Spending Review 2020
Baroness Bowles of Berkhamsted Excerpts(3 years, 5 months ago)
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Baroness Bowles of Berkhamsted (LD) [V]
My Lords, the Government’s spending on Covid has been generous—even if some has gone awry—and I do not underestimate the change in mindset that it needed in the Treasury. But lessons of history show that switching too soon into restoring finances slows recovery. The UK was not first in, or alone in, amassing Covid-related debt, and nor does it have to prove a point as it did in the financial crisis. Central banks are no longer seeing low interest rates as an abnormal blip and the IMF advises against an early return to austerity—so why take fright and cut previous growth plans now?
Much of the UK’s social infrastructure is already underfunded. Social care has been left on an unsustainable footing by Governments of all stripes, and universal credit has been cut to below liveable amounts. These are not bleeding-heart views but among the conclusions of reports from the Lords Economic Affairs Committee, chaired by the noble Lord, Lord Forsyth, of which I am a member. The very least that should be done on universal credit is to maintain the £20 increase. Post-Covid and post-Brexit life is not going to be any cheaper, and we cannot build a recovery on the backs of hungry children.
Over 1 million people are still not getting the care they need. Training more people to deliver social care and creating a valued career path can be a key route to providing jobs for the future. With an ageing population, it is time to turn the problem of social infrastructure into part of the solution. Building social infrastructure is faster at job creation than building physical infra- structure, and both are deserving.
Future of Financial Services
Baroness Bowles of Berkhamsted Excerpts(3 years, 6 months ago)
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Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I refer to my interests in the register.
A lot of time was used up seeking equivalence, and now it is right to move on with reforms and new matters. But what is the overall timeline, and will there be more democratic oversight than mere devolving of power? I welcome the unilateral equivalence decisions the UK has made. Many of them show that equivalence can benefit the granter; it is not all about benefits to those receiving equivalence.
I would also like to pursue the matter of pension funds investing in infrastructure. It is something we have envied in Australia and Canada for a long time. Has the Treasury considered how much more could be unleashed if there were not a systemic obsession of regulators with risk-free, liquid investment in government bonds? Post-Covid, is that not an even more outdated comfort blanket, which robs both public and pensioners?
Lord Agnew of Oulton (Con)
To reassure the noble Baroness, full disclosure will be made on any further progress with equivalence. The new Finance Bill, just starting its progress through both Chambers, will give opportunities to noble Lords to contribute.
On the issue of pension fund asset allocation, I agree that we have been too focused on pushing too many assets into government gilts or equivalent instruments and that enormous opportunity exists for investment in UK infrastructure.
Equivalence Determinations for Financial Services (Amendment etc.) (EU Exit) Regulations 2020
Baroness Bowles of Berkhamsted Excerpts(3 years, 8 months ago)
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Baroness Bowles of Berkhamsted (LD) [V]
My Lords, I refer to my interest set out in the register as a director of the London Stock Exchange.
I thank the Minister for introducing the regulations, but I admit that I got off to a bad start when looking at them. Helpful though it is to have tables in the schedule, I found it very awkward to have the regulations themselves drafted as an adjunct to a table that requires simultaneous viewing on different pages. I thought that I was in a puzzle book and having to take a cheat peek at the answers at the back.
First, I must consult the Schedule 1 list in the 2019 SI, and then I must cross-reference to table 1 in Schedule 1 of this SI—although it is unclear from reading Regulation 3 whether this refers to Schedule 1 of the 2019 instrument, as has just been referenced, or, as happens to be the case, Schedule 1 of this SI. I can find that out by discovering that Schedule 1 of the 2019 SI does not have a table. I must then repeatedly consult the table and look at each column to find out which paragraph of Schedules 2 and 3 and Schedule 1 of the 2019 SI are relevant. All of these instructions distract greatly from the clarity of Schedules 2 and 3, which really did not need all this obfuscation.
Aside from the structure, the SI seems to do what is necessary—although I reckon that it should have been part of the 2019 regulations to give regulators clarity. Unfortunately, this is all part of a patchwork that replicates, and makes even more confusing, the already tangled web of EU equivalence provisions that has evolved over time.
