is to be returned to local government, and there is of course the quantum of the share—the 50:50 split. But these issues about where the money will go and where it will end up clearly troubled the noble Lord, Lord Greaves, and the noble Earl, Lord Lytton, and others who have spoken.
What is driving the local/central split is the Government’s desire to control the overall envelope of local authority spending, routinely determined through the local government finance settlement. What this is currently controlling of course is the formula grant and its distribution. There is a range of other funding available to local government—its own fees and charges and council tax—as well as hitherto a series of grants, some non-ring-fenced and others which are. These grants do not all fall within the orbit of CLG. Such grants are controlled through the usual departments’ DEL processes. Although we have challenged the Government’s draconian cuts for local government—28% in Wigan, as we heard—we were not proposing to open up a broad debate on this aspect except to say that, by the reduction in the control total, the Government have added to the certainty that the business rate in aggregate will exceed the control total.
Of course, currently the whole of the business rate collected is returned on some basis to local government through the formula grant. Indeed central government tops that up with revenue support grant as well as formula police grant. We are now told that for the key year of 2014-15, which has the lowest spending control total, business rates will exceed that total and, therefore, cannot just be left uncontrolled in the hands of local government. A percentage will be peeled away to be applied to local government by central government.
For the record, perhaps the Minister would set down how the 50% has been calculated. What is the forecast of national business rates for 2014-15 and the extent to which that exceeds the control total? How is the 50:50 local control share split derived from that? The technical paper 2 sets out how that will be done and which multipliers are to be used, but some work must have been done to derive the 50:50 proposal. It would be very helpful if we could have that detail. Please can we be given the figures? How much headroom have the Government given themselves between the control totals and the local shares for 2014-15? The intention is that local authorities will be kept whole for 2013-14, based on the application of the formula grant. Can the Minister say whether it is expected to utilise the whole of the central share for that year in this way?
Appendix A to The Local Government Finance Settlement in England: A Guide to the Basics sets out a complete list of grants for the current year. Can the Minister confirm that, at least in theory, any of those could, in whole or in part, be funded from the central share? If you look at it, you will see that it includes, from the Department for Education, the dedicated schools grant, the pupil premium grant, the early intervention grant, the extended rights for free travel, and from the Department for Health, the learning disability and health reform grant. Those are very substantial amounts of money that concern local government in England and, on the proposition that the Government have advanced today, they could fall within the ambit of that description. If not, it would be good to have a denial on the record.
There is a separate issue about the extent to which the local and central shares are calculated after deducting amounts to cover the new homes bonus and other matters. Reading the various documents, I was a little confused about where the funding for the new homes bonus was ending up. Originally, I understood that it came from central Government and was not part of the local government settlement. On the basis of what we have read, I am not sure whether it is now being met from within the business rate total, the top-slice in a sense. If that is wrong, perhaps the Minister could put me right on that.
If the central share is to be used to replace any of these grants, the distribution of it would presumably follow existing rules, but if we prevent that happening, what other options do the Government have for distributing the central share? That hugely important question has been asked by many noble Lords in this debate. We are entitled to know the basis on which the central share will be made available to local government. At one extreme, which we could probably support, it might be distributed strictly by reference to a needs and resources analysis, such as formula grant, which, notwithstanding tariffs and top-ups, could ameliorate the consequences of the distributional effects of the business rate retention scheme. So it might be good for equity but not as good as an incentive. At the other extreme, it could be distributed in a way that is neutral between authorities or as favours the more advantaged authorities. There are no hard and fast rules and we need some clarity from the Government on this crucial point.
Lord Greaves
I wonder whether I can help the noble Lord. Does he agree that a further question, in addition to the very detailed ones that he is asking about the different grants, is whether any of this money might be distributed through non-departmental bodies—quangos and so on—such as the Homes and Communities Agency, and whether some of the money that they disperse might come from this source?
Lord McKenzie of Luton
That is a very interesting question. We have an amendment coming up which is intended to probe the heads under which various categories of institution are counted as qualifying as English local government. It is a possibility but we can specifically probe that when we come to the next group of amendments.
This really is the most troubling aspect of these proposals. Unless I am missing something, it is an area where we do not have enough information. On one basis, we might be happy with a share that is not 50% but 30%, and on another basis we would not want any central share at all. Under Amendment 9, my noble friend Lord Smith probed why we have that particular formulation. I am sure that the Minister has an answer.
Amendment 17 touches on the hugely important issue of not only having information about the current year but being able to project what is likely to happen in subsequent years, particularly in an environment where councils are having to save every penny they can and take painful decisions about cutting back on services.
Amendment 12 in the name of the noble Lord, Lord Jenkin, seeks to ensure that the quantum of the central share will not grow from year to year. Given the RPI increase in rateable values, this should mean that the percentage of the central share gradually declines.
However, we need to be mindful that all these matters could be achieved by central government charging grants against the national business rate collection so that both central and local shares decline in amount— effectively top-slicing. Perhaps we can have amendments to deal with that, as we need to protect against that possibility.
Amendments 21 and 22 in the name of the noble Lord, Lord Jenkin, offer a rather novel approach, which dictates a gradually reducing percentage share of a billing authority’s central share and a gradually increasing percentage of a billing authority’s local share, so that whatever is top-sliced—if anything is—what remains is increasingly skewed to the local share. I think that that approach has some real merit. I should be very happy to engage in discussions to see how it might be developed and made watertight if it is to be included in the legislation so that the Government do not have a way round it. Subject to what the Minister says about the distribution of the central share, we would seek to support that.
Amendment 16 in the name of the noble Lord, Lord Best, seeks to preclude the determination of a local and central share after the financial year ending 31 March 2015. Whether we can support this depends on what happens to the central share. If its application provides a means of redressing possible adverse distributional consequences of the BRRS, there may be an argument for its continuance. Otherwise, it is the business rate scheme that will drive the distribution of the control total, or its equivalent. Even if the rebasing is fair at the point that tariffs and top-ups are established, the dynamic does not mean that it will continue in that way until the reset date.
I shall comment briefly on a few of the contributions to this debate. The noble Lord, Lord Greaves, made the point that whether the figure is 50% or somewhat higher, it will not necessarily change the world for some authorities, particularly smaller ones. I would echo that from Luton’s perspective. My noble friend Lady Hollis reiterated the point about cutting the link between business and local government through the nationalisation. However, we should not berate the noble Lord, Lord Jenkin, any further; I think that he has redeemed himself by his approach, and he has certainly done so with his introduction to this debate, which was very constructive.
The noble Baroness, Lady Eaton, talked about the RSG distribution and the formula grant. I think she was referring to how you set the baseline and the parameters that are going to be used, and we are going to have some debate on that. If the resetting is not going to be for seven or 10 years, getting that as right as possible is hugely important. It might be—we might get some good news from the Minister—that it could be ameliorated in part by use of the 50% central share, but I am not sure that we are going to get that news this afternoon. I am looking forward to the Minister’s reply.
Baroness Hanham
My Lords, so do I. I am grateful to all noble Lords who have spoken to their amendments. They asked a number of questions, in particular, the noble Lord, Lord McKenzie of Luton, at the end. Some of them I will be able to deal with, but some I will not. I think the sensible thing is for me to make sure that we give a written response to questions where there is a need for detail so that we can come back to them at the next stage or have discussions in between, if that is necessary on the full information, not all of which I have today.
I shall start with Amendment 9, which was moved very shortly by the noble Lord, Lord Smith, and seems to require about six pages in reply. I am going to have to skim through this extremely important matter which has clearly shaken the tree a bit. On the face of it, Amendment 9 makes a very simple change to the accounting arrangements for the central share but, as the noble Lord, Lord Smith, probably knows, it has a far greater effect than it may seem.
I shall say a little about how the provisions will work. Paragraph 1 of new Schedule 7B requires a “main non-domestic rating account” to be kept for a year. Most payments to and from local authorities in respect of business rates will be made into and out of this account. The exceptions are levy and safety net payments, which we will come on to later.
Paragraph 2 sets out the payments to be credited to, or debited from, the main account. This includes sums received from local authorities in respect of the central share. We have said that the central share of business rates would be used for the purpose of funding grants to local government outside the rates retention scheme. I shall return to that later. The provisions that enable this are set out in sub-paragraphs (3) to (5).
Amendment 9 seeks to make it clear that the sum that can be debited from the account in respect of the central share shall equal the payments received by the Secretary of State from authorities in respect of the central share. That sounds very simple and sensible, but in fact it does not take account of the Government’s intention to use some of the central share money to fund the transitional protection payments provided for in Part 8 of the schedule. This is because, following revaluations, the Government are obliged by current legislation to put in place a transitional relief scheme, so that business ratepayers whose bills increase significantly can see their bills phased in over a number of years. The transitional relief scheme is paid for by similarly phasing down the bills of those ratepayers who see their liability fall significantly as a result of a revaluation. Earlier, the noble Earl, Lord Lytton, was discussing the effect of appeals on precisely this area.
In the context of the rates retention scheme, this means that some authorities could see lower income as a result of the transitional scheme being put in place for ratepayers and some higher as the transitional scheme unwound. That is clearly an untenable situation. Authorities’ income is supposed to reflect their success in promoting development and not the technical vagaries of the transitional relief regulations, so we have always said that we would take transitional relief completely outside the rates retention scheme and provide for a separate series of payments to and from authorities depending on whether they see more or less income as a result of the transitional relief scheme. Part 8 gives effect to this.
The payments themselves, however, will be credited and debited to the main rating account. I hope that the Committee is following this. The scheme will be set up to balance over time but, in any year, we may pay out more to authorities than we get in. So the current wording in paragraph 2(4), which Amendment 9 seeks to change, demonstrates that if there is a deficit, it can be met from central government’s share. In other words, central government will bear that cost. So while central government could choose to debit less than it has received from authorities by way of central share income, it cannot debit more. On the strength of this explanation, I hope that the noble Lord, Lord Smith, will feel able to withdraw his amendment.
I turn now to the remaining amendments in this group. The noble Lord, Lord Jenkin, explained very clearly and plainly what he is trying to do. Amendments 12 and 21 would effectively mean that the central share could never be increased, since it could never be greater than the previous year’s central share. Amendment 16 would set the central share for the current spending review period only, and Amendments 17 and 22 would fix the central and local share—or a trajectory for them—over a number of years.
The noble Lord, Lord Jenkin, and other noble Lords asked about increasing the local share. We have always made it clear that over time we would hope to increase the local share, particularly once we have the finances back on track. It is difficult to see how legislatively we could allow that bearing, in mind that this whole question of the economy is such a difficult area at the moment.
We have also made it clear that in setting up the rates retention scheme, our aspiration is to provide for a long period between resets of up to 10 years. The corollary of that is that the central and local shares and also the tariff and top-up payments will be fixed for the duration of the reset period. By definition, the 50% rate would go on for 10 years unless there is an amendment. Between resets, therefore, we do not anticipate central and local shares changing from year to year. The 50% will last until 2020. That will give local authorities much greater long-term certainty about their financial obligations to central government and the funding that they can expect to receive from government than under the current three-year spending review process. However, the Government must retain the ability to alter the local share of business rates where it is necessary to maintain affordability and protect the interests of the taxpayer and the wider economy. However, it would be imprudent to presume that there might never be a time when we might need to increase the central share.
The percentage approach to the central and local shares of business rates was adopted in response to views expressed in last year’s consultation about the potential risk of being expected to pay a fixed sum in business rates to central government. By sharing business rates on a percentage basis, some of the reward of positive growth, but also some of the risks of negative growth, will be borne equally by central government. The Government have, and always will have, an interest in public spending, and it is unrealistic to expect the Government to take their hands off it completely and to constrain themselves, as Amendments 12, 16, 17 and 21 suggest.
I will have to write to noble Lords about some of these points because I may not have the answers, but I was asked how the 50% share was set. How did we get there? The Government have considered a range of factors involved. If the information about the setting of the 50% share is not available before the next stage, it will be available in the local government finance report in the figures for business rate totals. That may not be soon enough for noble Lords.
Lord McKenzie of Luton
Can I just clarify this? The detail of the clarification is to come but, in respect of 2014-15, is it the case that the local share that derives from that calculation is equal to, or about equal to, the control total that the Government are seeking to apply to local government and that there is no extra in there?
Baroness Hanham
It is going to be based on the base from this year. Every local authority will be equal when it starts on this system, but the tariffs and top-ups will bring that to the equality base when there is too much in one and not enough in the other. So that will be the first shuffle to get the equality base across the piece.
Lord McKenzie of Luton
If the Minister could just clarify this, it would be really helpful. As I understand it, the local and central shares have been calculated by reference to the lowest of the control total years. I understand why arithmetically that is so. In respect of that year, is the 50% local share that comes from that calculation equal to the control total for that year? Is it the case that there is no extra in the central share and that just enough has been left for 2014-15 to be able to apply the control total and keep it intact, or has central government taken more than that?
Baroness Hanham
The Government will provide revenue support grants to make up the difference between the local share of the business rates and the spending control totals for local government in 2013-14 and 2014-15, having taken into account the amounts needed. Noble Lords asked about the new homes bonus. In future years, the total amount of grant funding will be determined through spending reviews and the Government will set up the base for distribution in the annual local government finance report. I do not think that that will answer the noble Lord’s question, but I will write to him.
Baroness Hanham
And I had better write to the noble Lord, I think. That seems pretty fair.
I was asked about the specific grants. The funding will be from the central share and the finance for specific grants, and that will include the revenue support grant. I will write on the specific grants that already exist and tell the Committee what is included.
The noble Baroness, Lady Eaton, asked about the local authorities’ pool and how the money gets distributed if they go into one with others. Frankly, that will be a matter for the pool to decide; they will regulate themselves. We would expect there to be a local government lead on that so that they can receive payments and that formal arrangements would be agreed on the operation of a pool, so it will be governed by some sort of constraints.
The noble Baroness, Lady Hollis, asked who paid and who gained, but that rather depends what you mean by who pays and who gains. We have always said that no council will be worse off as a result of its business rate base at the outset of the scheme. That was what I was trying to explain about the base, the tariffs and the top-ups. I am sorry if I did not come across well, but that is what the situation is. The information that the noble Baroness sought will be available at a point of the draft local government finance report. That will be my answer to some of the questions: that the information will be ready for a bit later on, I hope before we consider this matter further. I hope that that covers the points made.
There have been a lot of discussions, some of which we will come to on further amendments. I note what the noble Lord, Lord Tope, said about local government’s disappointment regarding the split. I appreciate that that is the situation, but we ought not to ignore the fact that by making the local business rate stay with local government, even if things are then done to it, we are setting a very sensible principle: giving the business rate to local government and maintaining it with it. That principle can then be worked on in the future, regarding how much is left. However, I think we have established an important principle here. I hope the noble Lord is happy to withdraw the amendment.
Lord Smith of Leigh
My Lords, that was a very interesting grouping of amendments, which received a wide range of contributions. I congratulate the Minister on the scope of her responses. She gave a full and helpful answer on the first amendment that I moved, Amendment 9. I will obviously read what she said in Hansard, and if necessary come back. She was definitely trying to be helpful in understanding it. However, she did not really respond to Amendment 17. She noted at the time that she was not sure whether there would be continuity, but perhaps she would like to write to me on that one.
I thought that the debate was really interesting, because it got some way to the fundamental parts of the Bill. The contributions of the noble Lords, Lord Jenkin of Roding and Lord Greaves, seemed to be a contradiction. We all want the Bill to achieve growth in local areas for the country. However, to use a Lancashire expression, I say to the noble Lord, Lord Greaves, that 50% of nowt is nowt and 100% of nowt is nowt. Therefore, it is not really going to help in those areas where there is no growth.
Lord Smith of Leigh
Yes, you do get the negative. I am afraid that the risk is there as well, but there was a safeguarding scheme. However, if that stays at 10%, it could be very significant. There is a contradiction.
My noble friend Lady Hollis’s contribution was about accountability. That would be the phrase that I would use. She described what happened with the business rate in the old days. There was a real accountability between the levying authorities and local businesses in discussing what was involved. Now, when we have a situation in which 50% of the money is disappearing and there is clearly a lack of understanding about the current system, as my noble friend Lord Beecham said, I suspect that businesses think local authorities set the rate because they collect it. We are the responsible agents in collecting the money, so clearly if the Bill comes in the name of the local authority, businesses will assume that that is where the money is going, and not that local authorities are simply a receptacle for transferring the impact onwards.
One of the Minister’s comments is at the heart of this: she said was that if we get the base, we can try to get people equal against the base. But my contention is that if the base is not right, inequality will just be built into the system. If the issues and the problems that the noble Lord, Lord Greaves, mentioned as existing in his area are not reflected in the base, it will not be fair. I beg leave to withdraw the amendment.
“(4A) Such an amount should only be paid in place of other grants to local government if the Secretary of State is satisfied that the overall needs of local government will be met.”
Lord Palmer of Childs Hill
My Lords, in moving this amendment, I shall speak also to Amendments 13 and 14. It appears that the effect of the central share is to allow the Government to reduce what would have been grants outside the formula grant—that is, paid for by general taxation—and thus allow the business rates to take up the slack. The Treasury could thus substitute business rates for other taxes. I would like to ask if the Minister agrees that there is a danger of improving central government’s fiscal position at local taxpayers’ expense. That is the crux of this very short amendment.
This would not have an immediate effect; the estimates have been made by various local government bodies that the effect could begin in 2016-17, but it could be a real effect.
The central share will come back to councils, as we have discussed, but not necessarily the same councils, in the form of grants. Other noble Lords have given an example of Westminster and have said that that is why there has to be a reallocation of these moneys. I understand and appreciate that, but the real problem is that one reallocates business rates to give an incentive to local authorities to improve businesses within their areas and improve the economy in those areas. Many of them need that incentive; the current system of business rates whereby you collect the money and keep none of it is not an incentive, which is why this is an improvement. If you take away and redistribute, you lose a lot of that incentive from the places where there could be a great improvement in the economy.
Mention has been made by other noble Lords as to the 50%. I could have come in at that stage, but I thought that I would include it in what I am saying now. There is one other aspect to a 50% share, which has not been broached by other noble Lords—that 50% for the Government and 50% for the local councils is a dangerous percentage. Local authorities will lose, as they have in other instances, the difference between the half-empty and the half-full bottle. You know exactly what it is when it is 50%, but it is more difficult when they start recalculating and the share is 51% and 49%, as has been my experience in local authorities. Measuring the value of local council housing, when the example given by CIPFA was 50:50, when the local authority came to use the calculation they took the wrong half, because it was never 50%—it was always something else. Someone in Whitehall may know how to do it; there is a rumour that that is the case. But there is a danger that when you have 50:50, you will end up with 51:49, which would mean that you would not know which was the Government’s share and which was the local authorities’. I would hope that the larger share would be for the local authorities.
The amendment makes the point that the Treasury will be able to switch grants that have been paid for by general taxation into the rates system and in effect raid local businesses to assist the Exchequer. All this will, of course, be in addition to the cut of £500 million, in terms of the legislation overall. Amendments 10, 13 and 14 seek to protect local councils and central government from that usual thing of temptation, because it is not easy to resist temptation. As Oscar Wilde said, “I can resist anything except temptation”. I do not think that we should put too much temptation in the way of central government. I beg to move.
Lord McKenzie of Luton
My Lords, we have Amendments 11 and 24 in this group. Amendment 11 is a very straightforward probing amendment; it refers to paragraph 2(5) on page 20 and is to do with payments to local government in England. Presently it reads:
“The reference in sub-paragraph (3) to use for the purposes of local government in England includes the making of payments under an Act or an instrument made under an Act (whenever passed or made) to”—
then it gives a range of authorities.
Baroness Hanham
I thank noble Lords for this short but none the less important amendment. I understand the concerns that prompted the amendments in this group, but I hope that I can persuade noble Lords that they are unnecessary.
Currently, the Government determine how much local government spending the country can afford and set local government grant totals.
The Deputy Chairman of Committees (Lord Bichard)
My Lords, there is a Division in the House. The Committee will adjourn for 10 minutes.
Baroness Hanham
My Lords, as I was saying before I was rudely interrupted by the television screen, currently the Government determine how much local government spending the country can afford and they set local government grant totals—both formula grant and specific grants—accordingly. Redistributed business rates income is then used to fund formula grant and any difference is made up from revenue support grant. That is the situation at the moment. The more business rates there are in the system, the less revenue support grant is needed, and vice versa. Therefore, since 1990, business rates have been used in partial replacement of revenue support grant.
Although the mechanism is different under the rates retention scheme, the principle is exactly the same. The business rates retained through the central share will be used to finance both revenue support grant and specific grants in the same way as they are currently used to finance formula grant. Earlier the noble Lord asked me, although I was not able to answer, whether grants relevant to local government from other departments are included. They will be put into that one pot, so all the grants will be relevant. Therefore, we cannot see why the Government would need to accept Amendment 14, as it would place greater restrictions on central government than currently exist. I hope that, looked at in this way, the noble Lord will agree not to press his amendment.
Amendments 10 and 13 accept the principle that the central share should be used to finance other grants but seek to ensure that this happens only if the Government are satisfied that the overall needs of local government will be met. The overall need of local government will be, as it is now, a factor that, along with the wider economic situation, will inform the amount of specific and revenue support grant that government will provide to local authorities.
At future spending reviews, the Government will have regard to the resources available to authorities from their own resources—council tax and, in future, retained business rates—along with the overall spending needs of local government and the fiscal situation of the country, to determine how much grant should be provided.
I hope that, having reflected on the nature of the spending review and the reality that the overall needs of local government will be fully considered as part of that process, the noble Lord will agree to withdraw his amendment. The Bill contains assurances that any money paid by way of central share will be used by government only for the purposes of local government.
On Report in the other place, amendments were made to the Bill to make clearer what was meant by “local government” in this context. The list set out in paragraph 2(5) of Schedule 1, however, was not intended to be exhaustive. Rather, it was illustrative of the sorts of bodies that would be covered by the phrase “local government”. Amendment 11 would have the effect of making the list definitive—something that it was never designed to be, and therefore I cannot accept the amendment. It could otherwise be added to or detracted from and have something else substituted.
Amendment 24 would require the Secretary of State to set out in a local government finance report what payments the Secretary of State had made from the central share. I have rather more sympathy with the principle of this amendment and, although the details are probably over the top, we have discussed it and I think we have said that it will be available just before the local government finance report. However, I must say to noble Lords that the amendment is unnecessary. It will be clear from government accounts how much revenue support grant and specific grants central government have paid out in any year. It will also be clear how much has been collected by way of the central share and debited from the national accounts. It will therefore be obvious whether the Government have used the central share money in support of local government.
Nevertheless, I am prepared to think about whether, regardless, it would be helpful to set this out in the local government finance report in respect of an earlier year. Because of the timing of the outturn data, that would mean that we could not set out this information except in respect of the two previous years, which might make it a little out of date. However, we will consider that and talk to the LGA about it. I hope that, having heard those comments, the noble Lord will be happy to withdraw his amendment.
Lord McKenzie of Luton
The noble Baroness dealt with the question of whether the list in sub-paragraph (5) is complete, and the answer was that it is not. If it were, however, what other bodies would be on there? Would it be a vast range? Can she give us a clue as to which others might have sat on that list?
Baroness Hanham
I think I have said all I can say. The list is not complete and others can be substituted or interposed if necessary. Those will arise at other times but I do not know what they are. If we have information on or a sort of idea of which others we might be talking about, I will let the noble Lord know, but at the moment it is simply left that other bodies may be included.
“(2) In Schedule 8 to the LGFA 1988, after paragraph 5(7) insert—
“( ) Appropriate rateable values will exclude a percentage of any increase in total rateable value of all appropriate hereditaments within the billing authority area as laid down by the Secretary of State in regulations.
( ) In setting the percentage, the Secretary of State must take into account the indexed rate of increases in rateable value of all hereditaments of all billing authority areas.””
Lord Best
My Lords, if the wording of Amendment 15 is pretty incomprehensible to most of your Lordships, I assure the Committee that I, too, found it extremely hard to follow. Indeed, officials at the DCLG have suggested that it should refer to Schedule 7 to the Local Government Finance Act 1988 and not Schedule 8, and they may well be right. However, I am anxious not to get bogged down in the incredibly complex intricacies of the Bill’s wording. Instead, I hope that this amendment will open up the debate on one important issue within the Bill.
The point of disagreement that the amendment addresses relates not to any difference on policy but to a divergence on the best way of implementing that policy. It is a difference between the clever people inside central government departments who devised the Bill’s clauses and the clever people inside local government who spot practical deficiencies therein. With this amendment, I think that all concerned are in agreement on the policy objective: that new arrangements should enhance incentives to local government to be more business-friendly and to increase the commercial viability and the wealth generation of the areas they serve. However, those drafting the Bill may not have chosen a route in this so-called fiendishly complex mechanism that achieves the desired goal in at least one important respect.
The problem is that the legislation would see councils rewarded from an increase in business rates that follows from physical growth in the authority’s tax base—that is, an increase in rateable floor space—but not from increases in the rateable value of existing properties. That means that there is an incentive for councils to go for the building of new offices or for larger-scale, out-of-town developments, but there are no incentives for councils to enhance the rateable value of existing buildings—for example, by spending money on the public realm, transport and community safety, attracting more businesses and more customers and users of services to the area. In heavily developed city locations, there may be few opportunities for creating lots of new buildings, leaving aside the kind of intensification that buildings such as the Shard can create. However, councils can be hugely important in improving the environment and the quality of an area, which leads to greater attractiveness to businesses and thence to higher business rates.
As I read the briefings, I am left with the thought that excluding business rate growth that comes from rental price increases at revaluation is simply an omission in the Bill. All of us would want to encourage councils to pursue economic growth policies that attract new businesses that result in such rises in rental values. Clearly, it can take a lot more effort on the part of a council to organise the upgrading of the business district, spending money on green spaces, on transport links, on improving appearance and on enhancing safety and security than simply granting planning consent for an edge-of-town, traffic-generating, environmentally unfriendly shopping centre; yet the former would provide no benefit to the local authority in terms of a share of the uplift in business rates while the Bill incentivises the latter.
I have had a look at several reports that have been sent to me, starting with a useful one from the Centre for Cities think tank, which was published in February. It makes the case for rewarding revaluation of growth because in some areas physical growth is just not where the focus should be if the end goal is growth and jobs. It identifies two types of area in particular—high-density restricted supply areas such as Westminster or Camden and slower growth or right-sizing areas such as Preston and Chatham. It also includes data demonstrating that, in 2007-08, 50% of authorities saw a reduction in rateable floor space, which the authors put down to a reduction in manufacturing, factories and so forth.
London Councils produced a report last year that included a graph detailing the physical expansion and decline of local authorities’ business rate tax base. The overall position for London was a net loss of properties. Some 14 out of 33 London boroughs actually saw an average decline during the period and, of those that achieved reasonable physical growth, the effects of the Westfield development in Shepherd’s Bush and terminal 5 opening at Heathrow had a large positive effect on the two boroughs concerned: Hammersmith and Fulham and Hillingdon respectively.
Then there was a report from the London Chamber of Commerce called Driving Local Growth, which detailed the results of a survey it carried out asking London businesses for the most important areas for prioritisation by local authorities. Interestingly, the result was not that businesses were keenest on planning considerations being improved but that infrastructure was top of their list, improving community safety and the public realm. Those were registered as most important by local businesses.
I know that this is a somewhat London-centric case, but many other towns and cities will also be seeing little physical growth in business premises but real opportunities to make what already exists more profitable for their areas. A system that incentivises councils only to promote physical growth seems to miss the point and is certainly not an environmentally sustainable approach.
It would be helpful if the Minister could take this away and satisfy herself that the Bill has not unwittingly erred in this regard and that an amendment along these lines would not be in everyone’s interest. I note that prior to the last general election the Conservative Party published a report about the business increase bonus, calling for the measures that would incentivise councils to promote economic growth and support businesses by ensuring that authorities directly benefit from enhancing local commercial environments. If the amendment that I propose is defective in that regard, other amendments are proposed by those with a deep understanding of these matters from within local government. I hope that the Minister will accept in principle that this issue is worth pursuing.
Lord Beecham
My Lords, not having had at the forefront, or indeed at the back, of my mind details of Schedule 8 to the Local Government Finance Act 1988—or indeed Schedule 7, if that be the correct schedule—I am obliged to the noble Lord, Lord Best, for having explained what was to me, frankly, an unintelligible amendment, but it is entirely intelligible now. I find myself in the odd position of already having spoken to it, in a sense, because I addressed some of the same issues and used some of the same terms as the noble Lord, Lord Best, when I spoke to an earlier amendment. I share the concern about the temptation to incentivise what the noble Lord described as new rateable floor space rather than enhanced rateable values. To that extent, I support the thrust of his argument.
However, I am less convinced about some of the other aspects. For example, massive taxpayer investment in Crossrail will presumably generate increased rateable values in the authorities in London that it will serve. Many of them are quite deprived authorities, so in one sense that is a good thing. On the other hand, that was not a decision of those authorities; the decision was taken by central government, funded by all taxpayers, including those in equally deprived parts of the country such as the one in which I live. The London chamber, to which I and the noble Lord referred, was right to say that authorities should be rewarded and incentivised for the decisions that they take. It is not necessarily appropriate that they should benefit significantly from an increase in business rate generated by taxpayers in the way that, for example, Crossrail might be argued to have induced. Presumably, it will take some time for that to happen.
I am also slightly concerned about the basis on which the claim is made that effectively we should be looking at a rise in rental values. I am not an expert in the property market but at the moment I anticipate that, although there are some exceptions, there is no great buoyancy in the commercial property sector. Many of us see empty shops, offices and factories. In my city of Newcastle we have seen the closure of one significant employer in a very modern factory in one part of the city, and we are seeing the almost certain closure of engineering works in an enterprise zone, for which the noble Lord, Lord Jenkin, was originally responsible—I give him credit for that. It was formerly Vickers and is now BAE. It will close with the loss of many jobs and the site will come on to the market. To put it mildly, I think that the anticipation that rental values will rise in the foreseeable future is incredible. It does not seem to me to be a firm basis on which to base these calculations.
Therefore, there is something in this argument—particularly the points that the London chamber raised—about trying to connect the reward to the positive actions of an authority. The converse is that an authority should not be penalised for things beyond its control when the rateable value falls, either because of general economic effects or because of an impact on general levels, leading no doubt to appeals against valuations. I have no doubt that the noble Earl, Lord Lytton, would be able to elucidate on the kinds of effects that might develop.
Therefore, the Committee needs to look at how we can tie the incentivisation to the actions of the local authority in the broad sense that the London chamber and the noble Lord and I referred to earlier—with investment in infrastructure and particularly skills and training, as well as, depending on the circumstances, community safety or other features in the local economy—rather than rely on the actions of the national Government or their agencies. The Highways Agency can transform a situation in certain areas, just as Crossrail might have done, and perhaps other bodies would have the same function or effect.
I take it that the amendment is from the Local Government Association, from which we have heard so much this afternoon. Some of us should go back to the LGA to explore this issue in greater depth to see whether we can come up with something more related to the activities of its members. I should be interested to hear the views of the Minister. I do not know whether the noble Earl, Lord Lytton, proposes to speak on this part, but it would be very interesting to hear his comments on these points, which relate very much to his professional expertise.
The Earl of Lytton
My Lords, with that invitation I had better rise to my feet. First I should declare an interest that I have not declared previously and probably should have done—that I have a small involvement with a local chamber of commerce, although I do not know that it especially informs this bit of the debate.
The noble Lord, Lord Best, mentioned a very important factor—that the constant incremental renewal and upgrading of our infrastructure and townscapes, as I believe he was chiefly referring to, is directly related to concepts of added value and therefore has wider application. The confidence to invest in such schemes is clearly dependent on certainty of outcomes. I said previously, on Second Reading, that I was concerned at the lack of certainty of outcomes. Like all uncertainty, it adds to risk and is a highly corrosive factor in getting good levels of net present value, to use valuer-speak.
The Bill’s laudable intentions are to a large degree overshadowed by some very difficult times, with the possible exception of central London. That colours everything, including the way in which these schemes can be financed independently and the sort of risks that you can afford to take with taxpayers’ money, if you are not financing them through conventional means. That obviously applies to central government just as it does to billing authorities and local authorities. My concern is about the migration of commercial floor space to other uses; I refer in particular to losses to residential uses. That may be the only certain outcome that delivers a sufficient return on capital invested to justify the financing. We live in the real world where finance is very difficult. Even if you have retained finance because you are a larger company, unless you can make a robust case to your finance director and the other key decision-makers, it is not going to go ahead. Things which are slow and drawn out and which have long timescales all add to the risk, even if there are no other issues.
