House of Lords

Monday 4th November 2024 Lords Chamber

Monday 4 November 2024

14:30

Prayers—read by the Lord Bishop of Bristol.

Olympic and Paralympic Games: Team GB

Monday 4th November 2024 Lords Chamber

Question

14:37

Asked by

[Lord Bassam of Brighton]

To ask His Majesty’s Government what steps they are taking to support the continued success of Team GB at the Olympic and Paralympic Games, and to ensure that there is community benefit from such participation.

[The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Baroness Twycross) (Lab)]

My Lords, I am delighted that this Government will continue to support the successes of Team GB and Paralympics GB. The Chancellor has confirmed that a multiyear investment will mean that a total of £344 million will be invested in Olympic and Paralympic success over the next cycle. This will support the teams through to the 2028 Olympic Games and provide excellent foundations for the 2032 Games and beyond.

[Lord Bassam of Brighton (Lab)]

My Lords, that is more excellent Budget news; it keeps coming. However, how people watch and are inspired by our sporting heroes is changing. During the Paris 2024 Olympics and Paralympics, the BBC had over 67 million online catch-up requests. The next two Olympics and Paralympics will be in totally different time zones. The listed events regime protects live TV viewing but does not prevent digital or on-demand clip rights being hidden behind a paywall. Can the Minister confirm the completion of the 2022 review covering this and help find a way to protect digital and on-demand clips so that everybody can enjoy LA 2028 and Brisbane 2032 despite being in a different time zone, and also be inspired?

[Baroness Twycross (Lab)]

My noble friend makes a good point about changing viewer habits. It is important that sporting events of national importance remain available for people to view for free in years to come. Both the Olympic and Paralympic Games are rightly group A-listed events, which means that live coverage must be offered to at least one free-to-air broadcaster. I can reassure my noble friend that we will continue to consider the issue that he raises on digital rights; we will look to set out our position on that in due course.

[Baroness Sater (Con)]

My Lords, we all congratulate the successes of Team GB at both the Olympics and Paralympics. However, we must recognise the importance of supporting grass-roots sport, which helps generate essential participation. Does the Minister agree that it is vital that we have early identification and effective delivery of talent from the grass roots, schools and clubs to ensure that all-important talent pathways thrive?

[Baroness Twycross (Lab)]

Yes, I would agree with the noble Baroness. Alongside the UK’s sports funding increase, the Government have also committed in our Autumn Budget to support elite and grass-roots sport by investing in multi-use facilities across the UK and scaling up work so that DCMS can deliver on plans for the UK and Ireland to host the 2028 UEFA European Football Championship.

[Baroness Keeley (Lab)]

My Lords, I declare my interests as in the register. In praising Team GB Olympic and Paralympic athletes for their continued success, I want to mention our Olympic head coach for athletics, the wonderful Paula Dunn. On community benefit from sport, in my former constituency in Salford, investment in the park tennis project has revitalised old tennis courts and is bringing people of all ages back to tennis. So I want to ask my noble friend the Minister: will the Government continue to invest in grass-roots facilities, including tennis and padel courts, particularly in areas of higher deprivation?

[Baroness Twycross (Lab)]

The importance of grass-roots sports facilities cannot be overstated. As I said in response to the previous question, the Government committed in the Autumn Budget to support grass-roots sport by investing in multi-use facilities across the UK. That will enable people such as those referred to by my noble friend to get the start in those sports that they need.

[Lord Wigley (PC)]

My Lords, will the Minister join me in congratulating the swimmers in both the Olympics and the Paralympics on once again doing very well? However, does she accept that disabled swimmers in particular can achieve their maximum potential only if facilities are available locally? With many local authorities under financial pressure, swimming pools are being closed. Can she give a commitment that the Government will do everything they can, in England for themselves and in co-operation in Wales, Scotland and Northern Ireland, to ensure that the resources are there to maintain swimming pools so that we can maintain this record well into the future?

[Baroness Twycross (Lab)]

I agree. I learned how to swim in a swimming pool in south London, where my father literally threw me in at the deep end—which I am not sure is an accepted approach to teaching swimming now. This is an issue that has gone on for some time and we are acutely aware of the issue that the noble Lord refers to.

[Baroness Finlay of Llandaff (CB)]

My Lords, following the excellent example in Paris of the Paralympics, which apparently were modelled on the London Olympics and the tone that we set, will the Government recognise that, to have young people coming through who are able to perform, we need to have rapid provision of specialist prostheses for those children? We need specialist wheelchairs for them to be able to participate. Our ordinary services need to recognise that, when those children have the potential to become Paralympians, they need rapid access to highly specialised equipment to enable them to perform.

[Baroness Twycross (Lab)]

I have the privilege of giving the House a demonstration of how I have moved around the country: I now live near Stoke Mandeville, and Buckinghamshire is the home of the Paralympics. Nobody in your Lordships’ House can be in any doubt of the acute crisis facing the NHS. I recognise the issue that the noble Baroness raises and will speak to my noble friend Lady Merron about it.

[Lord Parkinson of Whitley Bay (Con)]

My Lords, the whole Commonwealth is grateful to Glasgow for stepping in to host the next Commonwealth Games in 2026 and we wish Glasgow every success, as it had in 2014. However, many sporting bodies around the world have expressed concern at the reduction in the number of sports being included—seven fewer than the last time Glasgow played host. Among those that have been cut are diving, part of every Commonwealth Games since 1930; badminton, squash and table tennis, meaning there will be no racquet sports; cricket; hockey; the triathlon, and more. With the Games already billed as low-cost and smaller-scale, how are the Government supporting Glasgow to ensure that the Games are a success and that they too inspire new generations of people in a wide range of sports?

[Baroness Twycross (Lab)]

The Commonwealth Games are a clear and key part of the elite pathway in many sports. They are a really important event, which is why the Government have agreed to provide up to £2.3 million of contingency funding to support the safety and security required. We anticipate that Glasgow 2026 will deliver over £100 million of inward investment to the city through the Games. That will support economic and social benefits for Glasgow but also be an inspiration for future generations to come.

[Lord McNally (LD)]

My Lords, the Minister should be very grateful to her father: being thrown in at the deep end is very good training for ministerial life. Has she thought that this might also be a time for some socialist planning? Should not those individual sports that receive the benefits of the lottery and other grants have plans to make sure that they are fit and ready to take up any upturn in interest caused by the Olympics? There are often reports of sports clubs not being ready when interested people start applying.

[Baroness Twycross (Lab)]

Being thrown in the deep end definitely prepares one for ministerial life. I will look into what specific arrangements are undertaken, but I would assume that the sports covered in these major tournaments would then anticipate an upturn. I will look into what happens and what more can be done to make sure that they are available for people when they express an interest.

[Lord Wrottesley (Con)]

My Lords, now that a fiscal event has taken place, will His Majesty’s Government urgently review the strategy for the UK’s hosting of major and mega sporting events, given that opportunities have already been, and will in future be, missed if no review immediately takes place? I declare an interest as, earlier this year, we lost the opportunity to host the International Ice Hockey Federation men’s world championship. That would have brought in over £56 million of economic benefit to the UK—not a bad return on investment—and, specifically, would have helped the levelling-up agenda by supporting regions in the north.

[Baroness Twycross (Lab)]

I am aware of the issue that the noble Lord raises. However, we are clear that hosting major events contributes to inspiring future generations and to the economy. We have a number of tournaments coming up, such as Euro 2028, the Women’s Rugby World Cup next year and other future events. I hope that we will be able to have more success in relation to the ice hockey next time than we did this time.

Scotland

Monday 4th November 2024 Lords Chamber

Question

14:47

Asked by

[Lord Cameron of Lochiel]

To ask His Majesty’s Government what steps they are taking to strengthen Scotland’s position within the United Kingdom.

[The Lord Privy Seal (Baroness Smith of Basildon) (Lab)]

My Lords, the people of Scotland deserve Governments who work together and are focused on delivering for them. Within the UK, Scotland will be the powerhouse for our clean energy mission, with Great British Energy’s headquarters being based there. We will restore decision-making over the allocation of structural funds to representatives of Scotland and we will champion Brand Scotland at home and abroad.

[Lord Cameron of Lochiel (Con)]

Of course, one way to strengthen Scotland’s position within the United Kingdom is to support our key industries. However, last week’s Budget saw a 2.7% increase in spirits duty—a move described as a betrayal by the Scotch Whisky Association. The whisky sector sustains thousands of jobs, mainly in Scotland’s most rural and remote communities. Can the Minister explain why this Government have chosen to punish such an iconic industry?

[Baroness Smith of Basildon (Lab)]

My Lords, if the noble Lord checks back to past Budgets, I think he will find that previous Chancellors from his side of the House put more of an increase on Scotch whisky, whereas this was an increase in line with RPI. If he looks at the Budget overall, he will see that the amount awarded to Scotland is actually significantly greater than at any other time since devolution.

[Lord Browne of Ladyton (Lab)]

My Lords, under this Government’s predecessor, with the SNP in government in Scotland, the relationship between Holyrood and Westminster was at best uneasy and too often characterised by mutual suspicion and sometimes open acrimony. Given Labour’s record on devolution, what lessons have been drawn from last month’s inaugural meeting of the Council of the Nations and Regions on resetting the relationship between the Scottish and UK Governments, which of course is a manifesto pledge?

[Baroness Smith of Basildon (Lab)]

My Lords, we have thought about this a lot and, going forward, it is key to how we work across government. It goes back to the idea that we are stronger together. Unless both Governments work together, in the interests of the people of Scotland, we will not get the best outcomes for them. I think it also means, as my noble friend will be aware, that devolution does not mean that the British Government should abdicate their responsibilities to Scotland. We have a very strong role, and we remain committed to strengthening the union.

[Lord Bruce of Bennachie (LD)]

My Lords, does the Minister accept that for many people in Scotland, especially young people and businesses, the benefits of being part of the United Kingdom would be considerably strengthened if the Government’s reset with the European Union included accepting the youth mobility scheme, rejoining Erasmus, securing flexible visa arrangements for our creative industries and working to rejoin the single market?

[Baroness Smith of Basildon (Lab)]

My Lords, that question goes a little wider than anticipated, but I admire the noble Lord’s ingenuity. The important thing for young people and older people across the UK is to know that they have a Government who work with the devolved Governments in their best interests. That is what has been lacking for some time.

[Lord Foulkes of Cumnock (Lab Co-op)]

My Lords, can the Leader of the House confirm that this is the best settlement in real terms since the Scottish Parliament was set up, and yet the services in education, health and other devolved areas are deteriorating in Scotland? Will the Government do everything possible to stop the Scottish Government spending money on vanity projects, such as “Air Miles” Angus—their pretend Foreign Secretary—travelling the equivalent of three times around the world already? Can they make sure that every penny the Scottish Government get is spent on devolved areas?

[Baroness Smith of Basildon (Lab)]

I think my noble friend hits the nub of the issue. Yes, he is right, and I am happy to agree with him: it is the largest real-terms Budget settlement for the Scottish Government in the history of devolution. It is £1.5 billion in this financial year and will be £3.4 billion in the next. The point he made is that how that money is spent is really important. We have seen poorer outcomes in Scotland for people in the National Health Service, with longer waiting lists, and educational standards have not increased as they should. This is where that money should be focused—to deliver real benefits for the people of Scotland.

[Lord Stirrup (CB)]

My Lords, would the Leader agree that the presence of one of the RAF’s main operating bases on the Moray Firth and one of the Navy’s at Faslane, along with a number of Army units, reflect the strategic importance of Scotland within the union? They bring significant economic benefit to those areas, a situation that would be greatly enhanced if this Government could ever get around to funding defence of the realm adequately.

[Baroness Smith of Basildon (Lab)]

There is always a sting in the tail, is there not? We do recognise the contribution they make, both to the defence of the country and the economy. The Government remain committed to reaching 2.5% GDP defence spend. The noble and gallant Lord will be aware, as will the House after the sterling efforts of my noble friend Lord Livermore, that we have been left with a £22 billion black hole—

[Noble Lords]

Oh!

[Baroness Smith of Basildon (Lab)]

The party opposite may not like it, but the reality is that we have to get the finances of this country on a stable footing, and I can assure the House that that is what we shall do.

[Lord McNicol of West Kilbride (Lab)]

My Lords, what discussions have His Majesty’s Government had with the Scottish Government following the launch last month of the UK industrial strategy? Have the specific Scottish commitments in it, on medicine manufacturing, offshore wind and the Advanced Forming Research Centre in Strathclyde, been welcomed by the Scottish Government?

[Baroness Smith of Basildon (Lab)]

My Lords, if they have not, they should be. The industrial strategy is the core of our mission for economic growth, and the meetings so far have been very positive. We have published the Green Paper, which will kick-start our programme on this. It is a modern industrial strategy for the days and years ahead for this country. It will be published next spring, and it will be in line with the multiyear spending review. Unless we take advantage and make the most of growth across the whole of the UK, we will deny the people of Scotland and of this country the benefits of a strong economy that they deserve.

[The Earl of Kinnoull (CB)]

My Lords, the last quarterly report on intergovernmental relations between the four Governments was produced by the Department for Levelling Up, Housing and Communities, as it then was, and it arrived in December last year. Will these quarterly reports still be produced? Will they move to the Cabinet Office?

[Baroness Smith of Basildon (Lab)]

I do not have a precise answer for the noble Earl, but I will look into this. It is important that this is at the heart of government, with the responsibility lying there. I am confident that we will find a way of making progress and of marking that progress in a way that is easily understood. I will take a precise note of the noble Earl’s question and come back to him with a fuller answer.

[Lord Fox (LD)]

My Lords, the reason behind the breakdown in the relationship that the noble Lord pointed out was that, through the last Parliament, there was a continual flow of legislation that trod on the toes of the devolution process. The noble Baroness knows well that the common frameworks process was set up explicitly to deal with these kinds of issues. Can she update your Lordships’ House on where we are with the common frameworks and when we will see them back in the process of making sure that toes do not get trodden on again?

[Baroness Smith of Basildon (Lab)]

The noble Lord makes an important point. In some ways it is the opposite—the other side of the coin—to that made by the noble Lord, Lord Foulkes. We have reserved and devolved matters, and it is about making sure that we stick to our responsibilities and work together. The only way this works is with each Government having respect for the other and working together, so I assure him that that is what we seek to do and will continue to do.

[Baroness Liddell of Coatdyke (Lab)]

My Lords, is the noble Baroness aware that £47.7 billion was given to the Scottish Government last week—the highest amount in history? Will she join me in congratulating the Chancellor on that distinctive amount of money? But will she also call into question some of the expenditure mentioned by the noble Lord, Lord Foulkes, on vanity projects, rather than turning round the economy of Scotland, as it deserves? Incidentally, the money was made available because of a former Member on this side of the House, Joel Barnett—Lord Barnett—and it was supposed to be only a short-term measure, but it has been about 40 years now.

[Baroness Smith of Basildon (Lab)]

My Lords, it sometimes feels like 40 years can go by in the blink of an eye in your Lordships’ House. I remember Lord Barnett well. The noble Baroness is absolutely right: the real-terms increase of £3.4 billion next year takes Scottish funding to £47.7 billion—the largest settlement ever in devolution history. Of course, that is on top of the £125 million confirmed for GB Energy. We have also committed funds to Brand Scotland, which will promote investment opportunities in Scotland. The noble Baroness’s basic point is important: the additional money is supposed to directly benefit the people of Scotland, in the economy, health and education. We look forward to working with the Scottish Government to make sure that that is the case.

Pension Credit

Monday 4th November 2024 Lords Chamber

Question

14:58

Asked by

[Baroness Stedman-Scott]

To ask His Majesty’s Government what steps they are taking to ensure every pensioner who is eligible for Pension Credit receives it.

[The Parliamentary Under-Secretary of State, Department for Work and Pensions (Baroness Sherlock) (Lab)]

My Lords, the Government want all eligible pensioners to apply for pension credit. The Government have written to pensioners providing advice about claiming pension credit following the change to the winter fuel payment, alongside a range of other creative media campaigns. We are engaging directly with pensioners as well as with stakeholders, including devolved Governments, councils and charities, in a joint effort to raise awareness through our combined networks and channels.

[Lord Davies of Brixton (Lab)]

My Lords—

[Baroness Stedman-Scott (Con)]

I say to the noble Lord: feel free. Having run a pension credit campaign, I can understand what the Minister is undertaking. Do the Government intend to guarantee that the DWP has the capacity to deal with what could well be a rapid uptake of applications for pension credit—with all the extra administration needed to process the claims —after this Government’s shameful decision to deprive pensioners who need it most of their winter fuel payment?

[Baroness Sherlock (Lab)]

My Lords, on that final point, which, obviously, I cannot let go, the poorest pensioners are protected because those on pension credit will still have access to the winter fuel payment.

On the bulk of the noble Baroness’s question, we continue to operate good service levels. Around 500 additional staff have now been brought in to support processing during the recent surge in pension credit claims. Processing times may increase; we have advised customers who apply that it could take nine weeks to process their claims. However, anyone who applies before the deadline of 21 December can have their application backdated, which means not only that they will get winter fuel payments but that they may well get pension credit on top of that.

[Lord Palmer of Childs Hill (LD)]

My Lords, I compliment the Minister on the work being done to make people claim pension credit they should have claimed before, in order to try to make up for the rather strange removal of the winter fuel allowance. Can she tell the House when—if we have not reached this point already—the amount of pension credit that was not being claimed before is going to exceed the amount notionally saved from the winter fuel allowance? If that point has not yet been reached, when will it be reached?

[Baroness Sherlock (Lab)]

My Lords, I was so with the noble Lord for the first 20 seconds—all the way. I am grateful for his congratulations to the department, and I shall take them back to my colleagues, who are doing a brilliant job on this front. We have written to around 12 million pensioners about the change to the winter fuel allowance, so a lot of work has been done out there to encourage people to apply—and it is having an effect. We have seen a 152% increase in pension credit claims received by the DWP in the eight weeks following the announcement on the winter fuel payment compared to the eight weeks before, and that will be updated towards the end of the month.

On the costs at the end, obviously, a lot of these claims have to be processed and we will not know for some time down the road. However, it is very clear that the DWP wants everybody who is eligible to do so to claim pension credit. As I have said before, if we end up with more people claiming the money to which they are entitled, that is a good thing. Pensioners deserve the money to which they are entitled.

[Lord Davies of Brixton (Lab)]

My Lords, I apologise to the House and to the noble Baroness, Lady Stedman-Scott, for jumping in too quickly. My noble friend the Minister gave the figure of 500 additional staff in an Answer to a Written Question from me earlier in the Session. What was not clear from her reply was when the 500 extra staff would be in post and fully trained to provide the service required to achieve the take-up of pension credit that we all want to see.

[Baroness Sherlock (Lab)]

As I understand it, the staff are mainly being redeployed from within retirement services and the DWP. It is not uncommon for staff to get moved around to different areas of the department as the need moves and flows during the year. Some of those are already in place, and some are going straight in because they are already experienced in dealing with pension credit and need no training. Others who need specific training on dealing with those claims are being moved across—but we are already doing this.

[Lord Watts (Lab)]

My Lords, does the Minister agree with me that it is hard to take lessons from the Opposition, who in government oversaw the biggest increase in poverty and homelessness—and then they have the cheek to lecture this side about poverty?

