Grand Committee
Arrangement of Business
The Deputy Chairman of Committees (Lord Geddes) (Con)
My Lords, it is now 3.30 pm and, as usual on these occasions, I must advise the Grand Committee that if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
National Insurance Contributions Bill
(10 years ago)
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Lord Davies of Oldham (Lab)
My Lords, I rise to oppose Clause 1 standing part of the Bill, which ought to give the opportunity to explore in a little more detail the issues that we discussed previously. The Minister will appreciate that it was a fairly limited Second Reading, and I imagine he is anticipating that this Committee stage will also not be too prolonged. I certainly want to assure him that it is unlikely that I will ruin his Christmas Day and Boxing Day by giving him things to worry about on Report in the new year. We will move with some dispatch with regard to the Bill, because we are of course broadly in favour of it and have indicated that broad support at all stages. However, we have one or two anxieties, on which I would just like the Minister to give us the necessary reassurances that we have not detected thus far.
There are concerns about those who are going to be affected by the legislation. As the Minister will appreciate in particular, many who will be affected will be on low incomes, and therefore the issue of how and when payments are made is not a trivial matter but one that is bound to cause concern. We are worried about women claiming maternity allowance in the future. The Bill clearly recognises that pregnant women come into a particular category when it comes to claiming and we want to be certain about that, as well as about the rather broader category of those who claim universal credit. It would be very remiss if people on low incomes found themselves, as a result of this legislation, at a disadvantage when it came to claims for universal credit.
The self-employed will of course welcome the fact that the Bill introduces a simplification process and moves liability for NICs to the end of the tax year. However, that also means that there will be accumulated obligations that need to be paid, which for some low-paid workers could easily present very real problems indeed. We say this against the background of the Government making considerable play of the increase in the number of workers in the self-employed category. However, we detect that a very large number indeed are getting very little in terms of reward from this employment. We will come later on to those who were dangled a carrot—not, I hasten to say, by the Government but by unscrupulous intermediaries—about how to take a position with regard to the payment of NICs. We want reassurance from the Minister that he has fully taken on board the problems that may accrue for people who necessarily—we all know the evidence that establishes this—operate on the margin.
The Minister explained that the self-employed will continue to have the option of spreading the cost of paying NICs, but what is the method of payment? Is the Minister in a position to confirm that these payments may be made by monthly direct debit? That was the recommendation from the Chartered Institute of Taxation, and I would welcome his comment on that. Is the payment system due to be reviewed after implementation? We see it dealing with a group of people, some of whom—while many will find this very straightforward and will have welcomed the main proposals in the Bill, as indeed do the official Opposition—will find issues difficult. We wonder whether the Government have set in train a commitment to review the implementation of this part of the Bill.
The Government say that the simplification measure will help the self-employed, but of course it is the self-employed who have been the hardest hit in the cost-of-living crisis. A great number of the self-employed operate on very tight margins indeed, while those who have been self-employed for a considerable period of time, and are now subject to what may be an improvement in the way that NICs are collected, are likely to fall into the category of those who have lost significantly in recent years because average incomes have plummeted.
What other steps have the Government taken to address the impact that the cost-of-living crisis is having on self-employed people? It is clear that there has been a significant drop since this Government came into office, and therefore it would be a mistake on all our parts if, in thinking about the Bill as a progressive and helpful measure—a view that in broad terms we take—we failed to identify why those who are the hardest hit in our society might well find some difficulties in complying with the new arrangements.
Lord Newby (LD)
My Lords, I am extremely grateful to the noble Lord for his comments on Clause 1. He concentrated on the self-employed and the provisions for people to have a budget payment option available to them so that they can spread the cost. I assure him that budget payment plans will be operable and people can opt for them, paying by direct debit or standing order. They will allow an individual to decide the amount that they want to pay each week or month, change the regular payment amount, stop making payments for up to six months and cancel payments at any time. Indeed, even after they pay into the budget payment plan, an individual can choose to have the money repaid to them if they believe that there will be no eventual liability, or if they need it for another purpose. Indeed, we believe that this system is more flexible than what is currently available under the class 2 direct debit system, because someone is free to vary or cancel the arrangement at any time and there is no liability until a return is filed. They may request the money that they have paid through a budget repayment plan to be returned back to them, right up to the point when a future amount becomes a liability.
The noble Lord asked whether we would review the provision after implementation. The provision will indeed be kept under continuous review, because we are as keen as he is that everybody who operates it should be able to do so easily.
The noble Lord talked about the cost-of-living crisis as regards self-employed people and about the fact that, when many self-employed people become self-employed, they do so on a lower level of income than they were on when they were employed. That is undoubtedly true, but many people who start off on a lower level of income as self-employed build up a business and end up as well off as, if not better than, they were when they were employed. In addition, there is evidence that, for some people at least, being self-employed gives much more flexibility, which they welcome, and gives them a better work-life balance than they were able to achieve when they were in full-time employment.
The noble Lord talked about the cost-of-living crisis, but, as he is aware, the rate of inflation is low and falling and is likely to stay low; many prices—such as the price of petrol and food—are now falling and, as a result of the lower level of inflation, we are now seeing real wages rising across the board. All forecasters suggest that not just this year but for the next year and the next few years—indeed, for the entire forecast period—real wages are expected to rise. Therefore, while we do not in any way underestimate the impact of the recession on living standards, we believe that a very significant corner has been turned, and that the combination of low inflation, falling prices and rising real wages will mean that people will see greater prosperity than they have done as we have recovered from the great shock of 2008.