I know that the coalition has tried to make sure that the planning process is simplified. None the less, as I mentioned on the earlier group of amendments, there are sufficient uncertainties with all the boxes that developers have to tick. Many of these boxes have to be ticked up front and much of the ticking process costs real money up front. That is the problem that the real commercial world faces. I do not see how the classic role of government, which is to intervene in circumstances of market failure, can be shifted from central government, effectively backed by the political backcloth with central government resources and finance. I do not think that you can move that intervention to overcome market failure to a local government scenario. It will not work. The whole thing is too complicated, the finance is too tight, and matters are too uncertain.
The noble Lord, Lord Beecham, referred to Crossrail, and of course there are other large infrastructure schemes across the country on a wider scale. One thinks of HS2, the high-speed rail system. Many of these create blight. Although in the long term they are considered to bring benefit, they create short to medium-term blight of the most acute nature—in other words, people are unable to sell their properties and business premises are unlettable and so on. This, too, has a highly corrosive effect but, as I see it, it is not in the gift of local government to deal with these large-scale issues of blight.
The real question goes back to what the noble Lord, Lord Best, was asking: how do we deal with the necessary incremental improvements to and upgrading of our infrastructure without this driver of a commercial outturn? In a sense, the commercial outturn is there because value and satisfaction are added. More trade may be brought to an area. For instance, if it is a seaside town the number of beds let per annum in lodging houses and hotels may increase. There can be all sorts of things that go with that. However, it is a slow and diffuse process, and that means that the benefit is not sufficiently directly connected to the investment for the authority to claw that back. It is not a bankable benefit in the authority’s hands, and that is where the disconnect arises.
It may be that this whole consideration goes much wider than the context of the Bill. However, we are transferring duties and powers and supposedly finance streams to local government, and I think that it is right to consider this issue in its wider context. At the beginning of this afternoon’s proceedings, I mentioned that it is part of the backcloth in which we operate. I certainly hope that the Minister will be able to give some comfort that the cause and effect—in other words, the risks and costs of investment and the returns that can be gained from it—will be better looked at and better managed, even if they cannot be dealt with through the business rate retention scheme. There need to be other ways in which this issue is dealt with; otherwise, we will see areas going into wholesale decline with a considerable loss in values and, with that, risks to the loan books of the mortgage sources that have lent against those investments, as well as risks to the whole financial structure. We do not need to do that. Once we start going down that road, huge perils lie there. We really need to make this constant investment in order to make sure that that does not happen. We have to move forward; there is no stand-still position.
Lord Palmer of Childs Hill
My Lords, I support my noble friend Lord Best because there is a need to take into account revalued and increasing rateable values of properties. The analogy used by the noble Lord, Lord Beecham, reminded me of development land tax where when agricultural land got development planning permission its owner had to pay substantial extra taxation. We are in danger of looking at how much individuals, companies and corporations make as a result of Crossrail or whatever. If the land has increased in value as the property has increased in value, it ought to be a factor in the calculation of what the local authority receives. The point made earlier was that local councils such as Westminster would gain by the redistribution. Projects such as Crossrail spread that gain through rural areas and the like. I do not think that the fact that some local authorities may gain because of a national or regional development is a reason not to give that local authority the benefit of having an increased rateable base. If you look at new floor space, there are many places where that will not happen. Some noble Lords showed a degree of pessimism when they spoke about how things will devalue rather than increase in value. We have to look positively at how we should encourage local authorities to do infrastructure and to encourage infrastructure, even if it is Crossrail or whatever, so that the valuations of those properties increase and local authorities can see the benefit. That would incentivise local authorities to co-operate on those matters.
Baroness Hanham
That was an interesting, if unexpected, debate. When it started, I was very touched by the fact that I had a little note that said, “The purpose of Amendment 15 is not entirely clear”. My reply may not be totally applicable either, but somewhere along the line we have clearly raised really important points. We are going to have to look again at the amendment, but in the mean time, I will tell the Committee what we thought it was about, and if it does not quite tie up, we will sort it out, I am sure, between now and the next stage.
I am advised that the amendment in its current form could not stand as it would insert an amendment into Schedule 8 which, as a result of this Bill, will cease to apply for any purpose in England. That is the first problem. Even without this technical deficiency, we have a bit of a problem. We fully respect the noble Lord’s views that under the rates retention scheme authorities should be able to benefit from rental growth as well as physical growth. Westminster has been touched on by several speakers, but for authorities such as Westminster or, potentially, for my ex-authority Kensington and Chelsea, the potential for physical growth is much more limited than for others as there are very constrained sites with developments all through.
The efforts of local authorities to make their areas more attractive to business are not quite as limited as some would like to pretend. Efforts that have resulted in a steady increase in rental values and hence rateable values will arguably go unrewarded under the rates retention scheme. The duty of government is to legislate for a rates retention scheme that is workable for the whole of local government, not just for some authorities. For that reason, we could not devise a scheme that allowed local authorities to keep any part of the growth in rateable values. To explain why, I need to explain to the Committee how the revaluation works, although I hesitate to do that because the noble Earl, Lord Lytton, will understand this far more than I do. Perhaps for the benefit of the Committee we should go through it.
Every five years, the Valuation Office Agency undertakes the revaluation of non-domestic properties and, as a result, the aggregate rateable value of all English non-domestic properties either—amazingly—increases or decreases. In setting the multiplier for the first year following the revaluation, the Government take account of the overall increase or decrease in order to ensure that overall the same amount of tax is raised from business after revaluation as from before. For example, if the aggregate rateable value were to double, the multiplier would have to halve. In that way, it simply redistributes the tax burden between businesses on the basis of their up-to-date property values.
In the new world of rates retention, the system is set up at the outset so that through the means of tariffs and top-ups there is an initial redistribution of resources. That protects the position of those authorities that are relatively resource poor. But if, as I explained, we collect no more money from businesses following the revaluation than we did before, it follows that there is no additional money in the rates retention system. If therefore some authorities are to be allowed to keep additional resources, by the same token, some will have to receive less. Therefore, because of the uneven distribution of the rates base, this would not just mean a cut in funding for those authorities that have seen their rateable value fall. So an authority could see a funding fall, even if its rateable value had risen, if that price was by less than the national average. That could not be fair. In fact the only way to ensure that all authorities see their rateable value rise and see some income benefit is to break the multiplier link and raise the overall burden on business, and the Government are not prepared to do that.
For those reasons, I cannot accept the amendments that seek to allow any part of an increase in rateable values to be retained by local authorities. I hope that that explanation, somewhere along the line, meets the basis of the amendment. If it does not, perhaps we could discuss it between now and the next stage. I am not sure at all that it covers any of the matters raised by the noble Earl, Lord Lytton. Having looked at Hansard, we may need to come back to that. While it was a very relevant aspect to commercial improvements, I am not sure that it necessarily fits in with the amendment, but it may do. I will happily say that if the amendment is to be pursued and if the noble Earl feels that the reply is not adequate or there is something more that needs to be done, we should discuss it between now and the next Sitting and then we might be able to get us both together to decide what we are trying to achieve.
Baroness Hollis of Heigham
I was intrigued by the Minister’s answer. I fully understand her point about the multiplier effect and all the rest of it, but I did not understand her bald statement that the Government were not willing to allow local authorities to retain any growth et cetera under that formula, if you were to break the link. Why can the Minister not make a distinction, which most of us would expect to operate, between an increase in the value of commercial property—the amount per square foot as affected which runs across a city, which I absolutely accept has to be recalibrated given the equalisation formula—with the additional increase that comes through the efforts of local authorities for either the growth of a particular business or new business coming in? Those are two different sets of flows of money. The Minister did not distinguish between the two. The point about encouraging local authorities in this way was precisely to put a new emphasis and new attractiveness on the second of these.
Baroness Hanham
I did have to look over my shoulder for that one and I am told that it is an improvement against physical growth, but I will write a bit further to the noble Baroness.
Lord Best
My Lords, I am grateful to the noble Lords who supported this difficult but fundamentally important amendment. I thank the noble Lord, Lord Palmer, and the noble Earl, Lord Lytton. Perhaps I might respond briefly to the noble Lord, Lord Beecham, by saying that the objections he raises—first, that some places would get a windfall and might not deserve it and, secondly, that some places will see a fall in rental values and therefore of rateable values and income—did not strike me as undermining the case here. Major infrastructure projects require people to buy into them; to accept that Crossrail will come through town, or whatever the big issue is. It helps if there is some financial return to that area for the inconvenience that can elapse, perhaps for several years, when major infrastructure projects come through. However, this amendment is not of course specifically addressing that but addressing the upgrading of a particular part of town by the efforts of the local authority. That is the principal objective.
In relation to the noble Lord’s second point, that some areas may see a fall in values—that factories may close and nothing may happen—this amendment is intended to provide local authorities with a greater incentive to prevent that and to do something about it. If the council makes the area much better for customers to come to and for offices to recruit staff to work there, and if it does some good for the area, that is surely good for the local economy and can revive and regenerate a place. However, if councils have absolutely no incentive to spend that money in times of difficult resource allocation for them, it would seem most unlikely that local authorities would put their backs into trying to drive some business improvement and growth in those places. It strikes me that this amendment still has some heart to it. The technicalities have completely escaped me along the way and I would be very grateful if I could take up the Minister’s offer to explore whether or not her response was helpful.
Lord Beecham
Perhaps the Minister would also like to consider that question. I come back to the point that the noble Lord, Lord Best, has just made. I have a fair amount of experience in this area of regeneration. When I was leader of my city council, we had two quite different propositions. The first was, initially, to start developing along the riverside in Newcastle and to take advantage of the then Conservative Government’s enterprise zone. It was developed as a business park and we helped an engineering company, Michell Bearings, to move into a new factory. That factory was modern and all the rest of it but, 20-odd years later, it has closed. There is nothing much we can do to get it reopened. It is in an enterprise zone and has that attraction, for what it is worth. It is close to a bypass, which we would like the Highways Agency to do something about but cannot.
Against that, when we were faced with another aspect of enterprise zones, the development of an out-of-town shopping centre, we worked very closely with local business to promote the existing shopping core in Newcastle, just as other authorities did when faced with similar problems. That is one case where we can and did do something by responding to a downward pressure on business. In the other case of the closure of that factory, and indeed of another which we had always supported in another part of town, there is very little we can do. That, it seems, is the dilemma: we could find by accident or design that a substantial benefit is going to areas which have contributed nothing in the way of policy at all, let alone investment, towards the creation of value which they will get not just in the form of a 50% share of the rates that accrue but as the full amount. That is the point. Subject to the tariffs and all the rest of it, there is to be a retention, is there not, of the growth in business rate and not just the core rate. That could be quite accidental, and the product of other people’s decisions to which the local authority may have made no contribution at all. The consequence in the system as a whole is that it could widen disadvantage between one area and another. That is the point that we need to explore further. I have said enough and I leave it at that.
Lord Greaves
Perhaps I can follow with a much smaller-scale example. I ask noble Lords to imagine an old warehouse that has low-level use and is paying relatively low business rates. There is a joint proposal by the council and its owners, if it is near the centre of town, say, to work together to turn it into a modern retail facility with a much higher rateable value: the same building, on the same footprint, with no change to the shape of the building so there is no expansion. What is the difference between doing that and, for example, demolishing that building and then having a completely new retail building, which would presumably provide an extra rateable value that could come within the scheme and have 50% of it going to the local authority? There seem to be marginal cases here, either on a larger scale—such as the noble Lord, Lord Beecham, spoke about—or just individual things. I think we need an answer to that. In the case I am talking about, there is no difference in terms of the input of the local authority between the new building and the renovation of the old building.
Baroness Hanham
In response to the noble Lord, Lord Greaves—and again I think that we need to look into this—it seems to me that where you have a building which goes out of business, and consequently the rates from it may go away as well, if that building is converted for another use and there is a revaluation then the local authority can keep that growth, subject to the conditions that arise from growth. It contributes to the local authority’s income from the rateable value. I do not see that there is a problem with that in terms of what the local authority subsequently receives as a result of having maintained its proportion of that rateable growth. We can check that through, but I think that is correct.
Lord Greaves
In practice, if the property has been empty for a certain time—I am not sure of the details—they will have to pay rates on it anyway.
Baroness Hanham
In either case, I understand that the local authority would get the benefit of the rate and the growth.
The Earl of Lytton
My Lords, I am thinking about the current process of recording hereditaments, as they are known, in the local rating lists. I call to mind that as a result of the riots last year, one or more commercial premises were totally destroyed. As I understand it, there is a vacant site awaiting redevelopment that is described as a shop and premises, and it is in the list at £1. The Prime Minister had in fact said in the wake of the riots that properties with damage would be taken out of assessment altogether. Now, there is a little wrinkle here. If a site remains in the assessment, effectively as a cleared site, but is still called a shop and premises or a department store and premises, or whatever it was, at a £1 rateable value then it is still in the list. When it comes back into the list again as a refurbished property, it will be at whatever the level is of the new premises. If it was a redevelopment process—not riot damage or anything like that—in which the local authority was a key player, the question is whether it stands to be disenfranchised because the hereditament has not been taken out of the list altogether and is not therefore really a new entry in the list. It is a revaluation of an existing one.
This might be looking for trouble where there is none, but I want to be very careful. As I made clear both in the debate on the Queen’s Speech and at Second Reading of this Bill, there are a number of little wrinkles creeping in because of the way in which Treasury policy now appears to influence the work of the Valuation Office Agency in handling the entries in the valuation list. I want to be absolutely sure that by dint of this business of not taking things out of assessment when in fact they probably should be, we are not going to find that we have disenfranchised the authority from that gain in rateable value, which is undoubtedly the work of its own hands.
Lord Brooke of Sutton Mandeville
I realise that the noble Lord is about to ask permission to withdraw his amendment, but I could see that the Minister and her counsellors were engaged in conversation. If I just add a couple of sentences, it might enable the Minister to conclude her conversation, though I am not in any sense imposing on her.
If this is the last opportunity to give advice to the noble Lord, Lord Best, before his private conversation with the Minister, let me say something in the context of Crossrail, which has been used as an example and which had major constituency implications for me. On Crossrail mark 1, there was massive residential blight involved, about which I am happy to talk to the noble Lord, Lord Best. In the case of Crossrail mark 2, the Corporation of London was deeply involved in the terms that actually enabled the project to take place at all.
Baroness Hanham
My Lords, the noble Lord, Lord Brooke, gave me an opportunity to respond, which I am not going to take.
Earl Attlee
My Lords, this may be a convenient moment to adjourn the Committee until 2 pm on Thursday 5 July.
House of Lords
NHS: Spending Formula
(12 years, 5 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Baroness Quin
To ask Her Majesty’s Government whether they intend to make changes to the formula governing levels of NHS spending in the different NHS regions in England.
The Parliamentary Under-Secretary of State, Department of Health (Earl Howe)
My Lords, from 2013-14, the NHS Commissioning Board will allocate resources to clinical commissioning groups and the Department of Health will make a ring-fenced public health grant to local authorities. The Secretary of State has asked the independent Advisory Committee on Resource Allocation to develop formulae for both CCGs and local authorities. We published ACRA’s interim recommendations for local authorities on 14 June and its recommendations on CCG funding will be published in due course.
Baroness Quin
Is the Minister aware of the deep concern in the north-east and other parts of the north of England that if the Government, as has been rumoured, move away from using deprivation and health inequalities as an important criterion, and simply use an age criterion, areas of the north where life expectancy is lower will lose out, compared to more affluent areas in the south? This and other government-trailed proposals, such as regional public sector pay or regionalised benefits, as well as the daily reality of more job losses and more house repossessions in the north than in the south, are adding to concerns that there will be a dramatic worsening of the north-south divide. Will the Minister and his colleagues commit themselves to narrowing that divide, rather than widening it further?
Earl Howe
My Lords, yes. I am aware that this has been said, and it is based on a misapprehension, perhaps as a result of misunderstanding what my right honourable friend the Secretary of State said a few weeks ago. He was not suggesting that deprivation should not be a part of the future funding formula, but simply that age should continue to be the primary factor, as it currently is and should be, in the context of our intention to reduce inequalities of access to health services.
Lord Walton of Detchant
Is the Minister aware that a number of major surveys carried out by all-party groups into conditions such as muscular dystrophy and other neuromuscular diseases, Parkinson’s disease and, most recently, dementia have demonstrated gross inequalities in the standards of care, longevity and other important factors, in different parts of the country? The Neurological Alliance has pointed, in another major report, to serious discrepancies in relation to neurological and rehabilitation services in different parts of the UK. Will the proposals that the Minister has described do something to correct these serious inequities?
Earl Howe
My Lords, to a certain extent, we must say here that we are where we are. There is a lot of justice in what the noble Lord has said. We know that services in certain parts of the country are underfunded, compared to the level of clinical need and disability, and commensurately that some services are overfunded in other parts of the country. However, we cannot move suddenly to a position where we redress the balance. That would destabilise services. We certainly believe in equal access where there is commensurate need for the services, particularly those to which the noble Lord referred.
Lord Brookman
We are still the United Kingdom and the Question of the noble Baroness, Lady Quin, is very valid. I am originally from the valleys of south Wales. Life is pretty tough there. I hope that the National Health Service will provide equal service to the people in the valleys of south Wales as it does in the more prosperous areas of the country. Will the Minister confirm that that will be the case?
Earl Howe
My Lords, it is of course for the devolved Administration in Wales to decide on their own allocation of the health budget for Wales. That is not within my gift, as the noble Lord will understand. However, certainly within England we would expect the funding allocations to support the principle of securing equivalent access to NHS services, relative to the prospective burden of disease and disability. Because we have an independent NHS Commissioning Board, people can be assured that this will put beyond doubt that allocations are driven as far as possible by each population’s need for healthcare services and not by extraneous factors.
Baroness Greengross
My Lords, later this afternoon the All-Party Group on Dementia, which I am privileged to chair, will launch a report on the rates of diagnosis, the challenge of dementia and how it can be met. We know that more than half of all people with the disease have not been diagnosed. Diagnosis offers access to a memory clinic that can reduce the impact of the disease or postpone its worst effects. Is the Minister aware that the variations across the country are horrific and that people do not know where to go? Will the Government do something to ensure that everybody has access to the care and support that they need in an area that they can reach?
Earl Howe
My Lords, we come back to the issue of age in this context. I say again that we believe, as did the previous Government, that age is the primary driver of an individual’s need for health services. The very young and the elderly, whose populations are not evenly distributed throughout the country, tend to make more use of health services than the rest of the population—the noble Baroness gave a very graphic and important example of where that applies. This principle is reflected in the most recent PCT-weighted capitation formula. As I said earlier, there are imbalances that, over time, we will seek to correct.
Baroness Tyler of Enfield
My Lords, accepting that —as the Minister said—we are where we are, could he explain what evidence base is being used to determine the allocation of resources to CCGs?
Earl Howe
My Lords, the funding formula is made up of a number of components, including capitation, deprivation, age, the number of young people not staying in education and the number of people over 60 claiming pension credit. I have a long list in front of me. However, ACRA, the independent body that I mentioned, is composed of a group of independent-minded people who are keen to take into account every relevant factor that bears on this question. If my noble friend wishes, I will write to her with a more detailed list of the factors that historically have been in the formula.
Lord Foster of Bishop Auckland
My Lords, because the Minister has said that he will work very hard for more equality around the regions, we believe it—but that is not true of the Government as a whole. We are terribly worried, for example, that in the first round of local government negotiations the county of Durham lost £171 million, whereas the county of Surrey gained £60 million. If what we hear is true, the same kind of negotiation will go on in the next round. Will the Minister have words with his colleagues to say that people expect the same kind of equality in local government as he is trying to achieve in health?
Earl Howe
My Lords, I can go further than that. As the noble Lord knows, public health at a local level will become the responsibility of local authorities. Public health grants in 2013-14 will not fall below the 2012-13 estimates, other than in exceptional circumstances where responsibilities shift or where there has been a gross error in the calculation. ACRA proposes a public health formula driven mainly by a measure of mortality, which is strongly correlated with deprivation, and we are actively seeking views on these proposals.
Housing: First-time Buyers
Lord Gavron
To ask Her Majesty’s Government whether they propose any action to assist first-time property buyers following the publication of the English Housing Survey Headline Report 2010-11 on 9 February, showing that the level of owner-occupation in England has fallen to its lowest level since 1988.
The Parliamentary Under-Secretary of State, Department for Communities and Local Government (Baroness Hanham)
This Government are committed to supporting people’s aspirations to own their own home and are sensitive to the particular challenges facing first-time buyers. That is why we are supporting initiatives that we have started such as the FirstBuy scheme, shared ownership schemes, the NewBuy guarantee scheme and the reinvigorated right to buy.
Lord Gavron
I thank the Minister for her Answer. Is she aware that around 40 per cent of people living in London and parts of the south-east between the ages of 20 and 39, whose salaries are just above the limit for social housing, are still priced out of the open market because they cannot afford to buy or to rent at existing prices? These include nurses, teachers, firefighters, police officers and others who are essential to our well-being and who need to live in the city near to their jobs. Apart from the various schemes mentioned, for which I thank the noble Baroness, is she aware of any proposed changes in the planning system that might encourage the private sector to produce some sort of solution to this problem?
Baroness Hanham
My Lords, the national planning policy framework, which my department introduced recently, opens up many doors to planning and housing initiatives. That will release land for house building to support both affordable housing and houses for purchase, which should begin to solve the problem raised by the noble Lord. Another issue is that some people can afford the mortgage but cannot afford the deposit. Those are two areas, and I am sure that we will hear more about both.
Baroness Maddock
My Lords, is the Minister aware that first-time buyers in the north-east of England are returning to the market, and that there are more than there were in 2009? Have the schemes that she outlined in her earlier replies assisted first-time buyers in the north-east, and are there any other initiatives specifically designed to help first-time buyers?
Baroness Hanham
My Lords, I thank my noble friend for her question. With regard to the north-east, I can give her only the figures for FirstBuy, because the NewBuy scheme, which is the latest scheme, cannot identify figures yet as it has not been going for long enough. There were 129 purchase completions by first-time buyers in the north-east recently. Of course, the north-east is really important. As we heard earlier, there are different schemes and different worries. There are also other schemes that help with mortgages. A number of authorities and banks are helping to support mortgages, and the NewBuy scheme will come into that as well. Not only in the north-east but across the country we are beginning to see a solution to what has been a very difficult problem.
Baroness Royall of Blaisdon
My Lords, what is the noble Baroness’s response to the construction industry figures that were released this morning, which demonstrate that the industry is desperately in need of a boost? Does she agree that the Prime Minister should focus on alleviating the current housing crisis rather than on future Conservative policies that might include a housing benefit cut for the under-25s? That would have a detrimental effect on many young people, including those on low wages.
Baroness Hanham
My Lords, the construction industry is dependent on land that is available to buy. As I am sure noble Lords know, the Government are releasing their own land as fast as they can. There is a very big programme of land release, most of which is to be designated for housing, both private and public sector, along with the infrastructure to support it. Many schemes across the country have already been identified for these initiatives, and the construction industry itself is all ready to go. We know that builders are ready to take up the land that is available, so I am sure there will be a boost to housing in the near future.
Lord Vinson
My Lords, I believe that there is great common cause across the House that everything should be done to stimulate the building industry. It is one of the great motors of the economy and is a perfect contracyclical investment because housing, once built, is there, so the money is not wasted. Will the Government assure us that they are using every opportunity to help to fill the huge gap in the demand for housing by stimulating in every possible way the housing market and the construction industry, thereby creating many lower-paid jobs for people who would not otherwise be employed? It is a great key to our prosperity.
Baroness Hanham
My Lords, I thank my noble friend, who I know takes a great interest in these matters. I answered him to some extent in my response to the noble Baroness, Lady Royall. We are hoping and expecting to stimulate the construction industry through our programmes for new housing. It is absolutely essential to the growth of the economy that the construction industry should get going again, because it is in that sector where skills and training will be required for new jobs. I agree completely with my noble friend.
Immigration: Foreign University Students
(12 years, 5 months ago)
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Lord Hannay of Chiswick
To ask Her Majesty’s Government what consideration they have given to the benefits to the United Kingdom of ceasing to classify foreign university students as economic migrants.
Lord Hannay of Chiswick
My Lords, I beg leave to ask the Question standing in my name on the Order Paper. In doing so, I declare an interest as a member of the council of the University of Kent.
The Minister of State, Home Office (Lord Henley)
My Lords, the United Kingdom uses the internationally agreed definition of the migrant, which is someone who comes here for over 12 months. It is right that students staying for that period are counted because during their stay they are part of the resident population. It would damage public confidence in statistics to discount them.
Lord Hannay of Chiswick
My Lords, I thank the Minister for that somewhat familiar reply. The main reason he has given in replies to earlier questions—he has just given it again—for not changing our present practice of classifying students for policy purposes in the net migration figures is the existence of a UN guideline to the effect that anyone who stays for a year is a migrant. Can he confirm that the guideline does not have the force of international law, is therefore not binding on the British Government and, further, is not applied in the calculation of net migration figures for policy purposes by our main competitors in the higher education sector—the US, Canada and Australia? Is it not about time that the Government ceased to handicap the most rapidly growing and most promising invisible export sector we have?
Lord Henley
My Lords, I fail to understand what the noble Lord and Universities UK are getting at in their objections to us applying proper statistics as agreed by international convention, which is what we follow. If the noble Lord is suggesting that by changing the way we count the statistics, we will make life easier for universities, again I fail to understand him. I do not see why they are discouraging undergraduates from coming to this country. All we require of the students is that they show an ability to speak English and that they have an offer of a place at a university in the United Kingdom. The statistics simply do not come into it, so fiddling with them would discourage students because it would imply that probably the only subject they ought to come here to study would be statistics.
Lord Eden of Winton
Can my noble friend assure the House that nothing is being done now that would in any way damage or reduce the substantial economic benefit that bona fide foreign students bring to this country, in particular to our universities, colleges and academies where the English language is taught? It is important that this should continue unabated.
Lord Henley
My Lords, I totally agree with my noble friend, and we want to continue to encourage them to come here. I do not see why changing the statistics is going to discourage them. We have, in fact, seen an increase in the number of students who come to reputable and proper universities, and a reduction in the number of those who come to bogus colleges and schools, who come here not to learn but to work.
Lord Winston
My Lords, is the Minister aware that Britain is regarded by foreign students outside the EEC as a no-go area? I see that that is the case when I visit the United States and see foreign students there. Is he also aware that the Home Office has completely inadequate data on what universities students go to when they enter this country, what courses they take, and what happens to them? Is it not about time that the Home Office made much better preparation of these data so that we can police this better?
Lord Henley
My Lords, what the noble Lord says is complete nonsense. Britain is not seen as a no-go area; we are seeing an increase in the number of students coming here to reputable universities. If this was a no-go area there would be a decrease in the numbers of students.
Baroness Prashar
My Lords, now that the Government have taken the steps to deal with bogus students, what steps are being taken to encourage bona fide and genuine students to come to the UK, and who is taking responsibility for that?
Lord Henley
My Lords, it is for the universities themselves to encourage people to come to them. As I have put it on a number of occasions, we want to control the bogus students. We have not seen a reduction in the number of proper students who come to proper universities. We have, in fact, seen an increase over the years, and I do not see why any changes we make to the way in which we count our immigration statistics are likely to discourage people from coming to this country.
Baroness Hollis of Heigham
My Lords, the Minister will be aware, as the House is aware, that 60% of overseas migrants to this country are students, and the Government are concerned to cap the number of overseas foreign migrants to this country. However, the Minister will surely also be aware of his own Home Office research of November 2010, which shows, as other contributors to your Lordships’ debate have said today, that 96% of students who are registered for degrees at bona fide universities return home at the end of their course. We are talking not about statistics here but about policy. Can the Minister therefore not put students who apply for bona fide degrees, and all the gains between this country and their home countries, in a different stream from the Government’s efforts to cap foreign migrants who come to this country?
Lord Henley
We are, in fact, talking about statistics. The Question is about statistics and about how—
Lord Henley
That is what the Question is about, and I am answering it in those terms. We are talking about the statistics and how we measure the number of migrants coming here. Merely changing the way that we count those immigrants does not affect students coming into this country. I simply do not see how the way in which we count overseas students makes any difference to the decision made by them as to whether they come here. The only restriction we impose on them is that they have to speak English and need an offer of a place at that university.
Baroness Brinton
My Lords, given the Minister’s response to the noble Lord, Lord Hannay of Chiswick, is he aware of the OECD definition of permanent migration, which has a subset that specifically excludes international students? On this basis, does the Minister agree that the UK should follow the example of the USA, Canada and Australia, all of which use this subcategory from the overall immigration numbers?
Lord Henley
We should follow the United States, Australia and other countries that the noble Baroness mentioned, and stick with the United Nations measures, and that is what we will do.
Syria
(12 years, 5 months ago)
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Lord Wright of Richmond
To ask Her Majesty’s Government what action they are taking to prevent ammunition and other military assistance from being provided to Syrian rebels.
The Minister of State, Foreign and Commonwealth Office (Lord Howell of Guildford)
My Lords, we do not provide arms to the Syrian opposition. A European Union arms embargo is in place. Any EU citizen or company in breach of the EU arms embargo may be subject to prosecution under the laws of each individual member state.
Lord Wright of Richmond
My Lords, I am grateful to the Minister for that reply and I am very glad to hear that we are not supplying any military equipment to Syria. I have asked the Minister on several occasions for the Government’s assessment of how many foreign fighters and munitions are being supplied to Syria by other countries. Is the Minister aware that there are persistent reports that fighters from Afghanistan, Libya, Iraq and central Asia, paid for by Saudi Arabia and Qatar, are being infiltrated into Syria with the aim of changing the Shia regime in Damascus? There have also been more recent reports of heavy Saudi troop movements towards the Jordanian and Iraqi borders.
I hope the Minister can assure the House that we will continue to resist any suggestion that NATO might become involved in what has for some time been a Sunni/Shia—if not an Arab/Iranian—dispute. Does the Minister accept that any military intervention from outside, from whatever quarter, in the highly volatile and dangerous situation in Syria could provoke even greater deterioration in the security situation and further complicate Kofi Annan’s extremely difficult mission?
Lord Howell of Guildford
I totally understand the noble Lord’s concern about an escalation and military intervention. With regard to the assessment that he has asked for repeatedly, I cannot, by the nature of the activities he is talking about, give him a precise assessment. We are talking about activities that are inevitably covert and not reported, where statistics are not gathered. As he knows from his enormous experience in the Middle East, rumour is fleet-footed and can rapidly escalate into all kinds of assertions about what is happening. We work very closely with Saudi Arabia and Qatar. We stick very closely to the EU embargo. That is our position and that is what we will continue to do.
Lord Trimble
My Lords, can my noble friend confirm that the Turkish aircraft that was shot down recently was shot down by Russian equipment and that there may very well have been Russian personnel involved? Is it not the case that the Russians continue to supply equipment to the Assad regime that enables it to continue to oppress its people?
Lord Howell of Guildford
Regrettably, I can confirm that the Russians are continuing to supply attack helicopters and equipment to the Syrian regime, which of course is a regime of unparalleled violence that is using its equipment in the most evil and oppressive ways. I am afraid that I cannot give any confirmation as to what weapons actually shot down the Turkish fighter. The Syrians have offered to hold an inquiry with Turkey, but that is being resisted for the moment. It is a very serious matter and the Turks are arguing that it is an attack on NATO as a whole. I am afraid that the circumstances are all in dispute and I cannot confirm the first part of what my noble friend said.
Lord Triesman
My Lords, I think the House will understand the concern in the Question of the noble Lord, Lord Wright, and indeed in parts of the Answer; there will be general support for the arms embargo and a desire not to see any increased volatility. However, alongside the concern about the spread of armed conflict, it is wholly understandable that people should seek to defend themselves from a barbaric and murderous regime, and that is another key part of this equation. If we are to sound sincere—and not sanctimonious—what do Her Majesty’s Government believe can be done to assist those people who may have an ambition to acquire munitions, if they are to feel that there is any other hope of achieving at least a degree of safety as the regime tries to kill them?
Lord Howell of Guildford
I share the sentiment behind the noble Lord’s views. He asked what can be done. My right honourable friend the Foreign Secretary has made very clear indeed what can be done, both at the ministerial action group over the weekend in Geneva and at previous meetings, and will continue to make that clear: namely, that we want to find a basis on which we can bring forward a robust resolution by the UN Security Council that has the support of all those, including the Russians and the Chinese, who hitherto have not been ready to display the robust action and condemnation of violence and terror that we would like to see. We would like to see the text for that resolution worked on this week—in fact, we are pressing that it should be so—but there is the obvious obstacle, of which the noble Lord will be aware with his experience, that not all members of the P5 are in agreement.
Lord Trefgarne
My Lords, what are the prospects of success for Kofi Annan’s mission and has the Foreign Secretary very firmly supported them, as I believe he has?