[Baroness Sherlock (Lab)]

My Lords, it is true that the last Labour Government lifted more than 1 million pensioners out of poverty and that the number of pensioners in relative poverty has increased by around 300,000 since 2010-11. However, on the pension credit, I think we are all of one mind. We want to encourage everybody out there who is eligible for pension credit to claim the money and claim it as soon as possible. Please put the word out.

[Lord Naseby (Con)]

Is the Minister aware that we are dealing with some really quite elderly people? Therefore, the response, in terms of their ability to go online, for example, is likely to be very low, so why on earth are we establishing a terminal date of 21 December? Secondly, am I right in understanding from the Minister that we are taking on 500 extra civil servants to handle this demand? Is that not a complete farce, when really it would have been much simpler to leave the winter fuel allowance where it was for all our pensioners, all of whom have paid taxes over the years—and many of those families have lost loved ones in the Second World War and the subsequent Korean War?

[Baroness Sherlock (Lab)]

My Lords, I apologise to the noble Lord if I was not clear in my last answer—I acknowledge that I speak too quickly on occasion. Many of those 500 staff are being redeployed from within the department. It is not unusual for people to move to different areas of the Department for Work and Pensions, moving on to campaigns as needed. The noble Lord is absolutely right, and of course, there is a very wide range of pensioners. There are many in this Chamber who may technically be of state pension age but who are highly computer literate and more than able to use the online campaigns. The online form is incredibly simple: if somebody applies online, the maximum number of questions they will have to answer is 48, and for some it is as few as 35.

[A noble Lord]

That is still a lot.

[Baroness Sherlock (Lab)]

It is a lot, but they include “name” and “date of birth”, so give us a bit of a break here. That said, there are days, I acknowledge, when some of these are beyond me. The great thing is that if you phone the helpline, it is equivalent to doing it online, because the person at the other end is putting the stuff in for you. If you do not want to do computers, you can phone and someone will take you through it. The satisfaction rates are very high. Finally, those who are really struggling can apply with the help of somebody from DWP or from a charity. In extreme cases, someone from DWP will even visit people at home. We will do what it takes to get people to apply for the money to which they are entitled.

[Baroness Ludford (LD)]

My Lords, my noble friend Lord Palmer did not get an answer to his very legitimate question on when the cost of the claims for pension credit that we hope will be made will cancel out the saving from the winter fuel payment, factoring in the 500 extra staff in particular. It is fair to ask that question and to wonder whether there is a bit of conflict of interest here: if lots more people apply for pension credit, the £1.5 billion saving that has been headlined disappears.

[Baroness Sherlock (Lab)]

My Lords, when the costings on this policy were done, the Explanatory Memorandum made it clear that the expectation was that it would save £1.3 billion in this financial year and £1.5 billion a year after that. That saving was on the assumption that pension credit would increase by five full percentage points, and it was net of any other DWP benefits that might go with that. Until we exceed that point, the savings are still there. We will not know where this lands until all the claims are in and processed. I simply say, finally, that I want everybody who is eligible for this to claim it. If we end up with more people getting not just the winter fuel payment but the pension credit, that can be worth an awful lot of money. The average pension credit award for a single pensioner is around £72 a week. This is worth having.

[Lord Dodds of Duncairn (DUP)]

My Lords, the noble Baroness will be aware that these matters are devolved to the Northern Ireland Assembly and Executive, but we are affected as much as any other part of the UK by the cuts to the winter fuel allowance and short uptake of the pension credit. What has been done to liaise with the Northern Ireland Executive to ensure that pensioners in Northern Ireland will have the same advancements, encouragements and incentives to apply for pension credit?

[Baroness Sherlock (Lab)]

My Lords, my department is working very closely with the devolved Administrations, including with colleagues in Northern Ireland, to make sure that campaigns for take-up are out there. However, the core issues around, for example, state pension are reserved.

Budget: Taxes and Borrowing

Monday 4th November 2024 Lords Chamber

Question

15:08

Asked by

[Baroness Penn]

To ask His Majesty’s Government what assessment they have made of the impact of the Budget on levels of taxes and Government borrowing.

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, the Budget raises taxes by £40 billion as we repair the public finances and rebuild our public services. Borrowing falls from 4.5% of GDP this year to 2.1% of GDP by the end of the forecast. The current budget moves into surplus from 2027-28, ensuring that we do not borrow to fund day-to-day spending.

[Baroness Penn (Con)]

My Lords, after delivering the biggest tax-raising Budget on record, the Chancellor rightly said at the weekend that she was wrong to rule out those tax rises ahead of the election. She also said that this Budget

“wiped the slate clean … set the spending envelope for the remainder of this Parliament”,

and that

“we don’t need to increase taxes further”.

Will the Minister repeat the Chancellor’s reassurances today and rule out any further tax rises in future Budgets, or should we not believe what the Chancellor has said this time round either?

[Lord Livermore (Lab)]

We had to take some very difficult decisions in the Budget. They were the right decisions to clear up the mess that we inherited from the party opposite, to rebuild the NHS after years of neglect, to choose investment and not decline, and to keep our promises to working people. However, the noble Baroness is absolutely right and of course I agree with what the Chancellor said. This was a very significant Budget, because of the need to repair the public finances and rebuild our public services simultaneously. We have now wiped the slate clean, meaning we never have to do a Budget like this again. The noble Baroness asks about tax, and I point out that we have kept every single promise that we made on tax. Her Government, when she was a Treasury Minister, froze income tax thresholds, costing working people nearly £30 billion. We could have extended that but we chose not to.

[Lord Spellar (Lab)]

My Lords, is it not the case that the last Government’s plans would have taken tax as a share of GDP to 37.1%? Even then, they subsequently announced, but failed to account for, billions of additional public spending while promising unrealistic tax cuts. Does my noble friend agree that last week’s Budget measures were necessary to fill the last Government’s black hole and get this country back on track?

[Lord Livermore (Lab)]

My noble friend is absolutely right in what he says. We faced a £22 billion black hole at the heart of our public finances, which we had to take steps to address. We also faced promises for compensation payments, which the previous Government had completely failed to put a single pound behind, and we had to repair public services simultaneously. In the process, though, we kept every single one of our manifesto commitments to restore stability, invest in our public services and protect working people.

[Baroness Kramer (LD)]

My Lords, the Budget basically ignored social care providers, even though the sector is on its knees and taking the NHS with it. Will the Minister take seriously the need to exempt care providers from the increase in employers’ NICs?

[Lord Livermore (Lab)]

The noble Baroness is absolutely correct: we had to take some very difficult decisions on tax. We have acknowledged that the impacts of those measures will be felt beyond business. We have chosen to compensate the public sector with £5.1 billion, to ensure that there is sufficient funding to support our vital public services, including the NHS. On social care, the Government have provided a significant funding top-up to local government, which can be used for pressures, including adult social care.

[Viscount Hailsham (Con)]

My Lords, the Minister will know that the OBR has forecast that growth will peak at 2% in 2025 and thereafter fall back, after 2026, to around 1.5%. Does the Minister regard that as a satisfactory outcome of a Budget that imposed £40 million in taxes?

[Lord Livermore (Lab)]

It was £40 billion in taxes. The noble Viscount is right that growth was one of the biggest failures of the previous Government, and we are absolutely determined to turn that around. We cannot undo the damage of the past 14 years in just one Budget. The OBR has said that growth is largely unchanged over the Parliament; that is in the context of a Budget with some very difficult decisions on tax to clear up the mess that we inherited. Of course, we need to go further and we need to go faster. That is why we are doing planning reform, pension reform and skills reform, all of which will boost growth and none of which is included in the OBR’s forecast. Let us remember that, under the previous Government, we were the only G7 country with investment below 20% of GDP. Our growth rate was dismal by OECD standards. Their Brexit deal imposed new trade barriers on business equivalent to a 13% increase in tariffs for manufacturing and 20% for services. They crashed the economy, with interest rates peaking at 5.25%.

[Lord Patel (CB)]

My Lords, does the Minister agree that the Budget failed to address the financial difficulties faced by the higher education sector?

[Lord Livermore (Lab)]

I do not agree with that.

[Lord Eatwell (Lab)]

My Lords, the noble Lords opposite have some difficulty in understanding the arithmetic of coming through the black hole of £22 billion. Even if they cannot do the arithmetic, they can see that the prisons are full, waiting lists in the NHS are the highest they have ever been, schools are crumbling and there is a lack of police on the streets. It is their failure. Would the Minister agree that that is the core of the failure that this Budget is designed to correct? Is there not one important word missing in statements from the party opposite? That word is “sorry”.

[Lord Livermore (Lab)]

I 100% agree with my noble friend. It is incredibly striking that, in everything we have heard from the party opposite, not once has it apologised for the record we inherited. One of the reasons this is a once in a generation Budget is that we have had to simultaneously repair public finances and rebuild public services. That is why it is such a historic Budget. My noble friend is absolutely right that what we have not heard from those in the party opposite is an alternative. Would they not have repaired the public finances? Would they not have prioritised working people? Would they now cut funding to the NHS and schools?

[Baroness Vere of Norbiton (Con)]

My Lords, the Labour Government are taking money from pensioners this winter, taxing family farms on the death of a loved one, and hiking taxes on the hospice and care sectors, all while handing out inflation-busting pay rises to train drivers with no strings attached. Can the Minister confirm that this practice will stop and that there will be no more above average inflation pay rises without an agreement on productivity improvements and reform?

[Lord Livermore (Lab)]

I can. We said exactly that in the Budget.

[Lord Sikka (Lab)]

My Lords, I have long said that government debt is overstated, and I am surprisingly supported by a man called Jacob Rees-Mogg. On 2 August 2022, he effectively said that the balance at that time of £875 billion of quantitative easing—the amount owed by the Government to the Government—should not be included in the national debt. Its exclusion would reduce public debt to 60% of GDP, meaning that the Government would have more headroom to borrow, invest and grow the economy. Does the Minister agree?

[Lord Livermore (Lab)]

I absolutely agree with the importance of investment to the economy, which is why we have set out an investment rule which enables exactly that. The Government’s number one commitment is to economic and fiscal stability, which is why we have put in place those robust fiscal rules. It is interesting to note that average borrowing over the next five years will be 2.6% of GDP compared to 5.6% of GDP over the previous 14 years.

[Lord Deben (Con)]

My Lords, the Minister told the House that there were no promises broken in the Budget. The Secretary of State for Defra, which looks after agriculture, promised farmers that there would be no tax on inheritance. Why has he not resigned?

[Lord Livermore (Lab)]

On inheritance tax, currently the largest estates pay a lower effective tax rate than the smaller estates. I do not think that that can be right. Agricultural property relief is given on top of the normal inheritance tax thresholds. Individuals can pass up to £500,000 to a direct descendant, and then agricultural property relief would provide a further £1 million tax-free allowance. This means a couple can pass on up to £3 million tax free. Above that, there is a 50% discount on inheritance tax, so a rate of only 20% applies, and any liability can be paid in 10 yearly instalments. This seems to me to be pretty fair in the context of the decisions we have taken and in the context of what everyone else in society gets.

[Lord Wallace of Saltaire (LD)]

This Budget provided only a limited increase in defence spending, under circumstances in which the Ukraine war is depleting British stocks and our Armed Forces are under very considerable strain. If the Government were to consider that they needed to increase defence spending further, and to raise tax for that, would they be confident that the Conservative Party would support that, or do they think they would oppose it?

[Lord Livermore (Lab)]

I cannot speak for those in the Conservative Party—and it does not seem that they can speak for themselves either right now. It is very unclear what they would do at all in response to this Budget. We have set out a path for defence spending that fully meets our commitments, and we will set out a path to 2.5% in due course.

Education (Values of British Citizenship) Bill [HL]

Order of Commitment discharged
Monday 4th November 2024 Lords Chamber

Order of Commitment

15:20

Moved by

[Lord Harries of Pentregarth]

That the order of commitment be discharged.

[Lord Harries of Pentregarth (CB)]

My Lords, I understand that no amendments have been set down to this Bill and that no noble Lord has indicated a wish to move a manuscript amendment or to speak in Committee. Unless, therefore, any noble Lord objects, I beg to move that the order of commitment be discharged.

Motion agreed.

Bank Resolution (Recapitalisation) Bill [HL]

Report stage
Monday 4th November 2024 Lords Chamber

Report

15:21

Clause 1: Recapitalisation payments

Amendment 1

Moved by

[Lord Livermore]

1: Clause 1, page 1, line 18, leave out “another” and insert “a relevant”
Member’s explanatory statement
See the explanatory statement for my second amendment to Clause 1.

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, in moving government Amendment 1, I shall speak also to government Amendment 4. The Government have tabled these amendments after considering the concerns raised in Grand Committee by the noble Baronesses, Lady Noakes, Lady Bowles, and Lady Vere, and the noble Lord, Lord Vaux. I am extremely grateful to all of them for all of the points they have raised.

Reflecting in particular on the points made by the noble Baroness, Lady Noakes, the Government have decided to clarify in the Bill whose expenses can be covered by a recapitalisation payment from the Financial Services Compensation Scheme. I am grateful to the noble Baroness for her engagement on this matter since Grand Committee.

The Bill as introduced permitted a recapitalisation payment to cover the expenses that the Bank of England or another person has incurred, or might incur, in connection with the recapitalisation of the firm in resolution. These amendments replace that broad formulation with “relevant person”, then specify that “relevant person” means the Treasury, a bridge bank or an asset management vehicle. They further specify that “bridge bank” and “asset management vehicle” have the meanings given by Sections 12 and 12ZA of the Banking Act 2009 respectively.

In Grand Committee, the noble Baroness, Lady Noakes, indicated that she had no objection to the Treasury, the Bank of England and its entities having certain expenses covered by the new mechanism, but that this should be specified in the Bill. These amendments tabled by the Government seek to do just that; I hope that she and other noble Lords will be able to support them.

In Grand Committee, the noble Baroness, Lady Noakes, also asked questions about the specific expenses that would be in scope under the terms of the Bill. On this point, I should be clear that the Government maintain the position set out in Grand Committee: it is important that the Bill is not overly prescriptive, allowing the Bank to respond flexibly when costs arise. I refer to the explanations given in Grand Committee, in the Government’s response to the consultation and in the draft updates to the code of practice of the types of expenses that will be expected to be covered. The Government maintain that it is prudent to ensure that there is broad provision to cover these potential additional costs. Ultimately, it should be borne in mind that the alternative may be for such costs to be met by the taxpayer.

By way of reassurance, I reiterate that, in determining whether to include certain ancillary expenses in its request for funding, the Bank of England is subject to the usual obligations under public law to act in a way that is reasonable and proportionate. In addition, the legislation does not allow the Bank of England or any other person to claim expenses that arise exclusively for preparing for a Bank insolvency. The draft updates to the code of practice also set out that the Government would expect any final report on the use of the mechanism to explain why certain expenses were considered reasonable and necessary.

I hope that the Government’s approach as set out in these amendments addresses the points raised by noble Lords in Grand Committee, and that noble Lords will feel able to accept them. I beg to move.

[Baroness Noakes (Con)]

My Lords, I spoke in Committee. I draw attention to my interests as included on the register; in particular, I hold shares in a number of banks that could be affected by the contents of this Bill.

I thank the Minister for the comprehensive letters that he wrote to Members who took part in Committee—and, indeed, for the subsequent meeting that he organised. I also thank the Treasury for publishing the draft extra chapter for the code of practice, which has been very helpful to those of us trying to work through the Bill.

I certainly support the two amendments to which the Minister has just spoken, which go some way to limiting the wide power in new Section 214E(2), but I have some further questions for the Minister, building on the comments he has just made. These amendments constrain to whom payments can be made under that new subsection but they do not do anything to constrain the types of expenses that can be incurred. In Committee, I tried to explore what happens if litigation or regulatory actions arise in relation to issues that had occurred prior to the resolution action being taken but which do not emerge until a little later. We did not get very far, so I will spend just a couple of minutes on them here.

I am talking about material litigation or regulatory action. There could be shareholder litigation, which happened after RBS was bailed out by the Treasury. There could also be other kinds of issues that result in both regulatory action and civil litigation, as happened in relation to Libor, for example. Today’s hot issue is vehicle financing commissions, following the Court of Appeal’s decision recently, and no one knows how much it will cost.

Before this Bill, the working assumption was that smaller banks would be placed into the insolvency procedure and that, in that event, the kind of liabilities I am talking about would likely be extinguished as part of the insolvency because there would simply be insufficient money there to pay for them. However, once the recapitalisation power is used, it opens up the possibility that the Bank of England could use the power to raise capital in order to pay for litigation or regulatory costs that had arisen and were crystallising after the recapitalisation event.

The issue of litigation was raised by my noble friend Lord Moylan at Second Reading, and the Minister wrote to him on 21 August. The letter confirmed that litigation costs could well be covered through the use of the recapitalisation power. The Minister expressed this in terms of it being

“a judgement to be taken at the time, noting that the alternative could be to use public funds instead”.

From the perspective of the financial sector, which will be picking up the costs using the power—then doubtless passing them on to their customers—the alternative is using not public funds but the insolvency procedure. If we let the insolvency procedure take its course, at least nine times out of 10, those costs will not be met at all. So, that is the heart of the problem from the financial sector’s point of view.

I have not tabled an amendment on Report because it is very difficult to table one that would cover all eventualities. The redraft of the code of practice does not appear to deal with this issue either, whether in relation to expenses per se—in the terms of the new subsection we are discussing—or in relation to which liabilities the Bank should allow to go into the bridge bank. Today, I am seeking that the Government recognise that this is an issue and that it should be dealt with somehow as part of the code of practice.

I accept, as I have throughout, that there may be public interest reasons for avoiding the bank insolvency procedure, and for settling historical liabilities through the recapitalisation power, but the public interest test is a rather slippery concept and gives no real comfort to those who are expected to pick up the tab. I hope that the Minister will accept that this new power must not become a blank cheque to avoid bank insolvency and to pick up all kinds of costs that would otherwise fall by the wayside. I look forward to hearing what reassurances he can give.

15:30

[Baroness Vere of Norbiton (Con)]

My Lords, I too thank the Minister for the recent letters and documents he published in relation to the Bill. It was incredibly helpful to have them for the House to scrutinise the Bill properly. I am also grateful for these sensible amendments, which clarify the persons to whom the Bill’s measures apply as they relate to expenses. They are a bit technical, but they are improvements to the Bill and I am particularly pleased that the Minister has listened to concerns from across the House, including from my noble friends Lady Noakes and Lord Moylan.

I listened with great interest to the points raised by my noble friend Lady Noakes, and I urge the Minister to note what she said. I hope that some of these issues might be resolved in some way, either through the code of practice or by other means, as she seemed to me to make an awful lot of sense. However, on this basis, we support the Government’s amendments.

[Lord Livermore (Lab)]

My Lords, I am grateful to noble Lords for their contributions today and, as I said previously, in Committee. As I said at the start of this debate, the purpose of the Government’s amendments is to clarify whose expenses may be covered under the mechanism in the Bill. I hope that noble Lords will be able to accept the amendments, and I am grateful to both noble Baronesses for saying that they will.

I will respond to the points raised by the noble Baroness, Lady Noakes. As she said, I wrote previously to the noble Lord, Lord Moylan, on this matter. I will briefly repeat some of the points I made to him. In relation to litigation being brought against the authorities themselves, the Bill allows the Bank of England to request that funds from the Financial Services Compensation Scheme cover expenses that have been incurred by it or by the Treasury, a bridge bank or an asset management vehicle in connection with the recapitalisation or the use of the stabilisation power. This may include litigation costs arising from the recapitalisation or use of the stabilisation power, such as from challenges to decisions made by the authorities.

