Small and Medium-sized Enterprises: Mistreatment

Baroness Bowles of Berkhamsted Excerpts

Thursday 27th June 2019 Lords Chamber

Asked by

[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.

Securitisation (Amendment) (EU Exit) Regulations 2019

Baroness Bowles of Berkhamsted Excerpts

Monday 25th February 2019 Lords Chamber

Nobody sensible would want to stop these two SIs; they are crucially important for the future of the financial services industry were we to be stupid enough to leave the European Union without a deal. It is stupid to leave anyway, but to leave without a deal is manifestly ridiculous. However, in its job of proper concern for the detail of an SI, this House ought to say, yet again: can we please have some costs? Can we please have some idea about what they are going to be? Can we please not say, all the time, that we can trust these regulators when they say they have enough elbow room in their current budgets? Frankly, that makes me begin to wonder whether those budgets are overgenerous.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I declare my interests, as set out in the register, as a director of London Stock Exchange plc and of Prime Collateralised Securities (PCS) Europe ASBL, which is the Belgian not-for-profit parent company of third-party verification entities. I have no comments on the usual way in which the onshoring has been done, switching to the regulators being UK rather than EU ones, or the way in which infrastructure is dealt with in that.

However, one thing on securitisation caught my eye. Sometimes what is not there, or has been crossed out, is more interesting than what remains. I noted that there was some removal of draft regulatory standard criteria in Article 6.7(a) and (b) of the EU regulation, covering,

“the modalities for retaining risk … including the fulfilment through a synthetic or contingent form of retention”,

and measurement of the level of risk retention. I can fully understand why it might not be desired to go into those, or have them dangling as an invitation for people to lobby. It may make no difference, because those were just examples; they could perhaps be brought in again. However, I was curious about why they had been specifically deleted, or has something else which I have missed taken care of it?

Article 45, regarding a feasibility report on a simple, transparent and standard synthetic securitisation and the subsequent action relating to it, is also omitted. I can see that, in the case of Article 45, the report date—2 July 2019—is close, but I would have thought that there were ways other than deletion to retain the policy that one investigates synthetic securitisation. The deletion of synthetic criteria from both the list and the article makes me question whether a policy decision has already been taken not to have synthetics within STS at all in the UK in future. I can understand that some might wish that to be the case, but this instrument is not the place to make such a policy decision. Is there some other explanation? I see no reason why the criteria for binding technical standards, in Article 6.7(a) and (b), should be removed nor why we could not have some kind of report, even at a later date.

[Baroness Kramer (LD)]

My Lords, I will focus briefly on the second of the two statutory instruments. I need help from the Minister, because I am struggling to understand the consequences of this, and I am looking specifically at STS recognition. The Minister will understand that achieving classification as an STS is advantageous because it is very likely to lead to preferential capital treatment. That is very important to banking institutions, which obviously want to keep their capital requirements as low as possible. At the moment, to qualify for STS classification, all the parties to an STS securitisation have to be located within the EU. If I understand the change that flows from this statutory instrument, if we were to leave without a deal, the regime we would move into says that in the UK an STS can be recognised provided that just one of the relevant players is located in the EU—most likely the sponsor. I raise this issue because it sounds as though securitisations in the EU and in all third countries now become available for classification as an STS.

I raise that concern because we are all very aware that the United States has gone back to its old tricks in mortgage lending, and asset-backed paper, backed by US mortgages, is once more beginning to raise some fairly significant issues of concern. We have been protected from that to some degree by the STS regime, which requires that all relevant players are within the EU. If I understand this correctly, that protection is now removed, and since third countries can now get STS classification and therefore preferential capital treatment, we increase the risk or the attraction quite possibly—or rather, quite likely—to UK institutions to once again start playing in that environment of US mortgage-backed securities, where we already know there is incipient trouble; I hope it is genuinely incipient, but some people are using much stronger language than that. I would therefore like the Minister to explain that.