I hope that I have been able to give the noble Lord some reassurance on the specific questions that he raised.
Lord Davies of Oldham
My Lords, I am sure the Minister is pleased that we are making encouraging progress.
In moving that Clause 3 should not stand part of the Bill, I will reflect the fact that we are, of course, as committed as the Government to tackling tax avoidance and that we strongly believe that everyone must pay their fair share. As the Minister will recognise, tax avoidance is now a major issue as regards the operation of our economy, and there is not the slightest doubt that the public want things done. This is not the Bill in which to tackle the bigger of the issues—as regards multinationals and the problem of where they locate their profits as opposed to where they locate their sales and receipts—but the Bill is nevertheless a significant means of tackling tax avoidance, and we support that.
We are grateful in particular for the extension of measures to tackle high-risk promoters of NICs avoidance schemes, but we want some reassurance from the Minister that HMRC will be sufficiently resourced in order to implement both the measures and their safeguard. As the Bill has been considered, there has been constant reference on the government side to the amount of work that needs to be done—there is a great deal for Her Majesty’s Revenue & Customs to take on board. In a period when the major government priority seems to be to reduce the number of people who serve our society as national or local civil servants, he will forgive me if my party is anxious about how the Bill will be implemented as regards the manpower necessary to deal with these issues of tax avoidance.
We ask the Government to keep the measures on accelerated payments and follower notices under review, in addition to the new targeted anti-avoidance rule, as part of the review of all tax avoidance measures. It is quite clear that there are aspects of the collection of NICs—or the failure to collect NICs—which relate to quite a substantial business advising on how to avoid tax. We are pleased that the Government have recognised this as a significant problem, and the Bill represents their determination to act.
Lord Newby
My Lords, the noble Lord raises the key question about whether these provisions will actually have any impact. The statute book is littered with provisions that have not been fully implemented or properly policed. One has to think only of the minimum wage, which, when it was established, simply had no proper provisions attached to it to ensure that people were paying it. I am very pleased that this Government have been able to make considerable progress in implementing a measure that everybody agrees is a good one but which was not being effectively implemented in the past.
As far as these measures are concerned, the Government have provided significant reinvestment of around £1 billion specifically to combat revenue lost and at risk through non-compliance. This means that, while most of HMRC’s lines of business are reducing in size, the number of roles in compliance is increasing very considerably. HMRC has brought together all its work to tackle avoidance into a new counter-avoidance directorate. Around 100 staff have been recruited into the directorate to deal with the issue of accelerated payment notices, and a further 100 will be added in 2015. That is a very considerable additional resource. HMRC is also deploying additional staff to handle collection work and additional legal staff. HMRC is taking a flexible approach which will depend on the number and nature of legal challenges. The Tribunals Service is currently recruiting additional tribunal judges, both to handle the cases involving accelerated payments and follower notices and, more generally, to accelerate the number of cases going through the tribunal.
The noble Lord asked about the procedures which HMRC has in place in respect of follower notices. HMRC already has strong governance procedures in place to handle a range of complex issues such as these where significant amounts of tax are involved. Therefore, as with any of its responsibilities, it has put in place appropriate governance for follower notices and accelerated payments. The case team, advised by litigation specialists and solicitors, is responsible for analysing the decision to be used as the basis for the follower notice, identifying the relevant principles and reasoning and setting out how those apply to the potential follower notice cases. The recommendation is signed off by all relevant parties in the department before being submitted for approval. It is then presented to a senior governance body, chaired at senior Civil Service level, to consider whether or not to give that approval. The taxpayer can make representations that the judicial ruling is not relevant to their arrangements and must do so within 90 days of receiving the notice. The representations will be considered by an independent HMRC officer who is unconnected with the team which issued the follower notice and the governance panel which decided that the judicial decision relied upon was relevant.
In terms of how the department will monitor the effectiveness of the scheme, the purpose of the legislation is to change behaviour, so its success is not measured just by how many promoters are subject to the new information powers and penalties but by the number that improve their behaviour to acceptable levels and demonstrate this to HMRC without any need for action under the legislation. The frequency of use of the legislation will of course be monitored by HMRC, which is putting in place the governance arrangements that I have just described. But its wider success will have to be viewed more holistically—with regard, for example, to the need for additional legislation or for legislation to stop specific schemes in the future.
The noble Lord asked about a specific Statement to both Houses on the effectiveness of the scheme. The most logical way in which an annual report can be given on the effectiveness of the scheme will probably be in HMRC’s own annual report, which it is of course open for this House to debate and which is considered, I believe, by the other place. The Government are as keen as the noble Lord is to see how effective the scheme is, because we think it is an important way of improving the collection of tax. The Government will make sure that they constantly monitor its effectiveness and report on that. As I say, I think HMRC’s annual report would probably be the first way of doing that, but it would be open both for the Government to report separately, should they think it necessary, and for Parliament to keep HMRC and the Treasury up to the mark in terms of the information they provide to Parliament.
Lord Davies of Oldham
My Lords, let me say that this is an important provision in the Bill, which the Opposition support. We are glad to see that this important piece of legislation gives effect to certain promises that have been given on the overall issue of targeting tax avoidance.
In his previous answer, the noble Lord made it quite clear that there will be additional tribunal judges and so on, and I very much welcome that commitment because we all know the blockages that can occur in the work of tribunals. However, on the question of the staff in the new directorate, I was not too sure whether he was indicating that staff were being transferred from other parts of the department, because the department is so overladen with people with the expertise to get the work done that it is easy to effect such a transition, or whether further recruitment had been necessary. That point also applies to Clause 5, which deals with the important dimension of tax avoidance.