I hope that one day soon an overarching policy will be outlined on how the UK will balance openness, competitiveness, security and public interest in our future equivalence regime. This must reflect the needs not just of financial service companies in large countries but also the real economy companies that they serve, and encompass issues such as enabling trade at reasonable cost for the less developed countries. There can be a lot more to equivalence than first meets the eye, as was eventually realised with EMIR. At times, the benefits of equivalence may be needed within the country giving equivalence rather than the country gaining equivalence.
A similar point can be found in one of the fixes in today’s SI, which creates equivalence-determining powers so that where EU legislation says a third country has to have a recognition regime, we have one that qualifies. For us, this is fine, but the subtext of the EU requirement is a reciprocity requirement, and it is the sort of provision that needs care before imposing in any generic way, should that idea arise in the future.
It has been discussed previously, and in the context of authorisations, that regulators have been busy making various co-operation arrangements with third-country regulators where they did not already exist. It would be good to have an update on the progress of those agreements and how complete they are, including the business volume covered and the countries or instances where requirements are being waived.
Finally, a lot of energy and time has been expended researching, debating and hoping for a broad equivalence deal with the EU on financial services. Maybe that kept some in the City sweet and had to be heard and tried, but it has always been my informed view that that was unrealistic. Taken collectively, and in practice, equivalence for the EU is not really a matter of co-operation; it is yielded only when essential or aimed at promoting EU regulatory prevalence. Both those tendencies meant that resisting giving the UK equivalence was always going to be tested to destruction. It is what rises from the destruction that will be interesting, but it is not a sit-and-wait game.
Finance Bill
Baroness Bowles of Berkhamsted ExcerptsFriday 17th July 2020
(3 years, 9 months ago)
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Baroness Bowles of Berkhamsted (LD) [V]
My Lords, the expansion of IR35 has been postponed for a year. That is a small mercy, but a fair balance between the employed and the self-employed needs a more thorough reckoning. First, for the same reasons as now, the economy will not be in sufficient shape by next year to take the IR35 risk to workforce flexibility, nor for companies to take the burden.
Secondly, the fix is simply a tax fix that ignores the reality, recognised by both the Office of Tax Simplification and the Taylor review: that there is a set of flexible, dependent workers who are part way between being employed and self-employed. The Government are roping them in to tax and NI as if they were employed, on the basis of tax fairness, but leaving them out in the cold when it comes to employment rights and benefits, which is clearly unfair if they pay the same.
Thirdly, along with the aid given to the self-employed during lockdown, the Chancellor has indicated that a revision of national insurance and the coverage it provides for the self-employed might be necessary. This must apply vice versa, to the situation of the self-employed and the dependent worker: you must get the security that you pay for. Notably, many self-employed have been left out of grant-based help, ironically because they are not companies.
Fourthly, there is no fair solution, other than banning dependent workers, if this is not taken in the round alongside employment and social security rights.
Fifthly, contract workers have other expenses that can be imposed on them by their clients. How are these to be treated? They can include public liability insurance and giving indemnities to the client. They come as part of the package terms, which often include unreasonable contract terms that are not applied to employees. What protections will the Government bring in to defend taxpayers equally?
There are more points to make but time is short. As a veteran of proceedings on the Corporate Insolvency and Governance Bill, I share now, as I did then, the concerns expressed by my noble friend Lady Burt about the new preferential status for HMRC in insolvency, making it even wider in scope than before the Enterprise Act 2002. The arguments about it relating to tax paid by employees and held by the company do not wash, given that the company does not apply that logic to pension schemes in the hierarchy.
Covid-19: Economy
Baroness Bowles of Berkhamsted Excerpts(3 years, 11 months ago)
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Baroness Bowles of Berkhamsted (LD)
Pandemics, like wars, change the path of history. This one has not only put into focus where austerity went too far but also changed perception of the role of the state, both here and internationally. Already, there are serious and credible suggestions for a post-war type of investment, taking advantage of low or negative interest rates to invest faster and more than was envisaged pre-pandemic. We will not be the only ones doing this, which adds a competitiveness angle.
