Grand Committee

Thursday 15th June 2023 Grand Committee

Thursday 15 June 2023

Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) (No. 2) Order 2023

Thursday 15th June 2023 Grand Committee

Considered in Grand Committee

13:00

Moved by

[Baroness Penn]

That the Grand Committee do consider the Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) (No. 2) Order 2023.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, as the Committee will be aware, Silicon Valley Bank UK Ltd—SVB UK—was sold on Monday 13 March to HSBC. The aim of this sale was to ensure that customers of SVB UK could access their deposits and banking services as normal; to limit risks to our tech and life sciences sector; and to safeguard some of the UK’s most promising companies.

We have achieved these outcomes—the best possible—in short order, without any taxpayer money or government guarantees. There has been no bailout, with SVB UK sold to a private sector purchaser. This solution is a win for taxpayers, customers and the banking system. The IMF has said that the UK’s response to SVB UK restored market confidence and contributed to the UK’s upgraded growth forecast. It now expects the UK to avoid a recession this year.

On Monday 13 March, the Economic Secretary to the Treasury laid in both Houses a statutory instrument, using the powers under the Banking Act 2009, to facilitate the sale of SVB UK to HSBC. That instrument has now been approved by both Houses. It granted HSBC’s ring-fenced bank an exemption so that it could provide liquidity on non-arm’s-length terms to SVB UK on an ongoing basis. This was needed to facilitate the sale of SVB UK to HSBC, because it ensured that HSBC was able to provide the necessary funds—over £2 billion in the immediate days after—to its new subsidiary. The exemption also ensures that HSBC UK can provide liquidity to SVB UK as needed.

The Economic Secretary to the Treasury has now laid this second statutory instrument, which we are debating today, to provide an ongoing exemption from ring-fencing requirements for SVB UK, beyond the existing four-year transition period. This exemption is subject to conditions relating to the size of SVB UK’s core deposits, and the type of business it can undertake.

The first condition is intended to ensure that SVB UK, or its subsidiaries, will not be able to hold core deposits—typically, retail and SME deposits—above the existing core deposits threshold in the ring-fencing regime; that is, £25 billion. The threshold is used to determine whether a bank becomes subject to the ring-fencing regime. The second and third conditions are intended to ensure that SVB UK, or its subsidiaries, will be allowed to undertake only new business activities similar to SVB UK’s existing business at the time of the acquisition by HSBC.

These conditions are intended to ensure that the exemptions from the regime are limited to what was needed to facilitate the sale of SVB UK. Together, they minimise risks to financial stability and limit any competitive distortion.

Indeed, Sam Woods, deputy governor for prudential regulation and chief executive of the Prudential Regulation Authority, has confirmed the PRA’s support for the provisions in this instrument in a letter which the EST has laid in the Libraries of both Houses and which I sent to those who spoke in the debate on the first SI relating to SVB. It states that

“the statutory instrument and its conditions supports the PRA’s primary statutory objective of safety and soundness, and limits competitive distortion”.

The letter also confirms that the PRA has a range of tools to ensure the effective supervision of HSBC and SVB UK.

This amendment, along with the previous exemption, was crucial to the purchase of SVB UK by HSBC and protected taxpayers and depositors. The UK has a world-leading tech sector, with a dynamic start-up and scale-up ecosystem, and the Government are pleased that a private sector purchaser was found. I hope noble Lords will join me in supporting this legislation. I beg to move.

[Lord Davies of Brixton (Lab)]

My Lords, I support the order, but it raises some issues that bear significant further thought. The exemption from the ring-fencing requirement is clearly an issue, so it was discussed in the Chamber earlier in the week. The Government have said that ring-fencing is a key part of their package of banking reforms designed to increase the stability of the UK financial system and prevent the costs of failing banks falling on taxpayers—this was following the financial crisis. Clearly, it is important, and any decision to have some exemption needs careful consideration. I shall not deal with the issue in detail; I heard what the noble Baroness, Lady Kramer, said about it in the Chamber earlier in the week, so I can say in anticipation that I very much agree with her remarks.

I want to say something about the resolution process and what we learned about it during this episode. The Bank of England is responsible for taking action to manage the failure of financial institutions—the process known as resolution. The Bank said that the financial system needs an effective resolution framework, and that was one of the key lessons from the global financial crisis of 2008. Resolution reduces the risk to depositors, the financial system as a whole and the public finances which could arise following the failure of a bank. The object of resolution is to reduce the risk of bank failure as well as to limit its impact when it occurs. To be effective, a resolution authority needs powers that ensure that any losses will fall on a failed bank’s investors but without risk to financial stability or to the broader economy.

To achieve those objectives, the Bank has powers that affect the contractual rights of counterparties and investors in the failed firm, so there have to be statutory safeguards for creditors and counterparties. The requirement in general is that shareholders and creditors must absorb losses before public funds can be used. The Bank has a range of powers to enforce insolvency, which was the initial expectation in this case, or to transfer all or part of a firm’s business either to a private sector purchaser or to a temporary bridge bank established by the Bank pending a sale or transfer.

At the point of failure, Silicon Valley Bank UK had a total balance sheet size of about £8.8 billion and a deposit base of approximately £6.7 billion—that is, assets greater than liabilities to depositors. In that sense, it was solvent. However, the scale of the deterioration of liquidity and confidence meant that the Bank and the Prudential Regulatory Authority—PRA—concluded that the position was not recoverable. It is what the Governor of the Bank of England has described as “banking 101”.

Having consulted the Treasury, the PRA and the Financial Conduct Authority—the FCA—the Bank of England decided ultimately to use its resolution powers to transfer the bank to a private purchaser. My question for the Minister is: what lessons have the Government learned from this episode about the resolution process? The process is relatively new and untested, which means that each example must be explored in detail. The idea of testing the resolution regime is of course problematic; you would not want to test your home insurance by burning down your house, so we have to learn where we can.