It is quite clear that the Government need to take further action to tackle the issue of false self-employment. In the past, many of the stories about that have issued from the construction industry, but it is quite clear that the vast growth in the number of self-employed applies far beyond the bounds of just the construction industry. It is clear that there have been occasions when self-employment levels have been very high in certain industries, but the construction industry stands out: the average is 14%, but in the construction industry it is 40%. What is the incentive among so many of the people who contribute to that industry being identified and set up as self-employed? Partially, it is to do with the nature of the work, but the construction industry is not that unique in the work that it does. For the construction industry to have such a substantial number of self-employed raises the obvious anxiety that it is of advantage to intermediaries, when considering taking on labour, to act in a way in which they take on “self-employed” workers, who are not really self-employed because they are effectively under the direction of those who see that their work gets done. This is a very real problem.
We want to confirm that the Government have committed themselves to monitoring closely the impact of changes introduced by this Bill on the issue of false self-employment. Ministers are aware, as we are, of the degree of self-employment that exists, which has probably been increasing in significant numbers in recent years. Are the Government committed to bringing forward new measures to tackle any continued abuse in this area? We would like a timeframe for some kind of review on this issue. It is commendable that the Government express the correct sentiments, but the Government are to be truly applauded only when they have properly served the nation by having delivered. We are interested in the question of delivery.
Let me say that we have reasons for anxiety. In the 2012 Autumn Statement, the Chancellor forecast that the Swiss deal would raise £3.12 billion. The latest figures from the ONS put the revenue to date as £868 million, which is a shortfall of £2.25 billion. As all Members of the Committee will recognise, that is a shortfall of almost two-thirds. In July, HMRC’s director-general of business tax told the House of Commons Treasury Committee that the actual amount recovered is now expected to be “reduced substantially” to around £1.7 billion, which is a shortfall of £1.42 billion. Despite the fact that the Government set out with the best of intentions, that is the result of ineffectiveness.
Lord Newby
My Lords, the noble Lord asked me a number of specific questions about this clause. The first question, on staffing, asked whether HMRC had the appropriate level of staffing and whether staff had been transferred across from other parts of HMRC or recruited specifically. HMRC carried out a review of the resource required and is committed to ensuring that the appropriate resource is in place to introduce the new changes. As regards where the staff came from, some were transferred and some were recruited. There is a maximum pace as regards how quickly you can beef up this kind of compliance department, because it is highly technical work, and in particular people coming in from outside need to have a considerable amount of training to get up to speed.
The noble Lord made the point that self-employment was high in a number of sectors and he mentioned in particular the construction industry, which is absolutely right. Of course the construction industry is very cyclical, and people literally move about if they are skilled workers in that sector. It is therefore not surprising that self-employment is somewhat higher there than in many other sectors—and the same applies to offshore workers. However, I completely agree with him that we need to keep a very close eye on that and see how it develops and how the measure is working.
HMRC is introducing a quarterly reporting requirement from 6 April 2015 in this area, with the first return due by 5 August next year. This will provide HMRC with almost real-time monitoring to ensure that the measure in the legislation is being used effectively. Obviously, the whole purpose of doing that is to keep the issue under review and, if necessary, to take action to rectify any further problems that apply.
The noble Lord pointed out that the Swiss tax deal had had a shortfall, which shows how difficult it is to estimate the amount of cash that such deals might generate. The reason for that is of course not too surprising: people deliberately secrete their money out of the gaze of the taxman, so when the taxman attempts to guess how much money there is, it is extremely tricky to get that right. The Swiss deal did indeed bring in a smaller amount of revenue than was expected—or it has to date—but I think it is fair to say that the Liechtenstein disclosure facility has brought in more than was originally thought and has proved exceptionally effective. All that one can expect HMRC and the Treasury to do in these circumstances, when specific areas are targeted to repatriate funds to the UK, is, first of all, to do it—which previous Governments have failed to do—and, secondly, to make their best estimate of how much money might be involved. There is a considerable degree of uncertainty at the point when that estimate is made. The important thing is to close the loophole.
The noble Lord also referred to the tax gap. All I would say to him is that in monetary terms the gap has risen by £1 billion over a period, but in real terms, and in relation to the size of the economy, I think it is fair to say that that is a fall. Although over a long period we might see the monetary value of the gap rising modestly, the key question is: is it falling as a proportion of the total amount of tax payable? The figures he quoted suggested that, if anything, on that basis the tax gap was falling rather than rising.
Perhaps I could have the indulgence of the Committee briefly, before we finish our Committee stage today, to say a little bit about the amendments to the Bill that the Government intend to introduce on Report. As noble Lords will be aware, in the Autumn Statement on 3 December the Chancellor announced that the Government will abolish employer class 1 NICs for apprentices under the age of 25 from April next year. As the Chancellor made clear, apprentices are at the heart of the Government’s drive to equip people of all ages with the skills valued by employers. This measure is intended to support employers who provide apprenticeships to young people by removing the requirement that they pay secondary class 1 NICs on earnings up to the upper earnings limit for those employees. The measure is also intended to support youth employment. It will provide a zero rate of employer class 1 NICs on earnings between the secondary threshold and the upper earnings limit in respect of apprentices under the age of 25 from 6 April 2016. It will provide the power to define “apprentice” in regulations, allowing the time discuss the definition with stakeholders. It will also contain powers to alter the age range to which the zero rate applies and introduce a threshold for apprentices. As with the other changes to which I am about to refer, the Government intend to table amendments to give effect to these measures in advance of Report.