Any decision to request Financial Services Compensation Scheme funds for these purposes would be a decision for the Bank of England to take, but I stress that, in making this decision, the Bank of England would consider all relevant factors, including the fact that the alternative may be to use public funds. I note what the noble Baroness, Lady Noakes, said on that point. A decision to use insolvency depends on whether the conditions for resolution action are not met. If the conditions for action are met, public funds would be the alternative for covering these costs instead of FSCS funds.

I hope that the points I have made demonstrate that the Government have engaged in good faith with the concerns raised by noble Lords and have sought to address them where it has proved possible to do so. These amendments put beyond doubt which parties’ expenses may be covered by the new mechanism, and I hope that noble Lords will support them.

Amendment 1 agreed.

Amendment 2

Moved by

[Baroness Vere of Norbiton]

2: Clause 1, page 1, line 20, at end insert—
“(2A) The Bank of England must not require the scheme manager to make a recapitalisation payment if it has directed the financial institution to maintain an end-state Minimum Requirement for Own Funds and Eligible Liabilities (MREL) exceeding minimum capital requirements.”Member’s explanatory statement
This amendment seeks to prohibit the use of FSCS funds to recapitalise large financial institutions, defined as those which have reached end-state MREL.

[Baroness Vere of Norbiton (Con)]

My Lords, throughout the passage of this Bill, the issue of the size of the bank for which this new mechanism can be used has attracted significant comment and debate. In a letter to all noble Lords introducing the Bill, the Minister stated: “This Bill enhances the resolution regime to respond to the failure of small banks”. Yet that is not what the Bill does. The regime in the Bill is not restricted to small banks or even to small and medium-sized banks; it can be used for all banks, even the very largest. Despite the letter from the Minister on introduction, the Government have maintained their position that the mechanism should be available for use for the resolution of a bank of any size, including the very largest.

Using this mechanism in those circumstances would be astonishingly costly for banks and their customers, not only in the year in which the levy is first implemented but for many years thereafter, adding to a long-term and significant burden on the banking sector and its consumers. I concede that the Government clarified in a policy statement that the mechanism would be used for the largest banks only in exceptional circumstances, but the mechanism being given a statutory footing by the Bill will only ever be used, on a bank of any size, in exceptional circumstances. Therefore, I take only a small amount of comfort from the published statement.

As the noble Baroness, Lady Bowles, said in Committee, there is no differentiation in the Bill on bank size. It should be limited by a defined measure. My amendment, supported by the noble Baronesses, Lady Bowles and Lady Noakes, and the noble Lord, Lord Vaux, seeks to deliver that definition by making it clear that the Bill does not apply to banks that have reached end-state MREL—that is, the very largest banks in the UK. It would mean that only small and medium-sized banks, and those on the MREL glide path, can be supported by the mechanism. I believe that was the Government’s original intention.

My amendment is fairly simple. It does what it says on the tin. I will listen very carefully to what the Minister has to say when he comes to wind up.

[Lord Vaux of Harrowden (CB)]

My Lords, I add my support to Amendment 2 tabled by the noble Baroness, Lady Vere. From the outset of this process, the Bill was intended to cover only small banks. That was made clear in almost the first paragraph of the original consultation. It was then extended and now covers all banks, regardless of size. I thank the Minister for making sure that the draft code of practice was published by the Treasury before Report; it has been incredibly helpful in this process, and we are all very grateful for that. The draft code of practice is clear that the resolution mechanism is designed primarily to support the resolution of small banks and that the Bank of England will not assume use of the new mechanism when setting a preferred resolution strategy of bail-in and the corresponding MREL requirements of a large bank.

So why does the Bill cover large banks? The argument from the Government seems to be along the lines of, “Well, it might be useful to have this flexibility”. That does not seem a very strong argument. As we have heard, larger banks are required to hold additional capital resources, known as MREL, effectively to ensure that they are able to bail themselves out—a process known as bail-in. If the Government are not confident that the MREL regime is sufficient for those larger banks, they should be looking to strengthen that regime rather than extending a measure that is designed specifically for smaller banks whose failure would not create systemic risk, to act as a further insurance policy for the big banks.

I am afraid that unless the Minister can come up with a stronger argument than he has so far, I will be minded to support the noble Baroness, Lady Vere, should she decide to test the opinion of the House.

[Baroness Noakes (Con)]

My Lords, I add my support to my noble friend’s amendment.

If the power were used on a bank that had already achieved the MREL set for it, that use of the mechanism would raise questions about whether MREL and the minimum capital requirements had been set correctly—and whether there had been a regulatory failure. In either event, the Bank is conflicted, whether through the setting of MREL in its capacity as a resolution authority or through setting capital levels through its PRA arm. I am clear that the Bank should not have the power to cover up regulatory failure, which this unconstrained provision allows. There is no way for the Treasury to stop the Bank using the power other than by using the power of direction that exists but has never been used in the existence of the Bank since nationalisation. Unconstrained powers are unhealthy. That is why I support my noble friend’s amendment.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I concur with what other noble Lords have said about this amendment: that is why I have added my name. It cannot be left as a possibility for any size of bank; if it needs to apply to a larger bank, perhaps the MREL level should have been set higher. We have this rather unusual situation in the UK where we set MREL at a much lower level; it is set at about a quarter of the level of other countries. If there is a nervousness about needing to use it for a bank that is a little bit larger, perhaps some other fundamentals about where MREL is being set are wrong.

The premise of this Bill is based on it being an alternative to insolvency, where that would have been the normal end result. Maybe the compensation scheme would have had to pay out on deposit guarantees and so there is the happy thought that the money could be perhaps put to different use this way round. But the assumption should still be insolvency and we need a public interest test before we go looking at the Financial Services Compensation Scheme. It is already an extraordinary event—so how extraordinary are extraordinary events? I do not think one can layer extra extraordinariness on top of it: there has to be a line somewhere.

We do not know how many dips into the Financial Services Compensation Scheme there are going to be. In insolvency, there is one dip for the deposits that are guaranteed. It does not say that there cannot be multiple dips. There is already the notion that there is this enormous pot of money. Maybe it looks like a bank tax—and everybody hates banks and it is a pot to raid—but it is a very good way to cause more issues within the wider banking sector. Frankly, it is unfair if there are not some bounds somewhere. So I think this is the right one and, if the Minister is not going to incorporate the amendment, which I think would be a jolly good idea, we on these Benches will be supporting the noble Baroness, Lady Vere.

[Lord Eatwell (Lab)]

My Lords, my colleagues from the Financial Services Regulation Committee are rather confused on two issues; that is very unusual, but they do seem to be. First, there is the idea that somehow, if MREL were exceeded in a financial crisis, that would be a regulatory failure. The only way to prevent such a regulatory failure is to have MREL at 100%; that is to avoid the total failure of the financial system. That would be a disaster for lending in this country. At the moment, MREL is set at levels that are deemed to be a reasonable buffer under circumstances that might reasonably, even in extremis, be expected to occur. As we saw in 2008-09, even events that are deemed to be events that would occur only once in a millennium can occur several times in a week in a severe financial crisis. An MREL which can never be exceeded is 100% and if my colleagues are seeking to impose that on the British financial system, I would be very surprised.

The other point that seems to be neglected—it is why I deem this amendment to be irrelevant—is that my colleagues should recall that, in one of the letters from the Financial Secretary, he pointed out there was a cap on the amount that would be raised from the financial compensation scheme for these purposes. That cap, as I recall, was £2.5 billion. In those circumstances, £2.5 billion would never be sufficient to deal with the collapse of one of the big banks. So the cap itself defines these regulations as fitting only relatively small banks.

[Baroness Kramer (LD)]

My Lords, perhaps I could be helpful at this point. That £2.5 billion is certainly not in the Bill. If that is the argument being made by the noble Lord, Lord Eatwell, is it an interesting one but not one that the Government have grasped.

Perhaps I should clarify the issue of the threshold at which MREL kicks in, because that was the point to which my noble friend Lady Bowles referred. The UK demands MREL or bail-in bonds as the mechanism for resolution in the case of the failure of a much smaller bank than in any other country across the globe. The differential between us and everybody else is very large. That, we assume, is why the Government want to keep this mechanism available for banks that have been required to have MREL: they are trying to deal with that small to medium-sized group that, quite frankly, should probably never be in the MREL group in the first place.

15:45

As the noble Lord knows, MREL is very expensive. It restrains banks from growing and upscaling and there is a very strong argument that we have set MREL at exactly the wrong point; it should be for much bigger banks. That was the issue to which my noble friend referred.

I come back to the core of this argument: I do not take the position that the FSCS was ever designed to step in and deal with the failure of a major bank. It would crash our entire financial and banking sector if everyone had to step in and come to the rescue of, say, RBS, Lloyds, NatWest or whatever else. That would not be appropriate.

The noble Lord may be a little like me; I have always been sceptical that MREL would ever be used, because it would have such consequences in its own right. In the end, the resort is to public funds. I am afraid that every Government do not want to own up to that, but they know, in the back of their mind, that if we have an absolutely major crash, only one player will step up—I see the noble Lord is nodding—and that is the taxpayer. Any suggestion that the financial sector should go away and believe that it must consider its FSCS funds as available to rescue one of our major banks is, frankly, entirely inappropriate. That is why this amendment makes such sense.

[Lord Livermore (Lab)]

My Lords, I am grateful to all noble Lords, and to my noble friend Lord Eatwell for the points that he made. The scope of firms in relation to which the mechanism can be applied has been a key issue in all our deliberations to date. I am very grateful to noble Lords for their engagement on this topic since Grand Committee.

As I stated then, the Government’s policy intention is for the mechanism provided by the Bill to be used primarily to support the resolution of smaller banks. We have reaffirmed that intention by including it in the updates to the special resolution regime code of practice, drafts of which have now been published and shared with noble Lords. The Bank of England must have regard to the code of practice when exercising its resolution powers, and this is set out in statute.

The Treasury is involved in the exercise of any resolution powers, either by being required to provide a response to consultation or by consent. Nevertheless, the Government maintain that it is right for the Bill to contain some flexibility for the Bank of England to be able to use the mechanism more broadly in some circumstances. That is because firm failures can be unpredictable and there could be circumstances in which it would be appropriate to use the mechanism on other firms. To repeat the example I gave in Grand Committee, this may be especially relevant in situations where a small bank has grown but is still in the process of reaching its end-state MREL requirements. Firms in this position would have at least some MREL resources to support recapitalisation, but the new mechanism could be used to meet any remaining shortfall if judged necessary. Without the proposed mechanism, there will be a potential gap in this scenario, creating risks to public funds and financial stability.

There is, of course, a counterargument here that the scope could instead be constrained, such that firms on the glide path to their full MREL requirement remain in scope of the mechanism but firms that have met their end-state MREL are excluded. The Government note that this is the desired intent of the noble Baroness’s amendment and it is an argument that we have considered carefully.

Ultimately, noting what has been set out in the code of practice and the strong expectation that the mechanism will be used on small banks, the Government’s view is that it is still right for the tool to have additional flexibility for unpredictable circumstances. To narrow the scope would constrain the Bank of England’s optionality, particularly where it might be necessary to supplement the resources bailed in with additional capital resources.

I note that these are considered unlikely outcomes, rather than a central case. However, given the uncertainty and unpredictability of a crisis scenario, the Government consider it important to avoid constraining that optionality.

None of the Bank of England’s other stabilisation powers are constrained for use on a specific type of in-scope firm and that the choice of stabilisation option used remains a decision for the Bank of England to take, having considered the resolution conditions and objectives. The Government believe that it is right for a similar approach to be taken in relation to the new mechanism. To be clear, the Government’s clear view remains that this mechanism should be intended for smaller banks and that the Bank of England should not assume the use of this mechanism for larger firms. In that regard, I agree with the noble Baroness on the crux of the issue she is raising. The Government simply do not wish to hard-wire that principle into the Bill.

Since we last debated this issue in Grand Committee, the Bank of England has published a consultation on proposed changes to the MREL regime. These proposals include the removal of the additional MREL requirement associated with the transactional accounts threshold for being set to the transfer strategy, given the availability of FSCS funds under the mechanism in the Bill as an alternative. There are currently only a limited number of firms with a transfer strategy, and firms with such a strategy would typically be expected to have a relatively small balance sheet. As such, the proposed change to the MREL regime is modest, consistent with the policy intention for the Bill mechanism to be intended primarily for smaller banks and it has the additional benefit of seeking to ensure that the MREL regime is proportionate for growing firms.

I reiterate the message delivered in the Written Ministerial Statement I made on the day the Bank of England’s consultation was published. As I have already said, the Government and the Bank of England agree that the Bank should not assume use of the new mechanism when setting a preferred resolution strategy of bail-in and corresponding MREL requirements for larger banks.

Recognising the level of interest rightly expressed in Peers being able to scrutinise the changes to the code of practice before the Bill begins its passage in the other place, the Government published updates of that document on 15 October. Notably, on the issue of scope, these updates to the code of practice explicitly state that the Bank of England will not assume use of the new mechanism when setting a preferred resolution strategy of bail-in and the corresponding MREL requirements for a large bank. Those updates to the code also made it clear that the Bank of England is still expected to abide by the so-called 5% and 8% rules in the case of larger banks.

I hope the explanations I have given have been helpful. Throughout the commitments I have given today and in Committee, in publishing draft updates to the code of practice, in the Written Ministerial Statement and in the engagement I have had with noble Lords, I have sought to reassure noble Lords on the question of scope, the primary intention for the mechanism in the Bill and the importance of maintaining flexibility for the Bank of England to act in the public interest. I recognise that I may not have been successful and that strong views remain, but I hope that the noble Baroness may feel able to withdraw her amendment as a result.

[Baroness Vere of Norbiton (Con)]

My Lords, I am grateful to all noble Lords who have contributed to this debate, particularly those who have spoken in favour of my amendment. This has been the subject of numerous discussions with the Minister. I listened carefully to what he had to say, and I still cannot quite understand why the Government will not accept this amendment and are unfortunately still using terms such as “It is the strong expectation that it would be used for X, Y, Z-type of bank”, or “It’s primarily for smaller banks”. That does not give me comfort, as we may be storing up significant challenges for the future. Therefore, I am not encouraged by the Minister’s response, and I wish to test the opinion of the House.

15:53

Division 1

Ayes: 247

---

Conservative: 158
Liberal Democrat: 56
Crossbench: 21
Non-affiliated: 6
Ulster Unionist Party: 2
Plaid Cymru: 2
Green Party: 1
Democratic Unionist Party: 1

Noes: 125

---

Labour: 111
Crossbench: 10
Non-affiliated: 4

16:06

Amendment 3

Moved by

[Lord Sikka]

3: Clause 1, page 1, line 22, at end insert—
“(3A) Before exercising the power in subsection (1), the Bank and the scheme manager must assess whether they consider that there should be a clawback of any part of executive remuneration from the previous 12 months.”Member's explanatory statement
This amendment seeks to address potential moral hazards through requiring the Bank and scheme manager to take directors’ pay and bonuses into consideration when a recapitalisation payment is made.

[Lord Sikka (Lab)]

My Lords, a wise man once said that history repeats itself, first as tragedy and secondly as farce. So it is with successive Governments’ obsession with going easy on the banking industry. We are sleepwalking into the next financial crash, but this modest amendment seeks to check some of the moral hazards by imposing personal costs on bank directors through a possible clawback of their remuneration.

History shows that moral hazards give rise to heavy economic and social costs. The secondary banking crash of the mid-1970s forced the state to bail out banks and insurance and property companies. We have had a banking crisis every decade since the 1970s but Governments continue to indulge the City of London. The big bang, the Financial Services Act 1986 and the Banking Act 1987 formalised light-touch regulation. Then came the banking crash of 2007-08. The obedient state dutifully provided £133 billion of cash and £1,029 billion of guarantees to bail out banks. It also provided £895 billion of quantitative easing to support capital markets.

The reforms that were introduced after the crash have been gradually reversed and the race to the bottom is accelerating. The regulators once again have the secondary objective of promoting the growth and competitiveness of the industry. The Bank of England has watered down the capital requirement rules that were meant to shock-proof the banking system from another 2007-08 style crash. Banks would now have to increase their current capital buffers by less than 1% to abide by the Basel 3.1 standards. That is down from the previous proposal for a 3.2% rise last year, as the Government are now more interested in getting the banks to help to promote growth.

Research by my colleagues at Sheffield University shows that between 1995 and 2015 the scandal-ridden finance industry made a negative contribution of £4,500 billion to the UK economy. No questions have been asked about that, and Governments have done their best to conceal the criminal activities of banks. Documents relating to the 1991 closure of the Bank of Credit and Commerce International are still a state secret. No one has explained why in 2012 the Chancellor and the regulators urged US authorities to go easy on HSBC after it admitted in writing to “criminal conduct”, along with money laundering for criminals. To this day, no Statement about that has been made to Parliament. However, in Committee on the Bill, the Minister urged the House to trust the regulators.

Due to the absence of personal sanctions, there is no urgency for dealing with banking fraud. Thousands of people suffered from frauds at HBOS; these date back to 2003. The Government washed their hands of the matter and left it to Lloyds Bank to investigate its own failures. Dame Linda Dobbs was appointed by Lloyds Bank in 2017 and a report was promised by 2018. To date, no report has been published and no regulator or Minister has inquired into the reasons for the delay or done anything to help the victims of those frauds.

Despite warnings, swathes of banking remain unregulated. The shadow banking system, which is now bigger than retail banking and is enmeshed with the regulated sector, remains unregulated. The cap on bankers’ bonuses has been abolished and bankers are free to be reckless as they pursue personal riches. This Bill ensures that the banks will be bailed out, therefore there are even fewer incentives for the directors to behave in a responsible way. There are virtually no pressure points on directors to curb predatory practices and it takes years to disqualify any company director. Prosecutions for predatory practices are rare and the Government say that the prisons are already full, so we cannot send these people to prison either.

On 5 September, in opposing my amendment during Committee, the Minister said that

“it is a key principle of the resolution regime that natural and legal persons should be made liable under the civil or criminal law in the UK for their responsibility for the failure of the institution. This is delivered by Section 36 of the Financial Services (Banking Reform) Act 2013, which provides for a criminal offence where a senior manager of a bank has taken a decision which caused the failure of a financial institution”.—[Official Report, 5/9/24; col. GC 41.]

Following that exchange, on 12 September 2024 I tabled a Written Question to the Ministry of Justice. The reply on 23 September said:

“The Ministry of Justice Court Proceedings Database has not recorded any prosecutions under section 36 of the Financial Services (Banking Reform) Act 2013 since its introduction”.


There is no pressure on directors; they are not prosecuted —although they may get some honours.

I am not really persuaded that there are sufficient pressure points upon bank directors to curb predatory practices. I urge the Government to accept my modest amendment. The Government can stand up to the banking industry or perhaps, one day, they may well have to pick up the tab from the next banking crash. I beg to move.

[Baroness Vere of Norbiton (Con)]

My Lords, I thank the noble Lord, Lord Sikka, for bringing his amendment and for explaining it so well. We on these Benches are concerned that a statutory requirement to make assessment of potential clawbacks of executive pay may simply hinder the efficient use of the recapitalisation mechanism, which of course usually has to be done in a very timely fashion. Having considered his amendment, we feel that it would not be an improvement to the Bill and will not be supporting it.