Now, getting to the crux of what I am talking about, the example was discussed at the meeting that the House’s Economic Affairs Select Committee had with the Governor of the Bank of England on Tuesday, which I attended. Unfortunately, we do not yet have the official transcript, so I cannot quote what the governor said, but I can give the Committee my impressions of what issues need to be explored based on what was said at the meeting.

The first issue is whether the resolution regime worked. Was there a clear and predictable set of rules upon which depositors could rely or was it, in practice, totally ad hoc? It may be that what worked was the right approach in the circumstances, but we need to be clear about that. The governor appeared simply to rule out certain approaches—for example, a bridge bank—largely, it would seem, because of the impact on the public purse. Manifestly, the wish to avoid splitting the assets and liabilities led to the decision to break the ring-fence.

Another thing that was clear is that resolution is inevitably an intensely political process. When the bank said it consulted HMT, it certainly was not just officials. Certainly, the Chancellor but also the Prime Minister were involved in what in banking terms does not really count as a large institution but that on the face of it had wider financial implications. I do not want to downplay the significance of the event. It appeared that at one stage of the process it was suggested that a failure to resolve the matter satisfactorily would “really set back curing disease”—so no pressure.

Finally, the underlying question is whether we are heading in the direction that means that it will, in practice, never be acceptable to impose losses on uninsured deposits. We must remember that in this case the deposits were generally commercial, not personal, deposits. These issues are being discussed, and there is ongoing discussion about a digital currency, but it would be best if they were discussed clearly, openly and together.

[Baroness Kramer (LD)]

My Lords, I am delighted to follow the noble Lord, Lord Davies of Brixton. I am very glad that he has had an expanded discussion of resolution. I will refer to that very briefly in what I have to say.

I have a lot of questions for the Minister on this area. She will not be surprised by them because I and others had questions in March when we debated the SI that provided the temporary exclusion of HSBC from the ring-fencing provisions. This time we are looking at a permanent exclusion.

First, let us look at this permanent exclusion. A few moments ago, the Minister said that there are constraints and conditions. Indeed, when we discussed the first SI she led us to believe, I do not think with any ill intent, that when we saw the SI including the permanent exclusion we would find constraints and conditions on either the activities of Silicon Valley Bank UK or the ability of HSBC to transfer unlimited funds to it, in a way that would give us reassurance that this was a very limited busting of the ring-fence, not something with fundamental implications.

I am struggling to understand that because the Minister made it clear just now that Silicon Valley Bank UK could not expand into being a major retail bank. None of us ever thought that HSBC, as a major retail player, would be setting up Silicon Valley Bank UK to be a major retail bank. So long as Silicon Valley Bank UK does not become a retail bank, I cannot see how the PRA is in any way able to limit its activities. Presumably it would limit those activities under Section 55M of FiSMA—“Imposition of requirements by PRA”—and those would not apply if it was not engaged in regulated activities. I am struggling to understand quite how the role of the PRA would work to limit the range of activities carried out by Silicon Valley Bank UK.

Secondly, let us look at those activities. If anybody wants to know what they are, I suggest that they take a look at the Silicon Valley Bank UK website; they will see that it is heavily engaged in supporting both venture capital and private equity. That takes us into that investment banking, high-risk activity that has, since the changes post the crisis in 2007, been separated out from retail banking. We also know, just from discussions, that it is heavily involved in a range of derivatives.

13:15

Nearly all the kinds of activity that one would associate with an investment bank that sits outside the ring-fence are indeed already encompassed by Silicon Valley Bank UK. I am struggling to understand what the various constraints are that the Minister was talking about and how they apply—unless, as I say, Silicon Valley Bank has suddenly turned into a major retail player, which would not be logical and is not, I am sure, HSBC’s purpose. If the Minister could provide some clarification on that, I would be most grateful. I was looking to find the constraints within the SI itself. I may have misread the various clauses but I cannot see them.

My argument has always been that ring-fencing was an extremely significant decision by Parliament to provide a fundamental safeguard following the lessons learned from the financial crash of 2007-08, building on the work of the Parliamentary Commission on Banking Standards and its recommendations. The ring-fence had multiple roles; one was to separate the culture of retail banking from investment banking because their relationship with each other was clearly unhealthy. We saw retail banks trying to achieve far greater profits; that is how we ended up with mis-selling in a whole variety of areas and on a very large scale, and it is the reason why we saw HBOS lower its credit standards and begin to fund itself short in order to generate greater profits. We saw a lot of unfortunate behaviour within the retail sector because of this cross-contamination with the investment part of banking.

On the investment side, we also saw a very cavalier attitude towards risk-taking by quite a number of banks, which is how we ended up with the CDOs. They had that cavalier attitude because they knew that they could fund themselves, not by having to go to knowledgeable investors but because they had access to the funds in the current accounts of ordinary folk and retail depositors.

The decision was that the two had to be separated, so I am very concerned about an undermining of the ring-fence. As far as I can see, there is nothing to constrain HSBC from deciding that it wishes to use those retail funds that it has within its organisation to flow into Silicon Valley Bank UK to use for activities such as venture capital, private investment or exotic derivatives. That is exactly the issue that concerned the House the last time that we met to discuss this. At one level, even if you think it is a good thing that we should not have a ring-fence, it will give HSBC a very significant advantage over its various competitors. It is inevitable that those competitors would use pressure and precedent to make sure that they also get similar opportunities and a level playing field.

The sense is that the decision to provide this regime for our largest bank is effectively the death knell for most ring-fencing for major banks in the UK. I admit that there is a process that must be followed—we have the Edinburgh reforms—but the Government have always been very clear that they will come in through statutory instruments and regulation, not through Parliament.

