Financial Services: Mansion House Speech
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Baroness Neville-Rolfe (Con)
My Lords, the Chancellor’s speech at the Mansion House covered a wide range of very important topics which we will need to discuss over the coming months. I can touch on only a few of them today. However, perhaps first we should note that very recent developments include an unexpected reduction in the rate of economic growth and an increase in the rate of inflation; and, today, an increase in monthly borrowing to £17.4 billion—the highest level ever outside the pandemic.
The reduction in the growth rate in the fourth quarter was brought about in part by the unwise and inaccurate remarks on the state of the British economy that have been made frequently by both the Prime Minister and the Chancellor since taking office. Taken alongside the problems of the Budget, it has not been an auspicious beginning for the Government. Some of the effects on hard-working citizens, small businesses and farmers were brought to our attention outside this very building only this week. Furthermore, the UK gilt market has taken a hit, meaning that the cost of servicing our debt has risen. The last time yields on 10-year gilts were this high, Labour promised it would ensure that it never happened again; and, of course, higher bond yields mean higher debt-servicing costs. How do the Government intend to square this particular circle?
One major sector covered by the Chancellor’s very comprehensive speech was pensions, which are important for almost everyone. We share the Chancellor’s aims of securing greater returns for pension savers while at the same time enabling pension funds to contribute to funding increased infrastructure spending here in the UK. These objectives are not necessarily incompatible, but it will be difficult to bring about both. We on these Benches will take a keen interest in how this initiative is taken forward in the forthcoming pensions Bill and elsewhere. When can we expect more details?
We are also keen to know more about how, precisely, the proposed pension megafunds will work and, in particular, what rules they will need to follow as regards UK and foreign investments. We all know about the massive investment that Australian and Canadian funds have made in UK infrastructure. Will the proposed UK funds be able to invest in a similar fashion overseas? The Government have proposed consolidating 86 local authority pension funds into eight. When will this occur and on what criteria? How will the interests of those in well-run funds be protected from the ravages of the less successful ones?
Lastly, I return to the Government’s stated first aim of improving the rate of economic growth. We want them to succeed; really, we do. Per capita growth is the right measure of success. All economic policies should have growth as one of their aims, so I note with particular satisfaction that the Chancellor has recently impressed on several economic regulators that this should be their objective also. Otherwise, unfortunately, the Government have made a poor start on achieving growth and managing inflation. When we left government, we had the fastest-growing economy in the G7. Now that has greatly diminished. Let us hope, for the sake of our citizens, that the Government will do better in future.
Baroness Kramer (LD)
My Lords, my party is determined to see growth in the UK economy and to use tools such as reform of the financial services sector to drive that growth, though we would put much more emphasis on a revival of community banking and financing for SMEs. High risk, however, is not for all. For people with small pensions, safety—not a jackpot—is the goal. Will the Minister assure this House that, in all the various changes, small pensions will in some way be backstopped from losses generated through higher risk, including illiquid investments? In Canada, which seems to be a template for the Government, public sector pension funds are, in effect, wholly backstopped by the state.
Members on these Benches remember the financial crisis of 2007, which destroyed growth for a generation. It was enabled by gullibility and naivety in dealing with the financial sector, both by Conservative and Labour Governments and by the regulators. The Bank of England is re-looking at the regulation of CCPs to allow greater derivates risk; the PRA now allows insurance companies to hold illiquid assets without relevant reserves; the bank ring-fence is being undermined, and the FCA plans to gut the clawback on bankers’ bonuses and downgrade the certification of senior managers. We are back to jobs for the boys.
Much more—if I understand the Chancellor correctly in the Mansion House speech—is to come. I sat for two years on the Parliamentary Commission on Banking Standards, listening to the pernicious incompetence of masters of the universe who were turning a deliberate blind eye to market manipulation, mis-selling and money laundering, with no acceptance of responsibility. Will the Minster read the reports of the PCBS before he proceeds with any further weakening of regulation? If this is not done with extraordinary care, we risk seeing the reseeding the next financial crisis.
