Financial Services and Markets Bill

Baroness Chapman of Darlington Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Lord Naseby (Con)]

My Lords, the noble Lord, Lord Eatwell, mentioned the Crown dependencies. I want to ask my noble friend on the Front Bench about the position of the British Overseas Territories.

[Baroness Chapman of Darlington (Lab)]

My Lords, I accept that we are politically exposed people—of course we are—and we can be bribed, so it is right that there are rules around this. This topic has attracted a lot of interest throughout the passage of the Bill, along with a number of questions and debates. I completely understand why that is.

While the enhanced checks faced by politically exposed persons are often onerous, as we have heard—all power to the elbow of the noble Viscount, Lord Trenchard; well done to him for finding the names of two actual human beings to speak to at American Express, and I hope he gets his situation resolved—it is vital that this country maintains strong anti-money laundering regulations and acts in a manner consistent with international standards. Unfortunately, to an extent that involves us, but I think the Government’s amendments in this group do what is needed in making the distinction, as do many other jurisdictions, between domestic PEPs and those from other countries, which is consistent with the Financial Action Task Force guidelines.

We welcome the support for the amendments from the noble Lord, Lord Forsyth, and my noble friend Lady Hayter of Kentish Town, both of whom have raised this issue consistently for some time. Most of all, though, it is right that we thank the Minister for bringing the amendments forward. She has worked hard to try to resolve colleagues’ concerns on this issue, and we hope that those will be dealt with by the upcoming changes to the regulations and the accompanying guidance.

[Baroness Penn (Con)]

My Lords, I reiterate what the noble Baroness, Lady Chapman, has just said: our approach in this area has always been guided by ensuring that the rules in place in the UK maintain the international standards that are set in this area. That has been the guiding principle in looking at resolving this issue. Nevertheless, we felt that it was right that action be taken. Examples such as that from the noble Baroness, Lady Kramer, demonstrate clearly that the approach taken by institutions is not always proportionate, and we need to address that.

I have heard from noble Lords, including my noble friends Lord Forsyth and Lord Moylan, questions about the timescale for the two pieces of work that are committed to in the amendments. I understand that feeling, but we have engaged closely with the FCA on the review that it is committed to undertaking through the government amendment, and it is clear that if there is to be a thorough assessment of the treatment of domestic PEPs at a systemic level—we have already raised individual issues or individual institutions in response to previous debates—then it must be given adequate time to be conducted.

The 12-month timeframe will allow the review to benefit from fuller engagement with industry and with affected PEPs, and it will ensure that the FCA is able to develop a full understanding of the scale and extent of this issue. I think it gives the FCA time to address issues such as those raised by the noble Baroness, Lady Kramer. Included in that timeframe is the fact that, if it deems it necessary to update its guidance, it will produce the draft within that timeframe.

The Government have 12 months to amend the money laundering regulations. As I said, the distinction between domestic and foreign PEPs does not currently exist in law, and we want to make sure that we get the drafting right to ensure that it achieves the intended outcomes without unintended consequences. That will require us to consult with industry to ensure that the language in the amendment has the desired outcome of altering firms’ behaviour in how they treat low-risk domestic PEPs. These points relate to the questions posed by the noble Lord, Lord Sharkey, because this definition will come in part through the amendment of the regulations but in part from looking at the FCA’s guidance, and what needs to be set out more fully there when it has done its review.

Acknowledging the interest from parliamentarians—perhaps we should all have declared our interest as we stood up to speak, in respect of PEPs—we have committed to updates on progress both from the FCA and the Government in delivering on these amendments.

My noble friend Lord Moylan and the noble Earl, Lord Erroll, raised the interaction with tipping-off requirements and communication to customers. We have asked the FCA to consider this as part of its review. The noble Baroness, Lady Hayter, and others, mentioned the impact on family members. Again, we have asked the FCA to consider this in its review.

My noble friend Lord Moylan also asked if we need to wait for 12 months for action. The FCA remains committed to taking action where it identifies non-compliance with its current guidance on PEPs and will do so throughout the course of the review. I encourage noble Lords to use the contacts provided in my letter on this issue in November, if they encounter difficulties while the Government amendments are being implemented. I am sure that those in the FCA responsible for this area will look at this debate carefully.

The noble Lord, Lord Eatwell, raised a question on Crown dependencies, and my noble friend Lord Naseby asked about overseas territories. I will write to noble Lords on that. If it is right or appropriate that this should extend that far, there is nothing in the amendments to prevent the Government doing that, but I would want to double-check the right interaction and the right locus for addressing those concerns. With that, I beg to move.