I go back to Section 55M of FSMA, on the imposition of requirements by the PRA. Can the Minister explain how the application of Section 55M requires any kind of primary legislation, as I cannot see that it does? Even if the regulator said that it would try to limit the breach to just HSBC and Silicon Valley Bank UK, that is a decision by the regulator, not Parliament. The regulator could change its mind, go the other way and say, “No, we’re entirely comfortable with the idea of removing the ring-fence”. Essentially, we take the decision away from Parliament if we rely on Section 55M of FSMA as the control factor in whether the ring-fence remains in place. Perhaps the Minister can help me work through that. I am just trying to understand how the notion that primary legislation is required fundamentally to change the ring-fence remains intact now that this is in place.

I will talk for a moment or two about resolution. The Government put forward the argument—the Minister used it on Report of the Financial Services and Markets Bill—that the resolution plans for banks if they fail are an effective substitute for ring-fencing. I argue that they cannot be. We have had dramatic evidence of that over the past several months. Credit Suisse had in place a resolution plan in case it failed, but the Swiss regulators—I stress again that I do not think they are fools or inadequate in any way; they are excellent—made the determination that if they pursued the resolution plan, they would create an economic crisis for Switzerland, so they set it aside.

In the United States, the three regional banks that collapsed did not have resolution plans because the US had adjusted, after a lot of industry lobbying, the benchmark at which banks started to have to have them in place and these smaller regional banks had become exempted. However, under US banking regulation there is an option in these cases for the regulator to impose a resolution plan, even if one is not written and in place when the failure happens. In the cases of the three regional banks, the US made that same determination that it should not impose resolution because it would create too much risk to the economy. Instead, it found other ways to come to the rescue of the three banks that failed.

We now know from absolute experience that resolution, which may apply in some limited circumstances and may sometimes be exercisable, will be available only in relatively limited circumstances. That underscores the fundamental necessity not to harm the ring-fence, which has held the ground over the past several years and looks to be our best and primary hope of preventing the kind of mismanagement, misbehaviour and risk-taking that led to the 2007-08 crash.

I hope the Minister will help me through this, as I struggle to see where there are now realistic, meaningful limitations on HSBC’s ability fundamentally to avoid the application of the ring-fence to its activities, provided that it routes the funds through Silicon Valley Bank UK and also does not turn it into a retail bank, which I am sure is far from its intention.

[Lord Livermore (Lab)]

My Lords, in our debates on Report of the Financial Services and Markets Bill we discussed at great length the wider issues around ring-fencing. I said then that we fully support the steps taken by the Treasury, the Bank and the regulators in relation to Silicon Valley Bank UK. The system worked at pace to ensure that SVB UK could continue its operations.

Silicon Valley Bank UK serves a high concentration of life sciences and tech companies in this country, and those firms play an indispensable role in driving growth and innovation across our economy. We therefore recognise that granting an exemption to the ring-fencing regime for HSBC was necessary to guarantee the sale of SVB UK in exceptional circumstances.

However, I have three questions for the Minister. First, although it is welcome news that SVB UK will continue lending, it is clear that tech and life sciences firms need more options. What plans do the Government have to ensure that SVB UK is not the only way that such firms can access capital?

Secondly, the three conditions on SVB UK that have made this ring-fencing exemption possible appear to be sensible, but are there are any circumstances that could lead to additional conditions being imposed or to a reopening of the exemption in future?

Finally, the Government previously indicated that if parliamentary committees were to undertake an inquiry on SVB UK’s collapse or on wider issues with the banking sector, they would co-operate with that inquiry. Has there been any interaction on this matter, beyond March’s exchange of correspondence with the Commons Treasury Select Committee?

[Baroness Penn (Con)]

My Lords, I thank all noble Lords for their contributions. Although I think we all agree that the outcome reached with regard to Silicon Valley Bank UK was a good one, there are important questions about the process by which it was achieved and its implications.

The noble Lord, Lord Davies of Brixton, asked about lessons learned and, specifically, whether the regime worked as expected or as provided for when it was designed. Under the special resolution regime, various tools and powers are available to the Bank, the PRA and HMT to stabilise a failing institution. To deploy them, the authorities must be satisfied that: the bank is failing or likely to fail, by considering a number of factors, such as the value of assets and the ability to meet liabilities, as the noble Lord mentioned; outside the stabilisation powers, action will not be taken to prevent the bank failing; the exercise of the power is necessary, having regard to the public interest; and the objectives of the regime would not be better met by winding up the bank. Any use of the power that would entail risks to public funds must also be approved by His Majesty’s Treasury.

In the case of SVB UK, we can say that the powers were indeed used in a way provided for by the Banking Act 2009. The Bank of England, as the resolution authority, determined that the use of the private sector purchaser tool produced the best outcome, having regard to the special resolution objectives. In particular, it ensured that SVB UK’s customers were fully protected. As the noble Lord noted, the Treasury was consulted by the Bank of England before the private sector purchaser tool was exercised, as is also required by the Banking Act.

As I said, the authorities have a range of tools and options to choose from when deciding how best to manage a failing financial firm and contingency plan for a range of different scenarios. In choosing between the resolution tools set out in the Banking Act 2009, the Bank of England and the Treasury work closely together. The Bank is the UK’s resolution authority and is responsible for executing all stabilisation options provided for under the special resolution regime, with the exception of the temporary public ownership option, which is the responsibility of the Treasury.

13:30

Although we reached a good outcome in this instance, the noble Lord, Lord Davies of Brixton, is right that it is important that we reflect on what happened and look at whether any lessons can be learned and how improvements can be made in the future. I confirm to the Committee that the Treasury and the Bank of England are working together to ensure that we reflect properly on the events in this case and how best to draw on those lessons learned.

The noble Lord, Lord Livermore, asked about engagement with Select Committees in this case. We will absolutely co-operate with the Treasury Select Committee’s inquiry on this matter. We have not had any exchanges with it since March, but we stand ready to discuss the issues further with it as needed. That will also form part of the lessons-learned exercise that will be undertaken between the Treasury and the Bank; Parliament will also have a role to play in scrutinising what happened.