Strategic self-sufficiency should pay a greater part, bringing environmental benefit along with security. The pandemic has also taught us that personal space matters. Inadequate and high-density housing, over- crowded public transport and excessive commuting are all promoters of illness, lost productivity and social misery as well as spreaders in pandemics; this affects, and infects, everyone in the end, and so it must change.
More economic support for business will be necessary, but it must work in a distributed and reinforcing way. Last week, the FT reported that Rolls-Royce threatened to chop any supplier that cannot give it a 15% discount. The same article points out that big manufacturers demanding cuts from suppliers are simultaneously using their need to support the supply chain as one of their pleadings to Ministers. I hope that the Minister has spotted this hypocrisy, and that BEIS will make it clear that help is for sharing and that squeezing the pips out of supply chains, unreasonable discount demands and paying late will count against them.
National Risk Register
Baroness Bowles of Berkhamsted Excerpts(3 years, 11 months ago)
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Baroness Bowles of Berkhamsted (LD)
What consideration of the risk register and preparedness plans is made in policy and financial decisions?
Beyond Brexit (European Union Committee Report)
Baroness Bowles of Berkhamsted Excerpts(4 years ago)
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Baroness Bowles of Berkhamsted (LD)
My Lords, beyond the time when we must follow EU rules, engagement and influence remain important. That is common sense wherever we have large trading relationships, but there is nowhere in the world more open and organised for receiving input than the EU. Beyond committees and agencies, Brussels is awash with consultations, conferences and evidence sessions. Good speakers are sought from around the world, and a well-presented case can be very influential. It is serious work. My record was speaking at six such sessions in one day, and making several speeches in a week was common. Getting the tone and content right is of paramount importance, and claiming that we are best in the world is not it. “World’s best” is often claimed in this House. We do not always believe it, even if we want to, but I have also head it in Brussels from Ministers and officials in multinational settings, listening in horror as it jeopardised relationships and carefully crafted compromises. I am glad UKREP is getting bigger, but I query whether it is enough and hope that those appointed are recognised, not passed over, when returning to London.
Co-ordination with industry is also welcome. We do not have the government and industry solidarity on policy that some countries display, and I doubt we ever will, but collective strategic activity is very effective. Others have long done it and at a larger scale.
Finally, one effectiveness factor that should not be underestimated is transparency to Parliament and the public. There is nothing as persuasive to any argument as their endorsements genuinely obtained.
Income Equality and Sustainability
Baroness Bowles of Berkhamsted Excerpts(4 years ago)
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Baroness Bowles of Berkhamsted (LD)
My Lords, income inequality is accompanied by a lack of security and inequalities in health and longevity. Keeping the poorest poor is not good value for society or the state. The financial crisis slightly levelled incomes but left millennials comparatively disadvantaged, and now they are the ones most likely to have younger children, hit by school closures and cut off from grandparental help.
Indices now show that inequality is back on the rise, and the pandemic has already created its own economic inequalities—those who can work and those who cannot, those qualifying for grants or furlough payments and those who are not, those who will have jobs to return to and those who will not.
In January, a World Economic Forum report indicated that increasing social mobility—a key driver of income inequality—could benefit the UK economy by $130 billion by 2030. Tell me a better way to help recovery.
We can use what we have learned in lockdown for good. The “new normal” should treasure the positives, keep them and reinforce them. Work from home has been enabled for so many more people—use that to enable a more sustainable work/life balance, cut transport, and open more jobs to the disabled, carers and other people who have not been given the chance to work entirely from home.
We can have a green recovery, a caring recovery, a better shared recovery—and find that it pays its way. Will the Government seize that opportunity?
Brexit: European Investment Bank (European Union Committee Report)
Baroness Bowles of Berkhamsted Excerpts(4 years, 9 months ago)
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Baroness Bowles of Berkhamsted (LD)
My Lords, I welcome this report, which explains how useful the EIB has been to the UK. It is a shame that, pre-referendum, this kind of information about the EU was not deemed interesting by most media—I know, because I tried.