Noble Lords will also be aware that the Delegated Powers and Regulatory Reform Committee published its report on the delegated powers contained in the Bill on 27 November. It drew attention to the power in Clause 2 to amend primary and secondary legislation as a consequence of the reform of class 2 NICs. The power is currently subject to the negative procedure. The Delegated Powers and Regulatory Reform Committee has said that the justification given in HMRC’s delegated powers memorandum is not sufficient for the negative procedure to apply where the power allows for the amendment or repeal of primary legislation, and it has recommended that in this instance the power should be subject to the affirmative procedure. The Government have considered the report of the Delegated Powers and Regulatory Reform Committee and intend to table an amendment on Report so that, where regulations made under this power amend or repeal primary legislation, they will be subject to the affirmative procedure.
Finally, we intend to amend Schedule 1 to the Bill to ensure that the relevant self-assessment penalties apply to class 2 contributions collected through self-assessment by adding a missing reference to the self-assessment underdeclaration penalty contained in Schedule 24 to the Finance Act 2007. It was always the Government’s intention to align penalties for class 2 contributions more closely with those for SA as part of the reform of class 2 so that the self-employed are not subjected to two different regimes, but this particular penalty was unintentionally omitted. This minor technical amendment will correct that omission.
I hope that noble Lords will have found that helpful. We will be tabling those amendments as soon as we possibly can.
Lord Davies of Oldham
My Lords, I am sure that the Committee is grateful to the Minister for indicating his response to the Delegated Powers Committee—that obviates the necessity of the Opposition chasing the Government on Report. We are very much in favour of the suggestion about the affirmative procedure, so we will be ensuring that the Report stage moves with maximum effect on that.
The only thing that I would add is that there is a certain justification for adding second thoughts and developments to a Bill as it proceeds. The Minister will recognise that it took the Delegated Powers Committee to bring this to the attention of the Government. We are only a couple of weeks from Christmas so I suppose we are bound to get a certain Christmas tree effect, but one of the consequences of this fixed-term Parliament is that, basically, since we came back in October we have had dangling bits of additional legislation added to Bills, whether they fit or not. In this respect I have no particular criticism, but I think for instance of the Infrastructure Bill, of which the first four parts were concluded before the Recess but then the minor issue of fracking was added to the Bill after it. The Government are not to take the fact that the Opposition very much approve of this initiative, which we will be supporting on Report, as in any way a feeling on our part that the Government are full of good conduct when it comes to adding bits to Bills whenever it suits them.
Banking Act 2009 (Restriction of Special Bail-in Provision, etc.) Order 2014
(10 years ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Newby
That the Grand Committee do consider the Banking Act 2009 (Restriction of Special Bail-in Provision, etc.) Order 2014.
Relevant document: 15th Report from the Joint Committee on Statutory Instruments
Lord Newby (LD)
My Lords, these four draft statutory instruments are intended to transpose the requirements of the European bank recovery and resolution directive, which I will refer to as the BRRD. As a package, they will significantly strengthen and enhance the UK’s special resolution regime, which puts in place arrangements to deal with the failure of banking institutions.
I will first set out the background to these provisions. In general, when a company fails, it will enter insolvency, and the company’s creditors will be paid out in accordance with the priority of their claim. However, the financial crisis demonstrated that it is sometimes not possible to allow banks which fail simply to enter insolvency. This is due to the need to protect the banks’ customers by ensuring they can continue to access essential services. It is also because of how interconnected the banking system is, with the failure of one bank having the potential to spread problems throughout the financial system.
Responding to the financial crisis, the Government of the day introduced the special resolution regime in the Banking Act 2009. This gave the Bank of England and the Treasury a set of tools that could be used to manage the failure of a bank and limit the negative consequences for the economy and the rest of the financial system. Many other Governments found themselves in similar situations and introduced their own resolution regimes.
As a result of that common experience, there has, since the crisis, been a concerted international effort to address the problems that led to the crisis, building on the first steps taken during the crisis and making sure that we have the tools available to address bank failures in the future. The UK has been at the forefront of these efforts. We have been an active participant in the Financial Stability Board, which, under the chairmanship of Mark Carney, has established a common resolution framework endorsed by G20 leaders. This framework is designed to ensure that banks are no longer considered “too big to fail”. It includes enhanced supervision, planning for the recovery and resolution of firms and co-operation between different jurisdictions.
The BRRD is part of this global push to make banks resolvable. It is designed to ensure that European member states have a harmonised set of resolution tools that can be used to manage the failure of a bank.
The Deputy Chairman of Committees (Lord Geddes) (Con)
My Lords, a Division has been called in the Chamber. The Grand Committee stands adjourned, to resume if possible after 10 minutes. However, I understand that both participants are tellers and therefore it might take slightly longer than 10 minutes—as soon as possible.
The Deputy Chairman of Committees
My Lords, the participants having returned, the Grand Committee is resumed. The noble Lord, Lord Newby, was cut off in his prime, for which I apologise.
Lord Newby
My Lords, as I was saying, the BRRD is part of this global push to make banks resolvable. It is designed to ensure that European member states have a harmonised set of resolution tools that can be used to manage the failure of a bank. It also puts in place mechanisms to facilitate co-operation between member states in planning for and managing failure. It covers banks, building societies, investment firms and banking group companies. The BRRD builds on the existing UK resolution regime in the Banking Act 2009, ensuring that many of the powers introduced in the UK will be replicated across the EU.