The noble Baroness, Lady Kramer, asked a series of questions on the operation of this exemption and on its implications more widely. She asked where the limitations on the exemption to the ring-fence for SVB UK are in this SI. They are in Article 2(2), which sets out the limit to the core deposits that SVB UK can take and defines the permitted business as

“any business which is closely connected with, directly relates to, or is of a similar nature to, the products and services offered by way of business by Silicon Valley Bank UK Limited as at 13th March 2023”—

the date on which the sale took place. The noble Baroness asked—

[Baroness Kramer (LD)]

Just for clarification: HSBC could pass as many billions as it wishes through to Silicon Valley Bank UK to use for venture capital, private equity, structured derivatives and whatever other products Silicon Valley Bank provided to its customers on the date of its purchase—is that correct? So there is no constraint on the amount or where within that pool of activities the funding can go. It would be helpful for us to understand that.

[Baroness Penn (Con)]

If I might press on, I shall address at least part of the noble Baroness’s subsequent questions. Just to correct a perception: as the governor outlined to the Economic Affairs Committee yesterday, SVB UK typically provides corporate start-up banking services rather than investment banking. I think that difference is important in this context.

[Baroness Kramer (LD)]

I want to pick up on that “typically”. As far as I can see, there is nothing in this which says that the proportionality of commercial banking deposits with regard to the other activities has to stay constant. Carrying out one transaction in an area would bring it within the scope of future activities, would it not?

[Baroness Penn (Con)]

To answer the noble Baroness’s question about whether SVB UK will be permitted to use unlimited amounts of retail funding from HSBC’s ring-fenced bank, the ring-fencing exemptions are subject to conditions that restrict the amount of SVB UK’s core deposits and the type of business that it can operate, as I have set out and as is in the SI. In addition, the PRA has granted HSBC UK and SVB UK temporary waivers to remove constraints in the PRA Rulebook relating to the capital requirements regulation—CRR—on the intragroup lending and funding from HSBC to SVB UK. These waivers, along with the modification to the regime the Government made in the first SI, allowed HSBC to provide emergency liquidity to SVB UK.

As is usual practice with PRA waivers, they are time-limited. One of the waivers expires on 17 September 2023 and the other on 17 June. Whether these waivers are extended or modified is a matter for the independent regulator. The waivers are part of the range of tools that the PRA can use to ensure the effective supervision of HSBC UK and SVB UK. If these waivers lapse, the constraints in the PRA Rulebook regarding intragroup lending and funding from HSBC to SVB UK will come into effect, which would mean that SVB UK would not be able to be funded to an unlimited extent from HSBC UK’s retail deposits.

The noble Baroness, Lady Kramer, said that she took no comfort from either the provisions in this SI or the PRA’s wider supervisory and regulatory powers. What I would say is that the PRA has confirmed its support for provisions in this instrument. Sam Woods has stated that the SI and its conditions support the PRA’s primary statutory objective of safety and soundness and limits competitive distortion. He outlined that the PRA has a range of tools that it can and will draw on to ensure the effective supervision of HSBC and SVB UK and ensure the protection of retail deposits. It will continue to supervise both HSBC UK and SVB UK in line with its usual supervisory approach.

The noble Baroness asked me about Section 55M of FiSMA. I suggest that I should perhaps write to the noble Baroness and the Committee on this point. I have the outlines of an answer, but I think that it might be better delivered in writing for complete clarity. To come back to her point, more broadly, about parliamentary scrutiny or control over the process around the ring-fence and changes to it, the actions in this case are entirely in line with powers granted to the regulators in terms of operating the resolution regime. What we should not do is to think that the powers used under the special resolution regime are indicative of the Government’s or regulators’ approach to reforming the ring-fence more broadly. Any fundamental reforms to that ring-fencing regime would require changes to primary legislation. There is nothing in this process that has changed that.

To turn to the question from the noble Lord, Lord Livermore, on lending to the sector, or sectors, that formed a large part of the customer base for SVB UK, he is absolutely right that it is essential that tech and life science firms have access to the capital that they need to start up and scale up. We support that through the British Business Bank, which has several programmes tailored specifically to the needs of the UK’s life science and technology companies, including the £200 million Life Sciences Investment Programme and the £375 million Future Fund Breakthrough programme, which is specifically aimed at increasing the supply of growth-stage venture capital to UK-based companies working in capital and R&D-intensive areas, such as quantum AI, life sciences and clean tech. There is the National Security Strategic Investment Fund, which invests commercially in advanced technology firms and aims to accelerate the adoption of the Government’s future national security and defence capabilities.

Further to that, at the Budget, the Government extended the British Patient Capital programme by a further 10 years. Alongside that, the Government launched the long-term investment for technology and science initiative to aim to spur the creation of new vehicles for investment into science and tech companies, tailored to the needs of UK defined contribution pension schemes. The contribution of pension scheme capital in this area is something that we discussed quite a bit yesterday, and the Government have further intentions to take forward action in this area.

[Lord Davies of Brixton (Lab)]

Do we have a date for that?

[Baroness Penn (Con)]

I believe that at the Spring Budget the Chancellor said that he would report back in the autumn on the further work undertaken in that area—so quite soon, I would say.

I shall read through the transcript of this debate and look to ensure that where I have not fully answered the questions raised I write to noble Lords. Although it has been a short debate, it is an important area and I want to make sure that we get all the facts clearly on the record.

Motion agreed.

Judicial Appointments (Amendment) Order 2023

Thursday 15th June 2023 Grand Committee

Considered in Grand Committee

13:41

Moved by

[Lord Bellamy]

That the Grand Committee do consider the Judicial Appointments (Amendment) Order 2023.