Amendment 96 agreed.

Amendment 97

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Moved by

[Baroness Chapman of Darlington]

104: After Clause 71, insert the following new Clause—
“Defined contribution and defined benefit pension funds investment review
(1) The Treasury must publish a review of how to incentivise defined contribution (DC) and defined benefit (DB) pension funds to invest in high-growth firms and a diverse range of long-term assets in the United Kingdom, which must include green infrastructure.(2) The review must consider how best to do this while protecting the safeness and soundness of pension funds.(3) In carrying out the review, the Treasury must consult—(a) the Department for Work and Pensions,(b) the Department for Business and Trade,(c) the Pensions Regulator,(d) the FCA,(e) the PRA,(f) the Pension Protection Fund,(g) pension trustees, and(h) relevant financial services stakeholders.(4) The review must consider the merits of—(a) amending the definition of “specified scheme” within the meaning of the Occupational Pension Schemes (Scheme Administration) Regulations 1996 (S.I. 1996/1715) so as to increase the threshold of such DC schemes in respect of which trustees and managers are required to produce a value for members assessment under regulation 25 of those Regulations;(b) adjusting the terms of reference for DB Local Government Pension Schemes (LGPS) funds to consider regional development as an investment factor;(c) establishing frameworks to enable DB pension funds to invest in firms and infrastructure alongside the British Business Bank.(5) The Treasury must prepare a report on the outcome of the review, and lay it before Parliament within one year of the passing of this Act.”Member’s explanatory statement
This amendment would compel the Treasury to publish a review within a year of Royal Assent on how to incentivise pension fund schemes to invest in high-growth firms and green infrastructure. The review would have to consider requiring DC schemes to assess the merits of: consolidation, establishing frameworks for British Business Bank investments (so that DB pension schemes will be able to invest alongside them), and adjusting the terms of reference for Local Government Pension Schemes (so they consider regional development as an investment factor).

[Baroness Chapman of Darlington (Lab)]

My Lords, we are pleased to bring back Amendment 104. I am grateful to the noble Baronesses, Lady Bowles of Berkhamsted and Lady Altmann, for signing the amendment.

Since Committee, and following the suggestion from the noble Lady Bowles, we have incorporated an additional consultee in the form of the Pension Protection Fund. If we are looking at different and better ways to utilise pension funds, it is only right that that body be formally involved in the process. It is important to note that the amendment would not directly lead to changes in how defined contribution and defined benefit pension funds are invested; it merely seeks consideration via a formal review of a number of potential ways forward.

I draw colleagues’ attention to subsection (2) of the proposed new clause in the amendment, which puts

“the safeness and soundness of pension funds”

front and centre. While no investment fund is risk-free, this is about identifying how funds could be used to support high-growth firms and long-term assets, including green infrastructure.

In 2019, the British Business Bank and Oliver Wyman published research which found that the UK’s defined contribution firms are not investing in fast-growing and innovating companies. It is a problem because the UK is home to incredible tech start-ups and life science companies. They are Great British success stories, but their growth potential is sometimes limited by a lack of access to finance. The research found that retirement savings could be increased by a significant amount with just a modest investment in these firms. For example, a 22 year-old whose defined contribution scheme made 5% of investments in the UK’s fastest-growing companies could see an increase in their retirement pot of 7% to 12%.

Having amended the Bill to include a nature target, we must also consider how pension funds can do their bit to help the environment. This review would look at investments to the types of green infrastructure which will fuel our future economic growth and help deliver the transition to a net-zero economy. The Government recently included nature-based solutions as part of the definition of infrastructure in the UK Infrastructure Bank Act. If investment in nature is a suitable purpose for a Government-backed investment bank, we should harness the power of pension funds as well. This review would be timely, with the recent collapse of Silicon Valley Bank and its UK subsidiary and the demise of Credit Suisse sparking panic in the financial markets and hitting the value of pension funds.

The world is changing. More people shop online and work from home, meaning that investment in things like shopping centres and office blocks no longer produces the returns it did in the past. If done properly, small changes to how pensions are invested could have a significant impact on UK economic growth and, more importantly, a significant impact for the scheme members themselves. I beg to move.

