Queen’s Speech

Baroness Bowles of Berkhamsted Excerpts

Wednesday 25th May 2016 Lords Chamber

[Baroness Bowles of Berkhamsted (LD)]

My Lords, the gracious Speech included commitments to tackle corruption, money laundering and tax evasion—pernicious issues that undermine trust in business and finance. Greater transparency, as well as sanctions, is needed in these areas and beyond. As the noble Lord, Lord McFall, pointed out, transparency can usefully extend to regulators and, I would say, to HMRC.

Next year brings mandatory public disclosure of tax strategy for large businesses, but more could be done, especially around country-by-country reporting, such as publishing reasons for tax paid being less than headline rates and disclosure of tax risk. EY’s 2013 report on tax transparency noted that 53 FTSE 100 companies had an effective tax rate lower than the UK headline rate and also suggested potential benefit to organisations and board governance from understanding and reporting effective tax rates country by country.

More transparency is also still needed in the fee structure that has undermined pension funds. There is no incentive to save when those managing the money get more out of it than you do. Added to that are concerns about lukewarm stewardship by UK fund managers, and the FRC is now reviewing the stewardship code commitments. I would add to its list looking at pooled nominee accounts, both to enfranchise ordinary shareholders and to avoid risk from broker insolvency.

There is no room for fainthearted governance. It breeds the absence of culture identified in the Kay review, which showed how companies and wider society have drifted apart. There is too much “duty of directors to maximise shareholder value” and, to that end, complex executive remuneration incentives occupy acres of annual report while average employee pay is never the metric. The duty of directors to promote successful companies has been watered down and concern for markets and the public good reduced to mere price competition. An interim report from the Big Innovation Centre suggests that this narrow-minded approach has led to British companies losing growth of more than £130 billion a year, and accounts for lower productivity, lack of training and high worker turnover. Better corporate governance is the intangible infrastructure that business needs to grow.

I turn to the referendum. There have been suggestions that the third-country equivalence provisions in EU financial markets legislation could mitigate the loss of passporting rights. My back bears the scars of negotiating more open third-country provisions and, without the UK around the table, this is one of many examples where regulation will shift away from where we have taken it and where we wish it to be.

Equivalence findings are not swift, simple or comprehensive. The Commission is under no obligation to undertake them, member states collectively have to approve them and how prescriptive the requirements and conditions are depends entirely on the EU. It is political. There are significant administrative hurdles, too: firms registering with ESMA and notifying national regulators, supervisory co-operation agreements with ESMA, including disclosure of information about individual firms, agreement to litigation being in an EU member state—so not in the UK any more—and retail services will remain as 27 separate regimes with branch requirements.

A report, The UK Referendum—Challenges for Europe’s Capital Markets, commissioned by the Association for Financial Markets in Europe from Clifford Chance cautions that,

“there are risks that political constraints may obstruct the use of third country mechanisms to mitigate the exit of the UK from the EU”,

and that,

“changes to law or regulation over time in the UK and the”,

continuing EU,

“could adversely affect the harmonised legal framework existing at the outset and put at risk the continued availability of equivalence determinations”.

So at best, under Brexit we would be second-class citizens, taking instead of making financial services law and at significant risk of being cut off, given that our loss is their gain.

Brexit being bad for the City has also been compared to concerns about the UK being left out if we did not join the euro, which in fact did not materialise. Brexit is different, notably because we were saved before by the single market, which protected the City from the European Central Bank’s policy for euro securities to be cleared in the eurozone. The strength of the single market was underestimated. We are protected now by that strength—strip it away, and significant business will have no choice but to move.