Lord Howell of Guildford
The prospects of success obviously remain clouded while there is no sign of all the warring and killing parties in Syria agreeing to anything. However, the movement that was agreed at the weekend was not all that we would have wished but it was something. The agreement was that there would be a combined move to try to achieve—with the aid of the Kofi Annan plan—a transitional government body, upon which the beginnings of peace and dialogue could be built. So, the Kofi Annan plan is there. It is the path to the transitional government body that has now been agreed. There was disagreement about who should be on that body. This was an undoubted difficulty that we cannot gloss over. However, the Kofi Annan plan is a means to an end and it is still in place.
Baroness Falkner of Margravine
My Lords, given that the plan agreed this weekend has a mutual consent clause that bars the US and Russia from either getting rid of President Assad or keeping him there, it is evident that the plan will not go anywhere. Will the UK Government work with the UN to review our sanctions regime in light of the fact that 40,000 fighters now belong to the Free Syrian Army and the carnage is continuing unabated? Should we not review this to allow the Syrians to defend their wives and children rather than be massacred in cold blood?
Lord Howell of Guildford
These again are sentiments one totally agrees with, and of course we have some pathway forward with the European Union. Within the European Union, we are all agreed to apply and strengthen the sanctions and we are working all the time to see how that can be done. Once we get to the United Nations level, we are back with the difficulty that my noble friend, from her experience, understands full well—I know that she does. This is that, if we cannot get the wholehearted agreement through the United Nations Security Council of those who are supplying arms and of those who apparently resist the adequate condemnation of the slaughter, we cannot get the resolution in place. We will continue to work extremely hard to break through on this matter but we have not got there yet.
Draft Enhanced Terrorism Prevention and Investigation Measures Bill
The Chairman of Committees
That the Commons message of 29 June be considered and that a Committee of six Lords be appointed to join with the Committee appointed by the Commons to consider and report on the draft Enhanced Terrorism Prevention and Investigation Measures Bill presented to both Houses on 1 September 2011 (Cm 8166) and that the Committee should report on the draft Bill by 9 November 2012;
That, as proposed by the Committee of Selection, the following members be appointed to the Committee:
B Doocey, B Gibson of Market Rasen, L Jay of Ewelme, L King of Bridgwater, B Neville-Jones, L Plant of Highfield;
That the Committee have power to agree with the Committee appointed by the Commons in the appointment of a Chairman;
That the Committee have power to send for persons, papers and records;
That the Committee have power to appoint specialist advisers;
That the Committee have leave to report from time to time;
That the Committee have power to adjourn from place to place within the United Kingdom;
That the reports of the Committee from time to time shall be printed, regardless of any adjournment of the House; and
That the evidence taken by the Committee shall, if the Committee so wishes, be published.
Police and Crime Commissioner Elections (Functions of Returning Officers) Regulations 2012
(12 years, 5 months ago)
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Lord Henley
That the draft regulations and orders be referred to a Grand Committee.
Neighbourhood Planning (Referendums) Regulations 2012
Baroness Hanham
That the draft regulations be referred to a Grand Committee.
Education (Amendment of the Curriculum Requirements for Fourth Key Stage) (England) Order 2012
(12 years, 5 months ago)
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Lord Hill of Oareford
That the draft order be referred to a Grand Committee.
Office of Qualifications and Examinations Regulation (Determination of Turnover for Monetary Penalties) Order 2012
(12 years, 5 months ago)
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Lord Hill of Oareford
That the draft order laid before the House on 15 May be approved.
Relevant document: 2nd Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 25 June.
Green Deal (Qualifying Energy Improvements) Order 2012
Baroness Stowell of Beeston
That the draft order and regulations be referred to a Grand Committee.
Financial Services Bill
(12 years, 5 months ago)
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18:18 - Division on Amendment 35AB - Ayes: 197 / Noes: 251 - Amendment 35AB disagreed.
Lord Sassoon
Lord Eatwell
Lord Eatwell
My Lords, the amendment stands in my name and that of my noble friend Lady Hayter of Kentish Town. Members of the Committee will be aware that there has been considerable debate about the relationship between directions of the Financial Policy Committee and the attainment of a satisfactory rate of growth and employment in the economy. The issue at stake has been whether financial stability is achieved at the expense of growth and employment or whether financial stability can enhance the growth performance of the economy.
The amendments in this group—those in my name and that of my noble friend Lady Hayter, as well as those in the name of the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, and the right reverend Prelate the Bishop of Durham and those in the name of the noble Lord, Lord Sassoon—all seek to include growth and employment within the broad remit of the Financial Policy Committee. My amendment would balance a similar requirement on the Monetary Policy Committee to have regard to the general economic policies of the Government and argues that the Financial Policy Committee should have regard to the Government’s growth, employment and other economic objectives.
I suggest that “having regard to” is the appropriate admonition to the Financial Policy Committee at this stage and that the amendments in the names of the noble Baroness, Lady Kramer, and others and of the noble Lord, Lord Sassoon, are defective. They are defective because they are too insistent. The noble Baroness’s amendment, Amendment 35, states,
“in relation to financial policy in a manner designed to contribute to the achievement by the Bank of the Financial Stability Objective; and this shall include promoting … a stable and sustainable supply of finance to the economy, and … subject to that, the economic policy of Her Majesty’s Government, including its objectives for economic growth and employment”.
That of the noble Lord, Lord Sassoon, refers to the Financial Policy Committee “supporting” the economic policy of Her Majesty's Government.
In 2006, the economic policy of Her Majesty's Government resulted in an unsustainable boom. “Supporting” or “promoting” that policy would have been exactly the wrong thing to do. The role of the Financial Policy Committee is to lean against the wind in terms of what is happening in financial markets. When markets are overheated and expanding too fast and when the economy is growing too fast, it is the role of the Financial Policy Committee to use the levers at its disposal to change the supply of credit in the economy and consequently to slow growth down. That is why the careful wording, “having regard to”, embodied in my amendment is superior to “promoting” growth and employment, in the amendment of the noble Baroness, Lady Kramer, and to “supporting” growth and employment, in the amendment of the noble Lord, Lord Sassoon.
I have great respect for the position that the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, and the right reverend Prelate the Bishop of Durham are taking, because their intentions are entirely sound. Especially at a time of recession in Britain we all want to support growth and employment but we have to be careful in assessing the role of the Financial Policy Committee. In the amendments tabled by the noble Lord, Lord Sassoon, which were announced by the Chancellor in the Mansion House speech a few days ago, the emphasis on supporting is again excessive.
I suggest that the noble Baroness, Lady Kramer, and friends and the noble Lord, Lord Sassoon, look to a more careful wording than they have here. I think they have gone over the top in these recessionary times, but good times will return one day and in circumstances where growth is high, perhaps excessive, it will be the role of the Financial Policy Committee not to support the growth and employment policy of the Government of the day. I beg to move.
Baroness Kramer
My Lords, I appreciate the introduction to the topic from the noble Lord, Lord Eatwell, and I hesitate to speak on behalf of all of my noble friends but I think we have become aware in this country and across the globe that shifting the balance of policy in favour of economic growth is a desirable target. Therefore, to use language, as he has, which downgrades that role in the way that it is approached by the Financial Policy Committee frankly strikes me as unfortunate. We are talking to some degree about semantics but we have learnt the hard lesson that promoting is more important than simply paying regard. He could argue that when his own party was in government it chose the wrong policy path and was pushing on a boom. But had it really examined that boom, it would have recognised that underneath it the fundamental necessary structures for economic growth were not being achieved.
We have all heard in a variety of other debates that manufacturing was declining steadily, certainly as a percentage of this country’s GDP and in comparison to competitive economies such as Germany. We know that there was an incredible overreliance on a banking sector that was reporting forced profits because we were hearing an inflated set of reports from the banks that were not based on a genuine economic boom. We know that underlying that whole period, youth unemployment was steadily growing even though it was masked by overall employment figures. We know that that particular boom was being fuelled by consumer debt that led to both intensive borrowing by individuals and therefore a lot of purchasing, which in a sense was a false contribution to the underlying economic growth, and also inflated house prices creating a house-price bubble. Requiring the new FPC to dig beneath what is actually happening in the economy, to recognise what is happening with the fundamentals of economic growth and then to give that a great deal of importance in the way that it shapes its policy is essential.
I am glad in many ways that the whole issue of economic growth does not have much in the way of party characteristics. I hesitate to quote from the BBA at this point but, like a curate’s egg, everybody has good stuff in parts and this is one of the good parts. It talks about the Chancellor’s commitment to an economic growth objective to stand beside the financial stability objective and says:
“This is to be welcomed as we have said on many occasions that there is a risk that insufficient weight will be placed upon the achievement of economic growth and jobs which must be the overarching objective. This we believe feeds through to ensuring that the FPC be set the symmetrical task of using its tools and powers not only to subdue demand at the top of the economic cycle”,
which is the issue of sustainable growth,
“but also to ensure that reserves are used in support of lending capacity at the bottom”.
That strikes me as very important. Mr Sants, before he stepped down from his role at the FSA, said:
“Changing the FPC’s remit is really important. The interaction between regulation and economic growth should be debated at the FPC”.
It seems to me that the language we have used frames that debate.
I wanted to take this opportunity to comment on part of the amendment in my name and those of the noble Lord, Lord Sharkey, and the right reverend prelate the Bishop of Durham, because it contains within it one further element that the noble Lord, Lord Eatwell, at this particular point in time, has not addressed. That is the language that includes within the objective the promotion of,
“a stable and sustainable supply of finance to the economy”.
We see that as important enough to be worth integrating and highlighting. We should not simply assume that it will be part of an economic growth objective without a specific mention.
The reason we have done that is probably evident to many in your Lordships’ House. We have all shared frustrations over Project Merlin, quantitative easing and credit easing, and I fear we may have the same problem as we look at the consequences of the Government’s new “funding for lending” scheme. The Government, or the Bank, effectively push money into the system, which gets as far as the banks but does not emerge the other end. The second quarter report from the Federation of Small Businesses shows that demand for credit among its members was stable but that more small firms than ever were being rejected, with the rejection rate now reaching 41%.
The Bank of England’s credit conditions survey, for that same second quarter, shows that for small businesses, interest rate spreads actually widened, despite the Government’s loan guarantee scheme, which is meant to bring down interest rates for small businesses, and despite a sharp drop in default levels among them. Small businesses are demonstrating that they are less risky than they might have seemed historically, but are being rejected at a greater rate and also found that they were facing wider spreads on interest rates. We have to acknowledge at present that high street banks are the only distribution network of any size to get credit to those who need it on a small scale, but looking at the overall situation, we can easily recognise that the high street banks have many easier ways to generate a higher level of return than lending to small business.
There is a reason why, in our language, we have used the word funding and not just credit. The supply of finance is not just a debt issue but one of equity capital. Capital willing to take risks is hard to find. Angels are fewer than ever and venture capitalists are finding funds harder to raise. Indeed, long-term money of any kind is difficult to find at the moment, as I suspect the Government are finding as they try to look at ways to develop infrastructure projects. Some disintermediation of the banks is, if anything, aggravating the problem.
The UK differs from many other countries because it has very low retail investment in bonds and equities. Retail money is less volatile and tends to stick through the good times and the bad times. Germany is a good example, although there are many others, of a country where businesses, particularly small businesses, have been far less impacted because that retail sector, investing in both bonds and equities, is available to them.
There is another area where it is crucial that we have the attention of the FPC because the regulator can make a difference. We have a system now where the small end of the spectrum is very ill served—the small stockbroker, who often followed the small company, has largely gone. Most of the funding we have is simply fairweather funding. To change this, we have to develop a reliable funding supply. I understand that that is not for the regulator alone, but the regulator has a huge role to play if we are ever going to close those kinds of yawning gaps. This amendment puts it in a position to act. Some will say that there is already a competition objective in this Bill. There is a competition objective for the FCA, but it is very much designed to encourage a multiplicity of products—not to bring in new players or expand the scope of existing players, but to cover access to funding right across the business spectrum. Those are two very different things and we believe that we must capture that second aspect in the language that we use.
The FPC has to be engaged and to be part of making sure that there is capacity for funding the system across the whole spectrum, whether it be small, medium or large businesses. I would argue it also covers disadvantaged individuals and social enterprises, charities and other bodies which play a crucial role in our society today and will play bigger roles in the future. I suspect that other people will have much more to say about that, perhaps around this amendment and others. It is to push those underlying principles that we have put down Amendment 35.
Baroness Valentine
I am grateful to the Government for tabling Amendment 35A. This is a very important and conceptually challenging issue. I hope noble Lords will excuse me if I talk around the subject a little because, while it is certainly a step in the right direction, it is not at the moment clear to me whether, in legal terms, this amendment sets the right framework.
We should, perhaps, first consider that whatever framework we adopt must be flexible enough to operate effectively in three primary sets of economic conditions: first, the healthy state when one would expect the Financial Policy Committee to be scanning the horizon for future shocks at the same time as being conscious of any impact its actions might have on economic growth; secondly, crisis, where stability must be paramount; and, thirdly, the current state where uncertainty, principally from the eurozone, must be expected to continue for some time. This is, of course, a situation over which we have little control.
In the first and third of these scenarios, the issue at stake is the interplay between economic health and financial stability and the difficulty of balancing the two. There is a well-known saying:
“A ship in port is safe, but that’s not what ships are built for”.
In this instance we can see absolute financial stability as a safe port but it would be ironic, given our island’s history as a trading nation, if the port were so secure that our businesses could not put to sea.
At a simple level, this is seen in the tension between capital ratios set by regulators and the demand that the banks increase lending, variously voiced by parts of the Government, some parts of the business lobby and the media. It is sometimes forgotten that the collective interests of the banks are, in fact, aligned with those of the Government in seeking economic health and financial stability, but both sides of the lending equation have curbed their appetite for risk. Just as banks are mindful of their own exposures, small businesses, because of economic conditions, will be both less robust to lend to and less keen to take on debt.
On this point, it is essential to have a common understanding between the Bank of England, BIS and the Treasury, and for the banks and the real economy to have the same understanding of where we sit on the risk spectrum. We also need the Government to be clear whether, and to what extent, they can or want to influence lending in the marketplace through initiatives such as the Business Growth Fund, the green investment bank or, indeed, their shareholdings in certain banks.
The amendment, as proposed, makes it clear that financial stability retains primacy. Some have argued that there is a logic to this because it mirrors the hierarchy of the Monitory Policy Committee’s objectives. The flaw in this argument is that the primary objective of the MPC is clear and measurable. Inflation is X%. Conversely, I know of no indicator as simple as inflation that would provide a proxy for financial stability. The primary objective of the FPC therefore requires judgment. We cannot state that financial stability is 23 whereas last month it was 27. So the point at which the secondary objective comes into play can remain for ever opaque.
I think this argues for one of two approaches: either tightening up the FPC objective to one which is measurable or leaving it as it is but then recognising that the interplay between the primary and secondary objective is necessarily different and therefore that the current drafting may not in fact be fit for purpose.
The challenge for the FPC is that it is unlikely that any Government will be prepared to state explicitly where the axis between stability and growth should sit. As we saw under the previous regulatory culture, the Government’s desire for risk-based regulation, under which banks could and would be allowed to fail, lasted only as long as it took for a bank actually to find itself on the brink of failure. Under the new regime, I suspect that Governments of all political persuasions will wish to champion both goals, leaving it to the FPC to judge how to offset the two. I believe, therefore, that we need a clear mechanism under which the FPC can demonstrate how it has achieved its primary objective while complying with the requirements placed on it by its second one and not hindering the Government’s economic strategy.
Lord Sharkey
I shall speak briefly in support of Amendment 35, in particular the inclusion of the requirement to promote the Government’s objectives for growth and employment. I emphasise the importance of promoting a healthy and flourishing SME sector in achieving those objectives. The report of the noble Lord, Lord Young, last month, Make Business Your Business, noted that 50% of private turnover, excluding financial services, and 60% of private jobs are provided by SMEs, but SMEs still face great difficulty in finding funding.
The Breedon report of March this year estimates that by 2016, there will be a shortfall of between £26 billion and £59 billion in finance needed by SMEs for working capital and growth. The Government need to take direct action further to improve the supply of finance to the SME sector, in particular in our deprived communities. SMEs in those communities attract only 4% of all investment in SMEs and are in areas where unemployment, especially youth unemployment, is likely to be high.
There is another urgent reason for providing finance to the SME sector. That is to do directly with job creation. The Kauffmann Foundation, a highly respected United States think tank, published a study in July 2010 entitled, The Importance of Startups in Job Creation and Job Destruction. I will have more to say about the findings of the report later in the debate, but its most striking findings were that in the 28 years it surveyed, all net new jobs came from start-ups and that during recessionary years, job creation in start-ups remained stable while net job losses in existing firms were highly sensitive to the business cycle.
That surely has lessons for the UK. If the Government are to succeed in creating the right number of new jobs, they must strongly and actively promote not just SMEs but the start-up subsector of SMEs. To have the appropriate effect, they must do that particularly in our deprived communities. Without such strong and directed promotion, the growth and employment objective is in danger of remaining just that—an objective.
Lord Blackwell
My Lords, I apologise to the House that I was unable to contribute to the Second Reading debate. The fact that all these amendments recognise the interlinking of financial stability policy and the wider economic objectives is a major step forward. However, the amendment proposed by the noble Lord, Lord Eatwell, is mistaken in its wording. It is a fallacy to believe that monetary policy and financial policy can be conducted orthogonally, independently of general economic and fiscal policy. The two inevitably interact, and it is fallacious to believe that we can have a government Chancellor of the Exchequer in one corner deciding on a fiscal policy and an independent bank deciding on monetary policy in complete isolation—and, if necessary, disagreeing and conducting an alternative economic policy.
We are in this situation only because the previous Government separated monetary policy from the independence of the Bank of England in 1997. Until that point, the assumption was that the Chancellor of the Exchequer and the Government were accountable to Parliament and to the electorate for economic policy in the round. The Governor of the Bank of England certainly had a crucial role in advising the Prime Minister and the Chancellor of the Exchequer on monetary policy.
At the end of the day, however, a common policy was agreed that ensured that monetary policy and fiscal policy were aligned to the same objectives. They might be the right objectives, they might be the wrong objectives, but at the end of day the Government and the Chancellor of the Exchequer were accountable to Parliament and to the electorate for those decisions. The idea, as the noble Lord said, that at times you want a Bank of England or a financial policy committee to pursue a policy that is at odds with government policy is mistaken and misrepresents the way in which these functions ought to work together.
I therefore much prefer the wording of my noble friend’s amendment, Amendment 35A. Although I agree with much of what the noble Baroness, Lady Kramer, has said, my noble friend’s amendment has the great advantage of simplicity, and I support him in that.
Lord Peston
My Lords, I criticise both Amendments 35A and 35 on the grounds that they are both illogical and make no economic sense, to put it as bluntly as I can. I am amazed, however, at the intervention by the noble Lord, Lord Blackwell, just now, because he comes to the wrong conclusion. How can he support Amendment 35A on the basis of his analysis of interlinking?
Let me start with Amendment 35A. If you asked anyone why you would want to achieve what is in paragraph (a), the answer would be, “Because it makes the economy work better”. It is not wanted for its own sake, as far as I can see, because it involves a total confusion of means and ends. Therefore, sensible economics would delete the words—a favourite activity of my noble friend Lord Barnett and me—“subject to that”. All that is required is the word “and”—forget the “subject to that”.
The same applies to the amendment in the name of the noble Baroness, Lady Kramer, et al. What she wants to achieve is desirable; no-one would doubt that. However, if we ask, “Why do you want to have a stable and sustainable supply of finance to the economy?”, the answer is, “Because it makes the economy work better”. We cannot assume that the Government’s economic aim is to make the economy work worse; quite the contrary. My view is therefore that I would be reasonably happy with either of the amendments if “subject to that” was taken out, but in no other circumstances.
If I can, I will go back to the Monetary Policy Committee, which the noble Lord, Lord Barnett, and I have criticised for years now because of the “subject to that” clause. It gets around this dilemma by ignoring “subject to that”. I have said in this House before that in my judgment the MPC breaks the law under which it was set up, because there are now real inflationary dangers. You do not have to be a Friedmanite to say that expanding the quantity of money, which is what monetary easing is, is immensely dangerous when it comes to the future inflation rate of this economy.
Somehow or other, most members of the MPC—I am not certain that they all do—ignore that bit of the subject, go ahead with quantitative easing and forget their inflation objective, even though they are not achieving it. These two amendments might well be equally innocuous. Maybe in practice the whatever it is called—I am still having trouble with the acronyms but I think I am talking about the FPC—will become totally cynical and forget the subject of that bit at certain critical times. It would be better if the three little words “subject to that” were taken out; and then, to be perfectly honest, I do not care which amendment we agree to.
Viscount Trenchard
As other noble Lords have said, all three amendments are well intentioned. I also welcome the Government’s intention to introduce a new objective for economic growth and employment. However, it is a pity that we are not contemplating the introduction of a requirement to have regard to international competitiveness. If you have regard to the international competitiveness of the marketplace, that will certainly serve the Government’s declared objective to support economic growth and employment.
I do not understand why it is believed that the maintenance of international competitiveness is synonymous with the discredited system of light-touch regulation. We should not abandon at this stage any attempt to reintroduce into the Bill, in more places than at present, at least a requirement—if not an objective, which is what ideally I would like to see—always to have regard to the maintenance of the competitiveness of the marketplace, because that is what drives growth, creates employment and has made London what it is today.
I understand that the FSA’s report on the failure of RBS suggests that the FSA’s need to have regard to international competitiveness was one reason for regulatory failure, but I humbly submit that I doubt that. I believe that you can always have regard to competitiveness while at the same time protecting the consumer and ensuring the stability of the marketplace.
On the three amendments, I am afraid that I am unable to support Amendment 35 in the name of my noble friend Lady Kramer because it sounds very much like the command economy. It would give too much of a planning role to the Financial Policy Committee, and I suggest that it would be very difficult to give that committee on the one hand an objective to achieve a stable and sustainable supply of finance, and on the other a duty to remove or reduce systemic risks that include unsustainable levels of leveraged debt or credit growth. To give that body responsibility both to maintain sustainable credit and to prevent unsustainable credit at the same time would mean that it had to decide exactly how much was going to be lent to every business up and down the land. I submit that this command economy-type interventionist role would be inappropriate, and certainly would not lead to maintaining the competitiveness of the marketplace.
As for the other two amendments, I have great sympathy with the amendment of the noble Lord, Lord Eatwell, who treats the growth objective as being equal with the stability objective. Although I am happy to support my noble friend’s objective, which subordinates the growth objective to the stability objective, I ask the Minister to explain in what circumstances he thinks the growth objective would have to be ignored.
Baroness Noakes
My Lords, I support the formulation of the Minister’s amendment. While I understand what the noble Lord, Lord Eatwell, says about having regard to—not simply blindly following—the Government’s policies, which the Financial Policy Committee might think are irresponsible, my noble friend Lord Blackwell answered that point effectively. It would be intolerable to have a government-owned body in effect running a policy contrary to the Government’s own policies. However, he has a point but it is already dealt with by the ability of the FPC to make regular reports. Where it has to report on its view of financial stability, the FPC has ample opportunity, on a regular basis and without any interference by government, to say what is making financial stability difficult to achieve—if achieving that is indeed the Government’s economic policy. Therefore, we do not need to reformulate it as the noble Lord, Lord Eatwell, suggests.
I do not support the amendment tabled by the noble Baroness, Lady Kramer, because I am slightly appalled by the prospect of the FPC going out promoting government policy, let alone going out promoting various forms of finance being available to the City. That goes way beyond what the FPC was set up to do and is probably way beyond the competencies of the kind of people it has attracted.
Lord Davies of Stamford
My Lords, I will comment on the two previous contributions. I very much agree with the noble Baroness, Lady Noakes. It would be quite wrong to put the FPC in a position in which it was simply a mouthpiece for the government policy of the day. It is very important that it is independent. In response to the views of the noble Viscount, Lord Trenchard, on competitiveness—the suggestion that the FPC should pursue competitiveness as an objective in itself—my answer would be that competitiveness is an intermediate objective, not something that one pursues for its own sake. If one has an obligation to have regard to or to pursue—we will come back to the differences in a moment—growth and employment, anyone pursuing or having regard to those objectives is bound to take competitiveness into account because without it we will not get growth or employment. Growth and employment are ends in themselves, unlike competitiveness; that is the distinction.
We have a menu of choices before us this afternoon. All three amendments believe there should be a link between government economic policy, particularly on growth and employment, on the one side and financial stability on the other. No one has contended—nor could they easily do so—that those objectives should be pursued totally in isolation from each other. However, of the three choices before us, the amendment of the noble Baroness, Lady Kramer, and the right reverend Prelate the Bishop of Durham is the most coercive and creates an unqualified statutory obligation to pursue growth and employment. That is very dangerous because it is likely to result in a conflict of objectives. It is a great mistake to place in statute what could be regarded as contradictory objectives. The government amendment in the name of the noble Lord, Lord Sassoon, does not do that because the reference to government economic policy and growth is subsidiary to the obligation to pursue financial stability. The least coercive of the three amendments, and the one that I most incline towards, is that of my noble friend, Lord Eatwell.
It is particularly important that we should discuss this today, because the results of our discussions, deliberations and votes may have a very specific impact on the economy, about which we must all be very concerned. The situation today in relation to the pursuit of financial stability is particularly grim. There are at least a couple of areas where the Government appear, as of this afternoon, to be contradicting themselves very sharply and dangerously—namely, their policies on economic growth on one side and financial stability on the other. I will set out those two examples in the hope of carrying the Committee with me.
One is in relation to quantitative easing. The Government have promoted or encouraged the Bank of England to promote—in all events the 1946 Act makes it clear that the Bank cannot incur liabilities without the Treasury’s agreement, so the Government must be responsible—a policy of quantitative easing that runs into several hundred billion pounds, as we know. That policy was designed to encourage banks to increase their lending by automatically increasing their reserve assets as they received money from the Bank of England in exchange for bills and other instruments that it is purchasing under the quantitative easing programme. It has not worked at all and that has been very marked indeed. The Minister must have noticed the figures that show that the two quantitative easing exercises have not resulted in any increase in bank lending. The bank lending figures do not seem to correlate at all to quantitative easing. The Government need urgently to ask themselves why that is.
One of the extraordinarily perverse and, frankly, foolish aspects of the quantitative easing programme is that the Bank of England is paying the clearing banks or the commercial banks for the deposits that result from the programme. Its whole purpose was to encourage banks to lend and to encourage an increase in the money supply—in M3 or M4. That has not occurred because the banks have been keeping their deposits at the Bank of England. They are not using them under the fractional reserve banking system to leverage out and increase their lending to the rest of the economy, to the private sector. It is extraordinarily foolish to pay interest on deposits at the Bank of England because that reduces the opportunity cost to the banks of not lending—of not responding to the quantitative easing programme by increasing their lending.
When the Minister responds to the debate, can he first tell me the amount of interest—I am not sure whether it is 50 or 75 basis points—paid by the Bank of England on these reserve assets and deposits, which is a completely wrong thing to do? Secondly, why is the Bank acting so perversely? If it did not pay any interest on those deposits, there would be a much greater financial incentive on the banks, given that they would not be earning anything on that aspect of their assets, to lend more to the private sector, which they are noticeably not doing. Had the Bank decided, under the quantitative easing programme, not to buy in instruments from the banking system—the financial institutions—but to go out into the market and buy instruments, such as short-term gilts at the short end or Treasury bills and so on, from the non-financial private sector, it would have automatically increased the money supply. The Bank did not do that, and I do not know why the Government did not decide to do it that way. The way that the Government have done it seems to be somewhat contradictory and it certainly has not produced the desired result.
The Minister will not be surprised to hear my second point because I have made it two or three times already in this Chamber. It is contradictory to pursue a policy of encouraging bank lending to move the economy to greater growth, while at the same time forcing the banks to increase their capital ratios. In an ideal world, it would be a good idea for the banks to increase their capital ratios. It is something that we should have been doing in the good times when banks were running up their assets, perhaps to an excessive level in both quantity, which was too great in relation to their capital resources, and quality, which was subject to the law of diminishing returns as the assets were increased in the boom times. Those were the days when we should have been pursuing such a course. Of course I recognise that the Government of which I was privileged to be a member was in power at that stage, but the Tory party and members of the coalition cannot claim any virtue in this matter, given that, far from urging us at the time to bring in any such measures, they were always urging us to deregulate the banks further. Nevertheless, we are dangerously pressing on the accelerator and the brake at the same time.
The Minister normally replies to me by saying, “It doesn’t matter. These new capital ratios do not have to come into effect until 2018”. That is a somewhat naive approach. Anyone who has sat on the board of a bank, as I have, knows that if you know you have to achieve certain capital ratios in five years’ time, that is the trajectory that you have to pursue from now until the end of that period. In other words, it constrains you in your lending. It means that you have to be much more selective in the loans you take on because you are concerned that otherwise you will not reach the target that has been imposed on you. I recognise it is very difficult, with the present state of the financial markets both here and in the eurozone, to go back on an announced programme of strengthening the capital ratios of banks.
However, it is an almost textbook example—which will probably be cited in business schools and seminars in economics departments for several decades to come—of the Government pursuing two completely contradictory policies and now finding themselves in great difficulty. Even if they want to extricate themselves from this contradiction, they have already engaged in this particular programme and sent instructions to the banks, and it would obviously cause considerable problems in the financial markets if we suddenly announced that we did not want to strengthen the capital ratios of banks.
These are two good illustrations of how easy it is to run into a contradiction between the Government’s main economic policy objectives—which must always be to stabilise the economy, and in bad times, such as we are in now, to increase growth and employment—and the financial stability mechanism. From the menu of the most coercive, the medium and the least coercive amendments before us, I reject, as I have already said, the most coercive. I think that it is a mistake. I am fairly open-minded about the other two. It is very important that the FPC has an obligation to take into account my noble friend’s formulation of “other, wider economic objectives”. It would be very wrong of it to act blindly, as though it were in a watertight compartment. It may be that we can go a little further and place an obligation on it, provided that it is subsidiary to its main obligation in the view of the Government.
This controversy parallels discussions we have had in both this House and the other place. I remember the discussions in the other place 15 years ago, when we made the Bank of England independent, quite well. There were two great examples of successful independent central banks in the world at that time. One was the Federal Reserve system, which had a double objective statutorily imposed on it. Those objectives were price stability and employment, which in the short term can sometimes be in contradiction. It was left to the Federal Reserve board to resolve that contradiction. On the other side was the ECB which, basing itself on the Bundesbank tradition, had a single technical objective of price stability defined by maximum inflation rate of 2%. We had to choose between the two but ended up with something slightly between them, which may also be the right solution on this occasion, in this context.
Lord Hodgson of Astley Abbotts
The noble Lord, Lord Davies of Stamford, has given us a pseudo-economic lecture. I have to tell him that the lesson that will be drawn by future business schools will not be about the economic policy of this Government but about the economic policy of his Government, which led this country to the edge of ruin. That is the case that will be taught in business schools: how not to do it. It was his Government, of which he proudly said he was a part, that led us to the pass that we are now in.
Turning now from the general to the specific, the noble Lord, Lord Eatwell, in his introduction, described—
Lord Davies of Stamford
I realised when the noble Lord said that I had given a pseudo-economic lecture that he was going to disagree with me. He appears to have ignored the point that I made, to which I should like him to respond. Although in retrospect it is true that the previous Government might have taken moves other than those they did on financial regulation and supervision—I regret that we did not but this is very easy with hindsight—at the time, the party that he was and is a member of was urging us to deregulate. It said that we were constraining the competitiveness of the City of London with excess regulations. I have no doubt that he would have been one of the first on his feet to object and protest had we increased capital ratios, supervision and the examination of the quality of the assets in banks in this country.
Lord Hodgson of Astley Abbotts
I am very glad that the noble Lord appreciates that the previous Government got it wrong. The reality is that it was the macroperformance of the Government, which they now seek to blame on sub-prime lending in the United States, that left the country without adequate protection, not having taken adequate financial decisions in time. That is what a Government are supposed to do. It is the prime responsibility of the Government to make sure that the economic security of the country is maintained.
Going back to Amendment 34, in the name of the noble Lord, Lord Eatwell, he used, if I may say—in no patronising way—the attractive phrase, “leaning into the wind”, when he introduced it. Amendment 34 is stated in fairly general terms. It refers to,
“having regard to the Government’s growth, employment and other economic objectives”.
The noble Lord raised the issue of tension between that and the other objectives. Amendment 35A “leans into the wind” rather better than the noble Lord’s amendment. It refers to,
“contributing to the achievement by the Bank of the Financial Stability Objective, and … subject to that, supporting the economic policy of Her Majesty’s Government”.
That is a much more precise way of approaching this than the rather more general way that the noble Lord explained in his amendment. I am comfortable with Amendment 35A. It is more specific and purposive than Amendment 34 and does not contain the coercive elements of Amendment 35, tabled by the noble Baroness, Lady Kramer, with whom I agree on many other things but with whom I do not agree on this occasion.