[Lord Livermore (Lab)]

My Lords, the amendment tabled by my noble friend Lord Sikka replicates the one he tabled in Committee. I hope that my noble friend will therefore forgive me for repeating some of the points that I made when we discussed this amendment then.

Amendment 3 seeks to ensure that the Bank of England and the Financial Services Compensation Scheme consider whether there should be a clawback of executive pay and bonuses from a failed firm before using the new mechanism. Although the bank resolution regime does not set out powers allowing the Bank of England to claw back money from management, it does provide it with an extensive and proportionate set of powers to impose consequences on the management of a failed firm in resolution.

First, we expect that any existing shareholder equity would be cancelled or transferred when a firm is placed into resolution. This ensures that the firm’s owners bear losses, which is an important principle of the resolution regime. In many circumstances, this will affect directors and management who hold shares or other instruments of the failed firm.

16:15

In addition, the Bank of England has the power to remove or vary the contracts of service of the firm’s directors or senior managers. Whether to use this power in a particular case is a judgment for the Bank of England to make. However, as set out in the Government’s code of practice, the Bank of England generally expects to remove senior management considered responsible for the failure of the firm and to appoint new senior management as necessary.

Finally, as reflected in the code of practice, it is a key principle of the resolution regime that natural and legal persons should be made liable under civil or criminal law in the UK for their responsibility for the failure of the institution. This is delivered by Section 36 of the Financial Services (Banking Reform) Act 2013, which provides for a criminal offence where a senior manager of a bank has taken a decision which caused the failure of a financial institution, if their conduct falls far below what could reasonably be expected of someone in their position.

Overall, this ensures that there are material consequences for senior management when a firm goes into resolution. The Government do not see a strong case to make significant changes beyond these existing requirements, given that this Bill is intended to be a targeted enhancement to the regime and does not in itself justify material changes to conduct regulation.

Furthermore, I note that the noble Lord’s amendment would add a material additional obligation for the Bank of England and the Financial Services Compensation Scheme over a resolution weekend. At such a time, it is likely to be critical for the Bank of England to respond quickly and flexibly to a firm failure. However, the noble Lord’s amendment would add a further complex consideration when the authorities’ attention should be focused on the resolution objectives and maintaining financial stability. This may delay or impede effective resolution action. In any case, the information to make an assessment of whether there should be any clawback may not be available at the time when the use of the new mechanism is being contemplated. Such information may come to light only after the resolution has taken place. In addition, there may be ongoing enforcement action, in which case these matters may be best considered as part of that process rather than separately.

The Government are committed to high standards in financial services regulation and recognise their importance in maintaining confidence and trust in the financial system. The senior managers regime supports high standards by ensuring individual accountability for senior individuals within firms and by promoting high standards of conduct and governance. The Prudential Regulation Authority sets rules on remuneration and applies these to medium-sized and large banks, ensuring they are proportionate. The PRA rules include clear requirements for firms to ensure they have policies on malus and clawback in place to align management incentives with that of the bank. However, as the PRA’s CEO Sam Woods set out in a speech on 17 October, it is important to ensure such regulatory requirements remain proportionate. The Government are committed to ensuring the UK’s regulatory framework facilitates growth while continuing to be robust.

I hope these points reassure my noble friend about the structures in place to hold managers of banks to account. On that basis, I respectfully ask him to withdraw his amendment.

[Lord Sikka (Lab)]

My Lords, I thank the noble Baroness, Lady Vere, for her comments and the Minister for his detailed reply. I am not really persuaded by either of their replies. I feel that this is an important question and there are still no effective checks on the moral hazard created by institutionalised bailouts of the banking sector.

I have made my point and it has gone on the public record. I hope no Government live to regret not accepting this amendment, but given that there is a lack of support, I beg leave to withdraw it.

Amendment 3 withdrawn.

Amendment 4

Moved by

[Lord Livermore]

4: Clause 1, page 1, line 25, at end insert—
“(4A) In subsection (2)(b), “relevant person” means—(a) the Treasury,(b) a bridge bank, or(c) an asset management vehicle.(4B) In this section, “bridge bank” and “asset management vehicle” have the meanings given by sections 12 and 12ZA, respectively, of the Banking Act 2009.”Member's explanatory statement
This amendment, together with my first amendment to Clause 1, clarifies the persons (in addition to the Bank of England) in respect of whose expenses a recapitalisation payment may be made.

Amendment 4 agreed.

Amendment 5

Moved by

[Lord Vaux of Harrowden]

5: Clause 1, page 2, line 3, at end insert—
“(6) When the Bank exercises its power in subsection (1), the Bank must make a report to the Chancellor of the Exchequer within 28 days of the date of any recapitalisation payment being made.(7) The report must comply with any requirements specified by the Treasury, but must include—(a) the reasons why the Bank decided to make a recapitalisation payment in preference to allowing the financial institution to go into insolvency;(b) a breakdown of the costs referred to in subsection (2);(c) a comparison of the expected recapitalisation payment or payments that will be paid by the Financial Services Compensation Scheme, compared with the expected costs to the Scheme in an insolvency process.(8) The Bank must make a further report to the Chancellor of the Exchequer within three months of the date of the sale of the institution to a private sector purchaser, or the sale, closure or winding up of the institution or bridge bank, providing such information as the Treasury may require, including the breakdown of the actual recapitalisation payment or payments and the reasons for any differences to the expected costs referred to in subsection (7)(b).(9) The Chancellor of the Exchequer must lay a copy of each report under subsection (7) or (8) before Parliament.”Member’s explanatory statement
This amendment is intended to ensure that the reasons for decisions of the Bank to follow a resolution process in preference to an insolvency process are explained and the explanation laid before Parliament, both at the time of the decision and once the resolution process has been completed, and that the costs can be compared to what would have been expected if the institution had been placed into insolvency.

[Lord Vaux of Harrowden (CB)]

My Lords, this group covers reporting and accountability to Parliament on the use of the resolution mechanism, which was probably the greatest area of discussion in Committee. The Bill gives significant rights to the Bank of England to impose costs on the banking industry. It can only be right, therefore, that the Bank should have to explain the reasons for its decisions and the outcome to both the Treasury and Parliament.

A number of concerns have been expressed throughout the process, and again today, about how the Bank might use the mechanism. At Second Reading, the noble Lord, Lord Macpherson of Earl’s Court, said:

“I can foresee circumstances where the Bank will choose to recapitalise a small bank rather than put it into a bank insolvency process, less because it is in the national interest and more as a way of minimising the reputational damage of regulatory failure”.—[Official Report, 30/7/24; col. 914.]


The noble Baroness, Lady Noakes, said something similar earlier today. The noble Lord and others have pointed out that there is nothing in the Bill that would incentivise the Bank to control the expenses of the process; again, we discussed this to an extent earlier. Those expenses will be picked up by the FSCS, by the wider financial services industry and, ultimately, by the customers of that industry.

As we have just seen, the Government have tabled amendments to clarify that last point, which we have already discussed—but the point remains. Fears, which I share, have been raised that this resolution mechanism could become the default, rather than insolvency. I believe—others share this view, I think—that, in principle, a failing institution should be allowed to fail unless it is in the public interest for it to be bailed out. The draft code attempts to deal with this but the concern remains.

For all these reasons, it is essential that the Bank should have to explain its decisions and that Parliament should have the ability to scrutinise those decisions. For that reason, I have tabled Amendment 5, which would require the Bank to make a report to the Chancellor that must then be laid before Parliament every time a recapitalisation payment is made. The amendment sets out some minimum requirements for what the report should cover, including why the Bank chose to make a recapitalisation payment rather than allowing the institution to go into insolvency; the costs that will be incurred; and how those costs compare to the costs the FSCS would incur in an insolvency situation. It would also require a final report explaining what actually happened—and, if different, why—at the end of the resolution process.

Since I tabled Amendment 5, I am pleased to say that the Government have issued the draft code of practice—for which we are all grateful, as I said—and tabled Amendment 8. I am extremely grateful to the Minister for his constructive approach on this. Given that the two together deal with most of the areas covered by my Amendment 5, I will not push that.

However—there is always a “but” in these things—there is one important omission in the Minister’s Amendment 8. Although it requires the Bank to report within three months of any recapitalisation payment, it does not require a final report on what actually happened at the end of the resolution process. Although the resolution will happen quickly in many cases—the example of Silicon Valley Bank, where it happened over the weekend, is a good one—that may not always be the case. Under these rules, a bank can be put into a bridge bank for up to two years, which can be extended further. We can have multiple recapitalisation periods during that period, so the process can last a number of years. If the Bank reports within three months of each payment, we may never see a report on what actually happened at the end—for example, if the failing institution is put into insolvency two years later.

It is essential that the Chancellor and Parliament have an opportunity to review how the resolution worked out and, most importantly, to ensure that any relevant lessons are learned. So I have tabled Amendment 9, as an amendment to the Minister’s amendment, to cover that point. I think that this may have been the Minister’s intention all along, but I cannot agree with him that his amendment, as drafted, actually achieves this. On the report it requires, his amendment says:

“The Bank must report to the Chancellor of the Exchequer about … the exercise of the power to require a recapitalisation payment to be made, and … the stabilisation power and the stabilisation option to which the payment relates”.


Nowhere does it talk about what happened at the end, which could be a number of years later.

I am alive to the concern that we should not have too many potentially repetitive reports, so my amendment would have effect only if the reports published by the Bank, in accordance with the Minister’s amendment, do not cover the final resolution results. I hope that this is not controversial and that the Minister will be able to accept Amendment 9 to his amendment. However, as I say, it is essential that the final outcome of any resolution is made transparent and open to scrutiny.

If the Minister is unwilling to accept my proposal, or accepts the principle but does not like some of the detail—he has mentioned to me that he is not terribly keen on the three-month timeframe—perhaps he could commit to coming back at Third Reading with his own version of the amendment that satisfies the guaranteed requirement to report on the final outcome. He can tweak it as he likes on timing and things—I cannot get too excited about that—but, if he is not prepared either to accept it or to do that, I will be minded, I am afraid, to test the opinion of the House on Amendment 9 when the time comes.

The other amendments in this group relate to notifying the relevant committees of both this House and the other place of the use of the recapitalisation power. The amendments tabled by the Minister, as well as the amendments to his amendments tabled by the noble Baroness, Lady Noakes, arose from amendments that the noble Baroness put down in Committee. I am pleased that the Government have accepted those amendments. However, all the amendments do is say that the committees must be notified. Those committees need something to look at; it makes it all the more important that we have the reports we are talking about, both on the use of the recapitalisation power and on what finally happens, at the end of the day. I beg to move.

[Baroness Noakes (Con)]

My Lords, I have Amendments 11 to 13 in this group; they are amendments to the Government’s Amendment 10, to which the noble Lord, Lord Vaux, has referred. Before I address those amendments, I shall refer briefly to the reporting amendments in this group. I certainly praise the Government for bringing forward their Amendment 8, as well as for beefing up the code of practice on reporting. However, I agree with the noble Lord, Lord Vaux, that the issue of the final report made by the Bank of England is outstanding; I therefore support his Amendment 9.

On Amendments 10 to 13, I start by thanking the Minister for listening to the case, made in Committee, that parliamentary committees should be notified of the use of the bank recapitalisation power. I had tabled an amendment that named the Treasury Select Committee in the other place and the Financial Services Regulation Committee in your Lordships’ House; this was supported in Committee by fellow Members of the latter committee, as noble Lords might imagine. I retabled my amendment for Report—the noble Baroness, Lady Bowles, and the noble Lord, Lord Vaux, added their names—but the Government then tabled Amendment 10, which was similar in principle to my amendment but drafted using the language of the Financial Services and Markets Act 2023. That Act did not refer to the Financial Services Regulation Committee for the simple reason that it did not exist at the time—indeed, it was that Act that led to creation of that committee. So, following the helpful meeting that we had with the Minister, I was told that the Government were happy to refer directly to the Financial Services Regulation Committee. They suggested that this be achieved by my tabling amendments to the Government’s amendments. So I hope that, when the Minister gets up to speak to his amendment, he will confirm that he accepts my Amendments 11 to 13.

Noble Lords who have joined the House in the past eight years might be mystified by the reference to the Chairman of Committees in my Amendment 13. Although the House has not used the title since 2016, the post to which we now refer as the Senior Deputy Lord Speaker technically remains the Chairman of Committees. One learns something every day in Parliament.

Let me conclude by saying that I hope the principle of requiring notification to the Treasury Select Committee in the other place and your Lordships’ Financial Services Regulation Committee is now regarded as a precedent for any future creation of significant or unusual powers granted to the Bank of England or any of the other regulators in future. The strength of parliamentary accountability for those bodies, with their massive powers, must always be maintained—and, indeed, enhanced.

16:30

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I think that everything that needs to be said about these amendments has probably already been said. I have added my name where I could; one came in very late, so I could not. I congratulate the noble Baroness, Lady Noakes, on her diligence in getting the committee name in properly so that everybody knows where to go, with all these hundreds of people who are going to be reading this legislation. Nevertheless, we are an institution, as it were, so it is good to see our name there.

I also congratulate the noble Lord, Lord Vaux, on his diligence in hounding to a conclusion the final report, because it is, as he said, very important. In the meeting we had recently, those present from the Bank of England wondered why we might want this and suddenly nodded when I said, “Because otherwise Parliament may never find out what really happened”: that is what it is all about. They might think we do not want to know, many years on, if it is a long period. The sorts of people who sit on these committees do want to know, because we are the ones who have to learn and have to ask the questions, to make sure that it is not going wrong again. It is very important, and I hope the Minister will accept it. If votes are called, these Benches will be supporting the noble Lord, Lord Vaux.

[Baroness Vere of Norbiton (Con)]

I am enormously grateful to all noble Lords who have spoken today. I too add my thanks to the noble Lord, Lord Vaux, for tabling his amendment. This group epitomises what is so good about your Lordships’ House: a lot of movement has happened to date on these issues from the Minister, and we are grateful for his engagement and for the fact that we have been able to get a little further down the road. However, like terriers with very sharp teeth, noble Lords are not quite willing to let it go just yet, and I too support the amendments in the name of the noble Lord, Lord Vaux, and of course those of my noble friend Lady Noakes, who has also done a fantastic job in ensuring that the issues she raised, and which most noble Lords agreed with in Committee, come to the fore. Helpfully, the noble Lord, Lord Vaux, has tabled Amendment 9, which plugs a big gap, and I hope the Minister will accept that and the amendments in the name of my noble friend Lady Noakes.

[Lord Livermore (Lab)]

My Lords, this large group includes a number of the Government’s proposed amendments to the Bill. I begin by responding to the amendment from the noble Lord, Lord Vaux, which is intended to ensure that there is transparency about the Bank’s use of the new mechanism. It does this by creating a requirement for the Bank to report to the Chancellor of the Exchequer within 28 days on certain matters where a recapitalisation payment is made, and for the Chancellor of the Exchequer to lay these reports in Parliament.

I assure noble Lords that the Government recognise absolutely the importance of transparency and accountability regarding the new mechanism and appreciate the strength of feeling in the House. The debates at Second Reading and in Committee were helpful and constructive and have informed the Government’s approach. The Government therefore agree that there should be an explicit requirement for the Bank of England to report to the Chancellor when it uses the new mechanism. To that end, government Amendment 8 means that the Bank of England must report to the Chancellor about the use of the mechanism in any circumstances where it is used.

The Government’s amendment outlines two elements to reporting. First, it would require the Bank of England to produce a final report at a time to be specified by the Treasury. This is intended to be a comprehensive account of the use of the new mechanism and to include an assessment of the relative costs to insolvency. Secondly, the amendment would require the Bank to provide an interim report within three months of using the mechanism in the event that a final report has not been provided within that time. This would ensure a prompt initial public justification for the use of the new mechanism, even if further details would follow later.

Government Amendment 14 would require the code of practice to include guidance on what should be included in the reports. Taking these points together, the Government’s approach has a broadly similar intent to that of the noble Lord’s amendment. However, there are some points of detail where the Government have taken a different approach in order to avoid unintended consequences. In particular, while recognising the importance of clear reporting arrangements, the Government believe that it is critical that the timing and content of any reports do not complicate a successful resolution.

I would highlight two challenges with the approach set out in Amendment 5 from the noble Lord, Lord Vaux. First, the Government believe that requiring an initial report as soon as 28 days after using the mechanism is likely to be too soon. As noble Lords know, the complexity of firm failures mean that they may not always be fully resolved within a short period of time. This is particularly the case when using the bridge bank tool, which is anticipated to be an interim step before an eventual sale. It is possible that a resolution process remains ongoing 28 days following a firm failure. It is therefore important that sufficient time is allowed so that the Bank can focus on its primary function of maintaining financial stability through managing the failure of the firm, before turning to the process of reporting. The Government therefore believe that providing an interim report within three months is a more proportionate approach to take, allowing the Bank more time to ensure that an interim report is as meaningful as possible while still ensuring that the Chancellor and Parliament are updated on use of the mechanism in short order.

This takes me to my second point, which is that disclosing certain information too early in the resolution process, especially information relating to the relative costs of different options such as insolvency, risks complicating a resolution because such information is either incomplete or highly sensitive. Regarding the noble Lord’s proposal to require an initial report to disclose certain costs, it is worth noting that when conducting the resolution conditions assessment, the Bank of England would make an assessment of the costs that the Financial Services Compensation Scheme may incur if the firm was placed into insolvency. However, by virtue of necessity, this would be only an initial assessment based on the information available at the time. It is therefore important that the Bank of England’s assessment of relative costs is reported on only once the resolution is fully complete. This will ensure that the Treasury, Parliament and industry are provided with a comprehensive and accurate account.

In addition, if the firm was in a bridge bank, as it may well be after just 28 days, the early disclosure of this interim financial information could complicate negotiations regarding a sale, especially if it was subsequently revised. It may also be market sensitive and increase speculation about the failed firm during a period of heightened sensitivity. Ultimately, therefore, the Government see risks in requiring the Bank to report too early and in too much detail during a highly unpredictable and sensitive situation. This is in part why the existing reporting provisions within the Banking Act in relation to resolution require reports as soon as reasonably practicable only after a year has passed.

The Government have sought to reconcile these different issues in our proposed amendment, while recognising the important substantive point of principle raised by the noble Lord, Lord Vaux. First, the Government have proposed an interim report to be provided within three months. While it is possible that a resolution process may not have concluded by this point, as the FSCS is likely to levy firms within this timeframe, it seems reasonable to expect the Bank to provide a public justification of the decision to use the new mechanism by this point. I note that, alongside the notification requirement covered in government Amendment 10, which I will turn to shortly, this will ensure that the Treasury and Parliament have a prompt explanation of why resolution has been undertaken.

Secondly, the Government’s amendment means that the Bank of England must provide a separate final report, in the event that this has not already been provided within three months of using the mechanism. This final report is where the Bank would outline its assessment of the relative costs of different options. This reflects the points that I have already made, namely that the Government believe that the key reporting obligation should fall once the resolution process has concluded. This reduces the risk that disclosure frustrates that process and ensures that any report can be meaningful.