The Financial Secretary to the Treasury (Lord Livermore) (Lab)
My Lords, I am very grateful to the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, for their comments and questions. May I take this opportunity to welcome the noble Baroness, Lady Neville-Rolfe, to her place and say how much I look forward to working with her in the period ahead? I am very grateful to both noble Baronesses for the “cautious”—I think I should say—welcome that they gave to various aspects of these reforms.
The noble Baroness, Lady Neville-Rolfe, began by talking about growth and, of course, we all know that growth was one of the biggest failures of the previous Government. In her Budget last month, the Chancellor set out a number of important measures to fix the foundations of our economy, restore stability to our public finances and rebuild our public services. They included a new approach to public investment to help deliver high levels of economic growth.
As the Chancellor made clear at the time, however, the Budget was not the limit of our ambition. Increasing private investment and reforming our economy are also central to realising the UK’s growth potential. That is why, last Thursday at the Mansion House, the Chancellor placed the financial sector at the heart of the Government’s growth mission and set out a plan for investment and reform. The financial sector employs 1.2 million people and makes up 9% of GVA, and it is one of the largest and most successful in the world, but we cannot take the UK’s status as a global financial centre for granted. The Chancellor therefore set out a commitment to developing a comprehensive plan to grow that financial services sector.
In the spring, the Government will publish a financial services, growth and competitiveness strategy to give the financial services sector the confidence it needs to invest for the long term. It will be published alongside our modern industrial strategy and be clear-eyed about our strengths, proposing five priority growth opportunities: fintech, sustainable finance, asset management and wholesale services, insurance and reinsurance markets, and capital markets.
In her Mansion House speech, the Chancellor also announced plans in the key area of pension funds, which the noble Baroness, Lady Neville-Rolfe, focused on. I am grateful for her supportive words about the objectives behind those reforms. As she knows, the UK has one of the largest funded pension markets in the world, but pension capital is often not used enough to drive investment and growth in our economy. Our system remains highly fragmented and pension funds cannot bring their full financial weight to bear due to limited investment in more productive assets. This holds back investment in infrastructure and for our most innovative companies.
For this reason, the Chancellor announced the publication of the interim report for the pensions investment review. The plan in the report will deliver a significant consolidation of the defined contribution market and the Local Government Pension Scheme in England and Wales, harnessing the collective size of our pension funds and creating larger funds and pools of capital. The noble Baroness asked about the timescale. A consultation on our pension reform changes opened last week and will run until 16 January. To give the market the necessary time to prepare, these changes will not apply in full until at least 2030. Local Government Pension Scheme changes are expected to be completed sooner, by March 2026, given the arrangements already in place.
The Chancellor also set out plans for reform. We will upgrade our regulatory regime across our economy, including reviewing the guidance we give to the Competition and Markets Authority and other major regulators, to underline the importance of growth. The noble Baroness, Lady Kramer, talked about the global financial crisis; I am very happy to read the reports she recommends. While it was right that successive Governments made regulatory changes after the global financial crisis to ensure that regulation kept pace with the global economy, these changes resulted in a system which often sought to eliminate risk-taking and, in some cases, had unintended consequences that we must address. Regulation has costs as well as benefits; when spending large sums on compliance, firms are not using that money to innovate and grow. It can also have costs to consumers, such as by restricting access to financial advice that could help them plan for the future.
While maintaining important consumer protections and upholding international standards of regulation, we must rebalance our approach. I think this was cautiously welcomed by the noble Baroness, Lady Neville-Rolfe. Alongside her Mansion House speech, the Chancellor issued new growth-focused remit letters to the financial services regulators to make it clear that the Government expect them fully to support our ambitions on economic growth.
The noble Baroness, Lady Kramer, asked about risk-taking. Enabling more responsible and informed risk-taking will support innovation and investment to help drive growth. Our aim is to maintain a sound and stable financial system with appropriate consumer protections while allowing businesses and consumers to make informed choices about the level of risk they take on. Protecting consumers is central to these reforms; the remit letters are clear that the regulators must maintain high regulatory standards, including to adequately protect consumers, in the process of embedding their secondary growth and international competitiveness objectives.