Lord Phillips of Sudbury
My Lords, one takes one’s life in one’s hands if one tries to interpret the ineffable complexities of the Bill and of these amendments. However, I will try because I think that there has been some misunderstanding of Amendment 35, starting with the noble Lord, Lord Eatwell, and finishing with the noble Lord, Lord Davies of Stamford. If one analyses it closely, one sees that the fears that were expressed are not justified.
First, the promotion bit of Amendment 35 is couched within the purpose of the committee, which is to,
“contribute to the achievement by the Bank of the Financial Stability Objective”.
Therefore, whatever it does by way of promotion must be within that objective. The amendment continues by stating that this shall include promoting, first and crucially,
“a stable and sustainable supply of finance to the economy”.
That is the number one priority. Only then, and subject to that, as the noble Lord, Lord Peston, made clear, is there the inclusion of promoting,
“objectives for economic growth and employment”.
For the life of me, I do not see how the noble Lord, Lord Eatwell, can persevere with his concern, given that the right of promotion is subject and subsidiary to promoting a stable and sustainable supply of finance, and then has to be within the Bank of England’s financial stability objective.
Furthermore, there is no coercion here given that the economic growth objective is third on the list of priorities. Frankly, there is not a straw of difference between “promoting” these things and—in Amendment 35A, tabled by the noble Lord, Lord Sassoon—“supporting” them. Some may say that there is a difference, but as a lawyer I say that there is little or none. I contribute these thoughts in the hope that more light will be cast on Amendment 35.
Lord Flight
My Lords, I support the Government’s amendments. I would like to make two small points to pick up on the point made by my noble friend Lord Trenchard. First, when it comes to the achievement of stability, having adequate competition in the domestic market is crucial. The problem with the banking system is that it became too much of a cartel without enough competition. When cartels exist, they tend to do the same thing at the same time and the resulting problems are often large in scale.
I well remember, following the Barings problem, having many discussions with the then Governor of the Bank of England, the late Sir Eddie George. What happened then was that the lender of last resort principle was deemed to apply only to banks that were too large to fail, so smaller banks such as Hambros were closed down and sold, and we ended up with a moral hazard problem and a cartel problem. I stress that adequate domestic competition is very much part of the stability objective, whereas with economic success it is international competitiveness that is arguably more important, particularly for the role of London.
We will come to this subject later on, but there is an important difference in the interplay between adequate domestic competition and being adequately competitive internationally in terms of the two objectives of stability and economic growth.
Lord O'Donnell
My Lords, I rise to support Amendment 35A and in particular to speak in favour of the phrase “subject to that”. It is important that we understand why this was put there for the MPC. The basic economic principle was that low and stable inflation was the best prerequisite for long-term sustainable growth. Shocks to economies happen, which mean that inflation will move away either above or below. When that happens, the MPC has a choice. It has a choice of which path of its instruments—we thought at the time of just interest rates but obviously QE is part of it—it should choose. The legislation gives a very clear answer to that because it says “subject to that, look to the broad economic objectives”, so it should be choosing that path which best meets those economic objectives while hitting long-term stable inflation.
It works for the symmetry with the FPC because we would all say that financial stability is a necessary and sufficient condition of sustainable economic growth. When you get shocks to financial stability—and boy have we had a shock—you then have choices about how you get back from those shocks. I strongly agree with the noble Lord, Lord Eatwell, that in these circumstances you do not want to have pro-cyclical regulation, which could make matters worse. It is really important that the “subject to that” is there and that that builds in the economic policy.
For those who want to explain economic policy in a lot more detail and put subsectors in, I would say that could be a very long list, so I think you have to rely on economic policy. The amendment is very clear. It refers to the Government’s,
“economic policy … including its objectives for growth and employment”.
I, for one, would ask “What is the economic policy of the Government?”. The Prime Minister made that clear when he said that we do not live by GDP growth alone and that what really matters is maximising well- being. Therefore, I think we have an overall strong objective which allows us to get to the right policies. It is not about a simple mechanistic formula.
The Lord Bishop of Durham
My Lords, I would hesitate to disagree with the strong voices who have accused me of coercion. It is some time since I was last accused of coercion—not since the Church Commissioners sold off my palace with its dungeons. Coercion is much less of an opportunity than it used to be.
The amendment is not coercive and I disagree with the views that have suggested that it is intended to be. It is part of a series of amendments which are meant to open up the market and make it easier to have more stable and sustainable supplies of finance across the market. It refers to a stable and sustainable supply of finance; not to creating it but to enabling it—making it possible. One of the characteristics of many areas of economic stress, such as those in my diocese, is the creation of microeconomies, which may be much weaker or stronger than the national averages may indicate. Many contributions from noble Lords have tended to look at the macro and national picture and have forgotten some of the local and smaller problems that happen but which nevertheless affect many people. Adequacy of finance varies significantly even within one size or sort of company, as I remember from my days in the oil industry during a collapse in the oil price. SMEs in the south of England may find a very different position from what they will find in the north-east. The noble Viscount, Lord Trenchard, called it an amendment for a planned economy, but the word used is not “planned”; rather the intention is reflected in the word “promoting”.
The speeches of many noble Lords seem to assume that the present situation is working. In many parts of the country, it is not. Some areas are virtually demonetised, apart from cash, and this is a significant problem. The reports of the Bank of England agent in the north-east indicate the irregularity of finance. Anyone who has managed the finances of a company and a social enterprise, as I have, will know that that is a more serious problem than a continual supply or even a shortage of supply. You need to know what you are planning for. Moreover, a lack of attention to regulatory barriers to access to finance is likely to result, without attention, in a less competitive and open market that in turn will see a continuation of these inequalities across the country.
It may well be that the language of the amendment to which I have added my name is a little too forceful and coercive—I am rather attracted by coercion—and that seems to be a common view which I would probably be hard put to resist. I hope that the Minister will take note of the issues of closed and inadequately liquid markets in certain areas of our economy and of access to finance being more difficult in less fashionable areas where the need for employment creation is severe.
Lord Barnett
My Lords, I am delighted to follow the right reverend Prelate. I was in his cathedral on Friday and it was a very happy occasion. It is as beautiful as people say.
As my noble friend Lord Peston said, the two amendments are reasonably innocuous. I can certainly accept both of them with the exception of those three little words, and this is the first time that I have heard a real defence of them. Indeed, the noble Lord probably printed them himself. Last week I said that the noble Lord, Lord Sassoon, does not need to reply to most of these debates because we have three noble Lords here in the House who would be even better able to do so. However, as I say, I have not previously heard a proper defence of the words “subject to that”. The noble Lord is the first to do so, and I am sorry to have to disagree with a potential Governor of the Bank of England, if he still thinks that after all our debates.
The words “subject to that” have always seemed to be totally unnecessary because the Government of the day will certainly want to deal with inflation and, not subject to that but always on top of that, to look at economic objectives. I cannot see why that should not be so, and if I may say so, I have still not heard a good defence of it. But the amendments seem harmless enough, subject to the removal of those three words.
The question of QE has been mentioned in this brief debate. I do not wish to extend it, but it so happens—probably luckily for the Government rather than as a result of their policies—that inflation has remained relatively low. My noble friend Lord Peston, who is my professional adviser on these matters, may be right to say that that has nothing to do with the Government. However, what concerns me about both of the amendments is that I am not sure where the objectives of the Government lie on growth. I wish they could explain them, but perhaps on another occasion rather than today. Perhaps the noble Lord, Lord Sassoon, or one of the other defenders of the Government’s policy could also tell us what their policy is on economic growth and employment, because it is not succeeding. However, I will not pursue it any further except to say that I hope that the Government will be able to accept the removal of those three words.
Lord Phillips of Sudbury
I have a great deal of respect for the noble Lord, Lord Barnett, who says that he wants to see the words “subject to that” taken out. Am I quite clear that, in saying that, he is not in favour of a stable and sustainable supply of finance ranking as a higher priority than growth?
Lord Barnett
I am saying that I find the two amendments relatively harmless, and that I would be able to accept them. That is all I was saying.
Lord Stewartby
My Lords, I well remember the debates that we had all those years ago on the Monetary Policy Committee, and how many objectives could be added to the central one. This is a bit of a nostalgic occasion, because we are going through different subject matter but the same basic problems. I start from the point that the more of these extras you have, the more confusing they are likely to become for those who have to identify them and classify them under a heading—for example, “You’ve got a bit of employment here, and perhaps supply of finance. How is that getting on in our calculations?”. Those who attempt to allocate specific ingredients under these headings will fairly quickly find themselves with a lot of practical problems.
That leads me to say that I am probably a bit more cynical than sceptical than most noble Lords here today. There is a tendency to be overexpansive in economic policy-making, because Governments tend to be optimistic, and are therefore more likely to err on the side of overcooking than undercooking. Their focus also tends to be short-term rather than long-term. It is very difficult to feed in long-term assessments of this when it takes a good while for the implications of individual policies to be evident. I am, therefore, at the cautious end of this argument, and we ought to be very careful about not loading the process with too many objectives.
We should definitely say that nothing should conflict with growth or whatever we want, but it is different when one puts it in a negative rather than a positive way. You can add any number of “promoting”, “contributing”, “having regards to” and so forth, but the fact that there are all these different explanations illustrate that it is not a precise science. To treat it as though it were would be a recipe for difficulty and internal conflict. I may, therefore, be in a minority of one about this, but most of what has been said this afternoon comes from a starting point that itself is questionable.
Lord Sassoon
My Lords, the Government have always been clear that the Financial Policy Committee, as the body responsible for ensuring the stability and safety of the financial sector as a whole, must have financial stability as its primary focus. That is our starting point. However, we have been equally clear that the FPC must balance the pursuit of its primary objective for financial stability with the wider impact of its actions.
In our February 2011 consultation document the Government spoke of the need to,
“build the balance between financial stability and sustainable economic growth”,
into the FPC’s objectives. In addition, my right honourable friend the Chancellor made clear, when giving evidence to the Treasury Select Committee almost exactly a year ago, that we do not seek “the stability of the graveyard”. Our first shot at achieving this symmetry within the FPC’s framework was the creation of an economic growth “brake” for the FPC. The provision set out in subsection (4) of new Section 9C prevents the FPC from taking action that would significantly adversely affect the ability of the financial sector to contribute to medium- or long-term economic growth in all cases, regardless of the strength of the financial stability rationale. That is a very strong backstop provision.
However, the Government have listened to calls, both in another place and in our Second Reading debate in this House, for the FPC to be given a positive duty to support economic growth. In response to those calls, government Amendment 35A amends the Bill to give the FPC a secondary objective to support,
“the economic policy of Her Majesty’s Government, including its objectives for growth and employment”.
As many noble Lords are aware, this wording is identical to that used in the MPC’s secondary objective.
The noble Lord, Lord Eatwell, has used similar wording in his Amendment 34, but in the form of “having regard” rather than a secondary objective. I believe that in this case a secondary objective is more appropriate—more purposive, in the words of my noble friend Lord Hodgson of Astley Abbots—than “having regard”. We mean to be purposive here. The Government’s intention is to require the FPC to seek proactively to support economic growth. For this, you need an objective, not simply “having regard”.
Some noble Lords have questioned how such an objective bites in the context of the MPC. I am very glad that the noble Lord, Lord Barnett, is at last starting to get answers to his questions from the noble Lord, Lord O’Donnell, who is much more expert in these things than I am, and long may he continue to keep the noble Lord, Lord Barnett, supplied with explanations. In my inadequate way, I shall attempt to give one or two examples; first, of how the new secondary objective will impact on the FPC’s decision-making. I do not want to get sidetracked too much on the MPC but I will make one or two remarks to suggest that similar wording has impacted on the MPC as well. It is most important to think about the FPC, because that is what we are talking about here.
Let us imagine that the FPC takes action, such as imposing additional capital requirements, during the upturn of the cycle, when systemic risks are building up and financial stability concerns are heightened. If the situation changes—for example, the expansion subsides and the financial stability risks reduce—the secondary objective for economic growth will incentivise the FPC to remove those additional capital requirements in order to free up money for lending to the real economy. This effect will work in tandem with the new requirement for the Bank to review previous actions, which we will discuss in due course.
Lord Davies of Stamford
My Lords, will the noble Lord recognise that what he has just described as being the result of his amendment is precisely what the Government are not doing in the present circumstances? The economy is not reviving and the Government have not reconsidered their policy of imposing additional capital requirements on banks.
Lord Sassoon
My Lords, first, I was talking about different economic conditions, and, secondly, I would have thought that the point made by the noble Lord, Lord Davies of Stamford, would endorse why it would be extremely helpful to have such a secondary objective on the FPC.
Moving on, a second example of how such a secondary objective will operate is where the FPC is choosing between various different courses of action to address a systemic risk. Assuming that the actions under consideration are equally effective in addressing the risk to stability, the secondary objective will require the FPC to select the action that is more compatible with the Government’s economic objectives.
I agree with the noble Lord, Lord Eatwell, that it is the role of the FPC to lean against the wind.
Lord Peston
Before the noble Lord goes on with his agreement, which I am looking forward to, I still have not heard any argument from him about “subject to that”. What he has to say requires the word “and”, not “subject to that”. There is no way that “subject to that” makes any sense. To give him an example, could he imagine the head of the FPC being interviewed on the “Today” programme? The first question is, “What are you doing?”. “I’m contributing to the stability objective.” “Oh, and, incidentally, do you support the Government’s economic policies?” “Oh, no.” Can you imagine him saying, “Oh, no”? I cannot imagine any circumstances in which he would say, “Oh, no”. I cannot even imagine any circumstances—unless he wants to be regarded as insane—in which he would say, “I am unable to answer that question”. His only possible answer to the question “Do you support the Government’s economic policies?” is “Yes”, which is why the word “and” ought to be there and not “subject to that”.
That is why I regard the view that the Treasury took on the MPC as fudging the thing. I am afraid the ex-Treasury people have to recognise that that is what the MPC does. Could you imagine the Governor of the Bank of England saying, “I don’t support the Government’s economic policies”? We are not discussing the MPC. We are discussing the FPC—I always forget its name. Why does the Minister not use the simpler language, rather than “subject to that”, which is totally spurious?
Lord Sassoon
My Lords, as I was coming on to say, I agree with the noble Lord, Lord Eatwell, which is very much to the point of the noble Lord, Lord Peston. The FPC has to, and should, be able to lean against the wind—in appropriate circumstances—which is why the FPC’s primary objective is and should remain financial stability. It is right that it is “subject to that” primary objective that the FPC should seek to support the Government’s economic policy. The wording picks that up in the way that an “and” would not. We will have to disagree on that. I have given examples of where I believe that the FPC will interpret the language we have used appropriately.
Although I do not want to go too far into MPC territory, it is relevant to look at the MPC because there are examples one can draw out from its analysis to suggest that language is used in the MPC context in a very similar way to the way I would expect it to be used in the FPC context. I draw the attention of the noble Lord, Lord Peston, to what deputy governor Charlie Bean said in February 2012: that if the MPC,
“had chosen to run a substantially tighter monetary policy, then that would only have served to depress activity and raise unemployment even further … it would also make the task of fiscal consolidation and de-leveraging even more challenging. And by providing a gloomier climate for business, it would also inhibit investment and slow the necessary re-balancing of our economy towards manufacturing and internationally tradable services”.
Although this is not the time to go into it further, it is possible to argue—and the evidence is very much there—that the MPC is affected by the wording in the same way in which the suggested wording of the Government’s amendments will bite on the FPC. I am grateful to the noble Lord, Lord O’Donnell, for further illuminating some of these issues.
The three situations in which the noble Baroness, Lady Valentine, quite rightly postulated that the new secondary objective needs to work were good times, crisis and uncertainty. I can only say that I completely agree with her and that the wording that the Government propose strikes the right balance and will take account of all those scenarios. Of course, we are not relying solely on the secondary objective for growth, but I am sure that she understands that.
Lord Eatwell
My Lords, I am grateful to all noble Lords who have taken part in this debate. I was going to say “short debate” but it got a bit longer as we went along, as these things tend to do. The reason is because, although it appeared at the beginning to be a debate on semantics, it actually addressed the fundamental issue of giving powers to unelected officials in the form of the Financial Policy Committee, the exercise of which would in the past have typically been associated with elected, accountable politicians. That is a fundamental philosophical issue in the Bill and it is interesting to reflect for a moment on why it has arisen.
First, there is a fundamental difference among many in this House about whether it is more desirable to have a separable economic policy, in which monetary and financial policies are pursued entirely separately from policies on growth and employment, or a collective economic policy conducted with the Bank, the Treasury and all relative institutions collectively deciding on the overall stance that should be taken. That is a fundamental debate in economic analysis. However, it is not the point here, which is why we have been slightly diverted.
The point here is about the role of the Financial Policy Committee, which is an innovation that has arisen because of the change in economic circumstances, involving the speed at which innovation in financial policy can dramatically change the environment of a given government policy. The Government can suddenly find that a particular economic stance is being undermined or distorted by significant innovation in financial markets. The development, for example, of the credit derivatives that underpinned sub-prime mortgages in the United States changed the whole housing finance policy of the United States—an innovation by financial institutions that changed the environment of government policy.
The key role of the Financial Policy Committee is to watch out exactly for those sorts of things. That is what it is there for: to maintain a persistent study of what is happening in financial markets and how that might change the environment for government policy, and of the implications of any particular stance that the Government and/or other economic policy actors, such as the Bank, have taken.
Having said that, this was an interesting debate and we have eventually focused on the issue of “supporting” or “having regard to”. Obviously, since I put the amendment down with my noble friend, I think “having regard to” is a more appropriate relationship given the role of the Financial Policy Committee, but, in light of the debate, I beg leave to withdraw the amendment.
Lord Sassoon
“(a) contributing to the achievement by the Bank of the Financial Stability Objective, and(b) subject to that, supporting the economic policy of Her Majesty’s Government, including its objectives for growth and employment.”
Lord Eatwell
“(1A) The Financial Policy Committee is to exercise its functions with a view to contributing to the achievement by the Bank of the FCA's integrity objectives, including but not limited to those set out in subsection (2)(f) of section 1D and section 1DA of FSMA 2000 as inserted by section 5 of the Financial Services Act 2012.”
Lord Eatwell
My Lords, I rise to move manuscript Amendment 35AB and speak to manuscript Amendment 110ZA, which is associated with it. First, I apologise to the Committee for introducing a manuscript amendment and, indeed, for introducing a manuscript amendment to replace a manuscript amendment. It displays the serious defects in my own drafting abilities and I hope to do better in future. I apologise for that but it is a testimony to the flexibility of your Lordships’ House that we are able to consider these amendments now, which are designed to give the Committee the opportunity to address a very important matter that, as we know, has arisen in the last few days. It would be foolish to pretend that these amendments have not been brought forward as a result of the revelations of the LIBOR scandal in the last few days. However, it is valuable to give the Committee the opportunity to debate these issues in a concrete way and with a concrete proposal on which it can opine.
The consequences of this scandal are so serious and so far-reaching that their implications for this Bill are immediate. Fortunately, we had not reached what might be deemed the relevant part of the Bill that should be amended to take account of what we now know—something that, a week ago, we did not know. We now know that the setting of benchmark prices is a fundamental element in the efficient operation and stability of financial markets as a whole—that is, of the generation of systemic risk as defined in the operating principles of the FPC—and that the process of setting one of the most important benchmark prices in the world, the dollar LIBOR, has been severely compromised.
Lord Kerr of Kinlochard
Given that the noble Lord has explained that the public inquiry he seeks is not an alternative to the Tyrie inquiry, can he confirm that the Opposition will be co-operating in full with the Joint Committee to be set up under Mr Tyrie?
Lord Eatwell
I certainly think that Mr Tyrie and the Treasury Committee can and will pursue their activities in their normal way, including perhaps the pursuit of this particular inquiry. As to the future policy of the Opposition on the organisation of that inquiry, we are trying to achieve the best possible outcome. I see the best possible outcome as a three-dimensional one.
Lord Carlile of Berriew
My Lords, I welcome the opportunity for this short debate on a matter of great public interest. I have to say to the noble Lord on the opposition Front Bench that the Opposition have asked the right question but given the wrong answer to that question. The LIBOR issue is an immense financial scandal. It appears to have not just the scope of one bank, but possibly to affect other financial institutions. It affects not only what has happened in the United Kingdom, but affects at least four jurisdictions, including the United States of America. It affects the reputation of the City of London in a major way. Those of us who are as old as I am remember bankers in the City of London by the adage, “My word is my bond”. Now we see, “My Maserati is my success”, as the evidence of what happens in the City of London. I hope that noble Lords of all parties and none will agree that, as a result of this scandal, we need to emerge from it with “my word” being “my bond” once again. The trust in the City of London is why the City of London succeeded in the past. It will not succeed in the future if those who do business there, if I may use a Scouse expression, are seen merely to be “wide loads”.
What has happened undoubtedly potentially merits investigation for criminality. I do not believe that a parliamentary inquiry is the right way to winkle out criminality, welcome though a parliamentary inquiry is. It is not a way in which criminal investigations are carried out. In fact, it is a ludicrous proposition to suggest that this is the job of a parliamentary committee, however well led. I do not for one moment question the leadership and integrity of Mr Tyrie. He is obviously very good at what he does. I do not favour a judicial inquiry, because a judicial inquiry can quickly become a behemoth. I do not draw a comparison with the Leveson inquiry. Lord Justice Leveson is not merely an old friend; he is doing a brilliant job with a very specific inquiry of an entirely different kind. However, I fear that if a judicial inquiry were established, within a few days we would see some of the best lawyers in London—including some Members of your Lordships’ House—earning vast sums of money from lining up in front of a senior judge, expecting an outcome at some distant time, possibly in this decade, possibly not.
Lord Howard of Lympne
Could not the investigation that my noble friend asks for be carried out without the appointment of a special prosecutor but by the Serious Fraud Office, which has already embarked on such an investigation, with the director, if necessary, asking for additional resources to enable him to bring such an investigation to a speedy conclusion?
Lord Carlile of Berriew
I am grateful to my noble friend, who has considerable experience of dealing with high-level legal matters. I believe that might be achieved, but in my view there needs to be the clearest statement of intent by the Government. My intention, as my noble friend implies, is that whoever carries out this special investigation should be invested with the powers of the Serious Fraud Office, which are considerable and important. That is why I suggested earlier that this should take place under the instructions of the director of the Serious Fraud Office, Mr David Green QC. However, I believe that the Serious Fraud Office is completely unresourced for this kind of investigation. I also believe that in public terms, if the Government made it clear that they would provide Mr Green with the resources immediately to appoint a special prosecutor, albeit under his umbrella, and that person was provided with a team, probably largely from outside the SFO, which has been recruiting a large number of staff recently and may not have the experience to deal with this inquiry at present, then we would have a quicker and better result.
I do not want to detain your Lordships’ House for too long. However, I want to make the point that we have not yet reached the situation in which the essential issue is being investigated properly—that is, the potential criminality of those whom we were entitled to trust.
Lord Phillips of Sudbury
My Lords, I came to the City as a young lawyer in 1964 and am still there. Until last Christmas, I was a non-executive director of a well known City insurance entity. I agree wholly with the sentiments of the noble Lord, Lord Eatwell. However, the writing has been on the wall about the state of values in the City for very many years. The most recent shock—the LIBOR scandal as one might call it—is but one of many and there will be many more still to come, I am sad to say. It has been an open secret in the City that the culture has declined over the years to one of near amorality, where the law rather than normal moral instincts has been the arbiter of conduct. That in turn has declined, predictably, to a situation where too often if amorality is confronted with a significant loss of a good deal then there is little resistance left in the system and criminality occurs. Most of it is impossible to trace as it is in the form of market manipulation and oral conspiracies—whether within a firm or between different firms. It is a sad spectacle. To be fair, the vast majority of people in the City deeply regret where we have got to. Unfortunately, however, the culture of huge corporations tends to crush the moral life out of people in those entities. You get the occasional whistleblower who will stand out against the herd but one knows, I am afraid, what has happened recently to those few brave people.
The noble Lord, Lord Eatwell, is absolutely correct in his strategic overview of where we now are. We must, however, ponder this a little more than the space of this debate will allow. I am inclined towards giving serious thought to some sort of commission. It does not have to be a royal commission—a phrase which has attracted a good deal of adverse thought lately—but it is such a huge congregation of issues, not just confined to the City and certainly not confined to narrow misdeeds such as the LIBOR matter, that we may be better off with a royal commission that can look at the thing in the round, take its time, and let the criminal side of all this be separated and dealt with by the Serious Fraud Office or, conceivably, a special prosecutor.
My Amendment 109—to which my noble friend Lady Kramer and the noble Baroness, Lady Meacher, have added their names, and which we will probably get to next time—ironically achieves almost the identical effect to that of the first part of Amendment 110ZA, tabled by the noble Lord, Lord Eatwell, so I am obviously in favour of that.
In closing, the other quick point I should like to make is to wonder whether there should not be a wider duty of integrity in the Bill than that which applies only to the FCA in proposed new Section 1D on page 17 of the Bill. The prudential authority should be subject to a similar integrity objective, and it might make sense to have such an objective for the whole financial regulatory sphere. That is all I wish to say beyond thanking the noble Lord, Lord Eatwell, for raising this matter at this time.
Lord Neill of Bladen
My Lords, I should like to make a few observations about the amendment. We are at Committee stage of the Bill. While it is passing through your Lordships’ House there has been an enormous scandal about the fixing corruptly of the LIBOR rate by Barclays over, I understand, a period of years—a practice in which it is possible that other banks took part. They have thereby done enormous damage to the reputation of the City of London as a place where you can get honest dealing. The matters thus far brought to light show innate corruption, whereby it is seen as perfectly all right to rig the figures that you supply in order to fix the LIBOR rate and to bring in profit or reduce losses. That is a form of corruption.
One can go back to one’s early days with a bank. I banked with Barclays from the mid-1940s onwards. The notion of the bank then being involved in this type of activity was absolutely laughable. The banks have turned into merchant banks of the worst possible character, and that ethos is reflected in conduct that reveals a completely disgraceful picture.
The question is: what is the best way to have a wider inquiry into that matter? At the moment, it is a pity that what is called the Tyrie inquiry is being allowed to carry on on its own, without any thought as to whether or not the investigation of those facts would be central to any wider inquiry about the integrity of banks. However, how do you investigate integrity? The theory is that you are not allowed to look at other cases because Tyrie is dealing with the matter. In fact, it is the best possible evidence you can have of the way that bankers think today. You want to know all the details of that case and not exclude them from it, rather than ask a generalised question: how do we establish integrity or lack of it in the City?
I therefore assume that today we are having an exploratory discussion, that the amendment will be withdrawn, and that there will be time, at least by Report, to consider revised proposals of what might be done by way of investigation. The suggestions of noble Lord, Lord Carlile, are interesting and persuasive, but all this has just been pitched upon the House of Lords because of a curious financial scandal coming to light at this very time while we are in Committee. I hope that consideration will be given as to whether matters in relation to the banks and financial institutions could be better conducted after we have had time to think and the Government have had time to react to the amendment. I hope that some reasonable and rational delay will be introduced and that the amendment will be withdrawn.
Lord Davies of Stamford
My Lords, I am very glad indeed that we have an opportunity to discuss this extremely important matter. The news over the past few days has been dramatic and horrific, and the public would think that our parliamentary system was woefully inadequate if we did not take time not just to discuss this matter but to come rapidly to conclusions, which is why I profoundly disagree with the noble Lord, Lord Neill, that we should not take any decision today and that the amendment be withdrawn. I hope that my noble friend who spoke extremely powerfully on his amendment will press it in due time.
There seems to be prima facie evidence of widespread abuses, dishonesty and corruption—a good word that I take from the noble Lord, Lord Neill, with pleasure, because it is the right word—in our banking system. None of us would have supposed that that would arise here in the City of London. All of us have been excessively complacent about the standards of conduct which are applied in the City of London.
Lord Kerr of Kinlochard
My Lords, like the noble Lord, Lord Neill, I hope that the noble Lord, Lord Eatwell, will withdraw his amendment. His three-dimensional answer to my question made it impossible for me to support it, because I fear that he is taking a hostage. The most important thing that must be done is to establish quickly how we can ensure that the fixing of LIBOR cannot happen again. That is the crucial operational thing to do. I agree with those who say that this is an international scandal. I agree that around the world, people know about this. There are plenty of other scandals in the banking system that must be addressed, such as the mis-selling scandal and questions of remuneration and bonuses. There is plenty of time for a study of the culture of the banking and financial services industry. That is important but not urgent. What is urgent is to do something operational now.
I understand from the Prime Minister’s Statement that the Wheatley report will be published this summer. That fits very well with the Tyrie exercise, which will finish this autumn and can establish what happened. It should not go into areas of criminality. What was said by the noble Lord, Lord Carlile of Berriew, was fully justified; I would not go down the special prosecutor route but would follow the advice of the noble Lord, Lord Howard. We need a quick operational inquiry to establish how to make sure that this shocking thing—this poisoning of the water supply that is a scandal around the world—is put right and cannot damage London, and borrowers and lenders, any more.
I will say one further thing to remedy an omission in our discussions, and those of the other place, yesterday. I am confident that Mr Agius is an honourable man. It is a pity that no tribute was paid yesterday to the way in which he immediately accepted responsibility and felt that the buck must stop with him.
I was reminded of the noble Lord, Lord Carrington. Nobody thought he was responsible directly, hands on, and involved in the loss of the Falklands. I do not believe for a moment, and I do not believe that anybody in this Chamber believes, that Marcus Agius was in any way involved in fixing the LIBOR rate, yet he undoubtedly did the right thing, and it is important that that should be put on the record. It makes a striking contrast to the behaviour of some others in public life these days. I advise anyone intrigued by this reference to read a remarkable speech made on Friday on the Steel Bill by the noble Lord, Lord Fowler, referring to another Member of the present Government.
Baroness Kramer
My Lords, I want to associate myself with the words we have just heard from the noble Lord, Lord Kerr, on the importance of acting quickly. I speak as someone who has spent most of her career in banking, working with clients on transactions that involve the LIBOR rate and I understand the significance of the issues we have discussed in this House.
As others have said, this is not just a UK issue. The earliest that any inquiry, as proposed by the noble Lord, Lord Eatwell, could begin would be the autumn, so we are looking at something like a two-year inquiry. I am not sure that he understands—
Lord Eatwell
If the noble Baroness would allow me, perhaps it would be for the benefit of the Committee if I said that I certainly did not rule out the Wheatley or Tyrie inquiries: I argued that both have something to contribute. I say that to the noble Lord, Lord Kerr, as well. Therefore, I accept the whole notion of acting quickly—it can be handled—but we then have to ask: what next?
Baroness Kramer
When the noble Lord, Lord Eatwell, talks about the Tyrie inquiry, I am still not clear whether he is talking about the Joint Committee of both Houses, in which the Lords are as involved as the Commons, or whether he is simply talking about the Treasury Select Committee acting, if you like, in its normal way. I think that he has avoided giving us clarity around that issue.
The critical thing here is that other jurisdictions will act. The United States will not sit around while a committee lasting one or two years talks about the fundamental issues of banking, so the actions that we are going to take have to be decided in a far more immediate way. We have great opportunity with this Bill and with the forthcoming banking reform Bill. The changes will have to be embedded in those Bills at the latest if we are to stem the tide of real disadvantage.
If anyone doubts that work is afoot elsewhere to deal with the problems that we have been so slow to pick up and deal with, I suggest they take a look at today’s Wall Street Journal. There is an article in there called “Lining Up Potential Successors to Libor”. It is very clear that we in the UK are on the back foot and we need right now to get on to the front foot and not start playing for the long grass, however worthy that is. It is that sense of urgency that I want to convey. If we hear that the answer for the British Government is going to be a commission, there will be a very cynical reaction in the United States that once again the Brits are going for another long-term committee with navel-gazing and endless discussion, rather than immediate action. Perhaps someone can tell me what the value is of a commission that reports after all the changes have taken place. That sounds to me like a method for closing a stable door long after the horse has bolted. It is crucial to get that horse moving now, without delay.
I also have to say that I regard a Committee of both Houses as an extraordinarily effective way of getting to the root of a problem. Think of the expertise we have in this House. Surely that is exactly what we should be using. The breadth of the experience we can bring is important. Moreover, it is very different from Leveson because at the heart of that inquiry is the reality that it is investigating a relationship between politicians and the media, one in which there is a high suspicion—outside here I would probably go further, but that would not be tactful—of collusion and corruption. Politicians cannot investigate themselves under those circumstances, but I do not think anyone is suggesting that that is the situation in the banking industry. We are not talking about political collusion or corruption here.