The other issue on which I had a question was under exposures to national promotional banks. At the moment, national promotional banks located in the EU, again, are eligible to be provided with preferential treatment. It would therefore encourage a financial institution to invest in those national promotional institutions because if it lends to them, it faces a lower capital requirement. What is the situation that will fall out of the picture, according to the Explanatory Memorandum? It seems to be KfW, which is the German state-owned development bank. A UK investor who is lending money to KfW would no longer get that preference as it calculated its required capital ratios.

To me, this is the equivalent of “have gun, shoot foot”. KfW is a major player in funding small businesses in the UK. It has sat alongside the European Investment Fund and the European Investment Bank in putting significant blocs of long-term patient capital into large-scale infrastructure in the UK. I know that we have the British Investment Bank, but it is minuscule compared to the EIB, the EIF and KfW, and nothing I have heard from government suggests a scale-up to anywhere like the same dimensions. Why, then, would we, in a situation like this, try to discourage KfW from looking at opportunities to put its money into projects in the UK, and especially into that much-needed arena of small business? I find it slightly perverse but that is one of the things that this SI apparently intends to achieve. As I said, I am very fond of the British Investment Bank but, boy, does it have a long way to go before it can possibly replace those other institutions. Surely we should be encouraging KFW—we cannot do anything about the EIF or the EIB because of European rules—to keep it as a player.

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I hope that I have answered noble Lords’ questions. If not, I undertake to write to them.

[Baroness Bowles of Berkhamsted]

The bits taken out of Articles 6(7)(a) and (b) related to topics on which the regulator—that will now be the UK—is to make binding technical standards. However, they were deleted so the regulator will not now make them. References to “synthetic” have also been removed. Does this mean that this has already been discounted? I would appreciate it if the Minister could clarify that point in his written responses.

[Lord Young of Cookham]

The noble Baroness will know that under the withdrawal Act, we cannot make substantive policy changes using instruments such as this one, so whatever has happened should not be a major policy change. However, I generously accept her offer to write to her with a more detailed explanation of the changes she mentioned.

Uncertificated Securities (Amendment and EU Exit) Regulations 2019

Baroness Bowles of Berkhamsted Excerpts

Monday 25th February 2019 Lords Chamber

[Lord Sharkey (LD)]

My Lords, I accept that the two regulations in this group are closely linked and I have only one question and one comment. The question relates to the waivers that the Treasury may issue under the terms of the investment exchanges, CCPs and CSDs SI. Paragraph 117 of the impact assessment to this SI explains that, if the Treasury makes an equivalence decision on a third country jurisdiction and the Bank has recognised a third country CSD, this will mean that the third country CSD will be subject to Part 18 of FSMA. As the Minister has said, this will give the Bank the power to make rules requiring information about events specified in those rules and to require the third country CSD to give written notice to a regulator of a change to its own rules or guidance.

The Bank could also require a third-country CSD to give reports on the CSD services it provides in the UK and related statistical information. As the Minister said, the Bank may also inspect any branch of a third country CSD in the UK. There is also the rather threatening addition, “enforceable by injunction”. All of this seems eminently sensible. However, the impact assessment includes a provision which qualifies the use of these powers. It means that, for instance,

“the Bank may waive the above rules in respect of a third country CSD where it is satisfied that compliance with those rules would be unduly burdensome and the waiver would not result in undue risk”.

I take it that this waiver power is intended primarily to help the continued co-operation of CSDs within the EEA. My question is whether, if the Bank does make such waivers, they be will in the public domain and whether the Bank will explain the reasons for supposing the rules to be unduly burdensome and for supposing that exercising the waiver will not result in undue risk—whatever “undue” may mean in this context.