To support this approach, the Government have also tabled an amendment requiring guidance on the content of such reports to be included in the code of practice. This will ensure that there is clear public understanding of the key issues that any interim or final report is expected to cover. As I have noted, both interim and final reports would be expected to provide a justification for the use of the mechanism, and as set out in the current draft of the code of practice, the final report would need to set out an assessment of the costs if the firm had entered insolvency. The current draft updates to the code of practice also make clear that the Government expect to require the Bank of England to provide an explanation of why ancillary costs were considered reasonable and prudent.

I am grateful for the helpful engagement that I have had with the noble Lord, Lord Vaux, who has rightly emphasised the importance of the Bank of England providing a comparison of the expected and actual costs in its final reports. I am happy to reassure the noble Lord that the Government intend to request that the Bank of England include this in final reports and will ensure that the final updates to the code of practice reflect this.

The noble Lord, Lord Vaux, has also tabled Amendment 9 to require the Bank to produce a report three months after the resolved firm has been sold or otherwise closed. I understand that the intent of this similarly reflects a desire to ensure that the Bank of England is compelled to report after a resolution process has fully concluded and provide an assessment of how the expected impacts of its actions compared to the actual events that took place in resolution. The Government of course appreciate the importance of the Bank of England reporting promptly. Reflecting on the noble Lord’s proposal, the Government intend to further update the code of practice to make clear that, where feasible and appropriate, the Treasury would expect the Bank of England to report soon after the sale or closure of the resolved firm.

The Government believe that it would be preferable not to put this expectation into legislation. This reflects the point I have already made: that the Bank of England should be required to provide final reports with the more detailed assessments only at the appropriate moment. While the Government do expect, as I have said, the Bank of England to be in the position to report soon after the end of the resolution process, this cannot always be guaranteed. For example, in the case of selling a firm, it may not have been possible in all cases to complete the full post-resolution independent valuation process within three months of a sale. I believe the Government’s approach still captures the intent of the noble Lord’s amendment, which is to ensure that full reports following the conclusion of a resolution process are presented expediently, with some discretion for the Treasury to ensure that reports are still provided only at the right moment.

I hope that, taken together, the Government’s amendments address the noble Lord’s concerns on both the timing and the content of reports, while retaining the flexibility necessary to avoid unintended consequences. On the specific additional point raised by the noble Lord’s Amendment 9, I agree of course with his intention and I will be happy to update the code of practice to this effect. However, the Government believe it would be preferable not to put this into legislation. I would be happy to consider this matter further and discuss it with my honourable friend the Economic Secretary to the Treasury, but I cannot give any firm additional commitments at this stage.

Turning to government Amendment 10, on notifying Parliament when using the power, I note that both the noble Baroness, Lady Noakes, and the Government tabled similar amendments on the theme of parliamentary scrutiny. I am extremely grateful to the noble Baroness for raising this issue and for her engagement on the matter; I am especially grateful to her for agreeing to withdraw her original amendment. The Government’s amendment reflects the point made by noble Lords in Grand Committee concerning parliamentary notification and the creation of the Financial Services Regulation Committee in your Lordships’ House as a result of passing the Financial Services and Markets Act 2023.

Building on that innovation in parliamentary scrutiny and accountability, the Government’s amendment seeks to harness the role played by that committee, as well as the Treasury Select Committee. It requires the Bank of England to notify the chairs of both committees as soon as reasonably practicable after the new mechanism under the Bill has been used. It includes provisions to future-proof this requirement following use of the new mechanism, such that if the names or functions of those committees change, the requirement for the Bank of England to notify the relevant committees by which those functions are exercisable would still stand.

The noble Baroness, Lady Noakes, has rightly argued that the Government’s amendment requires some tweaking, in particular to refer to the Financial Services Regulation Committee in the House of Lords by name. I am grateful to the noble Baroness for bringing this to my attention, and I note her amendments to the Government’s amendment—Amendments 11, 12 and 13—which attempt to address this point. I am of course very happy to agree to those amendments being made.

I hope that the Government’s approach across all the issues debated in this group demonstrates that the issue of accountability to Parliament is being taken seriously, ensuring that there will be transparency in use of the new mechanism. In particular, I hope that the Government’s amendments on the new reporting requirements address the noble Lord’s concerns on both the timing and content of the reports, while retaining the flexibility necessary to avoid unintended consequences. On the basis of these points, I hope noble Lords will be able to support both the Government’s amendments and those tabled by the noble Baroness, Lady Noakes, and I respectfully ask the noble Lord, Lord Vaux, to withdraw his amendment.

[Lord Vaux of Harrowden (CB)]

My Lords, first, I thank all noble Lords who have taken part in this debate, and the Minister for his constructive approach to it. I take on board everything he said about Amendment 5, which is why, as I have already indicated, I do not intend to push it to a vote.

However, I take issue with the Minister’s thinking it is appropriate that the relative costs of the recapitalisation process versus the insolvency process are looked at only after the event, at the very end of the process. It is quite important that we see why the Bank made decision it made at the time it made it, and that it has not reverse-engineered the results and facts to justify what it did. So I am not totally sure that I fully agree with the Minister on that point. Be that as it may, I am not going to push Amendment 5, because Amendment 8, along with the code of practice, covers most of what is needed.

However, as to Amendment 9, I am afraid that I did not hear anything particularly new there. The Minister has confirmed that his intention is that the reporting should cover the final result of the resolution process, which, as I say, could be a number of years later—but that is not what government amendment 8 says. The amendment specifically refers to

“the exercise of the power to”

recapitalise and

“the stabilisation power and stabilisation option to which”

it

“relates”.

It does not refer anywhere to what happens at the end. It is all very well saying that it might go in the code of practice and that there is an expectation that this will happen, but this is a really important issue.

We must know what actually happened, to be able to see how that compares with what we were told was going to happen, and to be able to learn the lessons arising from that. With the best will in the world, it may not be the Minister who is at the Treasury whenever this is used. I absolutely believe and trust that he would do exactly the right thing, but whoever comes next might not. It is important that this is in the Bill.

I am afraid that I intend to divide the House when the time comes, but in the meantime, I beg leave to withdraw the amendment.

Amendment 5 withdrawn.

16:45

Amendment 6

Moved by

[Baroness Bowles of Berkhamsted]

6: Clause 1, page 2, line 3, at end insert—
“(6) When discharging its functions in respect of the exercise of recapitalisation payments under this section, the Bank of England must observe the competitiveness and growth objective.(7) The competitiveness and growth objective is facilitating, subject to aligning with relevant international standards—(a) the international competitiveness of the economy of the United Kingdom (including in particular the financial services sector), and(b) its growth in the medium to long term.”

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I will speak principally to Amendment 7 in this group, which has also been signed by the noble Baronesses, Lady Vere and Lady Noakes. Amendment 6 was my first attempt, when I was worried that defined first and secondary objectives were not already specified in connection with resolution. In fact, there are a whole load of objectives that have to be balanced in Section 4 of the Banking Act 2009. However, I then hit upon the formulation of claim 7, to make it agree with how it had been rendered in FiSMA 2000. I am suggesting that this is a secondary objective to all the existing ones, and the formulation is the one with which we are already familiar.

We on these Benches are not always certain of the merits of the competitiveness and growth objective, which is what I am inserting into the Bill here, in respect of the resolution authority. Our concern is that in other places, it might return to too much of the animal spirit that led to the financial crisis, but here, it has a different and particular role. The Bank has to balance all the Section 4 objectives to get the best results, and, in its resolution capacity, it is not really in a situation to be prey to animal spirits.

When it comes to the Financial Services Compensation Scheme as a source of funds, as we have already said, there are no bounds, or at least no written ones. How many dips into it can be made if the first one is not enough? How big can those dips be, compared to what might have been needed to compensate depositors if the Bank had gone bust instead? What happens if there are multiple resolution events in a narrow period of time? For how many years can the extra levy be put on to the banking sector in order to pay back the scheme? As the noble Baroness, Lady Noakes, has said before, how can we be certain that, years later, it is not called upon again in connection with some kind of legal action?

All these things are left open for the Bank of England resolution authority to decide and to do its best on. It will, of course, receive advice from the PRA, which has to consider what is an affordable levy for the industry, but it is receiving advice from a body which has in one sense just failed, and to which it is always close. It is advice that it does not actually have to take, either.

The only lever—other than the one suggested in the amendment of the noble Baroness, Lady Noakes, a requirement to minimise cost—is to impose the objective of competitiveness, which in this instance means affordability, and for that to be imposed on the resolution authority itself. It is secondary to everything else, so it cannot kick the other objectives into touch in any way; it is just making sure that there is a small reality check about what this does to other banks, especially in the circumstance that this is not the only bank or that this is not the only dip into the fund.

So, this is an instance where the secondary competitiveness and growth objective is relevant, and I hope the Minister can see his way to accepting it. If not, I shall probably seek to test the opinion of the House. I beg to move.

[Baroness Noakes (Con)]

My Lords, I have Amendment 16 in this group and added my name to Amendment 7, to which the noble Baroness, Lady Bowles of Berkhamsted, just spoke. As she indicated, the two amendments are related in that the imposition of unnecessary costs, which is the target of my Amendment 16, will do nothing to help the financial sector grow, be competitive or, indeed, support the real economy.

I fully supported the growth and competitiveness objectives introduced for the PRA and the FCA in the Financial Services and Markets Act 2023, and I am very glad that the Chancellor of the Exchequer has given her support to those. But I hope that the Government will want to go further and make all regulators, and indeed all other public sector bodies, pay attention to growth and competitiveness. Extending this to other organisations is important, particularly in the financial services universe, as they were not included within the competitiveness and growth objective in the 2023 Act.

One of those omitted at that time—perhaps we should have spotted it during the passage of the Financial Services and Markets Act—was the Bank of England in its capacity as a resolution authority. The noble Baroness, Lady Bowles, has had to confine her amendment to the use of the bank recapitalisation power because of the Long Title of the Bill. But the competitiveness and growth objective ought to apply to the Bank as the resolution authority in toto, not simply when it exercises the new bank recapitalisation power but also when, for example, it is setting MREL levels.

My Amendment 16 adds a special resolution objective to the seven already listed in Section 4 of the Banking Act 2009, and it requires the Bank to consider the minimisation of costs borne by the financial sector when the recapitalisation power is used. It is not an absolute requirement, as it would be just one of eight objectives, and it is for the Bank to determine, under the 2009 Act, how to balance those various objectives.

When it is using the power, the Bank is playing with other people’s money. Ultimately, it is the money of those of us who are customers of the banks, because at the end of the day the money that flows through the banks will end up being borne by customers, and it is only right that the Bank should have regard to the minimisation of costs that are ultimately borne by the banks’ customers.

In Committee I tabled an amendment that focused on the costs being borne through the FSCS not exceeding the counterfactual of the bank insolvency procedure to which the Bank should be paying regard in any event. My amendment today is a less complex test and is simply designed to act as a reminder to the Bank that it should treat other people’s money as carefully as it treats its own. If it does that, it should also help to keep the sector competitive and to help it grow. I hope that the Minister will agree that this amendment is right in principle and that it responds to a number of concerns expressed by several respondents during the consultation on the power over the last year or so.

[Lord Vaux of Harrowden (CB)]

My Lords, I support both the amendments in the names of the two noble Baronesses who have just spoken. I probably have a slight preference for Amendment 16 on the expenses—it is more direct—but we need something in the Bill that reminds the Bank of England that it is spending other people’s money, and that it needs to do that carefully and with care. These amendments are aimed primarily at that end, so I support them both.

[Baroness Kramer (LD)]

My Lords, I will speak briefly in support of Amendment 7 in the names of the noble Baronesses, Lady Bowles, Lady Noakes and Lady Vere, but I am not as minded to support Amendment 16 for the following reasons. Some in this House will know that I dislike intensely the competitiveness and growth objective that has been attached to the PRA and the FCA. If you were going to set out a pattern to repeat the crash of 2007-08, those two objectives would be essential paving stones on that route, so I do not look to attach that particular amendment to the Bank of England in its overall resolution role in, for example, setting MREL. It should be setting MREL to reduce risk, not to follow the lowest common denominator in the international banking arena.

Ironically, if you take the growth and competitiveness secondary objective and just apply it to recapitalisation, it turns on its head and becomes a risk-reduction tool, because it basically limits the ability of the collapse of one bank to then infect all the other banks within the system. That seems to me to be a risk-reduction strategy, so I am very much in favour of the way in which it has been crafted under Amendment 7. I say that to reassure others in this House who may be afraid that playing fast and loose with the competitiveness and growth agenda is always a risk-increasing agenda rather than a risk-reduction agenda. In this narrow role, it works in the opposite direction.

[Baroness Vere of Norbiton (Con)]

I rise briefly to speak to Amendment 7 in the name of the noble Baroness, Lady Bowles of Berkhamsted, and Amendment 16 in the name of my noble friend Lady Noakes.

On Amendment 7, I will not reiterate the points raised. I deeply appreciated the explanation by the noble Baroness, Lady Kramer, as to how she got to her supportive position. From our perspective, we feel that Amendments 7 is a reasonable objective that would ensure the Bank facilitates the international competitiveness of the UK economy and economic growth in the medium term—that is very clear. It also has the ability to look at the level of risk within the banking sector over the medium term. Given the Government’s stated objective of focusing on economic growth, I am very interested to hear the Minister’s view on these amendments.

Amendment 16 in the name of my noble friend Lady Noakes, which I have signed, seeks to minimise the net costs recouped from the banking sector via this mechanism. Again, it is a very sensibly drafted amendment that would improve the Bill, and I look forward to hearing the Minister’s response.

[Lord Livermore (Lab)]

My Lords, I start by noting that the Government fully understand the concerns raised by noble Lords regarding the objectives the Bank of England should adhere to when taking resolution action.

Amendments 6 and 7 tabled by the noble Baroness, Lady Bowles, seek to ensure that the Bank of England considers growth and competitiveness when using the new mechanism, by introducing a new objective that the Bank of England would need to consider. In the case of Amendment 6 this would be alongside the existing special resolution objectives, while in the case of Amendment 7 it would be a secondary objective. This objective would be to facilitate the competitiveness and growth of the UK economy, subject to aligning with relevant international standards.

I appreciate wholly the intent of the noble Baroness’s amendments. The Government have reflected carefully on this issue in the weeks running up to Report. Growth and competitiveness are, of course, fundamental priorities for this Government. The Government are resisting these amendments because, while we understand and appreciate their intent, they would pose challenges within the specific context of this Bill. I intend to make three main points—about the wider context of the Bill; the particular challenges a new objective may pose in the case of the new mechanism; and the steps the Government are taking to ensure that costs to industry are properly considered.

First, I note that the aim of the Bill is to enhance the resolution regime, but in a way that avoids making more fundamental changes to the regime or to the way in which the Bank of England exercises its resolution powers. This reflects a key conclusion from the Government’s consultation, which is that the regime already broadly works well. This was demonstrated by the successful resolution of Silicon Valley Bank UK.

As noble Lords are aware, the resolution regime has been developed over a number of years to align with international best practice. The relevant authorities have invested considerable time and energy in contingency planning to use the existing powers within their existing framework of objectives. As it stands, the regime therefore reflects a carefully calibrated judgment about the key priorities that should be considered in what is an emergency, firm-specific failure scenario.

17:00

This takes me to my second point, about the drawbacks of applying an additional objective, whether primary or secondary, for use of the new mechanism. I note that the noble Baroness’s amendments are intended to apply only when the mechanism in the Bill is used and would not apply to the resolution process as a whole. I understand that this reflects a reasonable concern that the mechanism has cost implications for the sector as a whole and seeks to ensure that those are properly considered.

However, the Government’s view is that having a specific additional objective related to the mechanism could impede and complicate the use of the mechanism in a way that would not best serve the public interest. When managing a firm failure and considering use of the new mechanism, the Bank of England will likely need to take a decision at pace in a highly complex and uncertain environment. In practical terms, it may not have the time or the information necessary to make a full assessment of the impact of using the new mechanism on growth and competitiveness. This is normally achieved by a careful process of consultation and deliberation, something that is unlikely to be possible in this scenario. Therefore, having a new obligation, but not necessarily having sufficient time or information to consider it in detail, would likely increase risks to the Bank in using the new mechanism, even if it became quite apparent that it was in the public interest.

At this point I note that this is distinct from the regular policy-making of the PRA and FCA, which do have a secondary growth and competitiveness objective, but one that is applicable only in the context of their general rule-making and policy-making roles. The Government are strongly committed to the broader secondary growth and competitiveness objectives for the financial services regulators and welcome the publication of the FCA’s and PRA’s reports on how they have embedded these objectives.

It would be quite different to say that something akin to the PRA’s and FCA’s secondary growth and competitiveness objective should apply to the Bank of England when taking urgent crisis management action in relation to an individual distressed or failing firm using this specific mechanism. That reflects the different nature of the decisions that the regulators take in the context of their general rule-making and policy-making roles compared with the resolution authority, which has to act quickly and decisively in a crisis, with limited information.

The Government believe that there are likely to be challenges in imposing a new objective when considering the new mechanism as, by its nature, it will reduce the weight placed on the other objectives. A key policy principle behind the new mechanism is that it is not in itself a new resolution strategy; rather, it provides additional optionality to implement existing strategies. In the cases where its use is contemplated, the alternative options could be the use of taxpayer funds or a disruptive insolvency. In that context, the Government continue to believe that the decision to use the new mechanism should be guided by the same objectives and on a consistent basis as all other resolution decisions. If not then the bar to using the mechanism may be implicitly higher than other alternatives. As I have noted before, the Government have set out their clear view that it would be undesirable for any costs in these scenarios to fall on the taxpayer.

Reflecting the points that I have made, adding a broader objective to the regime as a whole is clearly a complex matter that would require consultation with industry, the regulators and others. I therefore suggest that this issue may not be best solved by this Bill.

Finally, I appreciate noble Lords’ broader concerns about the costs of the new mechanism for the financial services sector, which has guided some of our debate on these and similar amendments. For this reason, the Government have, through tabling amendments and publishing draft updates to the code of practice, sought to clarify how the Bank of England would consider these costs when assessing the resolution conditions and to enhance transparency and accountability. As a public authority, the Bank of England is under general public law duties to ensure that, for any decision that it makes, it considers whether the impact on a firm or group of firms is proportionate to the outcome sought. Through their other amendments and the changes to the code, the Government will ensure that the Bank of England is subject to ex post scrutiny of its actions via the reports that it will need to make to the Chancellor. Given that the potential impacts on growth of any resolution action—or the absence of it—will take time to materialise, the Government believe that this form of accountability is likely to be more effective.

As noble Lords will appreciate, it is important to strike the right balance between ensuring that the Bank of England can respond quickly and flexibly to a firm failure and that any impacts on growth and competitiveness are properly considered. I hope that I have provided a helpful explanation of the Government’s views on this issue, and respectfully ask the noble Baroness not to press her amendment.

I now turn to Amendment 16, tabled by the noble Baroness, Lady Noakes. This amendment seeks to introduce a new objective into the special resolution regime to ensure that costs to the Financial Services Compensation Scheme are minimised when the new mechanism is used. The effect of this amendment would be to require the Bank of England to ensure it draws down as little as possible from the Financial Services Compensation Scheme when deploying the new mechanism.