I now turn to each of the instruments in turn. First, the Bank Recovery and Resolution Order makes substantial amendments to the Banking Act 2009 to ensure that the UK special resolution regime is fully consistent with the BRRD. It inserts a new section into the Banking Act 2009 which gives the Bank of England a set of pre-resolution powers. They are designed to be used where, in the course of resolution planning, barriers to the effective resolution of the firm are identified.
These powers enable the Bank to require a firm to take action to ensure that the Bank could use its resolution powers effectively in the event that an institution fails. Where barriers have been identified, the Bank may, for example, direct a firm to dispose of certain assets or cease lines of business or change its legal or operational structure. To support these new powers for the Bank of England and its exercise of the stabilisation powers, the order gives the Bank new powers to gather information from firms. This includes a power to appoint an investigator to investigate a possible failure to comply with a direction. It also includes a power to apply for a warrant to enter premises in order to obtain documents that are required for the exercise of its functions.
Failure to comply with a requirement of the Bank of is an offence. This section replicates existing offences in the Financial Services and Markets Act 2000, which relate to requirements imposed by the PRA or the FCA in their role as regulator. Here, however, it relates to requirements imposed by the Bank of England. The Bank of England may delegate its enforcement of these powers to the PRA or FCA.
The order makes some amendments to the special resolution objectives, set out in Section 7 of the Banking Act. These amendments are designed to ensure full compliance with the BRRD, providing clarity and certainty for firms. There is nothing which fundamentally changes the objectives, which include ensuring the continuity of banking services, protecting financial stability and public funds and protecting depositors covered by the Financial Services Compensation Scheme.
The order adds a new section to the Banking Act 2009, which requires that relevant capital instruments of the firm—that is common equity, additional tier 1 capital and tier 2 capital—are either cancelled, reduced or converted into common equity at the point where a firm fails. This ensures that capital instruments do the job they are intended to do, which is to fully absorb losses at the point of failure. This write-down must occur before or at the same time as a stabilisation power is used. It may also happen in the absence of any resolution, either because the write-down is enough to restore the viability of the firm or because the firm is entering insolvency instead of being resolved.
The BRRD also introduces a new stabilisation option, the asset management vehicle. The Bank of England may transfer certain assets of the failing firm into an asset management vehicle, where they are then sold or wound down over time. This prevents destabilisation of the market through the immediate sale of the assets. It also prevents the assets being sold at an artificially low price.
The directive introduces a harmonised bail-in power across the EU. Bail-in is a tool which enables the Bank of England to cancel or modify contracts which create a liability for a failing bank. This allows the Bank of England to recapitalise the firm, stabilising it while the fundamental issues that have lead to its failure are addressed. The Government have had a policy to introduce bail-in powers for some time. Following significant progress on bail-in at an international level, and as part of the negotiations on the BRRD, the Government introduced bail-in powers via the Financial Services (Banking Reform) Act 2013. This order amends those provisions to ensure full consistency with the BRRD. In order to ensure that the bail-in is effective, it is necessary to prevent counterparties of the firm in resolution from closing out their contracts in order to avoid being subject to bail-in. The order therefore specifies that a range of contractual termination rights do not arise solely by virtue of the fact that a stabilisation power has been exercised.
The Bank of England is also given a power to impose a temporary stay on contractual obligations and security interests to which the firm in resolution is a party. This allows a short period while the firm is being stabilised, during which those obligations need not be met. This stay is very strictly limited in time to avoid having a disproportionate effect on affected parties.
This order also gives the Bank of England powers enabling it to support a resolution carried out in a foreign country. Where the Bank is notified by a foreign jurisdiction’s resolution authority that it has taken action to resolve a firm, the Bank must make an instrument that either recognises that action or refuses to recognise it. Recognition of a foreign resolution action will confirm that it has effect in the UK. This provides legal certainty about the effectiveness of resolution actions in other jurisdictions, reducing the risk of challenge and making cross-border resolution more effective. The Bank of England may refuse to recognise a third country’s resolution action, or any part of it, where certain conditions are met. These include a determination that the recognition would have an adverse effect on financial stability in the UK or the rest of the EEA, or that UK or other EEA creditors would be treated less favourably than non-EEA creditors with similar legal rights. The Treasury must approve any refusal by the Bank of England to recognise a third-country resolution action.
I move on to the second order, which puts in place safeguards for certain liabilities that may be subject to the bail-in tool in the event of failure. It protects certain types of set-off and netting arrangements that are respected in the event of insolvency. The provisions here ensure that they are also respected in bail-in. The order requires that liabilities relating to derivatives or financial contracts or covered by certain master agreements must be converted into a net debt, claim or liability prior to bail-in. Other types of liability covered by the safeguard must be treated as if they had been converted into a net liability. The order also puts in place arrangements for dealing with any breach of the safeguard. Where there has been a breach, the affected party is entitled to have that breach remedied. The remedy aims to ensure that the affected party is returned to the position that they would have been in had the safeguard not been breached.
The third order requires compensation arrangements to be put in place following the use of the bail-in powers. They are designed to ensure that the shareholders and creditors of the firm do not receive less favourable treatment than they would have done had the institution simply failed, without the exercise of the stabilisation powers. This is commonly known as the “no shareholder or creditor worse off” safeguard.