In view of time, I will concentrate on chapters 4 and 5 of the report concerning the consequences of losing EIB access and how to replace it. For utilities, where there is a consumer on the hook, the private sector may well step in, at higher cost, and pass that on in the regular utility bills. Risk management and getting payment is easy and the Infrastructure Forum suggests—perhaps optimistically—that it will be an extra loan cost of 0.5% to 1%. However, there will be gaps that the private sector will not cover, such as technology, universities and regeneration, areas where there is also huge social and economic impact.
Action to plug those gaps is urgently needed, because the EIB money has already largely dried up in anticipation of Brexit. I was at international meetings where that consequence of the referendum was flagged by significant EU individuals. Steps to set up a UK investment bank should be taken as soon as possible, as well as meanwhile increasing and extending the guarantee scheme. It is no good hanging on to see if a future deal with the EIB transpires. That both loses time and fails to recognise that national investment banks are now an integrated part of delivering EIB group funding and would be an important component in any substantial EIB relationship and skill-sharing. We cannot just be supplicants.
Other member states have significant national investment banks that exist alongside the EIB. Those that have not had them are creating them. The communication from the Commission dated 22 July 2015 on the role of national promotional banks, as they are properly termed, explains quite clearly its rationale. Section 2.1 specifically lists ways that market failures happen, with R&D, infrastructure, education and environmental projects all flagged as areas of underinvestment. Section 2.2 of the Commission communication sets out the principles for setting up national promotional banks, which of course the UK did more selectively with the Green Investment Bank and the British Business Bank.
Why is the UK seemingly so reluctant about a broad investment bank? It seems there are two policy blocks. The first is aversion to state aid. Never was a truer word spoken than by Philip Duffy of the Treasury, who is quoted in paragraph 123 of the committee’s report. He says,
“some of the desire to be bound by State aid may come from us as much as it comes from our interlocutors in the negotiations”.
This was said in the context of the British Business Bank, but it applies generally. The UK has been strongly against state aid and in favour of competition and has been a driving force behind strict competition rules, often much to the annoyance of other member states. However, that is a battle largely won, even if without the UK there might be EU slippage. It is time to set aside the mentality that it is a binary choice and the fear that if we give an inch all the other countries will take a mile. It is time to concentrate on looking after ourselves where we have market failures.
In a conference I chaired in 2016, the chief executive of Cambridge Enterprise said,
“we do have the world’s leading financial centre on our doorstep, yet we’re not able to support companies like ARM to grow bigger in the UK, because they couldn’t access the money that could be accessed by a much smaller company on Japanese markets”.
He also pointed out that,
“we can’t fund everything on a 10 year venture capital horizon, some things need 20 or 30 years”.
And we wonder why we do not grow super-large companies and why most of our universities have to sell spin-offs before they grow large, because they hit the so-called death valley of funding. My own experience leads me to agree with the witness quoted in paragraph 124 of the report that we have taken an overly cautious approach and massively underused what could be done.
Then we come to the second taboo: the statistical treatment of national investment banks in national accounts. The committee was categorically told that a UK institution similar to the EIB would feature in public sector debt on the national balance sheet. I am not convinced of the correctness of that treatment, and a witness quoted in paragraph 130 of the report also says that the UK’s calculation of public debt is “a complete outlier”. Therefore, can the Minister tell me whether the ONS is applying the European system of national and regional accounts, ESA 2010, correctly with regard to these matters?