My comment has to do with paragraph 10 of the EM to this instrument. The paragraph explains in some detail, and with the appropriate references, the outcome of the consultation on the implementation of the CSDR. This was extremely helpful, and it illustrates a key difference between consultation and engagement. Noble Lords will know that many of the Brexit SIs laid by the Treasury have not been consulted on. The Explanatory Memorandums say when this is the case, and frequently follow this by noting that there has instead been extensive engagement with stakeholders. But in no case that I can recall have the EMs given any detail about the questions that arose in these engagements, the no doubt various views expressed by stakeholders or any modifications that may have been made to the draft as a result of these engagements. By contrast, as the current EM demonstrates, consultation gives a clearer, well-defined, comprehensive outcome and even demonstrates how government thinking has been changed. In this case, the three respondents were obviously very persuasive.

Engagement with no detail is a very unsatisfactory substitute for consultation. I realise that it is now too late to conduct consultations on the no-deal Brexit SIs that are before us and on those that will come before us. I think that we have only one more Treasury SI to consider—or at least very few. I ask the Government in general to be much more informative about engagement. I ask them to consider providing in the Explanatory Memorandums at least a list of stakeholders engaged with and a summary of what issues were raised by the Government and the stakeholders, what opinions were expressed and what changes were made as a result of these engagements.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I declare my interest, as in the register, as a director of London Stock Exchange plc. I am glad that we are debating these two instruments together, because they seem to go together and to form a continuum. Indeed, in some ways it is rather strange. The first says that it would not be appropriate to give the Bank of England powers pre Brexit, but then in the second the powers are being given to the Bank of England. That arises largely because the uncertified securities regulations are largely about transposing EU legislation under the European Communities Act.

I too was interested in the consultation done in 2015 and noted that there seemed to be variably one, two or three comments on various sections. That certainly determined me to step up my rate of response to consultations. The report says that changes have been made, but it leaves you having to compare the before and after. All that was getting a bit too much on a sunny Sunday, as the noble Lord, Lord Tunnicliffe, said. What struck me particularly was the explanation on page 6 of the Explanatory Memorandum to the uncertified securities regulations, which said that,

“the Treasury is taking a proportionate approach to implementing Article 49(1)”.

Given that they are regulations, and you cannot change what is in the regulation done by the EU, I am curious as to what this more proportionate approach entails. Does it imply that the first draft had been gold-plated in some way? What was in and has been taken out? I did not find a great deal of guidance in the documents.

My next comment is a very general one. In both of these statutory instruments, and in particular in the second one dealing with exchanges and so forth, there is a large number of changes to the Financial Services and Markets Act. As we have discussed at some length before, that is not up to date on legislation.gov.uk— although, of course, it does give you a list of the things you might want to go and explore, to see if you can work out what an up-to-date version might be, or you may be thrust into the hands of one of the commercial organisations that will do that for you. However, by the time we have ploughed through all 60 statutory instruments that we are told we have to deal with, and then whatever other number we may get regarding corrections and re-workings—some of which are coming along now—FSMA will be even more incomprehensible on the legislation website, and so too will be any sensible comparison of how EU legislation has been retained with regard to the EU originals.

That might be relevant. If we are ever trying to argue for equivalence, the first thing we will be asked to do is to show it. Page 3 of the Explanatory Memorandum for the investment exchanges SI names six other SIs involved in the onshoring of the Securities Financing Transactions Regulation—so one regulation goes to seven SIs, each of which further redistributes powers and requirements over a range of other instruments. As I have said, we are also getting into second-order corrections and additions, with further SIs winging their way through the system.

It is not my idea of a lawful democracy for laws to be so obscure and inaccessible. It is actually quite a mockery to make a fuss about the accessibility and clarity of wording in individual documents while it remains impossible to find out their cumulative effect. I have long been shocked at this unwholesome situation, but Brexit is making it far worse. What is the Treasury going to do about it? Clearly, check tables have to be used in the Treasury. I am coming to the view that we are reaching a stage at which Parliament should refuse to amend law that is not available in an up-to-date format. At the very least, could the Treasury share the various schedules that point out what has been put where, so that those of us who are expected to scrutinise this do not have to spend an awful lot of time getting frustrated as we try to work out the true current state of the law? If we cannot do it, and we are responsible for it, how is the ordinary citizen supposed to know what is the law, when ignorance is no defence?