Indeed, if we doubt the effectiveness of the political system in handling this, let us look at Bob Diamond’s resignation this morning. It is easy to see what happened. He knew he would face the Treasury Select Committee on Wednesday, so he sat down with his lawyers—I am guessing that, but I suspect I am right—and started to role-play how he would behave in the meeting. Soon he realised that his position was totally untenable. That is effective action, and it is what we should be building on, not going back to some sort of long-term commission. The additional benefit is that if there is leadership from Parliament, it will continue to observe and supervise the banking industry for many years. It will not pack up and go away after 18 or 24 months. We should build on that, not lose it.
Perhaps I can make a last comment. We seem to be going through an extraordinary trend, if you like, of subcontracting out our responsibilities. As politicians with the privilege of being part of this Parliament, surely we ought to be taking the tough decisions. We should not be trying to find someone else to contract out to every time there is something tough to do, otherwise we might as well just become a commissioning body. I would argue that we should look at our strengths and skills and take this opportunity to act. That would show the banking industry and the wider world what we can do. The longer term is too late, and we have to be aware of that.
Lord Myners
My Lords, I fear that the noble Baroness, Lady Kramer, might not have been listening to my noble friend Lord Eatwell. He supports the inquiry to be chaired by Mr Andrew Tyrie as well as the Wheatley review. I believe that the proposal of my noble friend is complementary to and necessary as an addition to those reviews.
Yesterday the Chancellor of the Exchequer said in the other place,
“we know what has gone wrong”.—[Official Report, Commons, 2/7/12; col. 613.]
I do not think that the people of this country know what has gone wrong. With all respect to the noble Lord, Lord Kerr, this is not simply a question of LIBOR. I first tabled a Written Question for the Minister about the manipulation of the LIBOR rate in March last year and got a very backhanded response from him; I have raised it several times subsequently. But this goes well beyond LIBOR. The lying and deceit around LIBOR manipulation that we know has taken place systemically across the banking industry—it is not limited to Barclays alone—is but a symptom of a wider cancer at its heart.
You can go to your bank manager to have your passport photograph signed. Banking was a profession held in high regard. It was associated with trust, integrity and prudence. How has that changed, and why? That is why we need a commission of review. The terms of reference of the Tyrie review are, as my noble friend said, extremely limited. They are ring-fenced and precise, so they do not ask the sort of questions that should be asked. Yesterday in this House the call was made for a review that would focus on the transparency, culture and professional standards of the banking industry. The Tyrie terms of reference do not look at the transparency, culture and professional standards that were called for by the speaker in this House—and that speaker was the Minister. We need a fundamental review of what has gone wrong in banking.
How can it be that a bank built on the Quaker traditions of Barclays can find itself in a position where three of its senior board members have resigned within 24 hours and where I confidently predict more will resign by the end of this week? How can we be comfortable with that? The noble Lord, Lord Kerr, referred to Mr Marcus Agius, whom I know well and hold in extremely high regard. It seems as if Barclays has been involved in a car accident where Mr Agius was the passenger sitting in the back. Yesterday he resigned, taking the blame for the accident. Today Barclays has concluded that it is the driver who should take responsibility, and now Mr Agius has got back into the car, which he has to drive from the back seat. This is a state of complete chaos. How can a great British industry, one in which we have led the world, have got itself into such an awful mess?
To answer those questions, we probably need to go back to the 1980s to see how the transition has taken place. Tyrie and Wheatley are not going to do that. Their work should continue, but the call by my noble friend Lord Eatwell for a thorough, deep and considered evidence-based review of what has gone wrong in banking, and what we can do to ensure that it does not happen again, seems to be an undeniable case. I shall certainly support the amendment if my noble friend presses it to a vote.
Lord Higgins
My Lords, we should be grateful for the opportunity to have a debate this afternoon because it enables us to focus on what our priorities should be. We have essentially been considering two things: how wide an inquiry do we need and how urgent is it that it should produce results quickly? What has become quite apparent is that one inquiry is not going to be enough. What has happened is this: on the one hand we need a short-term inquiry, but on the other hand we need a strategic inquiry. We also need the kind of investigation which the noble Lord, Lord Carlile, has put forward, but in a sense it is a separate issue because the outcome of that inquiry will presumably be the prosecution of particular individuals. In no way would the noble Lord’s inquiry tell us how to reform the banking system. So that is something which is self-contained and separate.
We come then to the question of the best tactical answer. I fear that the position has been somewhat confused by the references to Mr Tyrie. Let me make it absolutely clear—I speak as someone who was the chairman of the Treasury Select Committee for 14 years—that I have the greatest respect for Mr Tyrie, who has been doing a magnificent job as chairman of the committee, which I understand is to take evidence from Mr Diamond this week. But the question then arises of whether Mr Tyrie should also be the chairman of the Joint Committee, the proposal put forward by the Government. I think that this confuses the matter. The shorthand around the use of the word “Tyrie” has actually become extremely confusing. Yesterday I expressed a view that I shall repeat now: to do the jobs both of chairman of the Treasury Select Committee and chairman of the Joint Committee is too much. It will distract from the normal work of the Treasury Select Committee, while the Joint Committee will need the full attention of whoever is appointed as its chairman.
I am not clear on how it suddenly became apparent that Mr Tyrie would chair the Joint Committee. My noble friend the Minister pointed out yesterday that the Joint Committee will presumably decide who its chairman should be. I would prefer Mr Tyrie to continue as chairman of the Treasury Committee because he is doing such a good job, and I believe that someone else should chair the Joint Committee. However, that will be a matter for him and the respective committees to decide. At all events, the Joint Committee is the right way to go as regards the immediate investigation and rapid conclusions on what needs to be done urgently. That leaves unanswered some of the more fundamental positions that need to be considered. The body which could most appropriately do that was suggested by the opposition Front Bench.
To summarise, leaving the separate Carlile issue on one side, the Treasury Committee should continue with its work in the normal way; the Joint Committee should consider the immediate actions that need to be taken as it unearths the problems, as no doubt it will; and there ought also to be a longer-running inquiry. There will not then be any accusation that we are kicking the matter into the long grass, and at the same time we will get rapid results on the tactical situation. In the light of your Lordships’ debate, it is becoming increasingly apparent that that structure is the right approach.
Lord O'Donnell
My Lords, I support the sentiments expressed by the noble Lord, Lord Kerr, and the noble Baroness, Lady Kramer, and believe that we need to handle the very important issues raised by the noble Lords, Lord Eatwell and Lord Myners. There is a way of managing all of this.
First, importantly, we have a lot of information already. We want an inquiry to establish the facts, but we need to bear in mind that we have MoJ, CFTC, and FSA reports on the LIBOR issue that have raised enormous issues. I would very strongly support what the noble Lord, Lord Carlile said, but with the noble Lord, Lord Howard, variant, if I might put it that way; that is, that these reports have raised serious issues of criminality. We need to investigate those issues quickly, with sufficient resources, and with all the power and vigour that we would use if this were some other form of crime. That process is crucial. It should happen straight away, and it should not be resource-constrained.
Secondly, the Wheatley report will be important specifically to the way in which we handle the LIBOR issue. It is urgent, and plenty of others would like to take this business away from us. The Wheatley report, which should be with us through the summer, will suggest some amendments to this Financial Services Bill. I particularly like the suggestion of LIBOR being a qualifying financial instrument, which might well get us through a lot of these issues.
We then come to the more general set of issues on what is wrong with banking and how we can restore confidence in it. Those are very important questions. In my maiden speech, I suggested that we should have a Joint Committee of both Houses chaired by the chairman of the Treasury Select Committee who would have authority and power. Given the experience of Members of this House, it could come up with some answers that would get past the problem of reputational issue. Both Houses acting together would command confidence and such a committee more generally at what emerges from the LIBOR case.
Some issues will emerge directly from the LIBOR case which will relate to our future banking reform legislation, touching on the whole question of splits and the like. That Joint Committee could guide us as regards the changes we would need. I am in favour of changes to that legislation and I would look at total assets rather than only at risk-weighted assets, and at total leverage ratios rather than only at what is proposed. However, that is a separate issue that we will come to later in this House.
Lord Peston
My Lords, the background to my few remarks is the text:
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.
I am delighted that some of the better educated—no doubt those who were taught economics—are well aware of the provenance of this remark, which was by Adam Smith. He would not have been in the least surprised by what happened with LIBOR or by all the other conspiracies that, if we had enough time, I could tell you about, including the price fixing that still goes on in our economy.
Turning to my main remarks, I have a feeling that I will be in somewhat of a minority. I found what the noble Lord, Lord Sassoon, said yesterday, in announcing the Government’s proposal for what we will call the Tyrie inquiry to be totally unconvincing. The public require an objective inquiry which they can believe without a shadow of doubt is not a stitch-up. I do not believe for one moment that the remit given to the chairman of the Treasury Select Committee enables that inquiry to take place in any way whatever. I speak for myself in saying that, although I regard myself as totally objective and totally honest, if I were asked to be on that inquiry I would refuse because I do not believe that the public want people who are involved inside to be conducting it. We have very much to face up to that. I might ask the noble Lord, Lord Sassoon, why, if he is so anxious to keep politics out of things, does he make political remarks in almost every address he gives to this House—but that is simply me being my usual acerbic self.
Am I right, that the Prime Minister—given that this is a matter of absolute national importance—did not consult the Leader of the Opposition in deciding how we should go forward? The Government ought to backtrack and try to find a consensual way of going forward that would involve the Prime Minister talking to the Leader of the Opposition. I am not saying that we would definitely get a good outcome to that but I am absolutely convinced that that is the approach that ought to have been adopted.
I want to say a brief word about how speedily anything can happen. We are going to rise in three weeks’ time and, in the case of our House, not come back until October. As far as I can see, that means that any inquiry will certainly have to be short—whether it will be sweet, I do not know. This notion that it is all going to be done very quickly I just do not find believable, whoever does it. I have a holiday booked so I am not very keen on coming back earlier but we may have to. Again, perhaps the Minister can talk to us about the speed of the inquiry.
Perhaps I might ask another practical question: am I right that the corrupt practices on LIBOR have stopped? Do we know for a fact that they have definitely stopped? Perhaps the Minister could tell us. I hope that they have definitely stopped.
What is unavoidable is that we have to look at what the regulators have been doing. An inquiry that does not do a full examination of the regulators themselves would simply not be worthwhile. We are told that neither the FSA nor the Bank had the power to investigate the setting of LIBOR. I would have thought that the head of the FSA and, even more, the governor could have sent for some of the people involved with LIBOR for an informal chat—forgetting about what their powers might be—just to find out what they were doing, looking for some enlightenment. I find it astonishing that we are being told that neither the governor nor the main regulator knew about LIBOR, and did not think to apprise themselves of what went on, whatever they thought their formal powers were. I must say, if I had been one of them, I would have done that—perhaps that is why I have never been appointed to anything.
I have also been going through the nightmare of rereading your Lordships’ Second Reading debate, in which I was unable to take part. What is absolutely fascinating is that the one acronym that never appears in any noble Lord’s speech is LIBOR. There we are, all the great experts, and what we are really doing—as always happens—is fighting the battles of the past. Most of the speeches were looking at accounting for the financial crisis that started a few years ago and discussing a Bill to prevent that financial crisis ever happening again.
The great Chicago economist Frank Knight—who was very much on the right, I might add—wrote a classic work called Risk, Uncertainty and Profit. He said that risk was what you did not know was going to happen but that it was measurable, due to probability and that sort of thing. He argued that what really mattered was uncertainty, which you know about in an almost contradictory way: you know that what is really going to happen is something that is totally unexpected. The problem was how to prepare for it—how to expect the unexpected. He never found a satisfactory answer to that but he did say that the free market capitalist system was at least the best way of adapting to those unexpected shocks when they occurred.
This is where I disagree very strongly with the noble Lord, Lord Kerr, who said that what we have to do is make sure that LIBOR does not happen again. That is precisely to get it wrong: LIBOR is not going to happen again; something different is going to happen and we need a system that prepares us for dealing with something different. I do not think any of what the Government are proposing covers that.
En passant, the noble Viscount, Lord Trenchard, said that light-touch regulation was discredited. I have to tell him, I would be a light-touch regulator if I were one, because I do not believe that the role of the regulator is to run the businesses that it is regulating. That is my concept of light-touch. I believed it then and, if you accept my concept of light-touch, I believe it now. One place I would like us not to go to is the regulators essentially running the banking system, and I hope that the noble Viscount agrees with that.
Going back to the issue of the Joint Committee, it should not be ad hominem, as I think has been said; it is nothing to do with Andrew Tyrie. The real question is: should the Treasury Select Committee in the other place, which deservedly has a tremendously high reputation, be involved in this in any way? I do not want to go down the path of the Joint Committee; I would much rather go down the path suggested by my noble friend Lord Eatwell. I would be interested to know if other noble Lords know anything about this, but I think it would be a terrible mistake, in trying to maintain the very high reputation of the Treasury Select Committee, if it got involved in this inquiry. That would be a mistake beyond belief.
We end up with two possibilities. One is that we divide and test the opinion of the House on what my noble friend Lord Eatwell proposes; he will decide this. The other, which is what I would like to see happen—and I know I am being immensely naive here and there is probably nothing the Minister can do to help us—is that the government proposals are withdrawn and the Minister’s right honourable friend the Prime Minister and my right honourable friend the Leader of the Opposition do what I suggested earlier: get together and see if they cannot come to us with some proposals. This is a matter of national importance.
The noble Lord, Lord Carlile, will notice that I have not said a word about prosecuting the guilty because that is not my subject. As an atheist, I believe that if we do come back to this planet, I intend to come back as a Queen’s Counsel and certainly not as an economist. I really do believe that in the national interest the leaders of both main parties should get together and come back to us with some jointly agreed proposals.
Lord De Mauley
My Lords, I think I detect that the mood of the House is that we should move towards a conclusion. I do not want to stifle debate but perhaps I might suggest that my noble friend should speak and then my noble friend the Minister should wind.
Lord Framlingham
My Lords, I shall be very brief. Issues such as this are extremely complicated on the one hand and very simple on the other. We are dealing specifically with LIBOR—at least I am—which I am not an expert in. I am sure that there need to be inquiries—what sort of inquiries will be determined today, or later—which need to get to the bottom of the problem as quickly as possible.
In his opening remarks, the noble Lord, Lord Eatwell, said he was not sure what the word “integrity” meant in this context. I know precisely what the word “integrity” means. I also know precisely what the word “greed” means. I also know precisely what the word “criminality” means. Finally, I know what the word “prison” means. I support the noble Lord, Lord Howard, in this. Whatever else happens in terms of inquiries, the Serious Fraud Office should get on to this immediately to find out what has gone on and who the culprits are, and bring them to justice. That will be the best way to make sure these things and others like them do not happen again.
Lord Blair of Boughton
My Lords, I know that the Minister is about to speak but can I give a slight and practical example of how witnesses will approach these different inquiries. I find myself entirely in agreement, as any Cross-Bencher should be, with both sides of the House. How does a witness approach these different inquiries? They approach the criminal inquiry with the narrowest possible dimension about the facts in dispute. I have appeared at the No. 1 court at the Old Bailey, so I know what it feels like. You are always told that you should answer only the question you are asked. When you appear in front of a parliamentary inquiry, you have the same approach with a view as to where the political issues will come from, which you have to think about. When you appear, as I did, in front of Leveson, you do so on a completely different basis. My evidence to Leveson began in the 1820s. In other words, you are looking at the whole issue in the round. I do not understand why there needs to be any dispute between the two sides of the House in this debate. Have a criminal inquiry, have Tyrie and have a judge-led inquiry into the ultimate circumstances of the way in which the banking culture has taken over parts of our society.
Lord Sassoon
My Lords, first, let us be clear that these amendments have very little to do with the Bill before us today. They are all about the Opposition’s misguided attempts to slow down what we need to do to deal with the consequences of the LIBOR scandal. We need rapidly to restore public confidence in the financial services industry, which the Government are pressing on with. We do not need to kick these very serious matters into the long grass, as the Opposition now propose. It is time for Parliament, as well as the Government, to take clear leadership on these matters. The events of recent days have highlighted that the culture of banking is badly broken. The Government are in the process of fixing the system, but we need to change the mindset of the profession and those working in it. This is about restoring banking to what it should be about: to be the most, and not the least, trusted profession.
The basic facts of the attempted LIBOR manipulation are clear. There have already been published reports from three regulators in the UK and the US. We do not need a judicial inquiry to tell us what the facts are. A judicial inquiry would be principally aimed at establishing the facts; it would likely take years to complete, might not be able to start until after prosecutions had been completed and would cost the taxpayer millions of pounds.
Now we need three things. First, we need the rapid prosecution of individuals who may have broken the criminal law. This is what the SFO and the Crown Office in Scotland are looking to do. Secondly, we need to look at how LIBOR cannot be fixed again, which is the subject of Martin Wheatley’s review. Thirdly, we need to look into the ethical and professional standards of the financial services industry and we need to do so urgently to ensure that the banking industry is serving the needs of the wider UK economy and the continued global competitiveness of London and the UK.
For this reason, the Government recommend that Parliament considers undertaking an urgent inquiry into the culture and ethics of the banking industry to help shape the urgent reform that is so much needed. The Government propose the establishment of a full parliamentary committee of inquiry, comprised of representatives from both Houses, and set up by a joint resolution of both Houses. The proposed terms of reference for the committee are building on the Treasury Select Committee’s work and drawing on the conclusions of UK and international regulatory and competition investigations into the LIBOR rate-setting process, consider what lessons are to be learnt in relation to transparency, conflicts of interest and the culture and professional standards of the, financial services industry, including the interaction of these with civil sanctions and criminal law. While I hear noble Lords seeking to paint this as a narrow inquiry, on any construction, these words will give the Joint Committee a very wide remit.
I am also glad that the Opposition now seem to support the creation of this committee. I have laid out what is required. We certainly do not require a proliferation and duplication of reviews that could go on for several years. We recommend that the inquiry should commence immediately and conclude by Christmas. As noble Lords are aware, the Government plan to introduce the banking Bill that will implement the recommendations of Sir John Vickers’s Independent Commission on Banking in January next year. This will bring far-reaching and lasting changes to the structure of British banks. The Government’s preferred timetable for the committee of inquiry would allow the Government to use the Bill to make any appropriate further changes needed to the standards of the banking industry and the criminal and civil powers needed to regulate it, and hold people to account for their behaviour.
The Joint Committee will do its work well and comprehensively and will report by Christmas. However, if, at that stage, this House or another place was not satisfied with the work of the Joint Committee, it will be possible for Parliament to press for a further inquiry. At that time, the inquiry proposed by this amendment would not even have started. The Government fully intend that Parliament should play a significant role in getting to the bottom of what happened and helping make the system more robust. It is surely highly desirable and consistent with many of our previous discussions in recent months that your Lordships’ House should be fully engaged in the process, bringing the full breadth of its expertise to bear from Peers of all the main parties and none.
This is already a big Bill, on which time is now being taken up by debating the merits of an inquiry—a debate that will not help noble Lords with the key business of the House today, namely scrutinising the detailed contents of the Financial Services Bill. It may help your Lordships to know that in another place on Thursday there will be debates on two Motions—one an opposition Motion, another a government Motion—to consider in detail the questions that we have debated at some length this afternoon. It is appropriate to leave another place to debate those Motions on Thursday so that we get on with and stick to the Committee’s core task today on the Financial Services Bill.
Lord Carlile of Berriew
I am grateful to my noble friend for his response. Will he confirm that, if there is to be an SFO-led inquiry into any criminality arising from the LIBOR incident, the SFO will not be expected to meet the cost of that inquiry from its existing budget but will be given the separate funding needed so that the inquiry can be full, complete and properly resourced?
Lord Sassoon
My Lords, as was in the Statement yesterday, I can confirm that the SFO is on the case, looking at all the possibilities for criminal prosecutions and that the Crown Office in Scotland is doing likewise. There has been no request of which I am aware from the SFO for additional resources. I assure my noble friend that, if there was such a request, it would be looked at sympathetically by the Government. It has been an important and lively debate because these are critical issues for the financial services industry and I hope that, with those further explanations, the noble Lord, Lord Eatwell, will withdraw his amendment.
Lord Barnett
I am sorry to hear that it has been a wholly non-party political debate today until the noble Lord got up. However, will he at least consider—or, if not him, get somebody in government to consider—the point that my noble friend Lord Peston made? Given the circumstances of great national interest involved here, the Prime Minister should take the trouble to talk to the leader of the Opposition with a view to finding a way through that would be accepted on all sides. In those circumstances—if he could give us the kind of assurance that we need—I would certainly press my noble friend to withdraw the amendment. Can he give us any kind of assurance?
Lord Sassoon
My Lords, even better than that, two Motions will be tabled in another place on Thursday which will give an opportunity for the different views of the Government and Opposition on these matters to be aired fully. We should look very seriously at where that debates leads to.
Lord Eatwell
My Lords, I am grateful to noble Lords who have taken part in a debate which, as the noble Lord, Lord Sassoon, said, is timely and important. I was impressed by the fact that virtually every noble Lord who spoke, with one or two exceptions to whom I shall refer in a moment, felt some wider consideration was needed than that currently envisaged in the Government’s proposals with respect to Mr Wheatley and—if I may be forgiven by the noble Lord, Lord Higgins, for using the shorthand—Mr Tyrie’s review. The noble Lord, Lord Carlile, wanted to go wider in a different way by introducing the innovation of a special prosecutor. Special prosecutors have at best a very mixed record in the United States, which should be taken into account. Focusing on the legal issues is too narrow an approach in the circumstances that we face. As the noble Lord, Lord Phillips, said, there is “a huge congregation of issues”; my noble friend Lord Myners said that a fundamental review was needed; a “strategic inquiry” was the phrase used by the noble Lord, Lord Higgins. As my noble friend Lord Peston pointed out, the next major financial crisis is unlikely to occur in the LIBOR market; the next scandal will occur somewhere else. Unless we look at the underlying foundations of problems in our banking industry, we will not be in the least prepared. The noble Lord, Lord Blair, with his experience of legal matters in financial regulation, referred to a need to consider things “in the round”—I could not have chosen a better phrase.
The major difference, as I detected, with the arguments that I put forward came from those who felt that I was trying to slow things down. That is the last thing that I am trying to do. As I pointed out, I am entirely supportive of Mr Wheatley’s proposals and I am supportive of the idea of a Joint Committee moving forward to deal with the specific implications and consequences of the LIBOR element—what Mr Tyrie refers to as the ring-fence proposals. However, as the noble Lords, Lord O’Donnell and Lord Kerr, said, if there is no sign of getting to a solution, then we can have an inquiry. As the noble Lord, Lord O’Donnell, said, we should perhaps consider whether we need to go further.
The key issue then becomes one of timing and why we should not get on with all three? We should understand of course the legal issues with respect to prosecution—I take that under advisement—but what is the problem with addressing these matters? There is no other reason not to deal with all three. I reject entirely the caricature that I was suggesting that things be slowed down; I certainly was not. We need to get on with the immediate issues, but there are much wider issues affecting the future of this country that need to be addressed.
Lord Howard of Lympne
The noble Lord has repeatedly talked about the need for a wider inquiry than what I think we have all agreed to call the Tyrie inquiry. Given what on any view are the extraordinarily wide terms of reference of which the Minister has informed the Committee today, can the noble Lord identify any specific angle, matter or issue that is not covered by those wide terms of reference?
Lord Eatwell
Yes, indeed, my Lords, I can do that straightaway. Those terms refer to,
“drawing on the conclusions of UK and international regulatory and competition investigations into the LIBOR rate-setting process, consider what lessons are to be learnt from them in relation to transparency, conflicts of interest, culture and the professional standards”.
It is from them that lessons will be learnt—not from the wider characteristics of the industry; not from what the regulators were doing; not from the unintended consequences of the reforms of the 1980s; and not from the change in the nature and conglomeration of the banking industry. Lessons will not be learnt from any of those issues, which are much wider than those in the terms of reference. I am happy to provide the noble Lord with a copy.
Lord Anderson of Swansea
Has my noble friend considered the problems caused by the timetable set by the Government? If the proposed Joint Committee goes through the normal procedures, it will have to call for evidence. That process will take several weeks, which will eat up the rest of July until the Recess begins. This House does not return until the beginning of October. If the timetable is to end by Christmas, the committee will have to have several weeks prior to Christmas before the publication of its report, which essentially means that only the months of October and November will be available for its considerations. That would be a wholly impossible timetable.
Lord Eatwell
My noble friend has made an important point about the pressures that will be faced by Mr Wheatley’s committee and, if we may call it that, the Tyrie committee.
I do not want to delay the Committee. I have made two major arguments in favour of the amendments put before your Lordships. First, the terms of reference, to which the noble Lord, Lord Howard, has just referred, are too narrow. My Tyrie refers to them as “ring-fenced”. That is his expert view, which I accept. Secondly, we have to take this matter out of party politics. It was awful how yesterday’s discussions degenerated into a spat about which politician said what to whom and when, and who was responsible. That is not the issue; the issue is the future of our financial services industry. Let us get this matter out of party politics. I believe that I have heard around the Chamber support for the position that I have taken and therefore wish to test the opinion of the Committee.
Lord Sassoon
Lord Eatwell
“( ) factors likely to lead to a loss of confidence in the financial system as a whole”
Lord Eatwell
My Lords, this group of amendments is a rather mixed bag but all of them refer to various duties of the Financial Policy Committee. The first, Amendment 36, which is in my name and that of my noble friend Lady Hayter, adds to the definitions of systemic risk in new Section 9C(3) of the Bank of England Act 1998 the collapse,
“of confidence in the financial system as a whole”.
Academic research has identified four major sources of systemic risk, at least to date: first, linkages, or the connections between markets, referred to in new Section 9C(3)(a); secondly, the distribution of risk, particularly in the context of cyclical variations in risk, referred to in new subsection (3)(b); thirdly, excessive leverage, debt and credit growth, as referred to in new subsection (3)(c); and fourthly, the general collapse of confidence, which is not referred to at all. This is a serious omission—probably a slip in drafting, but none the less a serious omission in the analysis of systemic risk.
There can be a major systemic failure that is not associated with any of new subsection (3)(a), (b) and (c). You can have a situation that is not represented by linkages between firms, is not to do with the distribution of risk, and is not due to excessive leveraged debt or credit growth, but is due to the collapse of a firm in a particular strategic position within the industry, which leads to a general collapse of confidence. There is no necessary visible linkage between the firms, but the collapse of confidence can lead to a general systemic failure. Adding this fourth component—which is completely standard in the usual list of four in the academic literature—would complete the set from which, for some reason, this element has been neglected. To use the felicitous expression of the noble Lord, Lord Sassoon, it would plug the gap.
Amendment 37 is a probing amendment, although it has more substance than that. New Section 9C(4) of the Bank of England Act says:
“Subsections (1) and (2) do not require or authorise the Committee”—
the FPC—
“to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect”,
et cetera. The phrase “in its opinion” seems to me to make the new section completely meaningless. How would you ever tell? If something happened and the committee pursued some set of objectives that had a significant adverse affect on the capacity of the financial sector to contribute to growth—something the noble Lord earlier this afternoon pointed to as a very positive provision in the Bill—how would you then know whether this had been “in its opinion” or not? You would go along to the committee and ask, “Why did you do this?”. It would respond: “In our opinion, it was the right thing to do. End of story”. Consideration of the implications of its acts has been ruled out of court. The phrase “in its opinion” seems to make the clause devoid of meaningful content. If we remove it, we will improve the overall import of the Bill and, significantly, of this section that refers to the functions of the FPC.
With Amendment 39, I have a real mystery. Systemic risks are defined as credit growth, debt and leverage. However, in new Section 9C(7), all those terms are defined with respect to the UK only. Why is that? We live in a global financial market. Why do they refer to the UK? If these conditions had been in place and the FPC was considering the position of the Royal Bank of Scotland, that bank would have been found to be totally secure, because almost all the problems that assailed it occurred outwith the UK. The growth of credit from that bank was excessive outwith the UK. Its debt position was defined not by the debt it owed to individuals in the UK but to bond-holders and individuals throughout the world. I must be reading this completely wrongly but am totally mystified as to why credit growth, debt and leverage, as referred to in the definition of systemic risk, are confined to the UK. I would be very grateful if I could be enlightened and told that somehow I have got this wrong and that this does not confine consideration to the UK but is dealing with some other, wider element.
Continuing the international theme in this pot-pourri of amendments, I turn to Amendment 44, which deals with page 5, line 39, and refers to the overall functions of the Committee, suggesting that it should be,
“assessing its functions in the light of the policies of the European Financial Stability Board”.
As we know, much of the structure of the regulatory rule book for the UK will be written in Brussels. The EU, like the UK, is feeling its way towards defining the proper role of its macroprudential regulator, namely the European Financial Stability Board. The EFSB will, over the next couple of years, build a toolkit not unlike one that we desire for the FPC—rules on leverage ratios, procyclical provisioning, risk-weighted capital ratios and so on.
It is essential that measures taken in the UK are compatible with measures taken at the EU level, and vice versa. That is why the FPC must, at the very least, assess its functions in the light of what the European Financial Stability Board is doing. We will have an independent position, and the EFSB does not have the same European-wide status as the banking securities markets and insurance regulators, but none the less we want the activities of our FPC to be compatible with those of the EFSB.
To sum up, this is somewhat of a bran-tub. You put your hand in and take out amendments to see which aspect you would like to look at, so it is a slightly diverse group. Amendment 36 adds to systemic risk the risk of collapse of confidence in the system as a whole. Amendment 37 removes “in its opinion” from the new subsection whereby the FPC must take account of its impact on the financial sector’s contribution to growth, as the phrase would render the clause meaningless, or at least inoperable. Amendment 39 raises the question of why growth, debt and leverage are defined purely with respect to the UK, when—for goodness’ sake—we in Britain are dealing with some of the largest global financial institutions in the world. Amendment 44 simply adds to the functions and the need to take into account the actions of the European Financial Stability Board. Going back to Amendment 36 and the collapse of confidence in the system as a whole, I beg to move.
Lord Sassoon
My Lords, I do not know whether this group is a pot-pourri or a bran-tub, but let me attempt to do justice to a number of these amendments. Fine group though they make, they do not entirely find favour with the Government, as the noble Lord will know, because I do not believe they are necessary. I shall address each of them in turn.
Amendment 36 attempts to add,
“factors likely to lead to a loss of confidence in the financial system as a whole”,
to the list of specific types of systemic risks. I can reassure the Committee and the noble Lord in particular that new subsection (3) is not intended to be an exhaustive definition of systemic risk. The types of risk that have been highlighted in this section are generally accepted to be the main types of macroprudential risk, but systemic risks may well arise in future that are not included in these categories. That is why the FPC is free to look at anything else that it believes might pose a systemic risk to financial stability, and I would certainly expect that something that would undermine confidence in the system as a whole would have an impact on stability. It could be argued that market confidence is a necessary component for financial stability. I therefore believe that this is already included in the FPC’s objectives as they stand, and that Amendment 36 is not necessary.
Lord Eatwell
Yes, I can see that. I put a little question mark linking the two new subsections which seem to me to be contradictory, or at least inconsistent. I still do not understand why new subsection (3)(c) says that the systemic risks which the Financial Policy Committee has to consider are those which include,
“in particular … systemic risks attributable to structural features”,
and,
“unsustainable levels of leverage, debt or credit growth”.
How do we define leverage? It means,
“the leverage of the financial sector in the United Kingdom”.
Why? Debt means,
“debt owed to the financial sector by individuals in the United Kingdom”.
Why? Credit growth means,
“the growth in lending by the financial sector to individuals in the United Kingdom”.
Why? Why do we have these definitions when the noble Lord is quite right that new subsection (6) seems to contradict them?
Lord Sassoon
My Lords, the most important thing is that we are talking about financial stability in the UK, and the FPC needs to consider first and most importantly the metrics and indicators of financial stability in the UK. After all, the objective is for the FPC to protect and enhance the stability of the UK, so it is quite right that the definitions refer to the effects in the UK. We are not interested in the FPC deeming that it is not its business to deal with leverage in non-UK markets, but on the other hand it is quite right that the risks themselves may come from factors that arise outside the UK; I think that that is the point the noble Lord is trying to get to, which I believe is well covered by new subsection (6) and which we have made clear in the response to the Joint Committee. It is not the responsibility of the FPC to actually engender results outside the UK; it should be engendering results in the UK.
Lord Eatwell
I am sorry; the noble Lord must be wrong on that. If a bank is lending excessively outside the UK, then the FPC most certainly should be concerned. The idea that the FPC should be concerned only in managing results in the UK must be entirely wrong and could not be the basis of successful stability for the UK financial sector.