The Minister may recall that there was a recent adjustment to the way student loans were accounted for in the national accounts. That story started when I spotted how it was being done during the Economic Affairs Committee inquiry on student loans, and we called in evidence from Eurostat. ESA 2010 makes it clear that national investment bank loans done at arm’s length, without needing government approval, are accounted for outside the general government statistics. They fall outside the EU stability and growth pact, and while that has no force on the UK, it is where the recommended debt and deficit maxima come from. This is conveniently explained in the July 2015 Commission document that I previously referenced, and it is also how I recall the ESA 2010 legislation. Does the UK wilfully depart from the international system of national accounts because that is what ESA 2010 is based on, or is the UK not prepared to set up an investment bank sufficiently independently from the Government that it is off the balance sheet? This is important in the debate between investment bank versus gilts and guarantees and squeezing the debt figures.
Lord Young of Cookham
Yes, I will come to that. That is one of the most important themes that has run through this debate.
Many noble Lords mentioned investment in decarbonisation and in green projects. We have a suite of tools to support private investment in infrastructure. The contracts for difference scheme has made the UK a world leader in offshore wind. The world’s largest offshore wind farm, the Walney extension, opened off the coast of Cumbria in September last year. Elsewhere, the offshore transmission owner regime has brought down the cost of connecting offshore wind farms to the grid, and we have reached 96% superfast broadband coverage.
Also relevant to the debate on infrastructure is the UK Guarantees Scheme, delivered by commercial experts in the Infrastructure and Projects Authority, which has £40 billion of capacity to ensure that good projects can raise the finance they need. We have given the UKGS additional flexibility to offer construction guarantees.
So while the EIB has been active in the UK market, it has worked within a successful and road-tested framework that supports investment. There is a strong appetite from the market to lend to UK infrastructure projects. Untypically injecting a note of party-political asperity, I mention that threats of renationalisation might constitute a threat to inward investment in UK infrastructure projects. We need to be absolutely clear that we do not frighten off the private sector from investing in infrastructure.
We recognise that there are still some challenges in financing infrastructure; for example, in how we respond to new technologies that carry higher risk and how we raise finance for very large projects. That is why at the Spring Statement earlier this year the Chancellor launched the Infrastructure Finance Review. This is looking at the strengths and weaknesses of the market, the role of the EIB, the Government’s existing tools and the institutional structures needed to deliver them. The review also explores a recommendation from the National Infrastructure Commission that if the Government do not maintain a relationship with the EIB, we should consult on establishing a new, operationally independent UK infrastructure finance institution. As the noble Lord, Lord Bruce, has just said, this links to the committee’s recommendation on consulting on a new UK infrastructure bank through the Government’s national infrastructure strategy.
This was one of the themes that I heard running through the debate: that this is something that the Government should consider very seriously. It was mentioned by the noble Baroness, Lady Bowles, the noble Lords, Lord Butler and Lord Bruce, the noble Viscount, Lord Waverley, and many others. The Government should reflect seriously on the points made not just by the committee in the report but during our debate about the need to try to replicate the characteristics of the EIB in generating crowding in of other investment, creating loans at a lower rate of interest and creating the stamp of approval, which was referred to earlier.
The formal consultation period closed in June, and while it is too early for me to share with noble Lords the formal results of the consultation, I can say that we have engaged widely and heard a range of views on the EIB, which we will consider when negotiating any future relationship. The Government have set out our intention to publish a national infrastructure strategy in the autumn. The results of the Infrastructure Finance Review will form part of that strategy, and there will also be a formal response to the consultation.
The noble Lord, Lord Giddens, asked whether UK business would be able to participate in Galileo post Brexit. In a no-deal scenario, future EU programme participation, including in Galileo, will need to be determined as part of any future relationship.
I am conscious that I may not have covered all the points raised in our debate and I will write to noble Lords on those that I have not dealt with. I cannot pre-empt the Government’s spending review at this stage. Obviously, that will be important when it comes to investing in infrastructure, but the Infrastructure Finance Review consultation shows that the Government are taking this issue very seriously.
The noble Baroness, Lady Bowles, and the noble Lord, Lord Butler, asked about debt management, the ONS and definitions. That is venturing into almost theological territory as the noble Lord, Lord Butler, will remember the Ryrie rules and the unending debate about whether or not something scored as public expenditure. It says in my brief that we will leave questions on the interpretation of the guidance to the experts at the ONS, which is an independent body. It is highly likely that a UK bank would fall within the PSND measure. However, the Government will take the views that we have heard on board as we develop our policy following the Infrastructure Finance Review.