[Baroness Kramer (LD)]

My Lords, I concur with all the comments made by my colleagues on these Benches. I want to raise again the issue that I picked up in relation to the earlier statutory instrument: namely, the responsibility or duty to exchange information between the UK regulators and the EU regulators. As far as I am concerned, this gets even worse in these two statutory instruments. I will not comment much on the first statutory instrument because, to me, it is a combination of in-flight and onshoring, and I can see why it is essential. Obviously, I am also not going to object to the second statutory instrument.

However, I want to draw the House’s attention to the significance of regulating CCPs. Following the crash of 2008, the G20—quite appropriately, most of us think—realised that to underpin financial stability in the future it would be necessary to require that derivatives be cleared through central counterparties rather than just exchanged between institutions, because in the financial crash it was impossible to work out who owed money to whom, and that caused much of the system to freeze up and undermined liquidity. But everyone has also recognised that, by running all derivative contracts through a limited number of central counterparties, we are cumulating risk in one location. A mistake by a CCP in understanding a risk, in requiring margins and in recognising the creditworthiness of various players has potentially huge consequences because so much is now gathered in the one location—it has become absolutely critical.

Market Abuse (Amendment) (EU Exit) Regulations 2018

Baroness Bowles of Berkhamsted Excerpts

Wednesday 23rd January 2019 Grand Committee

[Lord Young of Cookham]

My Lords, the chief executive of the FCA, Andrew Bailey, has said that he expects to hold FCA fees steady for a year or so, assuming that there is an implementation period. However, the FCA is able to increase its fees should it need to increase its income in the event of no deal.

[Baroness Bowles of Berkhamsted (LD)]

As we have got on to the subject of fees, when the credit rating agencies want to get approval from ESMA, they have to pay a fee. Therefore, will we not have a comparable fee or is it just all part of the steady-state budget?

[Lord Young of Cookham]

They will continue to have to pay a fee, so to that extent there will be no change, but instead of it going to ESMA, it will go to the FCA.

Furthermore, the SI will require firms to establish a legal entity in the UK to register with the FCA, in accordance with the current policy under CRAR. The SI provides the FCA with pre-exit powers so that it is able to begin registering firms, and the instrument will also establish three regimes to allow for FCA registration to smooth the transition from ESMA supervision to FCA supervision. First, UK-established CRAs will be able to convert their ESMA registration into one with the FCA through the conversion regime. Secondly, newly UK-established legal entities that are part of a group of CRAs that have a registration with ESMA will enter a temporary registration regime if they have submitted an advance application to the FCA which has not yet been processed. Thirdly, certified CRAs established outside the EU will, through the automatic certification process, be able to notify the FCA of their intention to extend certification to the UK.

The SI will also enable credit ratings issued by a CRA established in the UK, with an FCA registration, to be used for regulatory purposes in the UK. The instrument will also enable credit ratings issued before exit day by EU firms that register, or apply for registration, with the FCA to be eligible for regulatory purposes in the UK for up to a year.

In addition, in relation to appeal rights, given the new enforcement rules provided to the FCA, references to EU institutions will be replaced with the appropriate UK bodies. The Upper Tribunal will now be responsible for appeal requests that have been made as a result of an FCA decision, and the FCA’s warning and decision notice will apply to this SI also.

The Treasury has been working closely with the FCA in the drafting of these instruments. Both bodies have continuously engaged with CRAs and taken on board their views where possible when deciding on the direction of the instrument to ensure that the market is informed of its policy intention. The Treasury published the instruments in draft, along with an Explanatory Note for each, to maximise transparency to Parliament, industry and the public ahead of laying.