Lord Sassoon
No, my Lords, it is not wrong. If we are talking about a British bank, it is a British bank, and that is linked to these metrics and to the remit of the FPC. Of course that is captured in the FPC’s remit. I think we are getting ourselves excessively excited about a simple issue that is perfectly well drafted in the Bill, which is that the FPC has a wide and appropriate remit to deal with financial stability in the UK, but that it should properly take account of systemic risks that may arise both inside and outside the UK. That is exactly what the drafting of the two clauses taken together means. If the noble Lord had been critiquing the Bill as it was introduced in another place, he would have proper grounds for questioning that, but we have plugged a possible gap, and the construction now works.
Baroness Noakes
I do not wish to be unhelpful to my noble friend, but I am probably going to be. What the noble Lord, Lord Eatwell, says seems to make sense. The systemic risks in subsection (3)(a) and (b) are defined in subsections (5) and (6) as not having any geographic restriction, but subsection (3)(c), which is defined by subsection (7), as the noble Lord, Lord Eatwell, said, relates only to,
“individuals in the United Kingdom and businesses … in the United Kingdom”,
for credit growth, debt, and so on. That ignores the fact that many banks have global balance sheets. As we do not have rigid subsidiarisation, a UK balance sheet could have significant exposures to other territories, depending on how a particular bank’s overseas operations were organised. Many of them are run as branches out of the UK institution and therefore, I should have thought, would be posing the kind of risks on which the FPC would need to keep an eye. I am unclear why we have chosen that formulation. I accept that for the systemic risks it does not matter where it applies, but when we are talking specifically about credit growth, debt and leverage, it is as if it can impact on the UK only if it happens in the UK, and I do not think that that is correct.
Lord Sassoon
I shall have another go, because this is tricky but important. The Financial Policy Committee is charged with responsibility for the overall financial stability of the UK: the systemic risks and the macroprudential role. We need to distinguish that from the situation of individual firms which will or may contribute to the overall systemic risk. In this discussion we risk conflating two things. One is the systemic risk in the system, which the FPC is charged with dealing with. That is credit growth, debt and leverage as defined by subsection (7), which is referenced to the United Kingdom. The financial stability of the United Kingdom is the concern of the FPC. That does not mean that risk may not come from the international financial system—that is made completely clear by subsection (6). However, for individual financial institutions for which the PRA will have first responsibility, if the FPC considers that they contribute to the overall situation, it does not rule out or limit consideration of the factors that affect individual financial institutions. The clause and the definitions do not rule that out. We should not confuse what is being defined here. The definitions are not exhaustive of the systemic risks which the FPC should consider. It may consider whatever else it considers relevant.
Lord Eatwell
Let me try this just one more time, because the argument that the list is not exhaustive is a toss-away argument: we did not include that, but it does not matter, because it covers everything. Let us be a bit more serious and deal with precisely what is in the Bill. To make the discussion concrete, I shall deal with the first part of subsection (7), which refers to credit growth. In my opinion, credit growth is an important indicator of systemic risk. Indeed, Professor Shin of Princeton University, who is the authority in this field, has identified credit growth as one of the key variables which any macroprudential regulator should have in its sights.
Let us consider credit growth. We are told that with regard to systemic risks in particular,
“‘credit growth’ means the growth in lending by the financial sector to individuals in the United Kingdom and businesses carried on in the United Kingdom”.
That cannot be right, because the stability of banks and financial institutions in the UK often crucially depends on the nature of credit growth in lending to individuals outside the UK. The businesses to which they lend will operate within and outwith the UK. What is the notion that somehow it must be businesses carried on in the UK? Will, say, British Aerospace be included? It happens to be a British company, but I believe that most of its operations take place outside the United Kingdom. I may be wrong about that, but a substantial proportion of its operations take place outside the United Kingdom. Would British Aerospace be covered in respect of lending to businesses carried on in the UK?
We could take out subsection (7) and lose nothing. It is the old adage that you teach pupils all the time: when in doubt, take it out. It adds nothing but confusion to the specification of the role of the FPC and the definition of systemic risk. Of course, the FPC is responsible for systemic risk in the UK, because that is its juridical domain, but that systemic risk can arise from activities by UK institutions on a worldwide scale. When in doubt, take it out. Let us drop subsection (7) and make the Bill more coherent.
Lord Sassoon
As there is doubt about this—considerable doubt, it seems, in the noble Lord’s mind—that is precisely why we need to leave it in. Again, he conflates the role of the FPC, which is to deal with financial stability issues, threats and risks in the UK. He says that it is clear that the Financial Policy Committee's remit is only for the UK. I do not know how he comes to that conclusion. If there were no definition of levels of unsustainable leveraged debt or credit growth, that would precisely raise in people’s minds the question of what is their geographic limit.
Lord Sassoon
If the noble Lord will let me continue, this discussion precisely makes the point that the FPC is responsible for systemic risk, which may be measured in terms of these factors and others listed in the clause. In that respect, we are talking about the UK. That is independent of whether banks are or were lending excessively to foreign companies. That is dealt with in other ways, as I have explained: partly through the PRA looking at the individual leverage ratios or whatever for the individual bank. Equally, if there is a systemically important institution about which the FPC is concerned, this in no way limits the considerations to the business of that institution simply in the United Kingdom, because this is dealing with something else. This is dealing with the overall systemic risk that the FPC is trying to deal with, not any question about where individual firms are doing business.
Lord Eatwell
My Lords, if it in no way limits the consideration of systemic risk, I would say again that it is otiose; it is worthless. It adds only confusion to the Bill. With respect to the noble Lord, the juridical domain of the FPC is defined by the definition of “regulated persons”.
Lord Sassoon
My Lords, we risk confusing different things again. The definition of “regulated persons” is wholly different from the question of financial stability for the UK. The concept of “regulated persons” is dealt with elsewhere. We are in a completely different part of the financial landscape. We are risking mixing up the microprudential with the macroprudential. When the noble Lord reflects on this debate, he will understand that these definitions are appropriate. He would say that they are unnecessary; I say that they are necessary in order to define the objectives of the Financial Policy Committee. However, a careful reading will show that they in no way restrict the FPC or the PRA in looking at the activities of individual regulated businesses, wherever they are, in so far as they relate to regulated activities or to the financial stability objective.
I shall move on to Amendment 37, which seeks to remove the words “in its opinion” from the economic growth “brake” that prevents the FPC taking action that would have a significant adverse affect on the ability of the financial sector to contribute to long-term sustainable growth. I disagree with this for three reasons.
First, in principle, the FPC is the best placed to assess the likely effect of its own actions. We do not want the FPC to rely on other people in forming this assessment. The FPC will be the expert macroprudential regulator. It is the right body to decide how the brake applies and the drafting should reflect that. Secondly, that assessment will be completely open, transparent and subject to outside scrutiny via publication of the decisions in the FPC’s meeting records. The government amendment, which we will discuss shortly, will go further and require the FPC to explain how it has complied with the duty to consider the “brake”. Thirdly, in practical terms I do not believe that there is any sensible alternative to this approach. In whose opinion would it be, if not that of the FPC itself? I am sure that the noble Lord does not envisage the FPC’s meeting adjourning while it seeks the opinion of some other body.
Amendment 44 would add to the FPC a function of assessing its functions in the light of the policies of the European Systemic Risk Board, or ESRB. I appreciate the sentiment behind this amendment. The Government believe that, given the international nature of financial markets, macroprudential policy will be most effective when co-ordinated internationally. I assure the Committee that, in the Government’s view, the current measures in the Bill and other arrangements are more than sufficient to achieve this.
The Bill requires the FPC to have regard to the international obligations of the United Kingdom. This will encompass the obligation to have regard to any warnings or recommendations from the ESRB that apply to the UK. It is also worth noting that the Governor of the Bank of England, like all European central bank governors, is a member of the ESRB. The current governor is also the first vice-chair of the board. The Bank is, and will continue to be, closely involved with the work of the ESRB and this will be reflected in the work of the FPC. The governor will be able to feed back the decisions and policies of the ESRB directly to the FPC. As the governor and the Bank will influence the policy of the ESRB, I expect that it will often be closely aligned to that of the FPC. As I am sure the Committee is aware, the UK authorities are required to respond to any recommendations that they receive from the ESRB. I am sure that they will give careful consideration to the policies of that board.
On the basis of this more extensive debate than I had anticipated, I hope that the noble Lord, Lord Eatwell, will agree, on reflection, that his bran tub of amendments is not completely necessary. I would ask him to withdraw his amendment.
Lord Eatwell
My Lords, I think I am naïve, because I am bemused by the drafting of this Bill. Sometimes we are told that things are unnecessary; of course they are being done, but they do not need to be on the face of the Bill. At other times we are told, “We have got to describe everything in extreme detail. Even though there might be some apparent internal contradictions, at least it covers every base”. We do not seem to care very much, with respect to the logic of the story, whether we have the one or the other. I will comment on the amendments, so that we can take them formally as we go through.
With respect to the collapse of confidence in the system as a whole, that is just leaving a hole in the Bill. If the Minister wants to leave a hole in the Bill, that is up to him. I was trying to make it a bit better, and more comprehensive; just the sort of thing we are told that we should do. It would have helped; it would have provided the FPC with another stimulus in its overall definitions of its objectives, which would have contributed to its effectiveness. The idea that it is just rolled into everything else is not true. It is easy to construct models which do not have the other elements, and this element is important. I refer noble Lords to the literature: Professor Shin is the name reference.
If we turn to “in its opinion”, the noble Lord was very convincing on that one, so I take his arguments. On Amendment 39, and the whole addition of this business about the UK, I think that it is a mess. The noble Lord has been completely unconvincing. He has not been able to justify in any coherent way subsection (7) and that is regrettable. It is regrettable that the Bill is left like this. One would think that the Minister would at least say, “Let’s take it away and look at it, just to make sure that I have got it right”, since he cannot defend it on this occasion.
On Amendment 44, we are told, “Oh, it’s all going to happen anyhow. There are nice informal procedures, whereby these things will be taken into account. So you don’t need it, because it’s going to happen anyhow.” It is going to happen anyhow because the governor happens to have yet another hat: was it vice-president of the organisation? I am sure that the vice-president of that organisation is busier and better informed than the Vice-President of the United States is reputed to be on policy there. None the less, how can we be sure that our next governor—whoever it might be; maybe it will be the noble Lord, Lord O’Donnell, who is not in his place—will not also be the vice-president and be as engaged and whatever else it might be?
We cannot make laws on an ad hominem basis; that is not the right way to do it. Surely, if the noble Lord accepts that these functions are appropriate—indeed necessary—he should accept Amendment 44 or agree to have a look at it and come back with some rather better drafting than mine. In the mean time, I am sorry to be grumpy about this process, but I really thought that we were trying to improve the Bill. I beg leave to withdraw the amendment.
Lord Sassoon
Lord McFall of Alcluith
“(8) The Treasury and the Financial Policy Committee must agree and publish a set of indicators which the Committee will use to measure its performance in meeting the Financial Stability Objective.”
Lord McFall of Alcluith
My Lords, this amendment is in my name and that of the noble Baroness, Lady Noakes. The Minister has just said that the FPC is responsible for overall financial stability in the UK. That was a question that exercised us in the Joint Committee on the draft Financial Services Bill, the question being, “How do we work towards establishing financial stability indicators between the FPC and Her Majesty’s Treasury?”. We realise that it would be difficult to set indicators for the FPC and, unlike the MPC, which has a single measured target—namely, the rate of inflation—the FPC does not do that. We think it important that our indicators, particularly for external assessment, should see whether the FPC is doing its job and achieving the government target, unlike the MPC, where it is very easy for people to see that it is dealing with that issue.
We understand that the FPC’s performance will be the focus, but it is important to put forward an amendment to the Bill. The Court of the Bank of England said in its response to the Treasury Committee that it did not want this in legislation, and in a follow-up letter to the Treasury Committee the governor said that there should not be hardwiring of a narrow set of indices in legislation. He wanted flexibility on this issue and a review at regular periods.
We realise that the snapshot element of stability has to mean that we need flexibility on this issue, and that the financial stability report would be an important tool for accountability, just as the inflation report is for the MPC. However, the Government responded to the Treasury Committee that in an annual remit to the FPC they would recommend additional indices if that needed to be fleshed out. Something needs to be in the Bill, and primary legislation is a good place to put that.
The governor set out in his letter to the Treasury Committee a number of indices that we could discuss. I would like this amendment to provoke discussion of a number of those indices—for example, a simple averaged leverage ratio of the major UK banks, the aggregate leverage ratio of the UK banks, the UK long-term real interest rates, the household debt-to-income ratio and the growth of lending in the UK to the non-financial sector, which has been topical now for four or five years without any solution in sight. These indicators are important, but if the Minister thinks that the Monetary Policy Committee and the inflation report, when it is produced to Parliament, are going to cause a bit of heat, in terms of the FPC this will really exercise politicians. We can imagine that certain judgments of the FPC would be unfavourable to a number of politicians who have particular constituency interests, and the FPC would find itself in the eye of the storm. Ahead of time, looking at certain indices and working out, the FPC is extremely important. When a body such as the FPC is given responsibility, it should be allowed to get on with that. I do not want to see it in the eye of the political storm. In order to ensure that that is not the case, we have to get these indices so that we understand what the FPC is about. There is some external assessment so that politicians and others do not just jump on the FPC for a job that it is pursuing as the result of inadequate indicators that have been supplied to it. That is the basis of the amendment. I beg to move.
Baroness Noakes
My Lords, as the noble Lord, Lord McFall, has already said, my name has been added to this amendment. It is one of those that have been put forward in the spirit of co-operation with the other place, and is one of the items left over, in the opinion of the Treasury Select Committee in the other place, at the conclusion of consideration of this Bill there. I was happy to put my name to it so that we could have a proper debate on the issue in your Lordships’ House.
There does not seem to be any fundamental disagreement that some indicators of financial stability should be used in the dialogue about how well financial stability is going along and ultimately, I imagine, how well the FPC is doing its job. Consequently, I am unclear why there has been so much resistance to date to recognising the importance of this in the Bill. The Bank of England rightly said that this should not be hardwired into legislation—that is, the hardwiring of the particular indicators. I do not think that anyone has a monopoly of wisdom at the moment regarding what those indicators should be and it is clear that the nature of the indicators will change over time, so it is wholly inappropriate for specific indicators to be reflected in the Bill. The amendment would merely ask the FPC and the Treasury to agree and then publish a set of indicators, and clearly that can vary over time.
I find it difficult to understand the Treasury’s approach on this. Usually the Treasury likes to get stuck in on practically anything and not leave things to the Bank of England, but it seems quite content to leave the issue of financial stability indicators solely to the Bank of England and to have no direct locus itself. It was curious that when the Government responded to the Treasury Select Committee’s 21st report of 2010-12, when this issue was raised, the response said:
“If necessary, as part of its annual remit to the FPC the Treasury will be able to make recommendations about additional indicators that it feels the FPC should consider”.
I do not understand why we have to have this indirect dancing around recommendations made in the context of an annual remit to the FPC. The measurements that are used to tell whether or not the financial stability objective has been met should be so caught in the dialogue between the Treasury and the FPC that it should be a routine item for discussion, not one left to the possibility of recommendations.
This is all part of the link of accountability from the functions of the Treasury in relation to the FPC to Parliament. The Treasury should be accountable to Parliament for its role in agreeing the indicators and not just say, “Well, it’s really up to the Bank of England and we’ll give them a recommendation if we feel that they’re seriously out of line”. I am struggling to find why the Government have not embraced the very modest idea that the Treasury should be agreeing this issue with the FPC.
Lord Davies of Stamford
My Lords, I think that my noble friend Lord McFall and the noble Baroness, Lady Noakes, have been very persuasive on this point. All human institutions—indeed, all human beings—perform best in life and achieve the most when we set ourselves clear objectives, we monitor our performance in meeting them and we are quite clear and honest with ourselves and others about the extent to which we have met them. Clearly, with regard to an institution that has public responsibilities and fiduciary responsibility on behalf of the public as a whole to supervise our financial sector, those criteria and objectives and the extent to which they have been achieved or otherwise should be a matter of public knowledge and public debate. I am certain that matters should proceed like that.
As the noble Baroness has just said, the amendment would not in any way hardwire specific metrics or criteria into the legislation; it says merely that the FPC and the Treasury would have to agree among themselves what particular objectives or criteria they were going to adopt for a foreseeable period, and then we could watch to see whether they were adopted or not. I do not have any specific objectives or criteria to put forward except perhaps an addition to the sort of principles that my noble friend Lord McFall referred to. We should at least mention something that, while it is quite obvious, the public would expect to be there, such as that the FPC would expect to intervene sufficiently early and to be sufficiently alert to the difficulties that can arise in order to avoid situations where the Bank of England has to supply either solvency support to banks by way of deposits in a crisis or indeed liquidity support or solvency support if it requires accuracy or nationalisation. These are extreme examples of how things can go badly wrong. They have gone badly wrong over the last few years and there should be an explicit commitment to avoid those mistakes and those disasters in any agreed criteria which may come out of the discussion between the Treasury and the FPC foreseen by the amendment.
Lord Northbrook
I support the very sensible amendment in the names of the noble Lord, Lord McFall, and my noble friend Lady Noakes. As the noble Lord, Lord McFall, stated, the MPC’s remit is to target inflation. Finding an indicator—or a set of indicators—for the FPC is difficult. There is merit in amending the Bill to ensure that a set of statistics is available to help external bodies, including the Treasury, to assess the performance of the FPC. The recommendation in the Treasury Committee’s report says:
“The selected range of indicators must be flexible and under constant challenge and review, not only by Parliament, Government and the Bank of England, but also by others such as financial industry practitioners, the media, academia and the public. The indicators should be published so that the performance in maintaining financial stability may be monitored and so that it can be held accountable for that performance. The FPC should report against these criteria at regular intervals”.
To the same extent, the Joint Committee said:
“The FPC should begin work towards developing indicators of financial stability in dialogue with the Treasury. They should be published and the FPC should report against them. The set of indicators should be flexible and subject to regular review”.
The recommendations of these two committees are very powerful and, as the noble Lord, Lord McFall, has already stated, the court was generally supportive but did not believe that they should be put in the Bill. I happen to disagree: I think it would be much clearer to have these in the Bill.
Lord Eatwell
My Lords, I support the amendment in the name of my noble friend Lord McFall, and the noble Baroness, Lady Noakes. This is—reflecting our earlier discussions—one of the Tyrie amendments. It is very cleverly drafted because it does not attempt to specify a particular set of indicators. It knows that the FPC is in a learning experience: that we are all going to be in a debate over indicators, instruments and so on in the years to come. Nothing could further that debate better than to propose a set of indicators, such as, for example, the rate of credit growth, which we have just been talking about, although not just in the UK. This is an extremely valuable amendment which, is, I hear, supported all round the Committee and I would expect the Minister to take account of the weight of this support.
Also in this group is a series of amendments in my name and that of my noble friend Lady Hayter. I would like to take a few minutes to address these. They are all concerned with the reports that the Financial Policy Committee is required to make and they all specify characteristics of the report. The first one requires the presentation of scenarios: the attempt by the Financial Policy Committee to look at various potential crises—stress-testing, we call it at a micro level—and assess the impact of their policies and of various events. We have learnt from the Office for Budget Responsibility how useful this technique can be and I am sure it will be extremely effective in the assessment of macroprudential measures. Amendment 73, requiring the presentation of scenarios, fits in with the philosophy of policy-making and of the empirical basis of evidence-based policy-making in finance today. I therefore hope the Government will accept it.
Amendment 74 is consequential upon today’s acceptance of the Government’s Amendment 35A, which we agreed earlier this afternoon. After all, if the Financial Policy Committee is required to take into account government policies on growth and employment, then it is surely appropriate that it should report on its performance on what it is required to take into account. This should really have been down as a consequential amendment to Amendment 35A but I am happy to help the Government out and introduce their consequential amendment for them.
Amendment 75, on the issue of indicators, referred to by the noble Lord, Lord McFall, and the noble Baroness, Lady Noakes, places those indicators in the reporting structure of the FPC. Amendment 76 would relate the FPC’s report to the functioning of financial markets and of the wider economy. If they do not discuss that then I am blowed if I know what they are going to discuss. So let us at least hope that that is agreed by everyone around the Committee.
These are just four amendments to flesh out the characteristics of FPC reporting which will be a crucial part of FPC accountability. Given that we are handing these powers to unelected officials, the reporting structure is an important component. That reporting structure— and the debates over the role of the FPC—would be enormously enhanced by the acceptance of Amendment 40 in the name of my noble friend Lord McFall and of the noble Baroness, Lady Noakes.
Lord Sassoon
My Lords, I wish we had a simple tag that we could use for amendments which come up so often when talking about legislation where we all agree on the substance but there is a kind of debate on whether it needs to be in or not. We are substantially in that territory with a number of amendments in this group. I will take them in turn.
First, Amendments 40 and 75 seek to require the Financial Policy Committee to publish a set of indicators of financial stability. I agree that financial indicators will aid the Committee, Parliament and the public in assessing the effectiveness of the FPC’s actions, but I hope I can assure the Committee that the amendments are unnecessary. The noble Lord may groan, but I acknowledged at the outset that this is one of those “is it necessary or not” amendments. Let me try to give the evidence because it is important to adduce the evidence of how things are going already—of which there is quite a lot—to put flesh on to the bones of why I believe it. We have looked very carefully at the Treasury Committee’s recommendations and have accepted a lot of amendments as a result. The Government’s record in picking up the Treasury Committee’s recommendations is very clear. We have been through them very seriously, and we have accepted a lot of them. I am grateful to the noble Lord, Lord McFall of Alcluith, and my noble friend Lady Noakes for assiduously going through them and provoking a further debate on the ones we have not picked up. That is quite right and proper. This is one amendment that we believe is unnecessary. I will give some reasons why I think the Committee should be satisfied on this.
The starting point is the Bank’s statement, in its response to the Treasury Committee’s report on bank accountability, that the FPC will publish and report against a set of indicators. Further than that, the FPC has already given some signals of the indicators it finds most useful for assessing risk through its oversight of the Bank’s financial stability reports over the past year and so too has the governor via a letter to the Chairman of the Treasury Committee last year.
Baroness Noakes
My Lords, my noble friend is mischaracterising what I was suggesting in relation to this matter. The amendment states merely that the Treasury and the FPC,
“must agree and publish a set of indicators”.
There is no suggestion that the Treasury could use this mechanism to tell the FPC not to look at certain things. The issue is whether or not the Treasury should take the responsibility of agreeing a range of indicators that are appropriate to the FPC’s objectives, just as the Treasury does in relation to the indicator that is set for the MPC. We know that it is radically different from the MPC, and that a single indicator cannot be set and that it cannot be the sole responsibility of the Treasury. However, the Treasury should have some responsibility for agreeing with the FPC the range of indicators that will be used.
I hear the cry of a child in the Public Gallery. It is amazing the effect that one has when talking about financial stability.
It is important that the Treasury should be engaged formally in the process, and it should not just leave it to the Bank of England. Equally, the Bill should not be silent and leave it to the Bank of England to choose whether or not to put forward indicators. I agree that it is doing so at the moment, but is it wise to legislate that there should be no requirement for it to do so?
Lord Sassoon
My Lords, I am sorry if my noble friend thinks that I mischaracterised her argument. My interpretation of the words,
“The Treasury and the Financial Policy Committee must agree … a set of indicators”,
is that effectively the Treasury would have a veto over the set of indicators. What would happen if the Treasury and the FPC did not agree? It states in the amendment that they must agree. They would therefore have to find some common ground and it would be difficult if the Treasury dug its heels in and said, “We believe that this and that should be in the indicators”. Our starting premise here is that the FPC is the expert body and it should be left to define the indicators. As I have tried to indicate to the Committee, the Bank and the FPC are already on the case, providing a high degree of transparency, and there will be a series of draft policy statements available in time for consideration of the passage in the relevant secondary legislation. There will be appropriate scrutiny, but we would be going into pretty dangerous territory if we were to hard-wire the Treasury into the set of indicators that should be for the experts to set. Appropriate parliamentary and public scrutiny is allowed for in the Bill in the way that I have described.
Amendment 73, which would require the financial stability report to include the FPC’s predictions about the likely future state of the UK financial stability, is unnecessary. Subsection (3)(d) of new Section 9T, which appears at the bottom of page 11 of the Bill, already requires the report to include an assessment of the risks to stability that is very similar to the suggestion of the noble Lord, Lord Eatwell, that it includes a “range of … possible scenarios”. Subsection (3)(e) of new Section 9T already requires that the report includes the committee’s view of the outlook for the stability of the UK financial system. The interim FPC has already published three financial stability reports since its establishment. As I am sure the Committee is aware, the most recent report, published just last week, contains a whole chapter devoted to the committee’s outlook and the actions that the FPC felt necessary to tackle risks that it had identified.
I move on to Amendment 74. It is important that we learn from the mistakes of the previous system of regulation. In that system, the Bank was given responsibility for maintaining financial stability but no means of achieving that objective. That is why it is vital to give the FPC effective and proportionate powers to use certain macroprudential tools. However, the use of those tools will need to be monitored carefully. That is why the Bill already requires that the financial stability report includes an assessment of the extent to which the committee’s actions have succeeded in achieving its objectives, including its new secondary objective for economic growth. That is also why the FPC is required to publish and maintain policy statements for each of its macroprudential tools. We expect these statements to include estimates of their impact on both financial stability and growth. As we will discuss in due course, other amendments will require the FPC to produce explanations of how its actions are compatible with its objectives, including the costs and benefits of those actions. I do not therefore think that Amendment 74, which would require the financial stability report to include an assessment of the impact of each of its macroprudential measures on employment and economic growth, is needed.
Lastly, on Amendment 76, the smooth and efficient functioning of financial markets is a key requirement for financial stability. As such, the FPC’s objective to protect and enhance the resilience of the UK financial system extends to the functioning of markets. As I have mentioned, the Bill already requires the FPC to include an assessment of its actions as part of the financial stability report. The amendments that I have made require the FPC to explain how its actions are compatible with its objectives with regard to financial stability and supporting the Government’s economic policy. I therefore regard Amendment 76 as unnecessary because the same ground is already amply covered by the Bill.
I hope that on the basis of those explanations and reassurances noble Lords will withdraw or not move their amendments.
Lord McFall of Alcluith
My Lords, this was the gentlest of amendments ever. The genesis of it was the tripartite authority, and how the link between the Bank and the Treasury did not work as well as it could. Here we have an ill-defined term—financial stability—for which there is no definition whatever. On that basis, in getting the balance right between the two institutions, the Joint Committee at the time recommended—and I promoted, because I did not want anything prescriptive—that they should agree indicators. That is a very general term, so that people knew what the Treasury was expecting, and what the Financial Policy Committee was asked, and tasked, to do. That was the genesis of it. If we do not get that balance right we could find, in a few years time, someone saying in this very place—if it still exists—why did they not come to some agreement, so that there was a general consensus on what was happening?
Far from it being dangerous territory, I think it is nothing more than plain common sense. I hope that the Minister will look at this again, particularly when we come back to the Report stage, but I do not intend to move the amendment tonight. I beg leave to withdraw.
Lord Sassoon
“9CA Specification of matters relevant to economic policy
(1) The Treasury may by notice in writing to the Financial Policy Committee specify for the purposes of section 9C(1)(b) what the economic policy of Her Majesty’s Government is to be taken to be.
(2) The Treasury must specify under subsection (1) the matter mentioned there—
(a) before the end of the period of 30 days beginning with the day on which section 9C comes into force, and(b) at least once in every calendar year following that in which the first notice under that subsection is given.(3) Where the Treasury give notice under this section they must—
(a) publish the notice in such manner as they think fit, and(b) lay a copy of it before Parliament.”
Lord Sassoon
“( ) the responsibility of the Committee in relation to support for the economic policy of Her Majesty’s Government, including its objectives for growth and employment;”
West Bank
(12 years, 5 months ago)
Lords ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Baroness Brinton
To ask Her Majesty’s Government what is their assessment of access to water in the Palestinian territories of the West Bank.
Baroness Brinton
My Lords, although it is not a formal interest, I want to say that I am a member of the Watford Friends of Salfeet, an informal gathering of concerned residents in and around Watford, who have been working with the Salfeet municipality on the West Bank for the last five years.
I am grateful for the scheduling of this debate, on a vital issue, but one that is not well publicised. Access to water is a fundamental human right. Without it, people cannot survive; they cannot grow crops or livestock; they cannot dispose of sanitation and effluent safely. We in the West take water for granted, rarely thinking about how it is provided: merely turning on a tap, even when we have a hosepipe ban.
In 2010, for the first time ever, the UN Human Rights Committee addressed the difficult area of denial of access to water and sanitation in Palestine. The report found that Israel was in violation of its commitments under international law—which included denying Palestinians access to safe drinking water and sanitation—and said that this was a violation of the right to life and the right to equal protection under the law.
Specifically, the most serious water and sanitation problems lie in Area C, controlled by the Israelis, but where services are provided by the Palestinian Authority. However, the Palestinian Authority has such limited control over water in the West Bank that it cannot fulfil its duty. This is important, because Israel frequently tries to lay the blame at the door of the Palestinian Authority, without recognising that its job is impossible without access to the water that the Israeli state holds back for its own use.
I want to illustrate the problem with reference to two villages that I visited in the West Bank in February this year. The first is the village of Faqu’a, on a hill, right on the edge of the north-eastern line of the 1948 green line, south-east of Nazareth. Faqu’a means “bubbles”, and the village is rightly named. It has more than 50 natural water springs and wells, and sits on an aquifer. It is part of the beautiful area of citrus groves and wheat fields that are key to the local economy.
Despite its name, Faqu’a is a community in crisis. It no longer has the right to access its own natural resource. Their water is siphoned off by the Israeli Government over the boundary—or, I should say, under the boundary—and locals are not permitted to use the natural wells. Any attempt to do so results in the wells being filled with cement, and the farmers or users punished. Farming citrus crops without irrigation is fruitless—literally—so family incomes have dropped.
With no natural access to water, this village has to rely on buying back its own water from Israel. The nearest tap standpoint is kilometres away and transporting it by tanker to the villages increases the cost to the villagers. Worse than that, contamination of water increases the more it is handled, and the children of Faqu’a now have a high incidence of water-borne disease, such as dysentery. A recent research study showed that there are now a number of hospital cases of infection caused by faecal contamination.
The World Health Organisation says that water resources for communities must be within one kilometre of the village. Faqu’a has been fighting in the Israeli courts for five years to have a standpoint brought to within seven kilometres. The result of this is that the average use of water per capita per day in Faqu’a is a shocking 25 litres, brought to the village every day by tanker.
In Palestine the average use per capita per day is 80 to 90 litres. For Israel it is 250 litres. I stood beside the 1948 line, and saw arid fields on my left in Faqu’a, beside the lush green fields, on the right, of Israeli farmers, just the other side of the wire fence: a very strong visual image that demonstrates the inequality that these West Bank residents face every day. The residents of Faqu’a are among nearly 200,000 Palestinians who live without running water.
Other West Bank communities face a range of difficulties. The illegal industrial area of Broqeen sits above Kefra Diq and other villages that make up part of the Salfeet area. The plastics factory there—which proudly advertises that it makes goods for Pilkington glass—puts its chemical waste directly into the local water source, polluting the only access to water that the Palestinian villages below them have.
The pollution of water is one of the subtler mechanisms used to cow the Palestinians, and sits alongside the better publicised confiscation of land, demolition of houses, cutting down of olive trees, and settler and army incursions into the villages. Residents also suffer from toxic fumes as the polluted water travels through their villages in the river, causing concern about birth deformities and other illnesses following long-term exposure to chemical effluent.
The Ariel settlement stretches across the hillside above these Salfeet villages, housing 30,000 people. This very large illegal settlement takes first access of the water resources, and their sanitation effluent goes into the water before it goes down the hill to the Palestinian villages.
In a report published this March, the UN Office for the Coordination of Humanitarian Affairs said it had surveyed 530 springs in the West Bank and found that 30, mostly in areas where Israel retains military control, were taken over by settlers. It added that Palestinians currently had limited access to 26 other springs where settlers had moved in and threatened to take control. The area round Kefra Diq is one such. The olive groves have been there for thousands of years, but without clean water to irrigate them, the chances of the trees being able to produce a good crop are reduced. So, reduction in access to water becomes tool of economic oppression.
Of the water available from the West Bank aquifers, Israel uses 73%, the West Bank 17%, and illegal settlers 10%. While staying with families in the Salfeet area, we saw how they manage to survive day to day with very little water. Their cooking practices, flushing of toilets and turning on of taps are all severely curtailed and carefully thought about.
Finally, as if all these examples of unfair practices were not enough, the state water company has differing charging levels for water. It will come as no surprise, given what I have said, that the Palestinians on the West Bank are expected to pay a significantly higher unit price for water than are Israeli citizens, even though much of the water comes from natural wells and aquifers in Palestine.