Baroness Bowles of Berkhamsted
The point that I was trying to make with regard to ESA 2010 is that it should be in our laws because it was from the EU and we have actually now transposed it into our Brexit preparation legislation. It is not a question of us running on our own version of what we think national accounts are: we should be running on the version that we are supposed to have in our law. That is why there was ultimately the change with regard to student loans. I feel the urge coming upon me now to suggest that this must be looked at formally, because it appears that we have been doing it wrong. The response that the Minister just gave appears to be wrong. I have the advantage of having been chair of the Economic and Monetary Affairs Committee at the time of ESA 2010 and, even more, I had to be the rapporteur because it was so complex that nobody else would do it. I have a reasonably good vision of this point because it was very important.
Lord Young of Cookham
I have in front of me the relevant paragraph in the Select Committee report, which states that:
“The EIB’s liabilities do not feature on the national balance sheets of EU Member States”—
which was the point that the noble Baroness was just making—
“but we were told that a similar UK institution would almost certainly feature within the Government’s measure of public sector net debt. While such an institution would also have assets and would probably be able to fund the interest on its paid-in capital, this could have significant implications for the Government’s commitment to reduce public debt as a proportion of GDP”.
The report went on to say:
“The measure of Government debt does not fall within the scope of this inquiry”,
and that it,
“is for the Government to choose the best way to calculate public sector debt”.
The report then continued with the point made by the noble Lord, Lord Butler, that,
“such accounting decisions should not determine economic decisions about the optimal form of support for long-term infrastructure investment in the UK”.
That is a proposition with which I broadly agree. At the end of the day, we have an independent ONS that resolves these theological decisions as to what does and does not score as public expenditure.
Baroness Bowles of Berkhamsted
I must come back very briefly. I was not saying where the EIB should or should not be; the point is that national investment banks should also not be within the public sector accounts. It is clearly made in The Role of National Promotional Banks (NPBs) in Supporting the Investment Plan for Europe, which was issued by the Commission on 22 July 2015.
Lord Young of Cookham
I hope the eloquence of the noble Baroness will be heard by the ONS, which is at the moment the arbiter of what does and does not score. I have almost overrun my time. I thank once again all those who have participated in this debate. No doubt the committee will want to pursue this subject later this year when we have announced our conclusions on the consultation and have published our national infrastructure strategy and we have the result of the spending review. I hope that on that occasion the exchange may be more cordial.
Small and Medium-sized Enterprises: Mistreatment
Baroness Bowles of Berkhamsted Excerpts(4 years, 10 months ago)
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Baroness Bowles of Berkhamsted
To ask Her Majesty’s Government what assessment they have made of the Report on the Financial Conduct Authority’s further investigative steps in relation to RBS GRG, published on 13 June; and what plans they have to mitigate any future mistreatment of small and medium-sized enterprises.
Baroness Bowles of Berkhamsted (LD)
My Lords, global restructuring group was a unit within RBS into which struggling companies were pushed, with little option, when instant repayment demands were threatened. Newspapers have been filled over the last few years with findings about its unfair treatment of SMEs—92% unfairly treated and material damage to 25% are among the many baleful conclusions of an independent Section 166 report by Promontory, eventually commissioned by the FCA and published by the Treasury Select Committee when the FCA refused to do so. It revealed that the infamous “Just Hit Budget!” memo urging staff to “let customers hang themselves” was circulated widely, its content and tone never challenged at senior level, and that it was,
“indicative of an unprofessional culture that set little store by the interests of its customers”.
Neither was it the worst email it found. GRG unfairly destroyed lives, repossessed homes and acted aggressively, without transparency or proper control. The Treasury Select Committee chair summed it up:
“The overarching priority at all levels of GRG was not the health and strength of customers, but the generation of income for RBS, through made-up fees, high interest rates, and the acquisition of equity and property”.