In summary, we believe that the proposed legislation is necessary to ensure that market abuse is effectively prohibited and credit rating agencies are appropriately supervised, and that the relevant legislation will continue to function appropriately if the UK leaves the EU without a deal or implementation period. I hope that noble Lords will join me in supporting these regulations.

[Baroness Bowles of Berkhamsted]

My Lords, the first thing that I noticed on page one of the draft instrument is that it says this is done not just under the EU (Withdrawal) Act but under the European Communities Act, but it does not tell us which bits are which. If you are trying to go through and ask whether this corresponds to the rules laid down in the EU (Withdrawal) Act, you do not know, because the rules under the European Communities Act are not exactly the same. I do not find any difficulty in what has been done here, and I have come across this before in other statutory instruments. But I think it would be good practice when you are doing it with powers in lots of different places if the relevant bit of the instrument were to say which the enabling power was instead of putting it in an anonymous way. But then, I am still learning about how these things are done in the UK.

I accept the points made by the Minister about what I call the symmetry point: that some bits here need to be retained, extending into EU territory, if I can put it that way, so that we know what is going on. Emissions trading is one example of that. Perhaps I should declare an interest on the register—the usual London Stock Exchange Group plc issue. How will we get information back into the UK from, for instance, the trading of UK instruments on exchanges in the EU? This is the other side of the trading obligation. If the EU says that you can trade only on recognised exchanges—there are exchanges that, for example, trade UK-listed shares—that means that, unless there is some kind of deal done, people will theoretically want to trade in the EU rather than the UK, or they will want to cut off trading in the EU so that they own the trade in the UK. We have concentrated on that when talking about trading obligations; we have not talked about what happens to the information from the trading venues that remain in the EU.

I am sorry that I had not thought this out previously; it just occurred to me while the Minister was speaking. This is something for the regulators and, probably, the Government to look at as we move forward and work out what the EU is going to do in respect of exchanging information with us. The exchanges provide data to the FCA so you can see whether there is any funny business going on; it is one of the methods of detection, as you can see spikes and so forth that might indicate something strange.

Another question on symmetry is that I wonder why we have bothered, in new paragraphs 5 and 5A on page 11 of the regulation, to list all the European organisations that still have exemptions. One of the things I did from time to time in the EU, perhaps a little mischievously, was to take out the list of all the bodies that did not have to come under market abuse regulations. As I have said more than once, central banks can do things that, if anybody else did them, would be called market abuse. Generally speaking, we allow central banks to do that.

There is a general provision for certain public bodies and central banks of third countries. If the EU is now a third country, why bother to state that the Treasury can make particular exemptions for member states, the ESCB, members of a federal state, the Commission, the European Investment Bank, the European Financial Stability Facility and the European Stability Mechanism? Why not just treat them as generic public bodies? This gives the EU special treatment. Yes, one might want to prepare a list, but was this just a short cut? If we were going to compact these things down for the long term and if we were going to treat the EU as a third country, why list all EU bodies but not other third-country bodies? I am not sure that I would have put them on the face of the regulations, just for the sake of it. Those are all the issues that I wish to raise at this point.

Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018

Baroness Bowles of Berkhamsted Excerpts

Wednesday 23rd January 2019 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I have a lot of common thought with the questions that the noble Lord, Lord Kirkhope, has raised, so I do not need to go into detail. I have no problem with, if you like, the way the handle has been turned on the routine adaptation but, again, the question comes of whether it was right to follow the symmetrical approach, so that immediately the EEA is in the third-country pot, or whether there could perhaps have been a transition that made it a little easier. This is not to say that in the longer term that is not the right destination, but I am not sure about a “big-bang” switchover. I, too, wonder what will happen under the Part 3 heading, “Customer Due Diligence”. Will this be another excuse for banks to extract life histories from an awful lot of people, quite a few of whom reside in this House?