[The Parliamentary Under-Secretary of State, Ministry of Justice (Lord Bellamy) (Con)]

My Lords, this order amends the Judicial Appointments Order 2008, which made chartered legal executives eligible for some judicial offices using powers under the Tribunals, Courts and Enforcement Act 2007. The order before us in effect adds three judicial offices for which members of the Chartered Institute of Legal Executives become eligible. Those three offices are that of recorder, judge of the Upper Tribunal and deputy judge of the Upper Tribunal. The purpose of the order is twofold: first, to widen the pool of people who are eligible to apply for these important judicial roles and, secondly, to further encourage diversity in the judiciary. The 2008 order made CILEX fellows eligible for various judicial offices such as district judge and judge of the First-tier Tribunal, and this draft order adds three offices to the list in that order.

Perhaps I could say a little bit at this stage about judicial diversity, which is a central part of understanding this order. Since 2013, the Lord Chancellor has had a statutory duty to encourage judicial diversity. The Judicial Diversity Forum has worked since 2015 to improve judicial diversity. There has been progress. Last year, 50% of newly appointed judges, taking the judiciary as a whole, were women, and 14% were from ethnic minorities. We know that we have a long way to go, however, and there is certainly less diversity in the senior judiciary.

CILEX offers an important route to increasing judicial diversity. It is interesting to note that 77% of CILEX fellows are women. Additionally, CILEX provides a non-graduate route to becoming a lawyer; it can and does attract candidates from diverse socioeconomic backgrounds, with considerable benefits for social mobility.

The important change in this order is another step towards it being a lawyer’s merit, rather than their particular method of obtaining their legal qualification, that determines suitability for judicial appointment.

As for the offices with which the order is concerned, it is already the case that a CILEX fellow can become a circuit judge if they have held office as a district judge for three years. Our position is that there is no substantial reason why they should not become recorders, which is an equivalent fee-paid role. The cadre of recorders is not currently as diverse as the Government would wish: only 28% of recorders are women and just 7% are from non-barrister backgrounds. It is important to encourage greater diversity in appointments to that office. As far as the judges of the Upper Tribunal are concerned, CILEX members can already be judges of the First-tier Tribunal, and that would normally entitle someone to be considered for the office of judge of the Upper Tribunal. That addition remedies a small anomaly in this area.

13:45

I will take this opportunity to say a word about the Government’s vision for the CILEX profession. CILEX offers a non-graduate pathway to law, enabling professionals from varied backgrounds to have a fulfilling legal career. Chartered legal executives are authorised under the Legal Services Act 2007 to carry out some of the reserved legal activities prescribed under that Act. As the legal services market has evolved, chartered legal executives now exercise many of the same functions as solicitors. The Government’s ambition is to ensure that there are no unnecessary barriers preventing CILEX members progressing their careers.

Two other examples come to mind. One is in relation to powers of attorney, which will be dealt with in forthcoming legislation. The other is about enabling, in a different context, CILEX members to perform the role of duty solicitors in police stations in criminal cases. This statutory instrument is in line with the Government’s overall vision to create and improve diversity in the profession and in the pool of potential applicants.

The Government consulted widely on this proposal. We consulted members of the Judicial Diversity Forum, the Judicial Appointments Commission, the three legal professions—barristers, CILEX members and solicitors—and the Legal Services Board. All consultees were in favour of encouraging more CILEX members to join the Bench. The Government are required formally to consult the Judicial Appointments Commission and the Lord Chief Justice, and I am happy to report that both have confirmed that they support the order. With that background, I commend the order to the Committee.

[Lord Ponsonby of Shulbrede (Lab)]

My Lords, this is a non-controversial instrument and we, the Opposition, support it. I am grateful to the Minister for setting out the priorities, particularly the priority to encourage diversity. He said that about 50% of newly recruited judges are women, and 14% are from ethnic minorities.

I want to drill down a little on that latter figure. My understanding is that the ethnic minorities are not evenly spread: some ethnic minority groups are far worse represented than others. From my perception as a magistrate, black men are about the worst represented in the magistracy, and I suspect that it may well be the same for the judges. It has to be said that we see a larger proportion of black men in our courts as defendants, so this is a concerning situation. It emphasises the importance of encouraging diversity and actively recruiting among certain ethnic minority groups to try to improve that situation.

The Minister made another point about people from non-graduate backgrounds applying for judicial appointments and said that they can work their way through CILEX to become a judge, as he showed. As he knows, I sit as a magistrate, and I remember that when I was first sitting as a magistrate, we still had a few magistrates’ clerks who were non-graduates. I understand that this is still possible, although it is quite unusual these days. Certainly all the legal advisers I have spoken to think it is something that should be kept as a route for people to work their way up through to becoming a legal adviser and then on to becoming a judge if that were possible. I do not know whether the route up through the magistrates’ clerk’s career, if I can put it like that, is something else that would be covered by this or is already covered within these provisions. I look forward to the Minister’s answer to that point. I think it is a good thing to maintain non-graduate routes potentially to the very top as there are in other professions.

It would be useful if the Minister set out what he sees as the next step for further encouraging diversity and widening opportunity. What more does he hope to do in his current role to promote those desirable objectives?

[Lord Bellamy (Con)]

My Lords, I understand—and I will correct the position in writing if I am wrong—that CILEX members can already be appointed as legal advisers. Speaking for myself, I would certainly support the idea that we should preserve non-graduate routes from the “lowest” position right through to the highest. I think that is essential so that everyone can work their way up without necessarily having to spend enormous sums of money on obtaining very expensive legal qualifications, in some ways, top-heavy legal qualifications, as is currently sometimes the position. The noble Lord’s point on that is very well taken, and the Government must certainly bear it in mind.