The fourth order implements the requirements of the BRRD on depositor preference. The majority of deposits in the UK, including all deposits of individuals, are protected by the Financial Services Compensation Scheme up to a value of £85,000 per depositor per institution. The Financial Services (Banking Reform) Act 2013 enhanced this protection by amending the Insolvency Act 1986 to add deposits covered by the Financial Services Compensation Scheme to the list of preferential debts. These debts are paid out first in insolvency, and are entitled to be paid out in full before other creditors receive any payments. This means that the majority of depositors in UK banks already have their deposits preferred.
The depositor preference order creates a new category of preferential debts, called secondary preferential debts. These are paid out after ordinary preferential debts but before other debts. All existing preferential debts, including covered deposits, will be ordinary preferential debts. The order designates amounts in deposits eligible for protection from the FSCS but above the £85,000 compensation limit as secondary preferential debts. Only deposits of individuals, micro-businesses and SMEs are given this preference. This change further reduces any chance that these depositors will be exposed to loss if the firm fails and either enters insolvency or is resolved using the powers in the Banking Act. This furthers the objective of protecting depositors.
I apologise for speaking at such length, but as the orders make extensive revisions to existing legislation I felt that they merited a thorough run-through. Taken together, they significantly enhance the UK’s resolution regime. Along with the other reforms that have been implemented to date, they will equip us well to deal with future bank failures in a way that protects taxpayers and the financial stability of the UK.
Lord Flight (Con)
My Lords, I would just like to put on record some concerns about the bail-in arrangements and what they are broadcast as achieving.
My first point is that, as the CEO of the Association of Corporate Treasurers recently said to the Lords EU Economic and Financial Affairs Sub-Committee, once there is any whiff of concern about a bank, any company will withdraw its deposits immediately. It is not going to hang around and wait for the bank to be subject to a bail-in. One thing that the bail-in arrangements do is actually accelerate the possibility of runs on banks. It will not be just corporate deposits; any form of lending to a bank will be subject to bail-in. If there is any whiff of trouble about that bank, that money will be withdrawn as soon as possible.
The second point, which perhaps has not been learnt from the recent banking crisis, is that the key thing that hugely accelerated the downturn in the economy in 2009 was allowing the money stock and the money supply to contract substantially, just as happened in America in the 1930s. If you are going to do a bail-in on a bank and its capital is going to get exhausted, it will have to contract its balance sheet dramatically, all other things being equal. While I note the comment that the Bank of England will come in and help, effectively it would have to be the state that came in and recapitalised banks or, again, the result would be a massive contraction of the money supply if any of the major banks were in trouble and thus required bail-in. Unless that happened, again, it would have the knock-on effect of a major economic contraction.
The bail-in arrangements make sense—we know what they want to achieve, which is to eliminate or at least reduce the extent to which the taxpayer has to bail out banks in a crisis—but people are kidding themselves if they believe that it is as simple as that. Fundamentally, even as a result of how the bail-in arrangements operate, unless the Government are there to replenish capital—whether they do so as the Bank of England or directly—you would have a huge monetary contraction, which would be damaging to the economy.
Lord Tunnicliffe (Lab)
My Lords, it is a privilege to be in Grand Committee again—and its packed rows—to address some affirmative orders. I thank the Minister for setting out the orders and indicate, as a generality, that the Official Opposition welcome the ideas behind the various Acts and the orders that make them operational. I will not make a contribution on the individual orders, but just a few comments about the concepts that are swept up in the orders, taken together.
I put on record my thanks to Catherine McCloskey, who was unfortunate enough to have her telephone number beside her name in the Explanatory Memorandum. Although I have sat through most of these banking debates and participated modestly in some of the amendments, I have to say that if you are not continuously involved with this, the whole shape of this legislation is impossible to retain in one’s mind. As a result of her tutelage, I think I have a reasonable view of the shape of the legislation and the orders and that I can claim that the Opposition have done their duty in probing the overall direction of the legislation and the effectiveness of the orders in bringing that legislation into effect.
However, I have some comments. As I understand them, the orders give effect to the BRRD and refine it for the UK environment—a sort of merging of our thinking and the thinking behind the directive. Everything becomes effective from 1 January next year, which strikes me as a good piece of clarity. As I recall, it was originally envisaged that there would be a period of British-only rules and then European rules, and so on. I commend the Government on meeting those timetables.
Lord Newby
My Lords, I thank noble Lords who have spoken on the debate on these orders. Their concerns fall into two parts. The first relates to whether this is a sensible way to do it, and what the negative consequences will be, and the second is a series of practical issues raised by the noble Lord, Lord Tunnicliffe.
The noble Lord, Lord Flight, said that these provisions could accelerate the possibility of runs on banks when it looks as though they are getting into difficulties but before we have got to resolution, and that if you get to resolution there will be a contraction of the money supply. If you have a banking crisis, whatever you do in advance, or even during the crisis, it will be extraordinarily difficult to deal with the crisis without there being costs somewhere. We are trying, with this regime, to ensure that the costs are minimised, for several reasons, and that the concept of “too big to fail”—that is, that the Government should be required to bail out banks if they get into difficulty—should no longer obtain.
First, we want the very fact that these provisions exist to have some impact on behaviour before we get to a crisis. We hope that well before you get to a crisis, shareholders and creditors will hold banks to account to a greater extent as regards their decisions. I hope that these provisions will give them an incentive to do that.