While I appreciate what the noble Baroness is trying to achieve with this amendment, and noting that it takes a different approach from the similar amendment she tabled at Grand Committee, the Government’s view remains that adding such a new objective could complicate matters for the Bank of England in using the new mechanism alongside stabilisation powers. This is for similar reasons to those I already touched on in relation to the amendment tabled by the noble Baroness, Lady Bowles, although there are some important differences in this case.

First, it is important to draw a distinction between what is necessary to achieve resolution in the public interest and what may minimise costs for the Financial Services Compensation Scheme. The risk is that this amendment could lead the Bank of England to consider drawing down less than may be appropriate to sustain market confidence in the firm in resolution and meet the other special resolution objectives. Further, adding this objective may make it more challenging to meet the resolution conditions when using the new mechanism, which could deter use of the mechanism in the first place, even where it was justified and in the public interest.

Paragraphs 26 to 32 of the draft updates to the code of practice provide a detailed explanation of how the Bank of England would be required to assess the costs to the Financial Services Compensation Scheme, including the likely costs in an insolvency counterfactual. It is of course right that the Bank of England should not impose any more costs on the wider banking sector than it needs to in order to meet the special resolution objectives when deploying the new mechanism. However, the Banking Act 2009 requires all the resolution objectives to be balanced as appropriate in each case. This amendment could therefore dilute the other special resolution objectives. This comes into sharpest relief concerning public funds, as these may be the primary source of alternative funding in the absence of the new mechanism.

In considering this matter, it is important to strike the right balance between ensuring the Bank of England can respond quickly and flexibly to a firm failure and ensuring costs to industry are properly considered. Having considered this, the Government concluded that the existing public interest test and special resolution objectives remained the appropriate framework for deciding whether the mechanism in this Bill could be used.

Adding a specific objective for the Bank of England to ensure the costs to the Financial Services Compensation Scheme are minimised could prevent it taking the most appropriate action to advance its broader resolution objectives. Those objectives include protecting financial stability, certain depositors and public funds. It is right these aims are prioritised at a time of significant risk, and this is part of the reason why the Government have not proposed changes to the broader resolution framework. Of course, as a public authority, the Bank of England would be under an obligation to ensure that any drawdown from the Financial Services Compensation Scheme ought to be sensible and proportionate and in keeping with public law considerations for it to act in a reasonable and proportionate way.

I note at this point that, as set out in the Government’s cost-benefit analysis, while highly case-specific, it is expected that the costs to industry from using the new mechanism are likely to be lower than in insolvency.

As I said, I appreciate the intent behind the noble Baroness’s amendment. The Government have reflected on the points raised by her and other noble Lords at Grand Committee regarding scrutiny and transparency of the Bank of England’s actions, with respect to costs to industry. As I have mentioned at previous stages of this Bill, there are a number of important safeguards within the regime to ensure costs to industry are proportionate and affordable. Notably, the Bank of England must consult with the PRA when considering resolution action. The PRA plays an important role in the resolution process by determining what is affordable for the sector to be levied, and it will continue to have this role under the new mechanism. The PRA also has an important primary objective to ensure the safety and soundness of firms, meaning the affordability of any levies is something it would consider very carefully.

We have, of course, debated today the reporting requirements that will be placed on the Bank of England and the expectation that it will disclose the estimated costs to industry of the options considered in the final reports it must provide. The Government believe this approach is the best means to ensure the Bank of England is held to account for its actions and to ensure it demonstrates that any costs to industry that arise are reasonable.

Finally, the Bill includes a clear provision that allows any funds that are not needed in resolution to flow back to the Financial Services Compensation Scheme. This means that, in the event the Bank of England draws down more than eventually turns out to be necessary, any excess funds can be returned.

I hope I have provided some explanation to the noble Baroness of the Government’s position on this matter, and I respectfully ask that she not press her amendment.

[Baroness Bowles of Berkhamsted (LD)]

I thank the Minister for his explanation. I have some sympathy for the position in which he finds himself, which is the usual one with the Bank of England: you cannot touch it or interfere with it, and it is infallible. You cannot occupy its mind with even a tiny other thought, as it might distract it from the resolution that it has in mind. I find that quite concerning.

Yes, we have the code of conduct and other things that are not in the Bill, but we are dealing with something a little different here. It is ruled by a public interest test, but what about the private interest test? You are using private funds to replace public funds, so there is a big difference. Some little corner of the mind of the Bank of England’s resolution authority has to register that point: private funds are replacing public funds—a special tax on the banking sector to help keep its competitors going.

Imagine you started doing this with grocery stores; what would they think about it? It is quite remarkable. It is not using private funds, by agreement, for a deposit guarantee in the public interest—that would be a specific amount that has previously been agreed—it is stretching the piece of elastic when you do not know how long it is and you are not prepared to have another little test. I find that unacceptable. Something is needed there.

I intend to press my Amendment 7 to a vote and to beg leave to withdraw Amendment 6. If the Minister can find a better way of doing that—this is a private interest test to go alongside the public interest test—he might come up with a better amendment, but this was the best that I could find for now, just to put something in the Bill that shows that we acknowledge what we are doing. This is a momentous precedent, and to say that we cannot have something in the Bill that acknowledges that is a very bad state of affairs. Where will it take us next? I beg leave to withdraw Amendment 6.

Amendment 6 withdrawn.

Amendment 7

Moved by

[Baroness Bowles of Berkhamsted]

7: Clause 1, page 2, line 3, at end insert—
“(6) As a secondary objective to the special resolution objectives in section 4 of the Banking Act 2009, when discharging its functions in respect of the exercise of recapitalisation payments under this section, the Bank of England must observe the competitiveness and growth objective.(7) The competitiveness and growth objective is facilitating, subject to aligning with relevant international standards—(a) the international competitiveness of the economy of the United Kingdom, and(b) its growth in the medium to long term.”

[Baroness Bowles of Berkhamsted (LD)]

I wish to test the opinion of the House.

17:13

Division 2

Ayes: 125

---

Liberal Democrat: 57
Conservative: 49
Crossbench: 13
Non-affiliated: 3
Ulster Unionist Party: 2
Democratic Unionist Party: 1

Noes: 155

---

Labour: 127
Crossbench: 20
Non-affiliated: 6
Plaid Cymru: 2

17:24

Amendment 8

Moved by

[Lord Livermore]

8: After Clause 1, insert the following new Clause—
“ReportingIn the Financial Services and Markets Act 2000, after section 214E (as inserted by section 1 of this Act) insert—“214EA Recapitalisation payment: report(1) This section applies where the Bank of England requires the scheme manager to make a recapitalisation payment under section 214E.(2) The Bank must report to the Chancellor of the Exchequer about—(a) the exercise of the power to require a recapitalisation payment to be made, and(b) the stabilisation power and the stabilisation option to which the payment relates.(3) The report (“the final report”) must—(a) comply with such requirements as to content, and(b) be provided within such period or at such time,as the Treasury may specify.(4) The Bank must provide an interim report if—(a) the period specified under subsection (3)(b)is a period of more than 3 months beginning with the day on which the Bank requires the recapitalisation payment in question (“the first 3 months”), or the time specified under subsection (3)(b)is after the first 3 months, and(b) the Bank does not provide the final report within the first 3 months.(5) An interim report must—(a) comply with such requirements as to content as the Treasury may specify, and(b) be provided within the first 3 months.(6) Subject to subsection (7), the Chancellor of the Exchequer must lay each report, and any interim report, before Parliament.(7) The Chancellor of the Exchequer may omit from the report, and any interim report, any information which the Chancellor of the Exchequer considers it would not be in the public interest to publish.”” Member's explanatory statement
This new Clause imposes a reporting requirement on the Bank of England when it requires a recapitalisation payment to be made.

[Lord Livermore (Lab)]

I beg to move.

Amendment 9 (to Amendment 8)

Tabled by

[Lord Vaux of Harrowden]

9: After inserted subsection (5) insert—
“(5A) Unless already covered by the final report under subsection (3), the Bank must make a further report to the Chancellor of the Exchequer within three months of the date of the sale to a private sector purchaser of the financial institution to which the recapitalisation payment relates, or the sale, closure or winding up of the financial institution or bridge bank to which the recapitalisation payment relates, complying with such requirements as to content as the Treasury may specify.”

[Lord Vaux of Harrowden (CB)]

My Lords, I have had the opportunity to consider further, based on the discussions that we have had. The Minister made some helpful commitments to discuss the matter further with his boss back at the Treasury and that the issue would be covered in the code of conduct going forward. On that basis, I will not press my amendment.

Amendment 9 (to Amendment 8) not moved.

Amendment 8 agreed.

Amendment 10

Moved by

[Lord Livermore]

10: After Clause 1, insert the following new Clause—
“Notification to Parliamentary CommitteesIn the Financial Services and Markets Act 2000, after section 214EA (as inserted by section (Reporting) of this Act) insert—214EBNotification to Parliamentary Committees(1)Where the Bank of England requires the scheme manager to make a recapitalisation payment under section 214E, the Bank must, as soon as reasonably practicable, notify in writing the chair of each relevant Parliamentary Committee that it has done so.(2)The relevant Parliamentary Committees are—(a)the Treasury Committee of the House of Commons, and(b)the Committee of the House of Lords which—(i)is charged with responsibility by that House for the purposes of this section, and(ii)has notified the Bank that it is a relevant Parliamentary Committee for those purposes.(3)The reference to the Treasury Committee of the House of Commons—(a)if the name of that committee is changed, is to be treated as a reference to that committee by its new name, and(b)if the functions of that committee (or substantially corresponding functions) become functions of a different committee, is to be treated as a reference to the committee by which those functions are exercisable.(4)Any question arising under subsection (3) is to be determined by the Speaker of the House of Commons.”Any question arising under subsection (3) is to be determined by the Speaker of the House of Commons.””Member's explanatory statement
This new Clause requires the Bank of England to notify relevant Parliamentary Committees when it requires a recapitalisation payment to be made.

[Lord Livermore (Lab)]

I beg to move.

Amendments 11 to 13 (to Amendment 10)

Moved by

[Baroness Noakes]

11: In inserted subsection (2) leave out paragraph (b) and insert—
“(b) the Financial Services Regulation Committee of the House of Lords”

12: In inserted subsection (3), leave out “The reference to the Treasury Committee of the House of Commons” and insert “A reference to a committee in subsection (2)”

13: In inserted subsection (4), at end insert “, in relation to committees of the House of Commons, and
(b) the Chairman of Committees of the House of Lords, in relation to committees of the House of Lords.”

Amendments 11 to 13 (to Amendment 10) agreed.

Amendment 10, as amended, agreed.

Amendment 14

Moved by

[Lord Livermore]

14: After Clause 2, insert the following new Clause—
“Code of practiceIn the Banking Act 2009, in section 5 (code of practice), after subsection (2) insert—“(2A) The code must include guidance on the contents of a report, and of any interim report, under section 214EA of that Act (recapitalisation payment: report).””Member’s explanatory statement
This new Clause require the Treasury to include, in a code of practice under section 5 of the Banking Act 2009, provision relating to the content of reports about recapitalisation payments.

Amendment 14 agreed.

Amendment 15

Moved by

[Lord Vaux of Harrowden]

15: After Clause 2, insert the following new Clause—
“Treatment of recapitalisation payments on a winding up(1) In section 215 of the Financial Services and Markets Act 2000 (rights of the scheme in insolvency), after subsection (2A), insert—“(2AB) Any recapitalisation payment made by the scheme manager under section 214E in respect of a bank, building society or investment firm is to be treated, in the event of such bank, building society or investment firm or associated bridge bank being wound up, as a debt due to the scheme manager from that bank, building society or (as the case may be) investment firm.”(2) In Schedule 6 of the Insolvency Act 1986 (categories of preferential debts), after paragraph 15AA, insert—“15AB Any debt owed by the debtor to the scheme manager of the Financial Services Compensation Scheme under section 215(2AB) of the Financial Services and Markets Act 2000.””Member's explanatory statement
This amendment creates a mechanism that would allow the FSCS to recover its money in preference to creditors who would otherwise have no right to be bailed out. This mirrors the existing treatment of stabilisation payments made by the FSCS in Clause 215 (2A) of FSMA 2000.

[Lord Vaux of Harrowden (CB)]

My Lords, we come to the end of this process; I am sure everyone will be relieved. I rise to speak to my Amendment 15, which is a somewhat technical and perhaps even slightly nerdy amendment, but it deals with an important wrinkle within this Bill.

When a failing bank is recapitalised under this Bill, the money is paid, by the Financial Services Compensation Scheme, partly to the Bank of England to cover the costs of the Bank and other parties, and the rest is then injected, as equity, into the failing bank by the Bank of England. In the case of the Bank putting the failing institution into a bridge bank, the recapitalisation is intended to cover the likely costs of the bridge bank for a full year. This has some quite important unintended consequences.

To give a simple example, if it is expected that the bridge bank will be sold quickly, but this does not happen for some reason, and, shortly afterwards, the Bank of England decides to put it into insolvency, it would still have a year’s worth of Financial Services Compensation Scheme money injected into it. We could then have a situation where that money gets used to pay off the liabilities of the bridge bank; these would be liabilities that, had it gone into insolvency in the first place, would not, and should not, have been paid.

This has two consequences. First, creditors who would otherwise have received nothing may get paid out just because of the recapitalisation. That is not the intention of this Bill, but it is the consequence. Secondly, it becomes highly unlikely, if not impossible, that the FSCS could ever recover any of its money in such a situation; it would be last in line to receive the money, after everyone else has been paid off, because its money would have been turned into the equity of the bank. Again, that does not feel right.

Clause 2 sets out that the Bank of England must reimburse any part of any recapitalisation payment that is not needed to cover the costs and expenses of the resolution. However, what I have just explained means that in reality Clause 2 is, in effect, redundant. There is no realistic chance, as it is structured, that any money could ever be recovered for the FSCS. It would go to pay off the creditors who should not otherwise have been paid off.

17:30

My Amendment 15 would fix that problem but, after discussions with the Minister and others, I am persuaded that there are complications. It is important that the bridge bank—the failed institution that is being recapitalised—should be able to obtain money from elsewhere. Giving the FSCS preferential treatment in such situations could make it more difficult to get further money, although I think that could be dealt with by changing the order in which things get repaid.

There is also the question of the tail. In my amendment as drafted, that would stay on the books of the failed institution for ever, even if two years later it was bought by another bank. Again, I believe that could be fixed, but fixing those things could become very complicated. So I am not going to press Amendment 15, but I hope the Minister will keep this problem in mind and keep it under review.

There is a potential solution, which the noble Baroness, Lady Noakes, referred to in the first group. In a sense, we have gone full circle. When a failing institution is transferred to a bridge bank, the default position should be that only the assets and the business of the bank—along with only very clearly defined liabilities, such as the protected deposits—are transferred to the bridge bank, and not the equity of the failing institution. That would define and limit the creditors that could be repaid out of the FSCS money in my example, and would make it much more likely that some money in that example might be recouped for the FSCS. A transfer of the equity of a failing institution into a bridge bank should happen only if there are very clear and exceptional reasons for doing so, with the implications for the FSCS of doing so being very clearly recognised.

That approach would have the additional advantage of dealing with the question of unexpected costs, such as legal actions—the point made earlier by the noble Baroness, Lady Noakes—taken against the failing institution. If only the business and assets were transferred, that would reduce the risk of such actions and increase the certainty of the outcome of the resolution. That could be achieved in the code of practice.

I am not going to press my amendment but I hope the Minister recognises that there is a genuine issue here, will keep it under review and will consider amending the code of practice in that respect. I beg to move.

[Baroness Noakes (Con)]

My Lords, I added my name to the amendment but I am glad that the noble Lord, Lord Vaux, will not be pressing it because, as he explained, there are difficulties with it.

I pay tribute to the noble Lord for chasing this issue down because it is a very real issue that could arise in certain defined circumstances, as he explained. I am not convinced that the solution of simply transferring assets into the bridge bank actually works. The complexities of a bank mean that you have liabilities—that is how you fund yourself from market sources—and in practice it may well be difficult. I hope the Government will take this away and find a way of minimising the likelihood that that ever happens, whether in the code of practice or otherwise, in discussion with the Bank of England.

[Baroness Kramer (LD)]

My Lords, the point that the noble Lord, Lord Vaux, has been making is significant and crucial in shaping the way in which the Bank of England approaches the resolution of banks when they fail.

Unlike the noble Baroness, Lady Noakes, I think there is a potential path of looking at the sale of the assets rather than the sale of the equity. That is the normal practice that one would follow in order not to transfer liabilities over to the new recovering entity. I fully understand all the complexities, and I hope the Minister will take this up with the Bank of England in his discussions. It requires a lot more work but it could get us out of some very nasty traps in future, and it will be more likely to do so if there has been thought beforehand rather than it being a reaction in a situation of emergency.

[Baroness Vere of Norbiton (Con)]

I wholeheartedly support the noble Lord, Lord Vaux, in his work in this area. Over the course of our scrutiny of the Bill, we have had some happy and quite nerdy discussions around this amendment. It is clear to me that it is a complicated situation. There is clearly an issue to be solved, but unfortunately the issue may not be exactly the same for each case of resolution that one might be addressing, so it needs further thought.

I am pleased that we will not be voting on this, but I impress upon the Minister that if there is something we can do in this area, whether that be in the code of practice or by other mechanisms, it is important. It is unconscionable to me that, because a particular entity goes down the route of resolution rather than insolvency, certain creditors could be significantly better off. That cannot happen and we must do something about it.

[Lord Livermore (Lab)]

My Lords, the amendment tabled by the noble Lord, Lord Vaux, seeks to give the Financial Services Compensation Scheme rights with respect to the recapitalisation payment, in the event that the firm in resolution is subsequently placed into insolvency or wound up, by then requiring it to be treated as a debt. It also seeks to grant the Financial Services Compensation Scheme super-preferred status in the creditor hierarchy with respect to that debt, enabling it to recover that claim in an insolvency process before other unsecured creditors, uncovered depositors and shareholders.

I am grateful to the noble Lord for the constructive engagement that I have had with him on this matter prior to this debate, and I am especially grateful for his time and expertise on it. I assure him that my officials and I have spent considerable time considering the concerns that he raises, and I shall set out the Government’s position.

The Government’s concern about the amendment is that it could frustrate the primary intention of the Bill to achieve recapitalisation in a way that restores financial stability and, as such, could potentially result in the resolution failing. The Government’s view is that the amendment could create uncertainty as to how such a payment would be perceived by the market when a firm was operating, rather than only in the unlikely circumstance of the firm winding up.

The effect of the amendment would be to create a shadow claim on the recapitalisation. Potential purchasers, investors and unsecured lenders to the firm would be aware that in the event of insolvency a new debt would materialise above them in the creditor hierarchy. Indeed, the shadow claim would follow the firm in perpetuity for as long as it was a going concern, even after the resolution was complete and the firm had been sold to a buyer.

It would also follow the firm even where the original shareholders and creditors were no longer involved with the business, creating a series of risks. That raises a number of potential issues. First, it could inhibit the sale of the firm in resolution. While the insolvency position would not be a primary consideration for potential buyers, it would naturally be part of the potential purchaser’s due diligence to understand the risk to its investment in a subsequent failure. That risk may be substantially greater with the existence of this debt, which may in turn impact potential interest in purchasing the firm and any purchase price.