Lord Birt (CB)
My Lords, I strongly support the plan to consolidate the UK’s pension funds. However, I used to chair the investor relations committee for a major UK private equity fund and dealt with many of the world’s most illustrious and successful pension funds. Their mission, which we all understand, was to achieve assured, long-term returns for their members and to do so, in part, by managing risk and investing in not one but multiple geographies and sectors. I am unaware—though there may be examples—of any constraints placed on any of those leading funds by their Governments. What justification can there be for the Government to constrain the investment strategies of the UK’s pension funds by requiring them to focus on particular geographies—most obviously, our own—and sectors?
Lord Livermore (Lab)
I am grateful to the noble Lord for his question and the expertise he brings to this conversation. This comes back to the issue of growth that the noble Baroness, Lady Neville-Rolfe, began with; we see these reforms as part of our wider growth strategy and want these significant consolidations and amounts of money to flow, in part, into UK infrastructure and assets to contribute towards our growth strategy. That is a key part of our investment objectives.
Lord Desai (CB)
My Lords, does the noble Lord agree that it is not fair to blame the present growth rate on the Labour Government? There are long and variable lags in economics, so whatever investment we make now will take some time to be reflected in the growth statistics. We all ought to calm down, let this policy go through and then see its effect, rather than immediately blaming whatever we do as having failed.
Lord Livermore (Lab)
I am very grateful to the noble Lord. It will not surprise anyone to hear that I agree with the sentiment behind his question. He is right that you cannot undo 14 years of damage in one Budget. Our economic strategy is based on the principles of stability, investment and reform; the Budget was about restoring stability to the public finances and therefore stability to the economy, which is the essential underpinning of any growth strategy. The Budget also talked about increasing levels of public investment in our economy; these Mansion House reforms are part of increasing private investment into our economy. The noble Lord is correct that there will be lags in that investment, but we very much hope to see growth coming through in due course.
Lord Liddle (Lab)
My Lords, I very much welcome the proposals on pension funds that the Chancellor has put forward. However, I have some sympathies with what the noble Baroness, Lady Kramer, said about City regulation. We must face the fact that, when the financial crisis hit us in 2008, because of the prudence of Gordon Brown as Chancellor of the Exchequer the debt to GDP ratio was less than 40%, whereas under the Conservatives over the last 14 years it has reached 100%. The chances of us being able to launch a massive rescue operation of banks in the way that Gordon Brown did with such success in 2008 will be constrained by that fact. What is the Minister’s judgment of that?
Secondly, what are the Government’s plans to improve access to finance for small and growing firms, particularly those outside London and the south-east? Lots of studies have demonstrated that growing firms find access to capital difficult. The British Business Bank is one response to that. Are the Government proposing to upscale it? That area is a key constraint on UK growth.
Lord Livermore (Lab)
I am grateful to my noble friend for his points. In the letter that the Chancellor sent to the chief executive of the Financial Conduct Authority, she made it very clear that the importance of competition, growth and risk-taking is to be seen in the context of its regulatory duties. She said that:
“The financial services regulators are key to driving forward”
growth;
“we must have proportionate, effective regulation that allows firms of all sizes to compete, innovate and grow, creates a stable, attractive environment which encourages businesses to establish and expand in the UK, and adequately protects consumers”.
She recognises that there are trade-offs to be made, but she would like to see a greater emphasis on achieving that secondary growth objective.
On supporting small businesses and their access to finance, my noble friend is absolutely right that, to date, the UK has been a very good place to start a business but a less good place to scale one, and access to capital is a vital part of improving that. He mentions the British Business Bank, which is incredibly important; it has been very successful in providing some of that finance, and we need to go further. Colleagues in the Department for Business and Trade will also be coming forward with proposals to help small businesses scale and grow.
Baroness Penn (Con)
My Lords, I welcome the inclusion in the Statement of work with tech platforms and telco networks to tackle fraud. Can the Minister confirm whether that work is just the implementation of the charter, launched about a year ago under the previous Government, on voluntary action from those companies, or whether it will move towards mandatory action if sufficient progress is not made? Can he also update the House on the implementation of the measures in the Online Safety Act to tackle fraud online?
Lord Livermore (Lab)
I am grateful to the noble Baroness for her question. When I first became a shadow Treasury Minister, the noble Baroness was taking through the Act that introduced the secondary objective, and we were very supportive of it at the time—I remember those debates well.