I welcome the Government’s clear message to the Israeli Government about illegal settlements and other illegal acts such as house and olive tree demolition. Will they make strong representations to the Israeli Government to address these issues and accept the findings of the UN Human Rights Committee; immediately cease these violations under international law; end the differential level of water charging between Israel and Palestine; prevent the poisoning of water sources on the West Bank, whether industrial or domestic, by settler communities; give the people of Faqu’a access to a tap standpoint within one kilometre of the village rather than seven kilometres; and allow them to use their own water resources? Will the UK Government also raise this abuse of water provision and access to water with the United Nations, the United States of America and other countries that are able to help influence Mr Netanyahu and his Government?
Access to water is one of the most fundamental human rights. Now is the time for the United Kingdom, the EU and the UN to put pressure on Israel to ensure that all the people of the West Bank are given access to their own clean water, at a fair price, and that those who oppress them through polluting or restricting water are brought to justice.
Lord Warner
My Lords, I congratulate the noble Baroness, Lady Brinton, on securing this debate. I will use my six minutes to speak about the related and linked issue of access to water in Gaza, where there is a very similar situation and lack of water is being used as an oppressive measure. In doing so, I declare my interest as a trustee of the Council for European Palestinian Relations.
I have been to Gaza twice in the past two years and seen at first hand the parlous state of the water and sewerage systems, and the impact on people’s health and on an already totally inadequate healthcare system. More than 90% of water from Gaza’s taps is unfit to drink, according to the World Health Organisation. This is in a population half of whom are children and young people aged under 18.
However, I will not speak from my own experience but will use the recent report by Save the Children and Medical Aid for Palestinians, the launch of which I had the privilege to chair last week. This report reveals some devastating things about water and its pollution in Gaza today. It found that Gaza is not a safe environment for children or adults because its water supply and land are contaminated with pollutants. A September 2010 assessment found that, “1.1 million Gazans”, out of a population of 1.6 million,
“are at high risk of consuming biologically contaminated drinking water from private vendors, the source of water for most Gaza residents”.
Concentrations of chloride and nitrates are as much as 10 times the safe levels established by the World Health Organisation. According to the WHO, ingestion of nitrates in drinking water has been linked to anaemia and some cancers. Some 70% of Gaza’s children are anaemic. The new report states:
“The most recent studies from 1998 and 2002 of infants and children indicated 48% prevalence of nitrate poisoning. Many more children are thought to be at risk today”.
A UNICEF report of March 2011 suggested that in five to 10 years’ time, Gaza’s already depleted aquifer, the sole water source, will stop producing water suitable for human consumption. Seawater has already penetrated the aquifer and the pollution has been compounded by Gaza’s inability to dispose properly of its sewage. Much of the sewerage network has been destroyed or is in a state of acute disrepair. According to the new report, 60 million to 90 million litres of untreated or partially treated sewage have been dumped in the sea every day since 2008. This has an impact not just on Gaza but on neighbouring areas. The report also points out that air strikes in 2011 destroyed $1.3 million- worth of water and sanitation structure, including a new sewage pumping station connecting 130,000 residents of Gaza.
Despite this appalling situation, the new report points out that.
“Sixteen internationally-led projects to address Gaza’s water and sanitation needs, valued at $75 million, continue to await facilitation following the easing of the blockade in June 2010. Only one-fifth of the materials required for these projects have been allowed to enter Gaza, with the remainder sitting in warehouses. No progress has been made on large-scale desalination projects addressing the lack of drinkable water”.
In conclusion, I will mention one of the five key recommendations of the Save the Children and MAP report. It states:
“Given the direct relationship between a supply of clean water and deteriorating water and sanitation systems, on one hand, and child mortality on the other, all planned water and sanitation projects should be implemented immediately, and a clear timetable provided by the Israeli authorities for their completion”.
What action will the Government take, in conjunction with EU partners, to press the Israeli Government vigorously to implement this very sensible recommendation?
Lord Alderdice
My Lords, I join the noble Lord, Lord Warner, in expressing appreciation to my noble friend Lady Brinton for securing this debate and for the knowledgeable, passionate and well informed way in which she presented a very moving case. It did not come merely from other people’s understanding; she has been involved. She has gone to the places she speaks about and met the people she talks about, and therefore can speak with great knowledge and passion.
The noble Lord, Lord Warner, in speaking about the situation in Gaza, also outlined the urgency of this appalling situation. I recall that in Northern Ireland, while we disagreed on many things, one thing on which all communities came together was the question of water. This is true everywhere; we simply cannot live without it. It is a fundamental human right. For it to be used in any way as a source of political pressure is not only morally wrong but profoundly dangerous, because people will not only react but remember. Some things involving water that are happening in the region concern me deeply.
In October 2011 I brought to your Lordships’ House a debate on the question of water in the Middle East, and how it might be turned from a potential source of great conflict to one of co-operation. I thank my noble friend the Minister, who responded to the debate. She ensured in her preparation for it that there was a constructive and positive response from the Foreign Office. That work continued and continues still, and I hope that a little later in the year it will be possible to have a round-table conference addressing those questions. It is not easy to put these things together, particularly from a distance. We often press our Ministers to do things, and when they are done it is very much appreciated.
This area will not be easily resolved. First, there is a profound difference in the standing of the Israeli and Palestinian water commissioners in the Joint Water Commission. The Palestinian water commissioner does not have the power to implement almost any of the decisions that he may take, whereas the Israeli water commissioner must be consulted and has the final say on all these matters. There are considerable differences in understanding some fundamental data in regard to water and water distribution, and almost endless arguments about pollution, its distribution and so on.
I was a little encouraged in February of this year when I spent some time in Israel and talked to both sides about this question, including the Israeli water commissioner’s office. An appreciation is beginning to develop, among not just NGOs but technical experts, that it is simply not possible for Israelis—Jewish or Palestinian—to isolate themselves from issues of pollution of the aquifers, for example. The disturbing question is whether this is being done to drive Palestinians off the land in order to have a one-state solution that excludes them. As someone who has supported the two-state solution for some time, there is a real question in my mind as to whether the two-state solution is becoming a non-viable proposition. We have to understand the dilemmas we are talking about in that wider political context.
I have to say that the Palestinians have not always reacted wisely in their handling of some of these issues. For example, some young Palestinians told me when I was there this year that one of the mistakes was that Israelis changed the facts on the ground and argued about the politics subsequently, while the Palestinians wanted to solve the political questions while the facts on the ground were changing all around them. I think that many young Palestinians realise that strategic mistake and want to engage in changing the infrastructure to the benefit of their people and discuss the politics subsequently.
If I said positive things about the Minister, I also want to say that I think our ambassador in Israel has also understood the importance of this question and has been pressing it and trying to get people to the discussions. Through the medium of your Lordships’ House, it would be appropriate to indicate our support for what he is doing to enable those in politics, in government and in NGOs on both sides to get together and address these questions. Whatever we say in your Lordships’ House, and whatever the Government try to do, unless we can engage those in the Israeli Government and in the Palestinian Authority, we will not achieve the kind of outcome that we all want to see in your Lordships’ House. We must therefore encourage those initiatives that are taking place, properly funded and properly encouraged, as best we can, and not simply make demands that we all know will not be achieved in the next six, 12 or 20 months.
Lord Winston
My Lords, I am sure the whole House is deeply grateful to the noble Baroness, Lady Brinton, for introducing this debate on a most important subject. It is good to hear the noble Lord, Lord Alderdice, praising Matthew Gould, the British ambassador, for his work in Israel and for his trying to cement relationships and do good diplomatic things for our country.
There is a huge amount of vilification of Israel, and often that vilification is expressed in the way certain statistics are presented. Sadly, we have heard some pretty misleading statistics this evening. It turns out that the Palestinians have 125 cubic metres of water per year, which is 351 litres per head per day. Given that the average American family needs between 200 and 300 litres, that is quite a lot of water. It is slightly higher in Israel at about 421 litres per day. More water will be used where there is industry and increasing agriculture, as the noble Baroness, Lady Brinton, pointed out, will also increase water usage.
Israel has had a legal agreement with the Palestinians since 1995. It was signed in Washington and was also signed by the European Union, Norway, Russia and the United States. It is interesting to point out that on 13 June Alex Kushner, the representative of the Israeli water authority, met with Dr Shaddad Attili, the Palestinian representative. The meeting was held in a very co-operative, pleasant and agreeable fashion and it was clear there was a lot of agreement between them. The problem is that, whatever might be said at this level, the situation that we should like to see with the various authorities in Palestine does not always follow. Unfortunately, disorganisation means there are huge problems with water. For example, none of the speakers has mentioned that some 6,000 wells have been illegally drilled in the country, which has resulted in the sewage that is referred to.
I find it difficult to understand how anybody could accept that Jews are poisoning wells. This almost sounds like the medieval blood libel. There is absolutely no reason for Israelis to poison wells and poison the aquifer; there is nothing to gain from that. The problem is that most of the sewage in Gaza certainly comes from Gaza. Israel has offered all sorts of help to Gaza, including pipes, technology and so on. Certainly, desalination would be expensive at around $400 million, and there is the issue of how you get that and continue it with the lack of power in Gaza. None the less, there is a total failure by anybody else to help the Gazans in their situation at present. It is shocking that the pollution that affects Israeli water by spilling over the border is so often seen as something that Israel has caused; it is something that is very much at the feet of the Palestinians.
I want to say only this in this very short debate. If we really want to see a peaceful solution, and a two-state solution to which the noble Lord, Lord Alderdice, has referred as being one that we can promulgate and support, it is crucial that we make certain that we do not vilify one side or the other. While we allow ourselves to be persuaded by inaccurate and often misleading statistics, we reduce the cause of peace. We make it more difficult for there to be an accommodation between the two sides. It is extremely important at this time that we are careful and accurate in our assessments of what is happening in the Middle East.
I was in Israel only a few weeks ago; I will be there again this coming weekend. I am there rather more frequently than my noble friend Lord Warner. I have been on both sides of the divide, and I have to say that Israel is trying very hard to make certain that the water supplies are kept intact, that the sewerage issues are controlled and that the damage is repaired.
Lord Wright of Richmond
My Lords, I also congratulate the noble Baroness on introducing this important debate and I thank her for her very moving personal account of her visit to Palestine.
I first point out that access to water in this part of the Middle East, as elsewhere in many parts of the world, is a critical issue for all the countries of the region, and has been the subject of dispute between many of them for years. For instance, there are problems between Turkey and its Iraqi and Syrian neighbours, let alone the problems around access to water for Israel and Palestine, much of it flowing from countries that are still at war with Israel. Indeed, it has often been said that water may be the cause of the next serious conflagration in the region. One of the tragic consequences of the present crisis in Syria and the so-called Arab spring is that it has diverted the world’s attention from the problem of water supplies.
I turn to the subject of this debate and, in stark contrast to the points made by the noble Lord, Lord Winston, the statistics available to me from international sources are truly horrendous. At the risk of repeating some of the points that have already been made, one crucial fact behind many aspects of this problem is the continuing illegal settlement of the West Bank by the Israeli occupying power. The settler population continues to grow, in spite of ineffective attempts by the Government of the United States and the European Union to persuade the Israeli Government at least to freeze their growth, if not to reverse it. At approximately 500,000, the growth rate of Israeli settlers on the West Bank and in east Jerusalem has averaged 5.1% a year, compared with an Israeli population growth as a whole of only 1.9%. What is called the mountain aquifer on the West Bank is hugely overexploited by the Israelis, who take 80% of the water, thus leaving only 20% for the Palestinians. More than 190,000 Palestinians live in 134 West Bank villages without any running water. In recent years during the summer months, the Israeli army has stepped up pressure on Palestinian border communities to force them out of the Jordan valley by confiscating their water tankers and depriving the villagers and their flocks of water at the height of the hot season.
Others will no doubt disagree with these facts and figures, but surely we cannot dispute the illegality of the Israeli settlement policy on the West Bank. What we have, in effect, is 500,000 Israelis who, under international law and the Geneva Convention, should not be there at all, using 80% of the available water and leaving only 20% for the indigenous population. For a Government who pride themselves on being not only the sole democracy in the Middle East but one who accept the rule of law, this is a shameful story. Even if, as it appears, the United States is unable or unwilling to do anything about it, surely the European Union should be doing something to correct this flagrant injustice. Mr Netanyahu may not have blood on his hands, to quote a frequent accusation against the Syrian regime next door, but he should certainly have water on his conscience.
Lord Turnberg
My Lords, I too am grateful to the noble Baroness, Lady Brinton, for introducing this debate. I should express my interest as a member of the Labour Friends of Israel. It is obvious to anyone who has looked at the condition of the Palestinian water supply and the terrible state of the sewage disposal facilities, particularly in Gaza, that the situation there is increasingly intolerable. Noble Lords have spoken eloquently about these difficulties, and I resonate in particular to the analysis made by the noble Lord, Lord Alderdice, and not least that of the noble Lord, Lord Wright, who it always seems to be my problem and privilege to follow. I differ hardly at all in my recognition of the problems for the Palestinians, but I differ in my view of the causes and possible cures. The prime cause, of course, is the stand-off between Israel and the Palestinians, and the cure for the water conditions would follow a peace treaty, but we are where we are.
I shall start with Gaza because that is where the problems are undoubtedly most acute. According to the United Nations, Gaza has a desperate shortage of pure drinking water. Between 90% and 95% of Gazan water is polluted and a threat to health. If ever a place desperately needed a desalination plant, Gaza is it. Recently, UNICEF came in with a plan to do just that, but it came up against a Hamas Administration that, I am afraid, put their politics ahead of their population’s health. UNICEF wanted to purchase at favourable rates all the equipment that it would need from Israel because Israel has all the necessary expertise in desalination that could be wished for. Moreover, Israel was ready to help. But unfortunately all hell broke out. Hamas absolutely forbade any Israeli involvement. The Palestinian contractors’ union condemned UNICEF and announced a boycott of the agency, which then had to shut down its offices.
This episode is just one example of why it has been so difficult for Israel to influence the development of clean water and a proper sewage disposal system in Gaza, both of which have been Gaza’s own responsibility since 1995. Hamas just will not have anything to do with Israel, even when it offers to help. If it is said that Israel has prevented the transfer of necessary materials, while that may have been true, it is no longer the case. All the pipes, pumps and chemicals that are needed for water purification are now going across.
On the West Bank the situation is far from perfect, but it is much better than in Gaza. My figures—we all have different statistics, of course—suggest that 95% of the population is connected to a clean water supply and that the people have access to almost as much water as the Israelis. We can argue about the data. The problem in the West Bank is again one of a lack of willingness on the part of the Palestinians to collaborate on water and sewage projects with the Israelis. From what I hear, the relevant experts in water treatment meet and talk on friendly terms, but any agreements reached are quashed by the politicians. I fear that the Palestinian Authority is at least as much to blame as the Israelis. It does not want to be seen to be collaborating with the enemy in Israel.
A couple of years ago, Israel agreed to an American proposal to hold joint hydrological workshops with the Palestinians, but again that has been put on hold by the Palestinians. Water and sewage management in the small area of land in which Israel, the West Bank and Jordan sit closely together demands a co-ordinated approach on which they all work together. Placing all the blame on Israel or on any one of those countries is unhelpful. We in the UK must focus hard on how to get the parties together, if not in a total peace agreement —that is probably asking too much—at least on water, which is vital to them all.
In debates on the Middle East in your Lordships’ House I always try to bring out the possibility of what we in the UK might usefully do that is positive, rather than the usual constant carping and criticism. In that light, will the Minister consider inviting representatives with expertise in water management from those countries to meet on the neutral ground of the UK, where, perhaps, they can work something out far away from the scenes of conflict?
Lord Liddle
My Lords, on behalf of the opposition Front Bench, I would like to say how much we welcome the fact that the noble Baroness, Lady Brinton, has got us this debate. It is a vital but not very well publicised issue, and she is certainly right that questions of water supply are about human rights. She has pursued this with her typical determination, which I admire, as well as her personal diplomacy through her twinning efforts between Watford and the Palestinian territories. I therefore have the greatest respect for what she is trying to do in highlighting these issues.
All noble Lords who have spoken in this debate accept that there are serious issues at stake here. The noble Lords, Lord Warner, Lord Alderdice and Lord Wright of Richmond, also spoke passionately about the problems. I agree with my noble friends Lord Winston and Lord Turnberg that certainly we have no wish to vilify the Israelis, and I am sure that many ordinary Israelis are horrified by these facts as much as anyone in this House. I also fully accept that the politics of the Palestinian Authority and of Hamas are not always the most constructive.
However, when you research the reports written by a number of international organisations and reputable NGOs on these issues, as I did briefly for this debate, one can only come to the conclusion that the Israelis have a serious case to answer. The most recent report I looked at was produced by the World Health Organisation last month. In that report the WHO says that the average supply of water to the Palestinians is only 50% of what it regards as a reasonable daily requirement, and that it is much worse in some parts of the territories—in Gaza and the so-called Area C—than in the rest. It also says, as did the noble Lord, Lord Wright, that Israel dominates the take of water from the aquifer on the West Bank—over 80% of it is taken by the Israelis—and similarly of the underwater aquifer in Gaza. Settlement building has made the problem worse: they are building deep wells, the building of which affects the water table and makes life more difficult for the Palestinians. The greatest injustice of the lot, in a way, is that the Israelis then sell a lot of the water back to the Palestinians, at quite a hefty profit. One estimate is that 50% of water in those parts of the territories has to be bought from Israel.
What is the Government’s view of this? This is something on which the British Government ought to have its own independent assessment of how serious these problems are. I hope that the Minister will be able to tell us that at the conclusion of this debate. We ought also to know what representations and what action the Government are taking to pursue this issue. I picked up in my researches an interesting report on these issues produced by Amnesty International in 2009. One of its suggestions, which seems perfectly sensible, is that there should be much closer co-ordination between the international donors who are trying to help to resolve these problems; a system of transparent reporting of difficulties and obstacles that they encounter, whether they are on the Israeli side or the Palestinian side; and a proper mechanism for reporting what is going on. That transparency and reporting mechanism seems to me to be an important part of trying to resolve the difficulties. What are we doing through our own aid efforts and the EU to try to ensure that that is done?
I have been passionately pro-Israeli all my political life but when one hears about some of the problems that the Palestinians encounter, it makes one wonder about the seriousness of the present Israeli Government’s commitment to a two-state solution. There are steps that the Israelis could take. As the noble Lord, Lord Wright, eloquently said, if they do not want to have blood on their hands, they should not have water on their consciences.
Baroness Northover
My Lords, I congratulate my noble friend on securing this debate on this very important issue. As the noble Lord, Lord Liddle, has noted, she and other noble Lords have spoken with passion and a great deal of knowledge about a challenge for the region that in itself reflects the huge political tensions of the area. We are indeed very concerned about the issue of access to water in the Occupied Territories and Gaza. I can assure the noble Lord, Lord Liddle, that we regard this as very serious indeed.
It is clearly very important that Palestinians have equitable access to the dwindling water resources in the area. The Palestinian population is allocated an average of 60 litres per capita per day, well below the World Health Organisation’s recommended level of 100 litres. In communities without water infrastructure, consumption dips to 20 litres per person per day. As the noble Baroness, Lady Brinton, indicated, not having regular access to water has a serious impact on the daily life of Palestinians, including their ability to tend their crops and therefore to provide for their families.
As noble Lords have indicated, there are various factors at play. There has been a lack of rainfall in recent years, the population has grown and the management of water resources could be improved. However, the main reasons why the Palestinians have inadequate access to water are political: the inequitable distribution of water resources compounded by Israeli restrictions on building and movement.
Less than 1% of Area C has been planned for Palestinian development by the Israeli Civil Administration. This kind of restriction does not lend itself to the creation of infrastructure that makes it easy to tackle this issue. As scientists, the noble Lords, Lord Winston and Lord Turnberg, are right about the misuse of statistics, which is why I am glad that we have independent analysis of this. Palestinians have access to only 20% of the West Bank’s water resources, the lowest access to fresh water in the region. The Office for the Co-ordination of Humanitarian Affairs has calculated that the average Palestinian receives 60 litres per capita per day. In comparison, Israeli settlers receive on average 280 litres per capita per day. This huge difference in allocation is unacceptable and indefensible. To help address this inequity, the UK is funding a project working with both the Palestinian and Israeli authorities to help improve co-operation on water issues to the benefit of all.
Of course, this is only one of the many problems associated with the illegal settlements, as the noble Lord, Lord Wright of Richmond, made so very clear. The Government’s policy on settlements is clear: they are illegal under international law and undermine the possibility of a two-state solution to the Israeli-Palestinian conflict and those working for a sustainable peace. I can assure my noble friend Lady Brinton that we have repeatedly condemned Israel’s announcements to accelerate settlement building in the Occupied Territories.
Another cause of the water shortage is the restrictions imposed on Palestinians, particularly in Area C, to develop their household and communal infrastructure. Based on the provisions of the Oslo agreement, both sides agree to co-ordinate the management of water and sewerage resources and systems during the interim period, as has been referred to by noble Lords. Development infrastructure projects in the water sector require the prior approval of the Israeli-Palestinian Joint Water Committee and subsequent construction permits and licences from the Israeli Civil Administration. The complex Israeli requirements and approval processes are an obstacle to the tangible development of the Palestinian water sector and to the Palestinian economy as a whole.
The demolition of Palestinian properties continues in the West Bank. Cisterns and water wells have been demolished. This has meant the loss of primary coping mechanisms in times of water scarcity. Such demolitions cause unnecessary suffering to ordinary Palestinians, are harmful to the peace process and, in all but the most limited circumstances, are contrary to international humanitarian law.
On 14 May this year, the EU Foreign Affairs Council called on Israel to meet its obligations regarding the living conditions of the Palestinian population in Area C by accelerating approval of Palestinian master plans, halting the forced transfer of the population and the demolition of Palestinian housing and infrastructure, simplifying administrative procedures to obtain building permits, ensuring access to water and addressing humanitarian needs. The Foreign Ministers further reiterated the EU’s joint commitment to provide financial assistance for Palestinian development in Area C.
While this debate deals with the West Bank, water is also a serious issue in Gaza, as the noble Lord, Lord Warner, made very clear, where 90% of drinking water does not meet international standards. The Israeli blockade and restriction of the import of goods and equipment into the Gaza Strip have resulted in significant delays in implementing major water-related development projects in the strip. Water and sanitation projects worth over $70 million are still awaiting Israeli approval for access of materials, the implications of which the noble Lord, Lord Warner, highlighted.
We continue to call for the full implementation of the relaxation of access restrictions for Gaza. We welcome all suggestions to improve the deeply worrying health situation in Gaza. We are very carefully reviewing the Save the Children report. In recent years, there has been some limited movement towards the easing of the restrictions, which we welcome. However, more remains to be done. We hope that further easing of the restrictions will follow.
Water scarcity is a major issue not only for Israel and the Palestinians but for other countries in the region, too. Water has been a scarce resource in the Middle East since early civilizations, as the noble Lord, Lord Wright of Richmond, indicated. Rivers in the region are few. Water demand is increasing as populations grow. Underground reserves are shrinking. The current water usage in the Middle East is unsustainable. Shortages are likely, unless Governments take action to solve the impending crisis, which is why we very much welcomed the work undertaken by my noble friend Lord Alderdice.
The UK funds the Global Water Partnership, which has supported a regional water partnership for the Mediterranean. Partners have included Israel, Jordan and Lebanon among others. These independent regional partnerships have promoted the concept and implementation of integrated water resources management as a vital approach to managing the world’s water resources. Following on from this, we very much welcome the work that my noble friend Lord Alderdice has been doing with the Strategic Foresight Group, which the House debated on 27 October 2011. I am glad that the initiative that he called for then is being taken forward; I wish him well with it and thank him for his kind words.
We supported the Negotiations Affairs Department of the PLO in developing improved data on water issues in order to promote effective negotiations with Israel on water sharing and co-operation. However, strengthened dialogue and co-operation between the Israeli and Palestinian authorities on water issues do not need to wait. I noted what the noble Lord, Lord Turnberg, said; we would like to hear more about the noble Lord’s suggestion about bringing those Israelis and Palestinians who are involved in this area to the United Kingdom to discuss it. I will ask FCO officials to follow up on it and see where we can take it.
The UK regularly discusses access to water in the Occupied Palestinian Territories with the Israelis, including the urgent need for Israel to ensure fair distribution of water in the West Bank and Gaza. We call on both parties—and, as the occupying power, particularly Israel—to take urgent, practical and immediate measures to improve this unacceptable situation, which has been so well described in this debate.
International interest in this area is keen. What happens between Israel and Palestine has a knock-on effect within the region, which has a knock-on effect far wider than that. The noble Baroness, Lady Brinton, and others have asked what representations we are making to the UN, the USA and others on this matter. We work closely with international partners, including the EU and the US. We will raise this issue in our discussions with them, as we have done. As I mentioned, the EU Foreign Affairs Council addressed the issue of access to water in its conclusions of 14 May.
The noble Baroness, Lady Brinton, asked about the village that she visited. I make the commitment that we will ask the British consulate-general in Jerusalem to visit the village and see how Her Majesty’s Government might be able to assist the villagers in gaining access to clean water.
The noble Lord, Lord Liddle, asked about the independent assessment of the situation. As he probably knows, the United Nations Office for the Co-ordination of Humanitarian Affairs conducts regular assessments of access to water in the OPTs. Many have quoted from those assessments here today.
Water is one of several important issues for negotiations between Israelis and Palestinians, and anything that can be done to bring the sides together is very welcome. With this resource being so limited in the region, effective co-operation is required from all parties to manage it to ensure enough for all. This evening’s debate only reinforces the urgent need for negotiations to resume and for a final status agreement to be reached between the Israelis and the Palestinians. Such an agreement must include a just solution on shared water resources.
Financial Services Bill
(12 years, 5 months ago)
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Lord Eatwell
Lord Eatwell
My Lords, this is another of those bran-tubs full of amendments, to jump us around various aspects of the functions of the FPC as set out on pages 5 and 6 of the Bill. Let us deal first with Amendment 42. I do not know whether this is a slip in drafting—although I know those never occur in the Treasury—but with respect to the need to understand or support the objectives of the FCA, the strategic objective of the FCA is left out. Since the FCA very emphatically has both operational and strategic objectives, it is interesting to know why the FPC does not have to avoid prejudicing the strategic objective of the FCA. According to this drafting, the FPC can readily prejudice the strategic objective that markets should function well. That is a mystery. We are going to have the FPC being able to ensure by its measures that markets do not function well. I think if it got up to that, it would rapidly get short shrift from the Treasury and, indeed, from Parliament, so I presume that this is just a slip and that the strategic objective of the FCA will be added to the operational objectives.
In Amendment 47, here the issue is knowledge collection for the FPC, in the sense that it is important that the FPC has knowledge of levels of leverage, as we discussed earlier this afternoon. Knowing levels of leverage is a vital part of systemic risk analysis so the amendment ensures that the FPC will have access to that information, either from the FCA or from the PRA, divulging levels of leverage as defined clearly in the Basel III agreement. You could take other definitions but the Basel III agreement is a perfectly reasonable definition of leverage and that is why my noble friend and I have used it here.
Amendment 51 is a probing amendment, tabled because I did not understand the issue of a “publication”, as referred to in new Section 9G(10) of the Bank of England Act 1998. Describing directions issued by the FPC, it says:
“The direction may refer to a publication issued by the FCA, the PRA, another body in the United Kingdom”—
so any other body, such as my local sports club—
“or an international organisation, as the publication has effect from time to time”.
I am sure that “publication” in this sense must be a term of art and I am missing something. I would be grateful if the noble Lord could elucidate the issue both of what a publication is in this context and what is “another body” in the UK. Does it include my local sports club, and if not, why not, since it is another body in the UK?
Amendment 53 is one of the standard openness amendments, which have been encouraged by the Treasury Select Committee in another place, requiring the chairman of the Treasury Select Committee to be informed and given reasons if a copy of a report on a direction is not laid before Parliament. A persistent problem that we are going to face in the workings of the FPC is that it is going to be using powers that have traditionally been those of the Executive or of Parliament. There is therefore always going to be this tension of accountability between the FPC and the Executive and Parliament until, after a few years, the process has settled down, we hope. In these circumstances, it seems important that if for some reason a report on a direction is not to be laid before Parliament, the chairman of the Treasury Select Committee should be informed and given reasons.
Amendment 64 is rather more important, particularly in respect of some of the discussions we have had over the last few days, including this afternoon, and relates to the definition of “regulated persons” and the scope of exemptions. We know from the whole LIBOR debacle that one of the problems was that this particular market did not come within the scope of regulation. I am sure the FPC would have been quick off the mark last March, when the Treasury first knew, or presumably even earlier when the FSA knew what was going on, and would have included the setting of benchmark prices within the definition of regulated persons or dealt with it under the scope of exemptions. The recommendations that the FPC should make on the scope of financial regulation are enormously important and it is vital that the FPC has the powers to keep these matters under review. Amendment 64 is, if anything, the most important amendment in this whole group. We have to give the FPC the power to make recommendations with respect to the scope of regulation as it affects financial stability and systemic risk.
Amendment 65, which applies to page 9, line 34, is one of these amendments to which I have already referred where the committee is given discretion over its own action, even though the action seems to be firmly defined in the particular new subsection of the Bill, which reads:
“The Committee may make a recommendation under subsection (2)(e)”—
with respect to additional persons who may be required by the PRA to provide information, so this is very important indeed—
“only if it considers that the exercise by the Treasury of their power to make an order under section 165A(2)(d) of FSMA 2000 in the manner proposed is desirable”.
It is only “if it considers” that. Why should it be its consideration that limits whether it makes a recommendation? Either this is just trivial—in other words it would not have acted if it had not thought it should act—or this is limiting the scope of any legitimate limitation on the recommendations that the committee might make. If we took out the phrase “it considers that”, it would read “The Committee may make a recommendation under subsection (2)(e) only if the exercise by the Treasury of their power to make an order under section 165A(2)(d) of FSMA 2000 in the manner proposed is desirable”.
There the test is the desirability of the Treasury’s action, whereas at the moment the test is whether “it considers that” it is a desirable action. How do we want the test to be posed? Should the test be posed that the committee decides to act, or that there is an objective consideration of the desirability of the action under consideration?
Amendment 88 is thrown into this group for reasons which are not entirely obvious, but I will speak to it because again it is a straightforward openness amendment requiring that the chair of the Treasury Committee be informed and given reasons should information concerning a direction not be published.
These amendments are all to do with the very important activity of directions and recommendations by the Financial Policy Committee. We have the need for information derived through directions and the openness issues, which are hugely important. The most important, particularly in the light of what we have seen over the last couple of days, is the question about the scope of financial regulation and the recommendations that the FPC may make about that scope as set out in Amendment 64.
To go back to the beginning of this bran tub-list, let us deal with Amendment 42. I simply want to ask the noble Lord why the FPC can actually, if it wishes, endanger the FCA’s pursuit of its strategic objective of having markets function well. I beg to move.
Baroness Noakes
May I clarify one item with the noble Lord, Lord Eatwell? He said in relation to Amendment 64 that the important thing was the definition of regulated persons and that that would have been necessary to ensure that the events in relation to LIBOR were kept under review. Is it not the definition of regulated activities rather than regulated persons that would have been relevant in that instance? That is to say, the activities were already being carried out by regulated persons but they were not regulated activities.
Lord Eatwell
The noble Baroness has made a very interesting point. I have forgotten the precise names, but you have a person who submits the information, and a person who receives it and then has the responsibility of transmitting that received information into the LIBOR setting. That is the person I have in mind.
Lord McFall of Alcluith
My Lords, I shall speak to Amendment 43. The four main Financial Policy Committee functions have been outlined in the Bill, but I would like the Minister to consider providing clear regulatory statements for both the FCA and the PRA, given that clarity is essential: there is an outside audience here, so transparency and clarity are very important. For both those bodies, that would be a helpful submission from the FPC.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, we are into another bran-tub—not a pot-pourri this time, but a bran-tub, I note; I am not sure what the distinction is. This is a varied group of amendments about the functions of the FPC.
I say to the noble Lord, Lord Eatwell, and all other noble Lords taking part in Committee that if there are definitional difficulties—we have got into one or two tangles about definitions, construction of difficult clauses and the interrelationship between clauses and subsections —I am very happy for the noble Lord or any other noble Lord to have meetings including the Bill team to try to thrash out some of those difficult issues outside the Committee if that would be helpful. Some of these things might more easily be done away from the constraints and formality of the debate. I lay that offer on the table to all noble Lords who are interested.
I will come back to Amendment 42, but let me start with Amendment 43, which would require the FPC to prepare and publish regulatory statements for the PRA and FCA. One of the most glaring flaws of the tripartite system of regulation was a lack of clarity about who was responsible for what. As we know, the Bill will create regulatory bodies with clear and separate responsibilities. Although the FPC will have the power to direct the FCA and the PRA, that will apply only in the case of actions required to address systemic risk. The Bill makes it clear that the FPC cannot make recommendations or directions that relate to specified persons—that is, individual firms. Decisions on the policy approach of the PRA and the FCA will be made by their respective boards, not the FPC. As such, the amendment would risk blurring those clear responsibilities of the regulators.