Secondly, both while the firm was in the bridge bank and once it had been sold, current and potential future creditors and investors in the firm could be deterred from investing in and engaging with the firm for similar reasons. That would frustrate a key goal of the resolution, which is to maintain continuity. For example, uncovered depositors would have an additional incentive to withdraw deposits as they may perceive a potential risk to the seniority of their claim in insolvency. Thirdly, it could potentially undermine restoring market confidence in the resolved firm.

As a result of the issues that I have outlined, the amendment could make it more expensive to run the firm, putting it at a competitive disadvantage. It may perpetuate the circumstances that the resolution is intended to address; namely, uncertainty around how and to whom potential future losses would fall. It may also make it difficult to secure the agreement of directors, who may not be comfortable running a firm under such a shadow while it was in a bridge bank.

In addition, existing legislation means that instruments may currently be classified only as common equity tier 1, the highest form of capital, if they are not subject to any arrangement, contractual or otherwise, that enhances the seniority of claims in insolvency or liquidation. The noble Lord’s amendment would mean that a capital injection arising from a recapitalisation payment under the Bill may not count as the highest form of capital, as it creates a seniorised claim for the Financial Services Compensation Scheme in the event of a subsequent insolvency. That brings into doubt whether it would have the desired effect of restoring market confidence in the firm.

Overall, the effect of granting the Financial Services Compensation Scheme a super-preferred claim over the recapitalisation payment, even if only at the point of insolvency, would be to increase the risk of the resolution not achieving its objectives. Therefore, while the Government absolutely understand the noble Lord’s concerns, we have concluded, for the reasons I have outlined, that the amendment may end up doing more harm than good.

I appreciate that this is a matter that the noble Lord feels extremely strongly about, but I hope this explanation has provided some clarity over the risks attached to the amendment and that as a result he feels able to withdraw it.

[Lord Vaux of Harrowden (CB)]

My Lords, I thank every noble Lord who has taken part in this short debate. It is a fairly nerdy and technical subject, and the Minister has just described very well why it is a complicated situation. I am sorry that he was unable to say that the Government would keep it under review —to keep an eye on the situation—because there is a problem. This process could lead to creditors being preferred unreasonably over the FSCS money in some circumstances, and that is not desirable. It comes back to some of the moral hazard points that the noble Lord, Lord Sikka, made earlier as well, albeit in a different context, so I am sorry that the Minister was unable to say anything on that front.

I agree with the Minister that it is complicated and that there probably are unintended consequences to my amendment. I again urge him to keep this under review and to look at whether anything might be done on it under the code of conduct. On that basis, I beg leave to withdraw the amendment.

Amendment 15 withdrawn.

Clause 4: Amendments to the Banking Act 2009

Amendment 16 not moved.

Water (Special Measures) Bill [HL]

Committee stage
Monday 4th November 2024 Lords Chamber

Committee (3rd Day)

Welsh legislative consent sought.

17:41

Clause 6: Automatic penalties for certain offences

Amendment 69 not moved.

Amendment 70

Moved by

[Lord Roborough]

70: Clause 6, page 10, line 35, at end insert—
“(8A) All fines imposed on the undertaker or its employees under this section by—(a) the Secretary of State,(b) the Welsh Ministers, or(c) another relevant authoritymust be gathered together and once per annum be used to reduce all customers’ bills by an equal amount per customer.(8B) Any reduction applied under subsection (8A) must be separately disclosed within the customer’s statement of account.”

[Lord Roborough (Con)]

My Lords, I welcome the noble Baroness, Lady Bakewell of Hardington Mandeville, back to her place. Her contributions have been missed on earlier days in Committee.

The main focus of the Bill is on improving the health of our rivers, and that aim will likely lead to a larger number of punishable offences. In its manifesto, Labour set out its plans to impose severe fines on water companies that failed to meet the expected standards, but it did not establish what would be done with that additional income. Amendment 70 seeks to put in place a system whereby the fines imposed on water companies and their employees—by this Government, the devolved Governments or, in fact, any other relevant authorities—are collected. Then, once a year, the income from these fines could be used to reduce customer bills.

In government we created the water restoration fund, which sees the money collected by the Treasury from fines and penalties and then channelled into improving the water environment. However, we sit here today with consumers facing pressure on their water bills as part of the inflationary environment that has created the cost of living crisis, as well as the cost of investing to improve water quality. It seems appropriate that fines and penalties should be returned to those consumers and identified by a separate line in their bills, making it clear that the regulator is taking action to punish wrongdoing and that money is returned to the consumer as a consequence.

An amendment such as this would benefit so many individuals and resolve how additional income from stricter fines is applied. It is not a subject that the Bill adequately addresses, as the noble Baroness, Lady Bakewell of Hardington Mandeville, has recognised in other amendments. Does the Minister agree that the money from the fines should be used to benefit the consumer through mechanisms such as the water restoration fund that we implemented when in government or by using the sum to reduce customer Bills, as this amendment suggests? As such, will the Minister confirm that the penalties will not return to the Treasury under this Government? I beg to move.

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, I apologise to the Committee and the Minister for my absence on the first and second days in Committee. I regret that an attack of Covid meant that I was confined to quarters and unable to travel to London. I did, however, watch the debate on both days on parliamentlive.tv and was therefore able to hear the nuances of the contributions, which you do not always get by reading Hansard. I thank the noble Lord, Lord Roborough, for his comments.

A seminar of all the devolved Administrations once a year, to discuss how to return all fines to the relevant customers, will do nothing to fix the problems of inadequate investment in crumbling and inadequate infrastructure. I am sympathetic to the need to keep customers’ bills to an acceptable level. Consumers should not have to pay for the inadequacies of the water boards to ensure that problems are fixed. I do not see why an annual gathering of the devolved Administrations or other authorities will be sufficient to refund bill payers in a timely fashion.

17:45

On these Benches, we believe that setting up a water restoration fund is a much more effective and transparent way of moving forward. It is also more likely to see the necessary investment in infrastructure carried out in a timely fashion. I will listen to the Minister’s response. However, I do not feel certain that she will give this amendment a positive welcome.

[The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Baroness Hayman of Ullock) (Lab)]

My Lords, I thank the noble Lord, Lord Roborough, for raising this important issue and tabling Amendment 70, which speaks to the administration of fines. I too welcome the noble Baroness, Lady Bakewell of Hardington Mandeville, back to her rightful place. I hope that she is now completely recovered, but I also congratulate the noble Earl, Lord Russell, on doing such a sterling job in her absence.

I emphasise that the money from civil penalties imposed by the Environment Agency and fines issued by the court go to the Government’s Consolidated Fund. This is in line with other enforcement regimes under the Regulatory Enforcement and Sanctions Act 2008. On the use of penalty funds, the water restoration fund, which launched in April this year, is reinvesting water companies’ environmental fines and penalties into projects to improve the water environment. Up to £11 million of funding from fines and penalties accrued since 2022 was made available on a competitive basis to support a range of water restoration projects. Defra is continuing to work with His Majesty’s Treasury regarding the reinvestment of water company penalties and fines, because while the Budget has of course now been announced, decisions have not yet been taken on all departmental spending.

I assure noble Lords that there are existing procedures in place to ensure that customers are reimbursed for poor performance. As the economic regulator, Ofwat sets specific performance targets for water companies and, where these are not met, companies must reimburse customers through lower water bills in the next financial year. I will give an example: as a result of Ofwat’s annual performance assessment process, it is requiring 13 companies to return £157 million to customers for underperformance in the financial year 2023-24.

Ofwat also has powers which ensure that companies return money to customers for failings related to specific breaches. For example, in 2019 Southern Water returned £123 million to its customers as a result of an Ofwat enforcement case. I hope that the noble Lord is therefore content that this amendment is not necessary, as we believe it would duplicate existing protections.

[Lord Roborough (Con)]

My Lords, I am grateful for the comments from the Minister. It is perhaps not the fullest reassurance that I was looking for about the future destination for fines and penalties. Amendment 70 is, by its nature, a probing amendment and I look forward to further discussions with the Minister.

Amendment 70 withdrawn.

Amendment 71

Moved by

[Baroness Hayman of Ullock]

71: Clause 6, page 11, line 9, at end insert—
“(11) Section 5(6) also applies for the purposes of this section.”Member’s explanatory statement
This amendment provides that Clause 6 applies to water supply and sewerage licensees only in relation to their licensed activities.

Amendment 71 agreed.

Clause 6, as amended, agreed.

Amendment 72 not moved.

Amendment 73

Moved by

[Earl Russell]

73: After Clause 6, insert the following new Clause—
“Power to revoke licencesAfter section 17R of the Water Industry Act 1991 insert—“17S Power to revoke licencesThe Authority may revoke a water supply and sewerage licence (WSSL) with six months’ notice.””Member’s explanatory statement
This amendment provides Ofwat with the power to remove a water supply and or sewerage licence with six months’ notice.

[Earl Russell (LD)]

My Lords, this group of amendments is on water company ownership. In preparing for this Bill, my Whips’ Office briefing note said that, in some circumstances, Ofwat could take no fewer than 25 years to revoke a water licence. When I read this, I found it hard to believe that this was the case, so I had to go away and have a look at it myself.

I note that different conditions apply to household water companies and retail or business suppliers, as retail suppliers operate within a different market, and that this is an extremely complex area of legislation. I understand that Ofwat can take up to 25 years to revoke the licence of a water company in some cases where it is in breach of its licence conditions. My amendment is a probing one. I want to be certain that it is possible for licences to be revoked much earlier than 25 years for matters such as sewage spills and failures to invest in infrastructure. I am also interested in looking at whether six months is a feasible timeframe for revoking licences in the cases of the worst sewage spill offenders.

It is unacceptable that, in 2023, for example, water companies dumped 54% more sewage in our lakes, rivers and coastal areas than they did in the previous year. This amounted to some 464,000 incidents and some 3.6 million hours of untreated sewage discharges in England alone, yet few water and sewage discharge licences have been revoked as a direct result of sewage spills.

The Government have given a clear commitment to make improvements, and this Bill contains many measures that we welcome. The framework for these proposed improvements is one where the Government are passing this Bill to bring in more immediate measures in order to hold the water companies to account and to strengthen the powers of the regulators. This is being done now while the water commission undertakes deeper, more fundamental thinking to make further recommendations in due course.

The Government’s argument is based on the belief that Ofwat can be supported, strengthened and remade to be an effective regulator. The arguments I want to discuss relate to the ultimate sanction of revoking water and sewage discharge licences. If Ofwat is to be effective, the ultimate sanction must act as a real deterrent against illegal and improper behaviour. I fully recognise that my suggestion of changing this to six months may not work and may need a rethink; I would be more than happy to discuss this with the Minister if it is of interest. I recognise that there is a need to balance the needs of water companies, their investors and customers, as well as to ensure continuity of supply.

I will be honest: I know that there are many different licences and conditions for revoking them, and that this is a complex area. The conditions for a quick termination, applying to the issues of a special administrator and bankruptcy, are welcome. My concerns relate more to the broader, far from general, form of deterrence for water companies doing what they have been doing up to now with no real comeback, such as siphoning funds off to shareholders while failing to meet the required levels of investments, falsifying self-reporting of sewage discharges and failing to prevent sewage spills.

I want this amendment to lead to a brief discussion on the licence conditions in place now. I seek reassurance from the Government that they will have a look at these powers, look at how they are used in practice and consider whether any changes are required as part of this Bill. I do this as there are no real changes to any of the licence termination conditions; I wondered whether this was a mistake or oversight. The imposition of tougher prison sentences and higher fines are welcome measures, but what happens if these measures alone failed to regulate companies’ behaviour?

For comparison, the revocation of licences in other regulated sectors appears generally to happen on a much quicker timescale. Can the Minister give the rationale behind leaving the 25 years in statute, and can she give examples of Ofwat acting much earlier in relation to lack of investment or pollution incidents? What is the average time for revoking a water and sewage licence?

I beg to move.

[Baroness Jones of Moulsecoomb (GP)]

My Lords, I will speak to three amendments in this group: Amendments 97, 98 and 99. This weekend saw tens of thousands of people marching for clean water in London. It was the most amazing event. It was a chance for me to speak to people who agree with me—as opposed to being here in your Lordships’ House, where not many people agree with me.

[Baroness Bakewell of Hardington Mandeville (LD)]

Oh!

[Baroness Parminter (LD)]

That is not true.

[Baroness Jones of Moulsecoomb (GP)]

I am sorry. Thank you; it is lovely to see the noble Baroness, Lady Bakewell, back in her place.

All three of my amendments are intended to be helpful—that is, to help the Government regulate the water industry properly and end the 30 years of fleecing bill payers while dumping sewage into our waterways. It is an absolutely unforgivable three decades of abuse of the system.

Amendment 97 would prohibit the Government bailing out shareholders and creditors of water companies in the event of special administration. Amendment 98 would allow the Government to take back control with public ownership of water companies, but it is only an option. It is an option that I believe the Government could use as a lever in their negotiations with the water companies, so I think it is worth putting it back in the Bill. Amendment 99 would allow water companies to be put into special administration for failing on environmental issues, such as leaks and sewage spills.

What strikes me about these issues is that the public are demanding that this is sorted, but the Government are giving us half measures. I am concerned that that will not bring the sort of change we need. There is a democratic shortfall here because polls tell us that 82% of the public want to end privatised water, but only a few of us in Parliament are willing to consider it. To me, this suggests that the Government are out of step with the public, which is very concerning for me; I would like the Labour Government to last longer than one term because I really do not want to see another Conservative Government in my lifetime. There is, of course, a fear among many campaigners that this Bill will raise their water bills by enabling the Government to bail out and reward the people who got us into this mess in the first place.

I thank the noble Baroness, Lady Parminter, and the noble Lord, Lord Sikka, for signing Amendment 97. It is essential that the Government do not bail out the water companies in such a way that they simply hand money to shareholders and creditors and let them start afresh, behaving in the same way but perhaps with a little more regulation. Amendment 97 would prohibit this so that the public purse does not underwrite the casino capitalism and financial engineering that has been going on in the water sector. We have a ridiculous situation where the debt is being traded by hedge funds, which are gambling on water bills going up in future to finance a bailout. If these companies fail, let us instead bring them into public ownership and democratic control. The shareholders and creditors took a gamble on greed when the companies used £75 billion since privatisation to pay dividends rather than invest. Let them take the hit.

Amendment 98 would allow the Government to set out how they will bring water companies into public ownership. The Greens are deeply disappointed that the Government have ruled this out. I do not understand any sort of ideological addiction to private ownership of a public service such as this, particularly when it is not even a competitive market. It is a monopoly, and it is time it stopped.

I have heard the Government say that private investment is essential, but it is simple maths that, if we stop paying dividends and debt payments, that frees up 40% of people’s water bills to be invested in fixing the sewerage system and building more reservoirs. The Government have been using overinflated estimates from the water industry—a figure of some £90 billion—to claim that public ownership would be too expensive, but actually, it is the complete opposite: it is privatised water that is too expensive to continue. Water company shareholders have spent decades sucking out the profits while loading debt on to the balance sheets and hiking people’s bills. That is inevitable, as free market economics simply does not work without competition. Thatcher turned a public monopoly into a cash cow for people who are greedy. Unless amended, this legislation does nothing to stop that continuing for another decade. I want the Government to at least have the power to bring the companies into public ownership. If they rule out that option, the Government will make any taxpayer bailout a lot more expensive, as a potential buyer has the upper hand in all negotiations.

18:00

I thank the noble Lord, Lord Sikka, for signing Amendment 99. Water companies have a job to do and, if they fail to do it, we should put them into special administration. That is simple logic that is hard to disagree with. If people across the country are in hospital because rivers and beaches are contaminated by E. coli, that is failure. If fish and wildlife—whole ecosystems—die due to regular sewage dumping, that is failure. If dumping regularly damages tourism in a national park or on a pleasure beach, that is failure. These water company bosses need to know that, if they continue as they have been, that will end with special administration without compensation or with the companies being brought into public ownership. The water companies must either clean up their act or hand over control to somebody who will.

This legislation is a set of political choices, and I am very concerned that the next election will be tough on the Labour Government if this all goes through in the way they seem to predict it will. If they try to get water bill payers to carry the debt from all the decades of privatised failure, that will not be popular with the wider population. So I hope the Government have a proper think about this and make the choices that put them on the side of bill payers and the environment.

[Lord Sikka (Lab)]

My Lords, I will speak to Amendments 97, 99 and 102. I congratulate the noble Baroness, Lady Jones of Moulsecoomb, on her speech. I fully support Amendment 97.

It is interesting that, following an article in the Telegraph, on 19 September, the Government issued a press release in which they said:

“These powers would never be used to pay bondholders, shareholders or creditors … we do not expect customers to pay the price for water companies’ mismanagement … The new measures in the Water Bill will protect taxpayers”.


At the same time, the Explanatory Notes state, on Clause 10, that the Secretary of State “may provide financial assistance” to companies. It is hard to see how these statements can be reconciled. I hope the Minister will tell us what kind of financial assistance the Government envisage providing to water companies while they are being restructured. Their being restructured means that they are already financially, environmentally and morally bankrupt, so why provide financial assistance?

In the debate last week, the Minister said that water companies are “private companies”. If they are, they should be fully exposed to the laws of capitalism, with absolutely no bailout of any kind. Why are we making these special provisions to indulge them and, presumably, write down some of the debt? This was a key assumption made by the last Government in what was code-named Project Timber. Information leaked out that it was talking about how the Government, presumably, may write the debt of Thames Water down to merely 40% of the amount owed.

Whenever we talk about not bailing out shareholders and bondholders, or refer to public ownership, the Government’s immediate response is to say that it will cost billions of pounds. I once again invite the Minister to show me the Government’s calculations—I will happily critique them for free and talk about whether those numbers make any sense. Will the Minister accept my challenge and please publish the numbers?

The Government also say that it would be hard to reintegrate the companies. We are doing it for railway companies, so why can we not do it for water companies? What exactly would be the hardship? Every day, there are numerous mergers and takeovers in the corporate sector, and they are easily integrated and rewired. I hope that the Minister will explain this. I would particularly like to see the calculations of what the cost of public ownership would be, so that we can then start looking at this and talking about the optimum solution.

I hope the Minister will not refer me, as she did previously, to the 2018 Social Market Foundation report. It fetched a number out of thin air and said it was worth about £90 billion—the following year, this was contradicted by Moody’s, which said it was only £14.5 billion. Since then, as we know, a lot of shares of water companies have become worthless and the debt has junk status, so it is easy to let the normal rules of capitalism apply.

I support the noble Baroness, Lady Jones, on Amendment 99. I will say a little more about Amendment 102. Currently, water companies can violate rules and legal limits on sewage dumping ad infinitum. They can easily do cost-benefit analyses and see that it is cheaper to pay fines for illegal practices than to invest in infrastructure and act responsibly. This boosts profits, dividends and executive pay, while the public picks up the cost of unplugged leaks, sewage dumping, health hazards, and the destruction of biodiversity and marine life. To some, such costs are just externalities, but the public sees this as abuse, as clearly shown by yesterday’s mass demonstration in London.

The puny financial penalties have not curbed the predatory practices. The Minister promises us that there will be more and says that the executives may be prosecuted—that is, if they can wait another 20 years to have their cases heard, as there is already a backlog of 60,000 cases in the Crown Court. The result is that the whole industry is now under the control of entities that have criminal convictions. Wastewater companies in England and Wales have been convicted 1,109 times since 1989. The dismal roll-call is as follows: United Utilities has 205 convictions, Thames Water has 187, South West Water has 174, Anglia Water has 128, Yorkshire Water has 125 and Southern Water has 119. Perhaps the Minister would care to name a pristine water company—never mind pristine water, just a pristine water company. That would be helpful.