As to judicial diversity in general, the judicial diversity forum works on this. There is a programme known as PAGE which supports potential judicial applicants from underrepresented groups. I understand that, by December last year, 667 lawyers had participated in workshops run through that programme. The MoJ is providing considerable amounts of funding and there is in additional £200,000 for 2023 for the targeted outreach programme—TOP—managed by the Judicial Appointment Commission to support diverse candidates towards more senior roles. By December 2022, 229 candidates had had one-to-one advice from a senior team with expert knowledge of the selection process to improve their chances. Forty people who participated in the PAGE programme have subsequently become judges. It is perfectly true, as the noble Lord said, that in terms of ethnic minorities the position is somewhat unbalanced and there are fewer black participants than the Government would wish, but it is the case that black PAGE participants who have applied to be judges have been appointed at a rate more than double that of the wider pool of black candidates over the past three years, so there is some evidence of success in this programme, which needs to be fully reinforced.

The Government are very conscious of the situation to which the noble Lord refers and will continue to work on improving that matter, as well as on encouraging female candidates from ethnic minorities. That is another very important element of outreach and is emphasised in the TO programme run by the Judicial Appointments Commission. This is ongoing work and I hope the Government will never take their foot off the pedal in this regard. I commend the order to the Committee.

Motion agreed.

Judicial Pensions (Remediable Service etc.) Regulations 2023

Thursday 15th June 2023 Grand Committee

Considered in Grand Committee

13:55

Moved by

[Lord Bellamy]

That the Grand Committee do consider the Judicial Pensions (Remediable Service etc.) Regulations 2023.

[The Parliamentary Under-Secretary of State, Ministry of Justice (Lord Bellamy) (Con)]

My Lords, I apologise for the fact that these regulations comprise 44 pages of the densest technical complexity one could imagine. I will try to explain them as simply as possible. Essentially, they provide for technical aspects of what is known as the McCloud remedy—McCloud being a legal ruling by the Court of Appeal in 2015 which found certain reforms to public sector pensions to be discriminatory on the grounds of age. These regulations remedy that ruling for the judicial sector.

It is a little complicated because, prior to 2015, various pension schemes applied to the judiciary. There was one under the Judicial Pensions Act 1981, another under the Judicial Pensions and Retirement Act 1993 and a third for fee-paid judicial offices. In 2015, the Government introduced extensive reforms to public service pension schemes, following a report by the Independent Public Service Pensions Commission. Following those reforms, the Government introduced the Judicial Pensions Regulations 2015, which provided that older members aged 55 or over were exempt from the various reforms and remained in their legacy schemes. Essentially, McCloud was a challenge by younger judges who said, “The older members are all right but we are disadvantaged”. The Court of Appeal held in 2018 that the 2015 reforms were discriminatory on the grounds of age. In July 2019, the Government accepted that judgment and took steps to address the difference.

These regulations are the result of those steps, which have been consulted on widely. Essentially, the affected judicial persons or their dependents, as the case may be, will be offered a retrospective choice between continuing to belong to their legacy scheme or moving to the 2015 scheme for the period between 2015 and 31 March 2022. Since 31 March 2022, everyone has been moved on to yet another scheme, the judicial pension scheme 2022. That is the only scheme available currently, but this deals retrospectively with the period from 2015.

14:00

Other public sector schemes follow a slightly different approach. In other schemes, the idea is that one makes a choice at the point of retirement, which is called the deferred choice principle, on whether you prefer the old scheme or the new scheme. It was expressed in the course of the consultation that it would be preferable to have an option to choose now which scheme you want to belong to, rather than wait for your retirement. This involves an options exercise, which will be conducted very shortly, and then people will have the chance to opt for the approach they prefer. Again, the Government have consulted on these proposals. The result of that consultation has been published, and there has been considerable support for the options exercise to begin as soon as possible.

The order takes the opportunity to introduce some rather technical supplementary amendments relating to some indexation calculations, the position of dependant contributions and a particular extension of certain regulations regarding fee-paid officeholders. I am glad to assist on any of the technical detail of that as necessary.

The Government trust that these regulations will show that they have given proper consideration to the McCloud judgment and that the judicial pension scheme is complete and equitable. I commend the instrument to the Committee.

[Lord Ponsonby of Shulbrede (Lab)]

I have only one question for the Minister: are there going to be further SIs on this matter? I remember debating previous SIs on the McCloud remedy, if I can put it like that, and the various things that need to be put in place. As the Minister said, it is extremely complicated. I have an expert behind me—my noble friend Lord Davies of Brixton—although he is not taking part in this debate. My real question is: are there going to be further SIs on this matter?

[Lord Bellamy (Con)]

I am happy to answer the noble Lord’s question in the negative: as far as I know, this is the last SI for the judiciary. The McCloud remedy is still to come in other parts of the public sector. This is the first of the McCloud SIs, I think, and we will gradually work through the public sector. The noble Lord and I have laboured on previous occasions through the detail of this dense matter, but I am happy to say that those particular labours seem to be coming to an end at this point.

Motion agreed.

Armed Forces Act 2006 (Continuation) Order 2023

Thursday 15th June 2023 Grand Committee

Considered in Grand Committee

14:06

Moved by

[Baroness Goldie]

That the Grand Committee do consider the Armed Forces Act 2006 (Continuation) Order 2023.

[The Minister of State, Ministry of Defence (Baroness Goldie) (Con)]

My Lords, for those of us who have served as deck hands on the good ship HMS “Defence” for some time, this continuation order will have a certain familiar resonance, but formalities must prevail.

The purpose of the order is to continue in force the legislation governing the Armed Forces, the Armed Forces Act 2006, for a further period of one year until December 2024. Our annual consideration of the legislation governing the Armed Forces, the 2006 Act, reflects the constitutional requirement under the Bill of Rights that the Armed Forces may not be maintained without the consent of this Parliament. So, while this is a routine item of parliamentary business, it is also one that must be done.

I remind your Lordships that there is a five-yearly renewal by Act of Parliament, which is the primary purpose of the Armed Forces Act. As noble Lords will recall, the most recent was in 2021, and another will be required before the end of 2026. Between each five-yearly Act, annual renewal is by Order in Council, such as the one before us today.