As regards the money supply, the Monetary Policy Committee monitors the money supply as part of its objectives and has a number of tools at its disposal to deal with that. Of course, resolution itself is intended to protect financial stability rather than the money supply, but the Bank has other tools in its locker to address the position as regards the money supply.
Lord Flight
If a bank loses its capital—and there are rules about how many multiples of its capital its expansion can be—it has to contract its expansion dramatically. That is the key problem: if you have a bail-out situation, it will most certainly remove all the bank’s capital, and that bank will have to contract dramatically. The question is: how will that be handled as regards the money supply?
Lord Newby
I accept that, my Lords, but if a bank gets into difficulties there are only two broad ways of dealing with it. One is for the Government to bail it out, and the other is for it to contract its capital in the way that the noble Lord describes. I think that there is a consensus internationally that we must get to the position that these orders will bring us to, where the primary responsibility will fall on the banks. As I say, it inevitably has an impact on the money supply—I do not deny that for a minute—but the simple point I was making is that the Bank of England has other tools in its locker to look at money supply.
Lord Tunnicliffe
Forgive my enthusiasm for money but it is a fascinating subject. The Minister says that the Bank of England has a series of tools in its locker. It would be unfair to ask him about them now but I wonder if he could do a small illustrative note to myself and the noble Lord, Lord Flight, about what particular tools he has in mind for that situation. Creating money supply would be a real challenge in those circumstances, and for us—and indeed the market—to know that the Bank of England had considered this and felt that it had the adequate armoury to tackle such a situation would be very good for my happiness and perhaps the wider happiness of the money environment.
Lord Newby
My Lords, I am very happy to write to the noble Lord in those terms. His happiness is always at the forefront of my mind.
The noble Lord, Lord Tunnicliffe, mentioned the effect of the exercise of these powers on funding for SMEs. In the immediate term, SMEs’ deposits would be protected, but in the aftermath of 2008 we certainly saw a big squeeze on funding for SMEs, which is now at best being only partially reversed. Part of the answer is that we are keen to see a much more broadly based and competitive environment so that SMEs are not forced, as they have been, to go to one of the handful of banks if they want funding. That is why we are so keen to see the establishment of new challenger banks for SME lending and the growth of peer-to-peer lending, which means that over a period we envisage that the proportion of SMEs that will be at risk from the small number of large banks will be greatly reduced.
The noble Lord, Lord Tunnicliffe, raised two broad questions about the way in which the orders will be implemented. The first related to the fact that it is virtually impossible to understand the orders because they amend other bits of legislation—how on earth is anyone to make any sense of them? We are in the worst possible position to make sense of them for the simple reason that, because the regulations are not yet in place, there is not readily available the kind of consolidated version of the Act, particularly the 2009 Act, that will rapidly be available via commercial databases—I was going to say “within seconds”, but more probably within a very small number of hours—after the orders have been approved. More generally, the National Archives is working on the production of amended versions of the primary legislation, which will be available to all, although I am not quite sure of the timing of that. If you are a depositor with a bank and you are worried about how this works, I would not actually direct you to the primary legislation in any event; even when it is consolidated, it is very difficult for the lay person to make any sense out of primary legislation all. People will need to look at the more general advice that will no doubt be available by googling “resolution”, “depositor protection” and the features of this scheme, because I am sure that many firms—banks and others—will have some commentary available on their websites as well. Of course, although I have not had a chance to look at it, I am sure that the Treasury will also have much relevant information available.
The noble Lord asked about contingency planning and resources. These are areas that he has, quite rightly, asked about in the past. In anticipation of him asking about them again, I have asked the Treasury the following questions. What is the name of the team in the Treasury and the Bank dealing with contingency planning? How many people are in it? Have they actually done any and, if so, what form did it take? The answer is that the financial stability group in the Treasury is responsible for identifying and analysing emerging risks to the financial stability of the UK and preparing and responding to them. In particular, it is responsible for the effective stewardship of government-supported banks; delivering structural reform in the UK banking system; developing the necessary legislation; and contingency planning for the possible failure of UK banks and putting those plans into action in the event of failure.
The group co-operates closely with the resolution directorate of the Bank of England. The resolution directorate co-ordinates the Bank of England’s resolution of failing UK banks. It also has responsibility for identifying the broad resolution strategy that outlines how a firm will be resolved, and for preparing the resolution plans that set out in detail how a firm will be resolved. The legislation introduced since the crisis requires banks to provide the authorities with information that will enable them to exercise their resolution powers and this includes detailed information about the firm and the identification of any substantial barriers to resolution that must then be addressed. This is an ongoing process, with the banks submitting information on an annual basis and the Bank of England updating its plans accordingly. The introduction of the recovery and resolution plans was a recommendation of the Turner review of the regulatory response to the financial crisis.
Lord Newby
My Lords, I had just answered the first of four questions that I had asked myself and my officials in respect of contingency planning under these orders. The second question was how many people were involved in the teams that I described before the Division. Around 40 people work in the financial stability group in the Treasury. In addition, contingency plans are in place enabling the group to draw on additional resources in the event that that becomes necessary. The list of reservists was one of the recommendations of Sharon White’s review of the Treasury’s response to the financial crisis, published in March 2012. The Treasury’s capability in this area has been significantly enhanced as a response to the crisis. Around 50 people work in the Bank’s resolution directorate. The Bank also has in place contingency plans that would allow it to rapidly increase the size of the directorate when necessary. Of course, in addition to the staff in the directorate, there are many more staff in the Bank and the PRA who work on financial stability more broadly.