There are no pristine, honourable, responsible or ethical water companies, but successive Governments continue to indulge them and give them monopolies in an essential public good. What would happen if 10 major food or medicine companies were convicted of 1,109 crimes that they knowingly committed? They would be shut down and consumers would sue them, but regulators in the water industry do no such thing. Indeed, Ministers make excuses, and successive Ministers have done nothing.

My amendment requires that habitual offenders be placed into special administration, if two or more criminal convictions are secured in a five-year period. This is akin to yellow and red cards in football. The first yellow card is a warning, effectively saying, “Don’t do it again. Mend your ways. Clean up your act”. If no heed is taken, the second yellow card, which is effectively a red card, would follow, and the companies would be placed into special administration.

It is often claimed that shareholders are passive. The threat of special administration for abusive practices would encourage them to actively invigilate companies and their boards and take an interest in their governance. For far too long, companies have got away with abuses; my amendment would ensure that there were serious consequences for them. If the Minister does not accept my amendment, can she say how many convictions water companies need before they are considered unfit and improper to own crucial infrastructure?

[Lord Roborough (Con)]

My Lords, I shall speak to Amendment 73, moved by the noble Earl, Lord Russell. I thank the noble Earl, the noble Lord, Lord Sikka, and the noble Baroness, Lady Jones of Moulsecoomb, for their contributions.

On these Benches, we have grave concerns about these amendments. While it is important that the water sector operates with integrity, we fear the amendments may have unintended consequences that could destabilise the industry and ultimately be detrimental to the public and the environment.

On Amendment 73, the power to revoke a water company’s licence is one of great consequence and must be exercised judiciously. An abrupt removal of a licence, without sufficient consideration of the ramifications for infrastructure and service continuity, could leave customers vulnerable and lead to service interruptions. It would also be a very substantial barrier to private sector investment. Investors must be able to have confidence that they will be able to enjoy returns on their investments without elevated risk of loss of licence. Should such an amendment be included in this Bill, it would lead to a much higher cost of capital for the industry and higher consumer bills as a consequence. While we appreciate the intent to hold companies accountable, we suggest exploring whether there are more balanced approaches to achieving compliance, without risking instability.

Amendment 97 raises further concerns. The possibility of cancelling debt in the event of special administration proceedings could create moral hazard. This amendment, while aiming to protect consumers from the fallout of financial mismanagement, might inadvertently incentivise risky financial behaviour by companies under the impression that their debts could be forgiven in times of crisis. The bankruptcy route already allows debt to be repaid in part or renegotiated in an orderly manner, respecting the contractual rights of all creditors. This would not be desirable.

As for Amendment 98, this is a matter of significant complexity. We must not overlook the potential costs and operational challenges associated with such transfers. The water industry requires immense resources, infrastructure investment and technical expertise. A shift to public ownership would strain government resources and create operational challenges. We support the Government in not wishing to see a return to public ownership of the industry.

I wish to address Amendments 99 and 102. These amendments would empower the Government to put companies into special administration if they breached certain environmental conditions or held criminal convictions. While we wholeheartedly support stringent environmental standards and rigorous compliance, it is essential that these mechanisms do not inadvertently undermine the ability of water companies to continue their core operations. The amendments could place companies in special administration for relatively minor infractions, which may not warrant such a severe response.

We must be careful not to adopt measures that could disproportionately impact employees, customers and investors who depend on the water industry. I thank noble Lords for tabling these amendments and regret that we cannot support them—and could not even before the noble Baroness, Lady Jones, gave her views on my party.

[Baroness Hayman of Ullock (Lab)]

I thank noble Lords for the suggested amendment in relation to water company ownership.

I come first to Amendment 73, in the name of the noble Earl, Lord Russell. The intention of the amendment is to provide Ofwat with the power to remove a water supply or sewerage licence with six months’ notice. I want to emphasise that the Government’s priority is to ensure that customers have a safe and stable supply of water. We are concerned that the proposed amendment could jeopardise this.

There are already established measures to replace an existing sewerage undertaker, by way of licence removal, under certain scenarios. For example, while it is true that an undertaker’s appointment is made for a period of at least 25 years, I can reassure noble Lords that it is not true that appointments cannot be terminated until 25 years have passed. If an undertaker cannot carry out its functions, Ofwat has powers to terminate the appointment, provided that a replacement can be identified and that the undertaker consents.

18:15

Our concern about the proposed new clause is that it would create significant uncertainty in the water sector and reduce the willingness of investors to remain in the sector if companies could lose their licence with only six months’ notice. This could deter investment at a time when investment is more needed than ever to deliver the changes that we want to see in the sector.

The noble Earl, Lord Russell, asked for examples of Ofwat requiring companies to fund pollution programmes. A current example is PR24, the programme going through at the moment; it will require billions to improve water company assets, which will reduce pollution incidents. An example of that is the funding of 2,500 storm overflow upgrades.

I hope that the noble Earl understands why we will not be accepting this amendment, but I understand his real concerns and why he has tabled it. If he wants to discuss this further, I am happy to do so.

Amendment 97, in the name of the noble Baroness, Lady Jones of Moulsecoomb, would prohibit the Secretary of State and the Treasury directly or indirectly discharging, assuming or guaranteeing any water company debts during a special administration regime. I emphasise that the exact quantity of debt recouped by creditors, or equity recouped by shareholders, following a special administration is a matter for the court-appointed special administrator. Within this, the special administrator will have to act in accordance with its duties, as well as with the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016, both as modified for the purpose of special administration by the relevant legislation.

When the water company in question exits from special administration via either rescue, such as a debt restructuring, or transfer, such as a sale, it will be for the special administrator to determine the level of repayment, as per its statutory objectives. The level of reductions suffered by creditors in accordance with the repayment priorities is already clearly set down in statute. If noble Lords are wondering about creditors asking for debt to be repaid during the special administration regime, for example, the answer is that they cannot, because there is a moratorium on legal proceedings during an SAR, which takes away creditors’ ability to enforce debt repayments. On the other hand, employees have some protection by being able to recoup certain debts, such as unpaid wages, via the redundancy payments service. I hope that that helps to clarify some of those issues for the noble Baroness, and that she understands why we think the proposed new clause is unnecessary.

I move on to the noble Baroness’s Amendment 98, which looks to confer a power on the Secretary of State to make provision for transferring water companies into public ownership through secondary legislation. The Government have been clear that public ownership is not the right solution to the challenges the water industry currently faces. The cost of nationalising the whole industry would be over £90 billion—this is based on Ofwat’s regulatory capital value figures for 2024. My noble friend Lord Sikka asked for details of the figures, and we are happy to share them with him and with the noble Baroness, if that is of interest.

The noble Baroness’s amendment rightly highlights that shareholders and debt holders must be fairly compensated, but the costs of compensation are high. Nationalising the water industry would clearly put a huge burden on the public purse at a time when public finances are already very stretched. Moreover, there is no evidence that it would fix the root of the problem. We see a variety of ownership models in the UK and internationally, with mixed performance.

It would also take years to transition from the current ownership model. During that time, there would be no action taken at all to fix the acute issues faced by the sector, which noble Lords have already raised at length during our debates on the Bill. If a future Government were to take a different view, it would be more appropriate to make provisions for reform through primary, not secondary, legislation. I thank the noble Baroness for wanting to see a Labour Government for more than one term and I reassure her that the Government are serious about tackling the problems of the water industry: it is why we have set up the review and why we have somebody as serious as Sir Jon Cunliffe to chair that review. We want to make permanent, long-term change in this area.

The new clause proposed by Amendment 99 looks to create a legal obligation for the Secretary of State to apply to the courts to place a water company into special administration should certain conditions be met. Special administration is the ultimate regulatory enforcement tool and, as such, the bar is set high. A water company can already be placed into special administration on performance grounds where it is in such serious breach of its principal statutory duties, or an enforcement order, that it is inappropriate for the company to retain its licence, as set out in Section 24 of the Water Industry Act 1991. We believe that lowering the statutory threshold for special administration on performance grounds would be inappropriate and could impact the investability of the water sector. For these reasons, I hope my noble friend understands why we consider her amendment to be unnecessary.

Finally, Amendment 102, tabled by my noble friend Lord Sikka, would create a new performance ground for applications for companies to be placed in special administration. The new performance ground would be based on the number and frequency of the company’s criminal convictions. I reiterate to my noble friend that special administration is a last resort. It must be a last resort because it has significant consequences for a company’s investors. Investors would not have the confidence to invest money if the special administration regime could be triggered without allowing a company to rectify any performance issues. The consequence would be instability in the market. Instead, the Secretary of State and Ofwat consider all aspects of a company’s performance and enforcement record when considering whether to pursue a special administration regime on performance grounds.

Further, it is worth noting that performance in general, not just where poor performance has led to a prosecution, is already a criterion. My noble friend asked what financial assistance the Government would provide to a company under a SAR. I confirm that the Government would provide financial assistance to ensure the day-to-day operation of any water company under a SAR. However, we expect that many of these costs would be recouped through the sale of a water company at the end of the special administration, to minimise any cost to the taxpayer. I hope for these reasons that my noble friend will not move his amendment and I thank noble Lords for their contributions.

[Baroness Jones of Moulsecoomb (GP)]

Before the Minister sits down, I had better clarify: I want another Labour Government only if I cannot have a Green Government. On the issue about having monopolies where market forces do not operate, can she see that there are inherent problems in having monopolies on something such as water—or any public service that we all need?

[Baroness Hayman of Ullock (Lab)]

I completely get the noble Baroness’s point. I would hope that, when we do the review, we look completely across all the issues to do with a water company, including the way it behaves because of the way it is set up, and that that should be part of any consideration. By the time we have reported, I am sure the noble Baroness will be very happy to have another Labour Government.

[Earl Russell (LD)]

I thank the Minister for her responses on this group. Mine was a probing amendment and I appreciate her response. I fully recognise that there would be issues with six months as a period, but I think it is important that we have a discussion about the power of revoking licences. I appreciate that the Government are keeping that under review. On Amendment 97, I appreciate what she says about the courts and their powers in all this: that was a welcome response. On Amendment 98 on the public ownership of water companies, I think her response to the noble Lord, Lord Sikka, giving those figures and calculations, was useful in moving that debate forward. Obviously, there are costs involved in that and in the Government supporting failing water companies as well. I know that these are difficult matters. Of course, on our Benches we want to have public ownership of water companies, and we will continue to support that, but I thank the Minister for her inclusive responses and I beg leave to withdraw the amendment.

Amendment 73 withdrawn.

Amendments 74 to 75A not moved.

Clause 7: Abstraction and impounding: power to impose general conditions

Amendments 76 and 77

Moved by

[Baroness Hayman of Ullock]

76: Clause 7, page 11, line 25, leave out from “if” to end of line 28 and insert “—
(a) it is held by a water undertaker or sewerage undertaker, or(b) it is held by a water supply licensee or sewerage licensee, within the meaning of the Water Industry Act 1991, for the purposes of the activities to which its water supply licence or sewerage licence relates;”Member's explanatory statement
This amendment provides that Clause 7 applies to water supply and sewerage licensees only in relation to their licensed activities.

77: Clause 7, page 11, line 29, leave out “a reference to such licences includes those” and insert “regulations under this section may apply to water industry licences”
Member's explanatory statement
This amendment is consequential on the Minister’s previous amendment.

Amendments 76 and 77 agreed.

Clause 7, as amended, agreed.

Amendments 78 to 82 not moved.

Clause 8: Charges in respect of Environment Agency and NRBW functions

Amendment 83

Moved by

[Baroness Hayman of Ullock]

83: Clause 8, page 12, line 32, at end insert—
“but, in relation to water supply licensees and sewerage licensees, includes those functions only so far as performed in respect of the activities to which their licences relate.””Member’s explanatory statement
This amendment provides that Clause 8 applies to water supply and sewerage licensees only in relation to their licensed activities.

Amendment 83 agreed.

Clause 8, as amended, agreed.

Clause 9 agreed.

Amendments 84 and 85 not moved.

Clause 10: Modification by Secretary of State of water company’s appointment conditions etc to recover losses

Amendment 86 not moved.

Debate on whether Clause 10 should stand part of the Bill.

[Lord Roborough (Con)]

My Lords, Clause 10 risks unfairly burdening consumers with costs likely stemming from earlier regulatory and management failures. Involving consumers to compensate for governmental losses would turn customers into de facto guarantors for companies, which contradicts consumer protection principles. As my noble friend Lord Remnant argued earlier in Committee:

“Clause 10 gives the Secretary of State the power to modify a water company licence in order to recover any shortfall in costs for the Government from its consumers. New subsection (4) extends this recourse to all other companies in the sector”.—[Official Report, 28/10/24; col. 1000.]


My noble friend addressed his comments to concerns over the impact on other companies in the sector, with which we agree. My concerns today are with the impact on consumers.

The clause provides no substantial safeguards to prevent excessive or unjustified charge increases. It grants broad powers to the Secretary of State to implement

“such amounts as may be determined”,

without clearly defined criteria or caps on those amounts. This vagueness opens the door to unlimited increases in bills for consumers at a time when cost of living pressures are high. Consumers rely on water services as a fundamental utility and trust is paramount in sectors with limited provider choice. By involving consumers in recovering losses associated with government interventions, the clause risks eroding public trust in the water industry. Why should the Government be able to depart from a consumer pricing model that the regulator has determined to be adequate for providing the service? Why should the consumer face surcharges due to the fault of others?

Clause 10 lacks clarity on how funds raised from consumers will be used or justified beyond the broad purpose of offsetting special administration order loss. Consumers have a right to transparency in any additional costs that they face, particularly when those costs arise from governmental action rather than direct service improvements. Without a clear, transparent breakdown of how these funds will be applied, consumers may view these measures as an arbitrary tax rather than a justified expense.

Permitting the Secretary of State to intervene in pricing to recoup government-incurred costs sets a disturbing precedent. It also highlights the importance of this debate in that the Government feel able to set themselves undefined and unaccountable pricing powers that are not available to the private sector. Is this not why the sector must remain privately owned and accountable rather than in the hands of government or some mysterious public benefit structure?

18:30

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, it is a while since I have taken part in proceedings where a stand part debate has been used to try to remove clauses of a Bill. On our Benches, our departed colleague Lord Greaves was very fond of this measure to enable him to make detailed speeches railing against the Government of the day’s proposed legislation.

The noble Lord, Lord Roborough, has set out his case eloquently for why he believes that Clauses 10 and 11 should be removed from the Bill. Clause 10 refers to England, and Clause 11 offers the same powers to Welsh Ministers. Both clauses are complex and deal with the recovery of losses. I respect the motives of the noble Lord, who appears to be on the side of the water industry and the bill payers at the same time. However, when 15,000 people from around the country are prepared to give up their Sunday to come to London to join a protest against the action of the water companies, I fear that he may have misjudged the mood of the water company bill payers. The public are rightly furious that, while their water and sewage bills have increased, the infrastructure has not been improved, but directors’ bonuses and shareholders’ dividends have not reflected the poor service that some water companies have given. I say “some” water companies, because some are performing well and do meet their targets; unfortunately, it is the ones that do not do so that we hear about on a continual basis.

Removing from the Bill the two clauses, which would have seen some balance being provided to enable costs to be recovered from those water companies that have failed to deliver on their Ofwat targets, is to give a signal to bill payers that the poor service that they have received is acceptable. If Clauses 10 and 11 are removed from the Bill, there would be no clarity on what is happening or how recompense would be achieved. I am therefore afraid that, on the Lib Dem Benches, we are unable to oppose these clauses standing part of the Bill.

[Baroness Hayman of Ullock (Lab)]

My Lords, I thank the noble Lord, Lord Roborough, for his interest in Clauses 10 and 11 and also thank the noble Baroness, Lady Bakewell, for her support for them standing part. A special administration regime—or SAR—enables a company that provides vital public services to be put into administration in certain circumstances to ensure that the public service will continue to be provided pending rescue or transfer to new owners. An SAR would be required only when there is evidence that a company is insolvent or in serious breach of its statutory duties. It is the ultimate enforcement tool in Ofwat’s regulatory toolkit and, as such, as I said in the last debate, the bar is set high.

Although government has had the powers to place water companies into special administration for over three decades, it is important that we regularly update legislation to reflect modernisation of law and experiences in other sectors. If a SAR occurs, government funding would be required to cover the costs of a special administration, including both operational and capital expenditure—for example, ensuring that statutory environmental obligations were met, as well as for paying the cost of the special administrator.

In the unlikely event that the proceeds of a sale or the repayments agreed as part of a rescue at the end of a SAR are insufficient to cover repaying government funding, there is a risk of a funding shortfall. Clauses 10 and 11 introduce a flexible power, allowing the Secretary of State and Welsh Ministers to recover any shortfall in funding in a manner that is appropriate to the circumstances. They allow for modification of water company licences to recover any shortfall in financial assistance provided in a water industry SAR. These clauses will align the water industry SAR regime with the energy sector. Without this power, there is a risk that taxpayers will foot the bill for the water industry SAR.

The Secretary of State and Welsh Ministers will be able to decide whether or not they should use this power and the rate at which the shortfall should be recovered from customers. This will include which group of customers it should be recovered from—for example, all water company customers, a subset of the sector, or only customers whose water company went into a SAR.

Although the power is flexible, the design of a recovery mechanism will be subject to consultation with all relevant sector stakeholders. The Government must consider these views and explain our approach accordingly. If a SAR occurs and this power is ever required, this will allow a decision to be made, and be consulted upon, on what the fairest cost recovery option is, based on the evidence and circumstances at the time.

I reiterate that the shortfall recovery mechanism does not mean that customers end up paying for water companies’ failures. Any intervention that would increase customer bills would be considered very seriously and as a last resort. In the first instance, the Government would seek to recoup all the funds spent on financing the SAR through the sale or rescue of the water company after the administrators’ conclusion. This new power would be utilised only if it were not possible to recover what the Government spent funding the administration. If there was a shortfall, Ministers would then decide whether they felt that it was appropriate to exercise this power.

This power would allow the Secretary of State to decide, subject to consultation, the rate at which the shortfall should be recovered from customers and which group of customers it should be recovered from, as I just mentioned. This will ensure that the shortfall recovery mechanism is always implemented in a way that ensures that costs are recovered fairly. I hope that noble Lords agree that this power is essential to protect taxpayers’ money in the event of a SAR, and that these clauses should stand part of the Bill.

[Lord Roborough (Con)]

My Lords, the noble Baroness, Lady Bakewell of Hardington Mandeville, may have misunderstood me. Far from speaking in favour of the water industry, I am seeking additional protection for the consumer and companies that have not fallen into a SAR.

The Minister has not fully reassured me that the powers in this clause are necessary. The Government perhaps should stand as guarantor, not the innocent. That this measure is very unlikely to be used is not in itself reassuring to me, but at this stage I will not press my opposition to the clauses standing part.

Clause 10 agreed.

Clauses 11 and 12 agreed.

Amendments 87 to 104 not moved.

Clause 13: Extent, commencement, transitional provision and short title

Amendments 105 and 106 not moved.

Clause 13 agreed.

House resumed.

Bill reported with amendments.

House adjourned at 6.40 pm.