Amendment 47, which would provide the FPC with the power to direct the PRA to require the disclosure of leverage ratios, is simply unnecessary. The Government agree that the disclosure of leverage ratios would be beneficial. That is why we supported the Basel III proposals to require its calculation from 1 January 2013 and its disclosure from 1 January 2015. The Government have pushed for full implementation of Basel III.
The interim FPC recommended in November last year that the FSA encourage UK banks to disclose their leveraged ratios from 1 January 2013, and an update on the progress of that recommendation was included in the financial stability report published last week. I will not, but I could quote extensively from that report. It is clear from reading that FSR that the FPC is already using recommendations to address disclosure issues effectively, so I suggest that Amendment 47 is unnecessary.
Lord Eatwell
I do not want to delay the Committee, but will the noble Lord elaborate a little on “addressing effectively”?
Lord Sassoon
Perhaps the best thing is to quote what was written by the FPC in its most recent financial stability report, which was published last week. It states:
“Following FSA discussions with chief financial officers earlier this year, the major UK banks and building societies are expected to disclose leverage ratios, calculated according to the fully implemented Basel III definitions, in their end-2012 annual reports. Thereafter, UK banks and building societies will report on both a half-year and end-year basis”.
That is an example of the FPC in interim form, already using recommendations to address disclosure issues to pointed effect.
Lord Eatwell
I should have been clearer at the time about what I had in mind. Would it, for example, include a speech made by, say, the Governor of the Bank of England, if that speech had not actually been printed somewhere or issued on a website, but the governor had made a statement about some matter relevant to the FPC?
Lord Sassoon
First, it would be difficult to define the governor as a regulator or other body. If the governor had made a speech that had not been published, it would certainly not be a document. Even if it is a published speech, it is unlikely to be a document in the sense of what I am suggesting—rules, codes, guidance or formal statements. The situation which the noble Lord postulates would not be one that would fall within what we are talking about here; there is no question of that.
Amendment 64 is identical to one that was debated in Committee in another place. They debated a number of amendments, although they did not spend as long as we are going to spend, quite rightly, on all this. However, this was one that debated in another place. I should start by repeating what my honourable friend the Financial Secretary made clear there, which is that the FPC’s responsibility to monitor the perimeter of regulation is not only for the outer perimeter covered by Amendment 64. It also has responsibility for the inner perimeter, between those firms regulated prudentially by the PRA and those that fall outside the PRA’s regulation; that is one of the FPC’s most vital roles. To do this effectively, the FPC must monitor whether activities outside the perimeter of regulation or outside the PRA’s scope are being undertaken in such a way that could cause systemic risk or sufficient risk to other firms or consumers that they need to be made subject either to regulation or to a different style of regulation. When the FPC believes that the perimeter of regulation needs to be changed to bring such activities within regulation or within PRA regulation, it can make recommendations to the Treasury under new Section 90. The Treasury can then use its powers to modify the perimeter of regulation accordingly.
I do not agree that the way to ensure that the FPC undertakes the role effectively is to place it under an inflexible and bureaucratic requirement to produce an annual report on the matter. In particular, it seems unrealistic to expect the FPC to produce recommendations within 30 days of coming into formal existence. We need to allow it to use its own judgment and discretion to decide what activities might pose a risk and how and when it should investigate them.
Amendment 65 would amend the FPC’s power to make recommendations to the Treasury to extend the scope of the PRA’s ability to obtain information from unauthorised persons. Given its expertise in systemic financial stability, new Section 90 gives the FPC a power to make recommendations to the Treasury if it believes that the ability of the PRA to obtain information from those outside the perimeter of regulation is needed for financial stability reasons.
Lord Eatwell
If I may interrupt the Minister, for the information of all noble Lords, he is referring not to new Section 90 but to new Section 9O. He lost me for some moments.
Lord Sassoon
I am very grateful to the noble Lord. I should have been referring to new Section 9O in the previous amendment as well. What can I say, other than that the hour is late? I was thinking, “Why is there a typo in my speaking notes?”. I probably have a flood of notes coming from the Box on the matter, but the noble Lord got there first—in fact, I see I have only one.
As I was saying, new Section 9O gives the FPC a power to make recommendations to the Treasury if it believes that the ability of the PRA to obtain information from those outside the perimeter of regulation is needed for financial stability reasons. Removing the words “it considers that” from subsection (4) of new Section 9O —O for orange—would defeat the purpose of the recommendation power, which is to allow the FPC to make its own expert judgment about the need for the PRA to be able to obtain information that is relevant to financial stability from the wider class of person and make recommendations to the Treasury accordingly.
It is important to note that the decision to extend the PRA’s power still lies solely with the Treasury and is subject to approval by both Houses. It will be for the Treasury to look at the recommendation from the FPC alongside other information from the PRA and others and make a call on whether the power needs to be extended.
I shall now address Amendments 53, 87 and 88, all of which deal in some way with transparency and publication requirements around the FPC’s direction-making powers. Amendments 53 and 88 would require the Treasury to inform the chair of the Treasury Select Committee if the directions by the FPC were not laid before Parliament or published. The Government do not believe that it is necessary to make a restrictive legislative provision to provide that Parliament is informed in all cases when the publication of information or documents is deferred for public interest reasons. There is a well established principle that where public money is used to resolve threats to financial stability, the chairs of the relevant parliamentary committees are informed, in confidence if necessary. There are formal and informal mechanisms for this to happen, although I would point out that they are non-legislative mechanisms. I do not believe that the case has been made that it would be necessary, reasonable or proportionate to extend this principle to sensitive material that does not involve the use of public funds. The Bill already provides for the FPC to keep any decision to defer publication of information or documents relating to FPC decisions under review and to publish that material as soon as the threat to the public interest has passed—something we discussed in the previous Committee session. The Bill also requires that a copy of any direction included in the record of an FPC meeting must be laid before Parliament. Given these extensive requirements for the publication of FPC decisions, I do not believe that Amendments 53 and 58 are necessary or appropriate.
Turning briefly to Amendment 87, the provision which the noble Lord, Lord McFall, is attempting to amend already has the effect he desires. New Section 9W(3) reads:
“A direction under Section 9V must be in writing and may be revoked by a notice in writing”.
What the second part of this means is that a direction may be revoked as long as the Bank sends a notice in writing to revoke it. The Bank does not have any discretion to revoke a direction without sending a notice in writing. The Bank cannot revoke a direction orally. I hope that provides reassurance on why Amendment 87 is unnecessary.
I return briefly to Amendment 42, where we began, and an important question asked by the noble Lord, Lord Eatwell, about why, in his interpretation, the FPC can endanger the FCA’s objective of making sure that markets function well. I hope I have got his key question right, because it is an important one. I will try to explain why I believe that it is a misunderstanding and how it actually works. The strategic objective is an overarching umbrella objective to provide a common goal for the regulator and, in that sense, it acts as a mission statement. It is an objective which has been amended in line with the recommendation of the Independent Commission on Banking; it was endorsed by the Joint Committee and now reads “ensuring that markets function well”. Legally, actions taken by the FCA in discharging its general functions need only be compatible with the strategic objective but must advance one or more of its operational objectives. As such, it is the operational objectives which provide the crucial mandate for the FCA to act in these areas. The Treasury Committee states that the case has not been made for the strategic objective. The Government believe that the strategic objective will act as a high level mission statement that brings together the diverse aspects of the FCA’s work and, as such, it will serve a useful purpose in focusing the new, regulatory culture of the FSA. It will also operate as a check and balance on the operational objectives and help to ensure that the FCA does not pursue any single operational objective in a manner that undermines the overall functioning of the market.
It might also be worth adding that effective mission statements commonly clarify an organisation’s purpose. They usually set out the aims of an organisation and its key target for shareholders. They do not go into detail of an organisation’s goals or targets and the approach taken in achieving them. The FCA’s strategic objective clearly meets these criteria. It gives an overall purpose or aim to the FSA, which is to ensure that markets function well, and it clarifies that this only refers to the relevant markets as defined in new Section 1F in Clause 5.
Lord Eatwell
I wonder if I have got it right. The noble Lord’s argument about the position being somehow at a different level does not work. What works in the definition of the FCA’s general duties is the following: the Bill states that the FCA must discharge its functions to,
“act in a way which … is compatible with its strategic objective, and … advances one or more of its operational objectives”.
Consequently, the only way in which the FCA can pursue its strategic objective is via one of the operational objectives. Consequently, if you do not prejudice the operational objectives, you do not prejudice the strategic objective. It therefore has nothing to do with higher levels, but simply relates to the word “and” at a relevant point that I had missed—for which I apologise—in the general duties of the FCA. Is that correct?
Lord Sassoon
My Lords, I believe that the drafting is fine. I reiterate that in discharging its general functions, the FCA must act in a way that is compatible with its strategic objective but which advances one or more of its operational objectives. The drafting is, I believe, appropriate, but I will of course have another look to see whether the “and” is appropriate. The noble Lord’s colleague in another place was, I am sure, given a clearer explanation by my colleague the Financial Secretary on exactly this point. Of course I will look again, but my belief is that the drafting works. If, on reflection, it does not, I will, in the customary way, write to all noble Lords who have taken part in this discussion.
Lord Eatwell
My Lords, I am grateful to the noble Lord for working through this particular bran-tub. The point that I was trying to make on the amendment is that the drafting is right, but not for the reason he gave. That was why I apologised for not having spotted the relevant “and” in the drafting of the responsibilities of and pursuit of objectives by the FCA.
Perhaps I may comment on a couple of the other amendments in the group. The issue raised by Amendment 47 has not been satisfactorily dealt with by the piece that the noble Lord read from the Financial Stability Report. There was a meeting, and a willingness to provide information was expressed, but no requirement. The issue here is the requirement because it is imperative that the FPC has knowledge of the leverage ratios of regulated persons, and Amendment 47 ensures that it will. I urge the Minister to have a look at that amendment and see whether I am not right and it is perhaps a good idea to have this requirement rather than the informal relationship which he described earlier.
I am grateful to the Minister for the elucidation on publications and other bodies. I suppose it really means other relevant bodies, but then people would have a great debate about relevance. I hope that my research centre at Cambridge University is included, since it is devoted to financial regulatory issues. That is just a commercial.
Amendment 64 was about the scope of financial regulation. I would like to go away and consider the words of the Minister, and think about the issue of the scope and boundaries. As he said, it is enormously important and we have got to get it right. I am not at all convinced that I have got it right here, so it would be helpful for me to have a think about it, look it over again, and come back to this issue if necessary on Report.
In the mean time, since I now know that Amendment 42 is unnecessary—not for the reasons advanced by the noble Lord, but for other reasons—I beg leave to withdraw the amendment.
Baroness Noakes
Baroness Noakes
My Lords, in moving Amendment 42A, I shall also speak to Amendment 62A in this group. These are probing amendments. Amendment 42A deletes line 38, on page 5. New Section 9F of the Bank of England Act 1998 sets up the functions of the FPC, and subsection (1)(c) creates the function of making recommendations. Amendment 42A deletes this function.
Amendment 62A deletes a lot of lines, but in practice deletes the whole of new Sections 9N to 9Q, inclusive, which detail the functions created by new Section 9F. The purpose of tabling these amendments is to probe why the FPC needs the power to make recommendations, and what the legal significance of this function is in practice.
When I first saw the Bill, I was mystified by the need to create a statutory power to make recommendations. I was not familiar with that being a requirement, so I did a little research. I seemed to find that this statutory power of recommendation-making is a relatively new phenomenon in legislation, with similar provisions in a handful of laws, all of which have been created since the Government came to power in 2010. I am beginning to think that this might be one of those constitutional innovations for which we have to thank our colleagues on the Liberal Democrat Benches, although I may be wrong on that.
The Minister wrote to noble Lords with an interest in this Bill yesterday, following the first Committee day, which I was unable to attend. In the letter he said that the Treasury has a common law power of recommendation, but that bodies created by statute need a specific power. I find that pretty odd, given that bodies created before 2010 managed perfectly well without a statutory power of making recommendations. Indeed, the Bank of England has managed perfectly well for over 300 years without any kind of power to make recommendations.
It may be just a matter of legislative fashion. One has to go with the times. The main purpose of my amendment is to probe what is meant in practice by the ability to make recommendations.
New Section 9N allows the FPC to make recommendations within the Bank. I found it difficult to get my head around making recommendations within the Bank. The FPC is a committee of the Bank’s court, and that is under Section 9B. Under new Section 9N, this committee can tell the corporate body in which it is housed what it thinks that body should do. What is the purpose of that? More to the point, what is the effect? The Bank, which acts through its court, fulfils its own function, and as far as I can see, those functions do not include paying any particular attention to what one of its committees says. I do not believe that the functions of the Bank or its court are changed by the Bill in this respect. If I am wrong on this, I know that the Minister will correct me. However, I am completely mystified about what making recommendations within the Bank means in practice. The Committee discussed the circularity of this in the context of the financial stability strategy under proposed new Section 9A, which covers the FPC making recommendations to the court. I must say that I was no wiser after reading both Hansard and the Minister’s letter on this point.
Proposed new Section 9O—9 Oscar—would allow the FPC to issue recommendations to the Treasury. However, while the FPC has to take notice of any recommendations made to it by the Treasury and has to respond to them—that is set out in proposed new Section 9D—there does not appear to be any reciprocal provision requiring the Treasury to respond to the FPC’s recommendations. If that is the case, why on earth do we have to provide in legislation for the FPC to make recommendations to the Treasury?
Proposed new Section 9P covers the FPC making recommendations to the FCA and the PRA—and does contain requirements for the FCA or the PRA to comply or explain their non-compliance. This seems to be the only part of the Bill dealing with the FPC’s recommendations that makes sense and has any real-world impact.
Will the Minister explain why, in drawing up the functions of the FCA and the PRA, no reference is made to their duties in respect of the FPC recommendations? If it is necessary as a matter of law to set up a power to make recommendations, why is there no requirement to set up a reciprocal duty or requirement of compliance with the recommendations?
Finally, proposed new Section 9Q allows the FPC to make recommendations to the whole world. The justification for this is that it may make recommendations to bodies such as the Financial Reporting Council. However, since the recipients of these recommendations can—as far as I am aware—do what they like with them, I fail to see the point of the provision.
I looked at the June 2012 FSR, which has been referred to already this evening. The executive summary makes either six or seven recommendations, depending on how one interprets “recommendation”. In six instances it states that the committee “recommends” that other people should do things, but in one instance it states that banks “should” continue to do something. I have no idea whether that constitutes a recommendation. In any event, most of the recommendations were addressed to the FSA—which will be the PRA and the FCA in due course—and two or three, depending on one’s interpretation, were addressed to banks. That is interesting because making recommendations to banks was not mentioned at all in the extraordinary recommendation-making powers, although clearly this will be an important part of their activity.
Perhaps I ought to be less worried about the scope of the recommendation-making power that is not bounded by space or time, because it appears to be of little substance. If my noble friend tells me that it does have real substance, we would look to constrain it in some way so that it did not include the ability to tell the whole world how to act.
In summary, this is a set of largely one-sided recommendation-making powers that might amount to something of importance—or alternatively, not much more than window dressing. We should be told. I beg to move.
Lord Hodgson of Astley Abbotts
My Lords, I have some sympathy with my noble friend’s amendment. When the Minister replies, perhaps he will focus some remarks on proposed new Section 9Q, which is the declaratory piece about the whole world. It seems that either the parliamentary draftsmen are saying, “Because you said certain people were included, you must include everybody else”, or it is otiose.
It would also be helpful to have some suggestions about the sort of events and recommendations that might fall under new Section 9Q, so that the Committee gets some understanding of the purpose behind this clause, if it is anything other than declaratory, to avoid, for parliamentary draftsmen’s reasons, the view that, because certain parties have been suggested, by definition they could make recommendations to nobody else.
Viscount Trenchard
My Lords, I also support my noble friend’s amendment. In particular I think that this whole section is unclear and muddled. It is extraordinary to state that a committee of the court, which is the board of directors, may make recommendations within the Bank. The Financial Policy Committee is clearly a committee of the court. That has been stated. It is strange that it is asymmetric and different from the MPC. This is a recipe for muddle because if it is a committee of the board—that is, the court—it has no authority beyond the court. Any authority that it has is the authority of the court. To state that a committee of the board—the court—may make recommendations within the Bank seems weird.
Similarly, in making recommendations to the Treasury, if it is a committee of the court, it should be the court that makes those recommendations. We are getting very confused. The difference between the FPC, dealing with macroprudential regulation as a committee of the Court of the Bank of England, and the PRA not as a committee but a different body, but again within the Bank of England, is strange. I just think it all needs to be clarified a bit more.
Lord Eatwell
My Lords, I first address the amendment moved by the noble Baroness, Lady Noakes. I am now very puzzled by the status of recommendations, given that a recommendation is not necessarily something which needs to be followed. Given that there seems to be no indication, as the noble Baroness, Lady Noakes, pointed out, about the reactions to recommendations, it is difficult to assess the status of this concept within the structure of the Bill. My Amendment 69 simply deals with the offending new Section 9Q and deletes it. It states:
“The Financial Policy Committee may make recommendations to”,
the world. I am sure the world would be very grateful, but we should not expend public money on making recommendations to the world, and especially not on confirming them in writing. It would be interesting to know who these “persons other than those” are defined to be when we are talking about the context of macroprudential regulation; we are not talking about relationships, say, with individual firms or whatever. The noble Baroness, Lady Noakes, has picked up on some important and valuable obscurities in the Bill and it would be helpful if the Minister could elucidate them.
A sort of bran-tub of my amendments has again been grouped together. I am sorry about that but I am not responsible for the groupings. I could ungroup them but that would be tedious for everyone, so let us deal with them. Amendment 48 is included in the group, which again has been tabled in the context of directions. It refers to the point made with respect to the nature of directions. The Bill states in proposed new Section 9G(4) that:
“The direction may relate to all regulated persons or to regulated persons of a specified description, but may not relate to a specified regulated person”.
I understand entirely what the drafting is supposed to do, but given the level of conglomeration and concentration in the financial services industry, I do not think that this will work as it is quite possible to refer to,
“regulated persons of a specified description”,
but for there to be only one firm of that description. It is quite possible for that to happen. If this may not “relate to” in the sense that it may not have a relationship to, that would rule out, say, a reference to,
“regulated persons of a specified description”,
if it just so happened that the set of persons of that description contained but one element—just one firm of that type. We can see that there are various niche firms and highly specialised companies in the City. I can think of very highly specialised money brokers of which only one performs a particular role in the money markets. Perhaps my amendment would have been more helpful if it had changed the word “relate” to “refer”, so that the direction could not refer to an individual specified regulated person. That would be inappropriate and would go beyond what the FPC is designed to do. However, I am nervous that the activities of the FPC may be unreasonably limited by the possibility that there might be just one specific regulated person within a given class of persons to which the FPC wishes to issue a direction.
I turn to Amendment 50, which again refers to new Section 9G. Subsection (6) refers to the fact that a direction,
“may not require its provisions to be implemented by specified means”—
I am not quite sure what that means—but then it goes on to say,
“or within a specified period”.
This is very dangerous in the sense that it may be enormously important that a direction should be operational within a specified period. It may be important for the financial stability of Britain that actions take place within a month or six weeks, or whatever the period might be. Being unable to require that provisions be implemented within a specified period seriously weakens the ability of the FPC to pursue effectively the stability objective. I am also a bit worried about the term “specified means”, but again, I am not sure what it means. Perhaps the Minister could help me on that when he replies. I really think that the business of a specified period should be looked at very carefully indeed for fear of weakening the powers of the FPC.
Amendment 63 has been withdrawn, so I turn now to Amendment 66. It refers to the making of recommendations under new Section 9P(2), and states specifically that:
“The recommendations may relate to all regulated persons or to regulated persons of a specified description, but may not relate to the exercise of the functions of the FCA or the PRA in relation to a specified regulated person”.
Again, this is the problem. It is quite possible that a generic description could apply to just one regulated person. Therefore, this is the same point that I made with respect to Amendment 48. The word “relate”—that is, “have a relationship to”—could result in the FPC not being able to make recommendations because the specified activity was performed by only one particular institution.
Finally, Amendment 69 is where I follow on from the noble Baroness, Lady Noakes, and comments that have been made by the noble Lord, Lord Hodgson, and the noble Viscount, Lord Trenchard, about new Section 9Q being very odd. It states that:
“The Financial Policy Committee may make recommendations to persons other than those”,
namely, the rest of the world. With those comments, I look forward to hearing the Minister’s comments on the amendments in the name of the noble Baroness, Lady Noakes, and the various amendments in my bran-tub in this case.
Lord Sassoon
Yet another bran-tub—I am looking forward to another pot-pourri, which will come in due course, no doubt.
On this group of amendments around the levers and powers of the FPC, I will start with Amendments 42A and 62A in the name of my noble friend Lady Noakes, and I will follow with Amendment 69 from the noble Lord, Lord Eatwell. These amendments seek to remove the FPC’s powers to make recommendations. As my noble friend has said, she does not seek to remove those powers but to probe how they will operate and why they are necessary in some particulars, although Amendment 69 is intended to remove the wider recommendation power.
I say at the outset that recommendations will be the primary means by which the FPC will seek to address systemic risks, and I do not think that any noble Lords who have spoken are challenging that. It is a question of how they will operate and whether some of the power is redundant, but I hope that we would agree that recommendations will be at the heart of the FPC’s ability to do its job. My noble friend talked a bit about how it used to work; once upon a time there was, of course, regulation by the governor’s eyebrows, and a carefully calculated arching could elicit all sorts of reactions from the City.
I suggest that recommendations to industry from the FPC will fulfil a broadly similar—if more wordy—role to that of the governor’s eyebrows, by allowing the committee to highlight risks or unsustainable behaviour. However, recommendations, unlike the governor’s eyebrows, will have and need to have legal backing. The Bill allows the FPC to make recommendations to the PRA and FCA. In a moment I will come back to where the reciprocal requirement on those two bodies to follow through on the explanations is—to the Bank, to the Treasury and to other persons.
On the PRA and FCA, the question was: where is the duty? I am slightly puzzled by this, because it seems very clear, in new Section 9P(3), that the FCA and the PRA have a clear duty to comply or explain. They must either,
“act in accordance with the recommendations”,
or explain why not, and that is a firm legal duty.
Lord Hodgson of Astley Abbotts
Just to be clear, the FPC is going to make recommendations within the Bank, so that the governor of the Bank, wearing his hat as chairman of the FPC, writes to himself as governor—is that what will happen? Have I got this right? I presume that the two deputy governors will also join in and send it in one door and walk next door to receive it—is that right?
Lord Sassoon
My Lords, that is broadly right. [Laughter.] We should remember that the FPC will be made up of a different group of people, including independent members, who will be making recommendations. Taking the example I gave of the supervision of payment systems, the FPC, with its independent members and statutory responsibilities, could be making recommendations to the Bank regarding its supervision of payment systems. It would therefore be a mischaracterisation—it really does not matter who signs a letter to whom, it would be the FPC making a recommendation to the Bank. To reduce it to a suggestion that the governor will be writing to himself would be a mischaracterisation of an important power that should have a degree of formality around it, in the same way that the FPC will be required to exercise its powers of making recommendations for other regulatory bodies.
Baroness Noakes
My Lords, I thank the Minister for the explanation that he is trying to provide, but I feel a little as if we are in Alice in Wonderland. Can the Minister give me an example in the real world where people within organisations behave in the way in which we seem to be expecting the Bank of England to behave?
Lord Sassoon
My Lords, I am not sure whether one can distinguish the world in which we are talking about financial regulation from the real world. This is the real world. It is a world in which these are very important powers that go to the heart of ensuring the financial stability of the UK. This is not a frivolous point. It may appear on the surface to be Alice in Wonderland territory but, if the FPC is to exercise the really significant powers in the system that it is being given or the responsibility for financial stability, it must first have the levers. One of the important constituencies that it will be addressing—and it would be totally remiss of the Government and this Bill to leave it out—would be directions from the FPC to another important regulatory body, of which the Bank is one.
An awful lot of things could be left unsaid which one would assume would somehow happen. This is not one where it would be safe in any way to do so because, if we did not have this power to make recommendations, there could be a significant risk that the FPC would not have the powers—the levers—over critical areas of the supervision and the regulation of the financial infrastructure that underpins so much of our financial system. One only has to look at recent events to see how computer glitches and apparently relatively simple IT problems can have very significant consequences. I suggest that the FPC would have a huge hole in this armoury if it was not able to make recommendations also directed at those who supervise the infrastructure.
Lord McFall of Alcluith
On this point, can I remind fellow Peers that I have invited the Governor of the Bank of England along tomorrow morning, so I suggest that they ask him the very important question: “Will he enjoy writing letters to himself in the future?”.
Viscount Trenchard
The Minister just said that the FPC is to be a separate committee with strong statutory powers. I find it very hard to reconcile this with its being a committee of the Court of the Bank of England. This is different from the MPC, which is not a committee of the court but is a committee of the Bank. It would be more logical and comprehensible if at least it were acknowledged—as it clearly is—that the FPC is not a committee of the court but a strong semi-separate body. However, the Bill says that it is a committee of the court, in which case it cannot have any powers beyond the powers of the court.
Lord Sassoon
My Lords, the clear advice on the drafting of the Bill—notwithstanding other constructions that my noble friends are putting on this—is that the FPC should have the clear power to make these recommendations. I remember now that I, almost on a daily basis, am writing letters of perhaps a similar kind when I write to my boss the Chancellor—when, for example, he is wearing his hat as the chair of a Cabinet committee—for clearance or to seek permission for some policy matter. I certainly write letters within the Treasury on a regular basis to deal with formal matters, which is broadly similar territory to what we are talking about.
I have talked about the importance of clarity and transparency. It is perhaps worth underlining that one of the things that this power does is to ensure—because FPC recommendations will be published in the meeting record of the FPC—that the public are informed that, if a recommendation has been made by the FPC to the Bank, it is recorded and is open to public scrutiny.
I think that it was my noble friend’s construction that the FPC cannot have powers beyond those of the court. I correct him on that: if the Bill confers such powers on the Financial Policy Committee, it does indeed have powers that the court does not have.
Viscount Trenchard
In that case, does my noble friend the Minister not think that it would be right to recognise the FPC as a committee of the Bank and as separate from the court, having its own powers as given in the Bill? The position would then be logical. At the moment, it is stated that it is a committee of the court. If I were a member of the court, I would not find it easy to understand any structure where a committee of the court—that is, the board—had powers which were independent of and separate from those of the court itself.
Lord Sassoon
My Lords, that is the situation; my noble friend might find it difficult now. If he or anybody else was appointed—as they have been—to the interim FPC or the formal FPC if and when it becomes established, they will of course receive extensive briefing on all these matters. This is not the right place to discuss how the FPC fits into the architecture of the Bank—that is dealt with in other provisions. Although my noble friend may not like it, the FPC, however it is constituted—I do not think that his construction would alter the point—simply must have these important powers, which are unequivocally the powers of the FPC and not those of the Bank. That is the case however the FPC fits into the architecture. I am glad that we have probed this matter but, without this provision being in the Bill, the FPC would be unable to make recommendations and would not therefore be transparent and open to parliamentary or public challenge.
These are important matters, but I think that I should turn, if the Committee will permit me, to Amendment 69, relating to the FPC’s ability to make recommendations to people other than those whom we have discussed so far. Amendment 69 would remove one of the FPC’s most versatile and useful levers for addressing systemic risks. Perhaps the best way of explaining this is by addressing the challenge given to me by my noble friend Lord Hodgson of Astley Abbotts to provide examples of what we are thinking about and why the power is necessary.
For example, the FPC may wish to make a recommendation to the Financial Reporting Council regarding corporate governance standards, or to the European Banking Authority about a risk to the UK financial system stemming from European banks—that very much links in with our recognising earlier that systemic risks may come from overseas and should not be ruled out. Equally, here is a power taking on board the challenge from the noble Lord, Lord Eatwell, about international linkages. Here is a power that gives an important ability to the FPC to make recommendations to an international authority.
Lord Eatwell
My Lords, I want to refer to that discussion on Amendment 50. First, the amendment would not give the FPC the power to specify a precise time. It could specify a period: by the end of the month, within six weeks, within two months, or whatever it might be. The notion of a precise time is an inaccurate reading of the amended subsection. Secondly, while it is clearly right that the PRA and the FCA may have specialist knowledge at the micro level of the regulatory system, we are giving these powers to the FPC because it has specialised knowledge with respect to macro- prudential measures. If the FPC feels that it is urgent, for macroprudential reasons, that measures be taken within a specified period and it has the specialised knowledge, it seems to me that denying it the ability to require something to be done within a given time seriously weakens its effectiveness.
Lord Sassoon
My Lords, we could discuss at some length what the meaning of a “specified period” might be. Clearly it could, if interpreted as the noble Lord says, be by a certain month end. Equally, it could mean tomorrow, on the day after tomorrow or at the beginning of next month. I did not want to detain the Committee for too long at this late hour but a recommendation or direction dictating that an action be implemented within a certain timescale could have a serious negative implication for the safety and soundness of individual firms or for consumers. The FPC will not necessarily be aware of those negative implications on individual firms or consumers but the regulators themselves will be.
There are scenarios that could be highly undesirable if they led to consumer detriment because the FPC had been specific about the timing of implementation. On the other hand, the arrangements that I have explained at some length, which mean that the FPC could issue the direction on a “comply or explain” basis, would put the individual supervisor or regulator in a position where it had to come back and justify very clearly why it had taken a particular course of action. I believe we have struck the right balance here, which avoids the difficulties to which I have referred.
Turning to Amendments 48 and 66, I will go straight to the critical issue that I was asked about on a couple of occasions in different ways. There may be other points that need to be made, but I will be clear on the questions about whether the FPC can be specific about one firm. The FPC can describe a type or class of firms even if that, in practice, only captures one firm. This is allowed so long as the FPC targets the risk and not the firm. The FPC is not allowed to say: “Do X to Barclays or prevent RBS doing Y”. However, in the circumstances that the noble Lord postulated, where a firm was the only one in a particular area or type of business, the FPC would not be prohibited or prevented from describing a class of one in those circumstances.
Lord Eatwell
I do not see how that can be right. Taking the first of the two amendments, the new Section 9G(4) would read:
“The direction … may not relate to a specified regulated person”.
If the direction is a generic direction and there is only one person who satisfies that generic description, it does relate to—that is, it has a relationship to. I think it is just the wrong verb. If you said “refer to”, you would be entirely right. “Relate to” is wrong. Perhaps later, over a glass of wine, we can turn to the Oxford English Dictionary, but I believe the word “relate” does not mean what the noble Lord has suggested it means. The word “refer” would mean that, but “relate” means “to have a relationship to”, and in the case that I have just described, it would certainly have a relationship to a specified regulated person.
Lord Sassoon
My Lords, my clear understanding of the drafting here—and like these other drafting points that we have dealt with, if I have got it wrong I will of course write—is that a specified regulated person is the key thing, which in the examples I gave would be Barclays or the RBS. We should not be concentrating on the verb “relate” but what we need to be looking at in new Section 9G(4) is the construction on “specified regulated person” and that would be naming an individual firm.
If the FPC were to make a direction related to regulated persons of a specified direction which happened only to be a class of one firm, then I am clear that that is what is intended here. If I have got it wrong, which I do not believe I have, I will clarify the situation. I wish I had the complete Oxford English Dictionary. It would be quite difficult to bring it in to discuss it over a glass of wine, but I have the Concise Oxford English Dictionary at my fingertips and it might help the noble Lord to say that the concise edition defines “relate” interalia as meaning “having reference to”. I do not know whether that helps him, but perhaps we can move on.
We were on Amendments 48 and 66, and I think that that particular point was the major one here concerning the Committee. I would just say more generally that we are absolutely committed to maintaining clarity of responsibilities and distinguishing micro or firm-specific roles from the macro role. We do not want any lack of clarity here, but on the situation which the noble Lord postulates, I hope that I have satisfied him that indeed the drafting is correct. After that long and interesting discussion, I would ask my noble friend to consider withdrawing her amendment.
Baroness Noakes
My Lords, given the hour I shall not prolong any further what has been an interesting debate. I would like to thank my noble friend and the noble Lord, Lord Eatwell, for taking part in 50-odd minutes of discussion. My noble friend says that these recommendations to which my amendments were addressed are a lever, and that they need legal backing. I frankly do not see that. I am going to read with great care what my noble friend has said, in particular about making recommendations within the Bank, to the rest of the world and indeed to the Treasury, none of which seems to have any legal effect and is just simply a way of writing down something that might happen. I will not prolong the agony any further this evening and I beg leave to withdraw the amendment.