If the Order in Council is not made by the end of 14 December 2023, the Armed Forces Act 2006 will automatically expire, in effect ending the powers and provisions to maintain our Armed Forces as disciplined bodies. As your Lordships will understand, this would have real consequences, as servicepersons have no contract of employment and thereby no duty as employees; instead, they owe a duty of allegiance to His Majesty and an obligation to obey lawful commands. This duty is enforced through the 2006 Act, which contains the provisions for the maintenance of the Armed Forces, including the systems of command, justice and discipline. If the order were not to be renewed, while servicepersons will continue to owe a duty to His Majesty, Parliament will have removed the power of enforcement—that 2006 Act. Consequently, this will leave courts martial and commanding officers powerless to punish transgressors for criminal conduct or disciplinary matters.

Therefore, the continuation of this Act is essential for the maintenance of discipline wheresoever in the world servicepersons do serve—that sounds straight out of the 17th century, I have to say.

Importantly, the act of renewal also presents Parliament with an opportunity to reflect on and pay gratitude to those who protect us and defend our country’s interest in a very uncertain world—a world which will see the Defence Command Paper refresh tackle the issue of how the UK’s Armed Forces will keep pace with, and be able to counter, the evolving threats in the international environment, while building on the original work of earlier Command Papers.

It is vital that our Armed Forces maintain a state of readiness to work with and support our NATO allies and partners to combat today’s—and tomorrow’s—threats, wherever they arise, as exemplified by the professionalism of our service personnel in their unstinting efforts, for example, to instruct and train thousands of Ukrainian men and women in our combined arms approach to warfare, which may prove pivotal to the outcome of the ongoing counter-offensive.

At present, the stakes could not be higher, with the very fabric and stability of the rules-based international system under threat from rogue actors with delusions of imperial irredentism, threatening to abandon law and diplomacy in favour of a “might is right” attitude. That is why we in the United Kingdom, along with our Armed Forces, stand shoulder to shoulder with our Ukrainian partners, providing them with much-needed assistance in the form of kit, equipment, training and funding.

I also salute the courageous and unstinting efforts that saw the UK complete the largest and longest evacuation by any western country during the recent emergency operation in Sudan, where thousands of people were successfully and safely airlifted out of that troubled country.

That warmth of sentiment towards our brave service people reflects this Government’s drive to do more for those who protect us. That is why the Ministry of Defence is currently considering the comprehensive report by the independent Haythornthwaite review, which has looked in depth at what more we can do to incentivise and retain our service personnel, in a way that better balances the entirety of the package we offer them in return for their service. This report will provide an invaluable guide to developing a holistic strategy for defence, enabling it to recruit, incentivise and retain people with the skills that we will need over the coming decades. Importantly, the measures stemming from the review will help to ensure that defence keeps pace with the ever-changing ways of modern working and living. For noble Lords’ information, the report has been submitted to my right honourable friend in the other place, the Secretary of State for Defence, who will respond in due course to its invaluable contents.

Lastly, our consent for the order is an opportunity for us all to acknowledge the debt that we owe to those who serve us so bravely and professionally. I hope that noble Lords will support and approve this draft continuation order, which will provide the sound legal basis for our Armed Forces to continue to protect us. I beg to move.

[Baroness Smith of Newnham (LD)]

My Lords, this annual request to approve the Armed Forces Act 2006 (Continuation) Order is a bit like Christmas or birthdays—it seems to come round ever more frequently. In particular, the fact that we have to renew it in June in order for the continuation to happen in December really seems to speed up the process.

It is an annual request to give approval to which the only thing we can really do is say “Yes, we are content”. On the previous item of business, there was one question to the Minister and one answer, which was in the negative. For this statutory instrument, it would be very easy to say that we endorse everything the Minister has said, we wish His Majesty’s Armed Forces well, and let us move on.

However, the Minister has invited us not only to give approval to the continuation order but to reflect on and pay tribute to His Majesty’s Armed Forces. As so often from these Benches, I am very happy to do so, and I am assuming that the noble Lord, Lord Tunnicliffe, will do something similar from the Labour Benches because, on questions of defence, we tend to agree. We are committed to supporting our Armed Forces and doing precisely what the Minister has indicated we need to think about, which is looking at the recruitment and retention of, and incentivisation and motivation for, our Armed Forces. I was very pleased to hear that the Government are looking at a new report; we look forward to hearing more about that.

14:15

His Majesty’s Armed Forces serve this country incredibly well, whether it is responding to domestic crises, whether it is doing something which perhaps they never anticipated doing, such as covering in the case of strikes, or whether it is doing the jobs that they have perhaps anticipated, such as the evacuation in Sudan or giving support to Ukraine. So there are many roles that we ask of His Majesty’s Armed Forces, and they always come up to the mark and serve us incredibly well.

A question for the Minister is: do we serve our Armed Forces so well? Are we giving them the support that they need? Obviously, the Minister has already said that the Secretary of State will come forward at some point with a response to the new report, but it would be good to know whether she feels that we really are doing what we need to be doing. We have a very small Armed Forces. Are they sufficiently large? Should we look again at increasing their size because of the increased challenges that we are facing? It was fine to have a peace dividend in the wake of the Cold War. We are no longer in a peaceful situation. Have His Majesty’s Government considered whether the size of the Armed Forces is adequate?

When thinking about what support they give to the Armed Forces, have the Government given any further thought to whether they themselves should be subject to the Armed Forces covenant? I know that I have asked the Minister about this before, to which she has responded, but I want to come back to it because there is a question of imposing duties on local authorities and other employers when perhaps the Government should be doing that themselves.

Obviously, we have a formality to do. This statutory instrument is essential, and I am very happy to say that we support the continuation of the Armed Forces Act 2006. We look forward to rubber-stamping it in the main Chamber when it is agreed that the Grand Committee has indeed considered this statutory instrument, even if I think that there will not be too many questions detaining the Minister.