I asked whether the teams had actually done any contingency planning. The authorities regularly carry out contingency planning in relation to economic trends and events that could have an impact on financial stability; for example, contingency planning in relation to instability in the eurozone. Finally, I asked: if so, what form did this work take? Among many other things, earlier in the year the Chancellor and the governor and deputy governors of the Bank travelled to Washington to participate in an exercise designed to further understanding, communication and co-operation between the US and UK authorities in the event of the failure of a cross-border globally systemically important bank. The exercise furthered our understanding of the key aspects of resolution planning that would require co-operation and communication between the UK and US authorities and how this would be achieved.
That is one example of the work undertaken in this area and the Government remain committed to the agenda of financial sector reform, including ensuring that robust contingency plans are in place to deal with the possible failure of UK banks. I hope I have been able to satisfy the noble Lord, Lord Tunnicliffe, at least in part.
Banks and Building Societies (Depositor Preference and Priorities) Order 2014
(10 years ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Newby
That the Grand Committee do consider the Banks and Building Societies (Depositor Preference and Priorities) Order 2014.
Relevant document: 15th Report from the Joint Committee on Statutory Instruments
Banking Act 2009 (Mandatory Compensation Arrangements Following Bail-in) Regulations 2014
(10 years ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Newby
That the Grand Committee do consider the Banking Act 2009 (Mandatory Compensation Arrangements Following Bail-in) Regulations 2014.
Relevant document: 15th Report from the Joint Committee on Statutory Instruments
Bank Recovery and Resolution Order 2014
(10 years ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Newby
That the Grand Committee do consider the Bank Recovery and Resolution Order 2014.
Relevant document: 15th Report from the Joint Committee on Statutory Instruments
Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2014
(10 years ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Newby
That the Grand Committee do consider the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2014.
Relevant document: 14th Report from the Joint Committee on Statutory Instruments
Lord Newby (LD)
My Lords, noble Lords may find it helpful if I start by outlining the background to this regulation. The term “sale and rent back” refers to a type of transaction whereby homeowners agree to sell their property, usually at a discounted price, in exchange for tenancy rights. This product reached the peak of its popularity in 2008, when the Office of Fair Trading estimated that 50,000 of these transactions had taken place until that point. Its attraction was mainly to homeowners struggling to meet mortgage repayments but who wished to stay in their family home. However, a number of questions were raised over whether customers taking out these agreements were receiving fair treatment.
In 2008 the OFT investigated business practices in this market and published a report that confirmed the presence of significant consumer disadvantage, in two respects. The first was through the financial loss to the customer when the property was sold. The OFT found evidence to suggest that most sale and rent-back providers bought the properties at a significant discount, paying between 70% and 90% of the market value of the property. The second was a lack of security of tenure. Sale and rent-back agreements make a virtue of the homeowner’s ability to continue to live in their home. However, the OFT report showed that in many cases people were being relatively quickly evicted from their home, while they had been led to believe they would be able to stay there over the medium to long term.
The OFT identified a number of market failures that led to these poor outcomes. These included the asymmetry of information between vulnerable individuals with low levels of financial capability and professional salespeople offering these agreements. That was a particular problem in this market because transactions tended to be undertaken by people in difficult and stressful circumstances, who may not have been in a position to weigh up all their options carefully and objectively. However, another factor was that relatively few homeowners took out such agreements. That meant that these firms were not subject to reputational risks in the same way as many other types of firm, limiting the ability of an effective feedback mechanism to operate where customers were consistently receiving poor outcomes. In addition, the OFT found that these market failures were often compounded by the deliberately misleading high-pressure sales tactics used by many providers.
As a result of the OFT report, the then Government issued a consultation paper recommending the statutory regulation of the sale and rent-back market by the then Financial Services Authority. An interim system was introduced to regulate the market in 2009, but it was then replaced in June 2010 by full regulation, as the Government legislated to add sale and rent-back agreements to the list of financial services activities regulated by the FSA. This meant that the FSA was given the powers to make and apply appropriate regulatory rules. The regime developed by the FSA included a requirement for providers to offer a minimum tenancy length of five years, a requirement for independent property valuation and a ban on high-pressure sales tactics. However, even following the introduction of regulation, consumer groups and other housing market stakeholders continued to report the widespread occurrence of detriment caused by purchases failing to meet the standards set by the new regulatory regime.
In response to this, the FSA conducted a thematic review of the market in 2011. The review confirmed that new regulatory standards were not being met in a number of key areas. These areas included, but were by no means limited to, the requirements for tenancy agreements, the form of financial promotions and the disclosure that customers received. In the light of these findings, the FSA temporarily closed down the market to protect customers.
In addition, the report highlighted that many firms were using complex financial arrangements with private financial investors, which providers argued meant that they did not fall within the scope of the regulation as set out in the legislation. It was the private investors who actually entered into the agreements, often on a one-off basis, which allowed them to argue that they were not doing so in the course of business, and therefore they fell outside the scope of regulation and did not need to comply with the requirements intended to protect consumers.
In response to this latter point, the Treasury worked with the FSA to develop the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2011. That made it clear that all sale and rent-back agreements should be within the scope of regulation unless it was a transaction between two family members. It ensured that the FSA was able to regulate this market effectively, as was originally intended by both this Government and the previous one.
Lord Tunnicliffe (Lab)
My Lords, this is a perfectly sensible order, which we support. It opens up the opportunity for a philosophical debate on sunset clauses—but because it is Christmas, I will not press the matter further.