On her first question, I may have to write to her as I do not have that answer to hand. On the fraud question, the Chancellor, Home Secretary and Secretary of State for Science, Innovation and Technology have written to leading tech and telecom companies, calling on them to go further and faster with clear, demonstrable action to reduce the level of fraudulent activity that exploits their platforms and networks. This comes ahead of the legal content duties under the Online Safety Act coming into force next year. The Act requires user-to-user and search services in scope to take measures to respectively prevent and minimise illegal fraudulent content on their service, or face the prospect of significant fines.
Building on existing measures to tackle scam calls, telecom companies have also recently agreed to a second fraud charter, to help prevent the misuse of telephone networks by criminals. We will monitor this closely in the months ahead, as the Government prepare the expanded fraud strategy.
Lord Brooke of Alverthorpe (Lab)
My Lords, I wonder whether the Minister recalls the conversations we had, before he was in government, about the possibility of having a fresh look at PPPs—public/private partnerships—to see whether we could update them and perhaps use them in a better way than in the past. One of my concerns is that the private equity funds that we see growing on such a scale are leading to a diminution of the number of individual personal investors in stocks and shares, of the type who were encouraged in the 1980s and 1990s.
I see that we are now going to call for evidence to examine the common bond on credit unions, and I wonder whether that could have been extended to having a review of the structure on public/private partnerships. We ought to be seeing whether we could encourage a change that would allow the public to invest directly in public/private partnerships, and whether the concept should not simply operate on a national level, as originally introduced, but be moved down to local-level activities and used particularly in expanding the growth opportunities in green energy.
Lord Livermore (Lab)
I am grateful to my noble friend for the question. I do remember the conversations we had in the past and I am, of course, happy to continue to discuss these issues with my noble friend. He talks about partnership; it is a key part of our investment plans. Partnership between public and private investment is key to our national wealth fund, with our public sector investment leveraging greater amounts of private sector investment into exactly the kind of green technologies that my noble friend references. I understand and sympathise with the spirit behind his question, and I am very happy to continue discussions with him on that point.
Baroness Neville-Rolfe (Con)
My Lords, I thank the Minister for his welcome; I too look forward to a constructive relationship in the traditions of the House. Can he comment on my point about gilt yields? My concern is their impact on compliance with the Chancellor’s fiscal rules. There has been a worrying increase of about 0.5% in the gilt yields, and I was interested in his reflections—perhaps in writing—on that.
Lord Livermore (Lab)
The noble Baroness is kind enough to give me the opportunity to write, and I will happily do so.
Baroness Manzoor (Con)
My Lords, I have a very brief question. I put on record that I am the chairman of the Financial Ombudsman Service. I welcome the Mansion House speech from our perspective and, personally, the emphasis on financial reform. It is very important that there is much greater clarity around the rules and regulations that govern both the businesses and the responsibility of consumers. I am particularly concerned about the level of fraud and scam cases in the UK, which continues to rise. We have a call for input, put out by the FCA and the Financial Ombudsman Service. The Minister has already identified the importance of consumer protection, and that remains key, but are there plans to ensure that there is also much greater clarity around the responsibilities of consumers themselves, in terms of the reform measures?
Lord Livermore (Lab)
The noble Baroness raises a very important question and I am grateful for her support around the reforms of the Financial Ombudsman Service; she brings a great deal of expertise to it. Her point about the role of consumers is a good one, and I will write to her on that specific matter.
Baroness Kramer (LD)
My Lords, I pick up the issue of consumer protection that the Minister mentioned, as well as a number of other speakers. Does he recognise that the consumer duty, as it is currently fashioned by the FCA, definitely has cost for businesses—it is very box-ticking? But what it does, which very much pleases businesses, is to deny individuals who have been injured a right of private action. It is that right which allowed the sub-postmasters to challenge the abuse that they suffered. That is not available to people within the financial services sector, and quite deliberately so. Without it, essential consumer protection is, to my mind, very much undermined. Will the Minister take a look at that issue?
Lord Livermore (Lab)
I thank the noble Baroness for her question. She brings out quite eloquently the trade-offs that the regulator has to make across these different protections. I am happy to look at what she says, of course, but I do not believe there are any plans in that respect.