Those of us who are former Members of the European Parliament ought, I suppose, to declare an interest; we tend still to have residual bank accounts and such things there. I should talk about this because the same rules apply to those bank accounts as apply to UK bank accounts. Whereas from the UK banks I get 20 pages to fill in, including, as I said, a life history and everything since the year dot, I seem to get one page from a bank in Belgium, which is under the same ruling. I would quite like to know how many of these rules are consequences of the legislation and how many are consequences of gold-plating or uncertainty among our banks. It is, in a sense, an identity thief’s charter when you have to fill in all this information, along with copies of your passport and everything else, and upload it while unsure of where it is going; or you can take it into your branch. Anything that helps with regard to that would be useful to know.

In this case, there would have been an argument for being asymmetrical for at least a little while. I regret that that opportunity was not taken, but I do not believe anything has been done that offends, as such, against what one is supposed to do under the EU withdrawal Act.

[Lord Tunnicliffe (Lab)]

My Lords, perhaps I should say a couple of words about where we find ourselves with these SIs. As Her Majesty’s loyal Opposition, I do not want our participation in this process to be misinterpreted in any way as an endorsement of a no-deal exit from the EU; I cannot think of a worse outcome than no deal to the chaos that we find ourselves in. However, we have to accept that, given this chaos, which has to be laid at the Government’s door, there is a real possibility that we will stumble out of the EU without a deal. While the Government seek to make contingency plans for this, by bringing in front of us what one might call no-deal instruments, we will do our duty of scrutinising them as best we can.

So far, the Government seem to have played by the rules. In my view, the rules are set out first in the European Union (Withdrawal) Act 2018, but also in paragraphs 7.1 through to 7.9—which are identical in all Explanatory Memoranda that come from the Treasury. I believe they say that there will be no new policy introduced except where necessary to achieve the transition.

I diligently read through the Explanatory Memoranda. I fear that I did not read the instruments with as much care, because, frankly, I would not know how to start. A lot of them relate to other documents and getting up-to-date, amended copies of them is difficult, so I have to judge an instrument on the basis of the Explanatory Memorandum. All it basically does is say that EEA countries become third countries. It then goes on to make the consequential changes, which involve transferring various responsibilities. In relation to this instrument in particular, it also defines high-risk countries, which I can see is important.

I have only two questions. The problem with these memoranda is that the authors know what they are talking about, whereas the reader does not know what they are reading about. Having staggered through the document, when I got to paragraph 2.12, I became exhausted. I shall read what I think is the offending passage:

“The standards are to specify what additional measures are required to be taken by credit institutions and financial institutions with branches or subsidiaries abroad, when national law outside the UK does not permit group-wide policies and procedures to be implemented that are at least as strong as those that are required by the MLRs”.


I hope that the noble Lord can make some sense of that.

My only other comment is on the tone of the memorandum—this is true of other memoranda, but I shall centre on this one for the moment. The obligation to report to EU institutions is removed, and one can see why that is perfectly logical. However, money laundering is an international crime with an enormous impact on ordinary citizens, relating particularly to terrorism and to their wealth, because of the crimes committed and their impact on the economy. It is crucial that, even if we are daft enough to leave the EU without a deal, international co-operation continues. It is not just about taking the law where it is now; it is about the law needing to develop as criminals become cleverer and do different things, and we understand more about what they are doing and what action and international co-operation are necessary.

These regulations are brought before us as no-deal SIs and will be commenced on exit day. It is clear what role they will have if it is a no-deal exit, but if a deal is done and we enter a transition period and then come to the end of it, what will happen to this statutory instrument? Will it be repealed or will it be paused? The answer to that makes a big difference to its impact. If the instrument is merely paused, we are making law for the future. If it is repealed and we essentially start from scratch as part of the negotiation in the transition period, and if sanity then reigns and we complete a deal, this SI will not matter; we will be looking at longer-term ways of managing the problems to which it relates.