And now the FCA report, although faint-hearted, is nevertheless damning, because it corroborates the Promontory findings: lack of management; failure to manage conflicts of interest; lack of appropriate governance, policies, procedures or processes. However, it stops short and is feeble on enforcement, presenting a catalogue of excuses in chapter 2, and in chapter 8 implying mitigating circumstances for RBS because the bank is systemic and was bailed out—which I do not recall coming about because of good behaviour. It says it cannot take action because commercial lending is not regulated. This is another GRG: the great regulatory gap. I agree with the Treasury Select Committee that commercial lending for SMEs should be regulated. Perhaps the Minister will explain the logic of why charges on homes differs from home lending, which is regulated.
Page 16 lists the Principles for Business that apply to every authorised firm, then says they do not apply because the business was not a regulated activity—except that principle 3, “Management and control”, can sometimes apply and has been used in the context of pursuing banks on the unregulated activity of foreign exchange. The RBS failings clearly fall under the “Management and control” definition:
“A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems”.
I give your Lordships 360 pages of the Promontory report as evidence. The FCA then says that,
“Principle 3 only applies to the prudential context of unregulated activities”,
which means having,
“a negative effect on the confidence in the financial system … or a negative effect on the ability to meet … the ‘fit and proper’ test in the ‘suitability’ threshold; or the applicable requirements and standards under the regulatory system relating to the firm’s … resources”.
Grudgingly, the FCA concedes that the market for commercial lending is part of the financial system. Then in a box on page 18, it explains why the FX scandal was considered to undermine confidence, but it does not explain why it thinks GRG does not. Is it implying that commercial lending to SMEs is not sufficiently important? With 5.6 million SMEs employing more than 16.2 million people, 60% of UK employees and 52% of corporate turnover, of course SME lending is systemically important, to the economy and to the financial system. And RBS, the largest SME lender, is systemically important to that market.
On a different count, RBS gave evidence that GRG managed 25% to 30% of the group’s capital, and at one point in the relevant period had almost half of the group’s capital tied up. This is on page 70, in chapter 8, which is all about the systemic importance of RBS and how difficult it was after bailout in the asset protection scheme. However, chapter 8 is itself evidence of the systemic relevance of GRG to RBS and hence to the financial system. A unit tying up half of a systemic bank’s capital, operating without proper governance or management controls, without a second line of defence and with systematic flaws, is a significant threat to RBS and therefore to the entire UK financial system. That is what being a systemically important bank means. The reputational and financial risk to RBS from GRG was known internally, as is explained on page 42.
These control concerns are not limited by the 8% value of the SME lending in GRG; it is about all of GRG and the proper capital control systems in a systemic bank. For the current CEO to say, as he did to the TSC, that it is only a matter for GRG, not the group, is plainly wrong: a group must have controls over where 50% of its capital is at risk. Not to do so is hardly “fit and proper” for any senior banking activity and is wildly deficient under,
“requirements and standards under the regulatory system relating to the firm’s resources”.
Will the Minister explain whether all the systemically important and capital control counts I have elaborated were explored in detail with regard to principle 3? Can arrangements be made for me to see the analysis? It will be impossible to legislate properly in future if that all remains in the dark. Will the Minister say whether the FCA consulted the asset protection scheme and whether there was improper pressure from it or the Treasury? Is that playing a part in suppressing action? If not, why is so much made of it by the FCA?
The FCA poses the question whether it would it be right to bar people now. The answer has to be yes. Should big miscreants be saved because it would mean public disclosure? If we take that line, only the small will be brought to justice: that is what many think always happens in spades in financial services. The FCA also says that, because the activities are unregulated, no standards have been set by it, so there is nothing to measure “fit and proper” against. Well, shame! I have looked at the rulebook, and it is appalling how a general safeguarding provision has been sabotaged to be nothing of the sort.
I commend again the Australian offence of unconscionable conduct in commerce, which is defined simply with regard to the norms of the day, is not rule-bound, and the courts can interpret it. Courts, like the person on the Clapham omnibus, know a scoundrel when they see one.