[Lord Tunnicliffe (Lab)]

I wish I had taken the trouble to count the number of times I have done this order.

I welcome the opportunity today to speak for the Opposition on this instrument. It is important not because it has any significant policy or legislative impact but because it provides this House with an opportunity to further demonstrate its support for our Armed Forces by providing a continuance to the system of command, discipline and justice to which they operate.

However, it is of course important, because without the continuation of the 2006 Act, in January we would have a military with no legal requirement to follow orders and implement other disciplinary and criminal procedures. This is something that we have repeated annually since the 1689 Bill of Rights, one of the foundational pieces of our constitutional jigsaw. Given the formality of repeating something for hundreds of years, it is important to re-emphasise, as we have rightly done many times recently, the pride we share in our military, which embodies the very best of Britain. This has been demonstrated particularly in response to the Russian invasion of Ukraine, throughout Covid, and continually for a long time before. Those who serve in our Armed Forces spread and share the finest of our values across the globe, putting themselves in harm’s way to guarantee the safety of us, our friends and our families, and they are an essential part of our national defence, resilience, and obligations under NATO to our allies.

That is why it is disappointing that, in the Defence Secretary’s own words, our forces, for which we have so much responsibility, have been “hollowed out and underfunded”. The fact that this instrument is focused on the disciplinary system of the Armed Forces and that it is that which must be renewed annually implicitly makes the point that it is people, whether those in uniform or the civilians who support their work, and not just equipment, weapons, vehicles and ammunition, who make up the bedrock of our Armed Forces.

Yet just a few weeks ago, the very same Defence Secretary who said that the Armed Forces had been hollowed out confirmed that the Government were continuing with their plans to shrink troop numbers to an all-time low, in his words to “shield them from further reductions”. I cannot say that I understand the logic there, but I have heard the views of wise and vastly experienced military leaders who fear the impact of these cuts.

Over the past year and a half especially, our Armed Forces have done a tremendous job. I will even acknowledge the defence leadership shown by the Government since Russia invaded Ukraine. However, I also hope that the Government go away and reflect on these decisions so that, alongside the provisions maintained by this instrument, their capacity to continue operating at such a high level also remains year after year.

[Baroness Goldie (Con)]

My Lords, I thank the noble Baroness, Lady Smith, and the noble Lord, Lord Tunnicliffe, for the brevity of their remarks, as I think the prevailing temperature in the Moses Room is not designed to afford maximum comfort to its occupants. I am very grateful to both noble Lords for their thoughtfulness. I also very much appreciate their tributes to our Armed Forces. As I have said before in the Chamber, a lot of what we say and do in this Parliament resonates far beyond it, including to an audience of our Armed Forces. It is very important for them to know that there is absolute unanimity in Parliament on our regard and respect for them, our desire to do our best for them and our undoubted gratitude to them for the tremendous contribution they make to our country—not just in keeping us safe and the wider obligations we require of them, but in the incredible contribution they have made to civilian life in MACA, which has been prominent in recent times, as your Lordships will be aware.

The noble Baroness, Lady Smith, raised the important issue of recruitment and retention and asked the pertinent question of whether we serve our Armed Forces well. The answer is that we try; we certainly hope that we do, but that is where parliamentary scrutiny and the call for accountability of the Government by opposition parliamentarians is so important. I refer again to the Haythornthwaite review, which was designed to look at the current offer to our people. The offer has many positive financial and non-financial elements—there is no doubt about it—and our Armed Forces acknowledge that, but it needs to be modernised to reflect how we will ask them to operate in future against the changing threats we face, as set out in the integrated review and the integrated operating concept.

We need a modernised offer to allow our Armed Forces to better harness valuable skills, whether that is regular or reserve. We need to improve recruitment and retention and to be consistent with family life and people’s changing expectations of work in the 21st century. The Haythornthwaite review will be a very important contributor to that thought and decision-making process; it will be a signpost as to how we take things forward. As I said earlier, the review has concluded and the report is with the Secretary of State. He will determine the Government’s response in due course, but there will be a desire to place it in the public domain.

Both the noble Baroness and the noble Lord asked, “Do we have enough of them?” The noble Lord referred to the acceptance of having hollowed out, over decades, our land capability in particular. I say in response that, in the combination of the Integrated Review Refresh 2023 and the defence Command Paper refresh—which is very much a live and vibrant document, requiring constant ministerial involvement, and expected to become public in early course—we have the whole question of what we are trying to plan for. What is the threat? Where is it? What is its character and how do we formulate our Armed Forces to be in a position to respond to it? In this challenging day and age, with a maelstrom of activity, the hybrid character of threat and the opportunity for new technology, we will need to make some important decisions about how we marry all that in an intelligible fashion to ensure that we have the capability we need to deal with the hybrid character of the threat as it now exists.

I cannot be drawn much further on the detail of that; suffice it to say that I give your Lordships my assurance that the MoD is very cognisant of the need to be able to demonstrate—not just for the satisfaction of opposition politicians but, very importantly, to potential adversaries—that we have a serious, workable, effective capability.

The noble Baroness asked whether I could give a little more information on the covenant. She is absolutely correct: this arose when we were looking at the Armed Forces Bill in 2021. Helpfully, that Act extended the reach of the covenant to providers of housing, education and health services across the United Kingdom. The question arose of whether it should extend to central government and the devolved Administrations. I say to both the noble Baroness and the noble Lord that we provided an update in The Armed Forces Covenant and Veterans Annual Report 2022 in December last year, outlining the scope and methodology for conducting the review. The Government will report on the results of this review in the 2023 covenant and veterans annual report, when we will provide more information.

I think I have dealt with the specific points raised. I thank noble Lords for their contributions and I commend this instrument to the Committee.

Motion agreed.

Committee adjourned at 2.27 pm.