--- Later in debate ---

[Baroness Bowles of Berkhamsted]

When there is a change, will there be any kind of notification for businesses and others? One of the biggest problems that, if you like, completely innocent people can experience when they are transferring money is that it gets suspended somewhere while further checks are made. That is more likely once we have gone into a third-country regime than being in the EEA. If you are transferring money for the purchase of a property or something significant for your business with a contract attached, to suddenly find that your money has been delayed by several days or a week can mean that you are in breach of the contract. Because of the particular way in which the money laundering rules operate, we are not allowed to warn people because of the risk of warning the potential money launderer. People should at least be aware that the rules are switching because that would be useful to know in order to build in some certainty. I am thinking in particular of businesses. They will have to realise that they must send money with time to spare.

[Lord Young of Cookham]

I am grateful to the noble Baroness. The last thing we want is to have any turbulence at the point of transition or to have legitimate transactions held up. The FCA will be consulting with the banks and payment services providers concerned, particularly in the light of the transitional arrangements that I mentioned earlier. Of course they have known for some time that these changes are on the way so that they have been able to prepare for them. However, one of the consequences of what I have just said is that there does not have to be a sudden switchover on 30 March or 1 April because the Treasury and the FCA will be introducing transitional arrangements. There will be due warning before any change takes place.

Employee Shareholding and Participation in Corporate Governance

Baroness Bowles of Berkhamsted Excerpts

Thursday 11th October 2018 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I too thank the noble Lord, Lord Haskel, for securing this short debate. The topic has many aspects but today I will focus, as my noble friend Lord Greaves hinted, on the employee ownership sector, which represents some 4% of UK GDP.

In June the report The Ownership Dividend was published, after a year-long UK-wide inquiry into the effects of employee ownership—EO for short. I was the independent inquiry chair, aided by distinguished individuals from 20 leading independent business organisations, who posed questions at oral hearings and guided the report and its recommendations. The Cass Business School and the Alliance Manchester Business School also attended and provided a rigorous framework analysis of the substantial evidence. We were repeatedly informed that EO stimulated long-term thinking, collaborative behaviour, ambition, transparency, good governance and well-being. We were told, “It’s like owning a home instead of renting”, and, “You get a whoosh effect in the profits”.

The dividend of employee ownership is summarised as three things: driving productivity and performance, especially of SME and family businesses; rooting jobs in regional economies and providing resilience, especially at the succession stage; and sharing wealth and influence more equally among all employees. EO businesses are not all 100% employee-owned, in the formal acronym sense. Some are minority employee-owned, some use trusts, some use direct ownership and some a hybrid. Benefits, though, are delivered because there is both an ownership stake and true ownership culture: that is what defines employee ownership, as opposed to simply employees owning shares. There is an inbuilt meaningful say.

Following introduction of the employee ownership trust—or EOT for short—in 2014, there are now 250 EOTs. The majority are outside London and that number is growing at a rate of 30% a year, in contrast to “Save as you earn” and share incentive plans, which are declining. The Ownership Dividend reported many recommendations and has an action plan of how to grow more EO businesses, covering topics from capacity-building, awareness, regional development, training and finance to removing anomalous tax obstacles and providing tax incentives.

Just this week the Employee Ownership Association, the industry body for the EO sector, submitted a further interesting proposal to HMT for an employee share ownership trust which can hold both EOTs and SIPs. Using both elements, tax-free payments of bonuses and dividends could be made to employees of up to £14,600 per annum. That is under the current tax rules. Refinements such as shorter SIP holding periods could add further attractiveness, along with other measures. I can see ways in which an ESOT could become a vehicle for employee-corporate governance participation, even if using only the SIP side. It rolls up well with ideas such as having to spend as much on free shares for employees as is spent on executive incentive schemes. We need to attract all sizes of company, public and private, into meaningful employee share ownership for the benefit of the individual, businesses and the economy. ESOTs could be the way. I hope that the various relevant government departments and Ministers will make a good study of the ownership effect inquiry’s report and its work programme.