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[Baroness Penn (Con)]

My Lords, the Government welcome the further discussions that this debate has given us the opportunity to have on the issue of unlocking pensions capital for long-term, productive investment where it is in the best interests of pension scheme members. Indeed, as I set out in Committee, the Government have a wide range of work under way to deliver the objectives set out by this review. While I was a little disappointed not to hear those initiatives referenced in this debate—apart from, perhaps, by my noble friend Lady Altmann—I will give it another go and set out for the House the work that is already under way in this area.

As previously set out, high-growth sectors developing cutting-edge technologies need access to finance to start, scale and stay in the UK. The Government are clear that unlocking pension fund investment into the UK’s most innovative firms will help develop the next generation of globally competitive companies in the UK.

The Chancellor set out a number of initial measures in the Budget to signal a clear ambition in this area. These included: increasing support for the UK’s most innovative companies by extending the British Patient Capital programme by a further 10 years until 2033-34 and increasing its focus on R&D-intensive industries, providing at least £3 billion in investment in the UK’s key high-growth sectors, including life sciences, green industries and deep tech; spurring the creation of new vehicles for investment into science and tech companies, tailored to the needs of UK defined contribution pension schemes, by inviting industry to provide feedback on the design of a new long-term investment for technology and science initiative—noble Lords may have seen that the Government launched the LIFTS call for evidence on 26 May; and leading by example by pursuing accelerated transfer of the £364 billion Local Government Pension Scheme assets into pools to support increased investment in innovative companies and other productive assets. The Government will come forward shortly with a consultation on this issue that will challenge the Local Government Pension Scheme in England and Wales to move further and faster on consolidating assets.

At Budget, the Chancellor committed the Government to undertaking further work with industry and regulators to bring forward an ambitious package of measures in the autumn. I reassure the noble Baroness opposite that this package aims to incentivise pension funds to invest in high-growth firms, and the Government will, of course, seek to ensure that the safety and soundness of pension funds are protected in taking this work forward, as in proposed new subsection (2). Savers’ interests will be central to any future government measures, as they have been to past ones. The Government want to see higher returns for pension holders in the context of strong regulatory safeguards.

In addition, the Government are already working with a wide range of interested stakeholders, including the DWP, the DBT, the Pensions Regulator, the FCA, the PRA and the Pension Protection Fund, as well as pension trustees and relevant financial services stake- holders. Proposed new subsection (3) in the amendment seeks to set out this list in legislation. I reassure the House that this is not necessary as the Treasury is actively engaging with them already, as appropriate. The Government would also be happy to engage with other interested stakeholders, as raised by my noble friend Lord Naseby and the noble Lord, Lord Davies of Brixton.

I note the specific areas of review outlined in subsection (4) of the proposed new clause, and I reassure noble Lords that the Government are considering all these issues as part of their work. In particular, proposed new subsection (4)(a) references the existing value-for-money framework. As I set out in Grand Committee, one area of focus for the Government’s work in this area is consolidation. To accelerate this, the Government have been working with the Financial Conduct Authority and the Pensions Regulator on a proposed new value-for-money framework setting required metrics and standards in key areas such as investment performance, costs and charges, and the quality of service that schemes must meet.

As part of this new framework, if these metrics and standards were not met, the Department for Work and Pensions has proposed giving the Pensions Regulator powers to take direct action to wind up consistently underperforming schemes. A consultation took place earlier this year, and the Government plan to set out next steps before the summer.

Turning to proposed new subsection (4)(b), I have already set out the forthcoming consultation to support increased investment in innovative companies and other productive assets by the Local Government Pension Scheme. Noble Lords may also be aware that the levelling up White Paper in 2022 included a commitment to invest 5% in levelling up. This consultation will go into more detail on how that will be implemented.

I turn to proposed new subsection (4)(c). The Government are committed to delivering high-quality infrastructure to boost growth across the country. We heard references in the debate to the UK Infrastructure Bank, which we will work with. The Treasury has provided it with £22 billion of capital. Since its establishment in 2021, it has done 15 deals, invested £1.4 billion and unlocked more than £6 billion in private capital. Furthermore, we have published our green finance strategy and Powering Up Britain, setting out the mechanisms by which the Government are mobilising private investment in the UK green economy and green infrastructure.

The Government wholeheartedly share the ambition of the amendment to see more pension schemes investing effectively in the UK’s high-growth companies for the benefit of the economy and pension savers. We agree with noble Lords on the importance of this issue. Where we disagree with noble Lords is on how crucial this amendment is to delivering it. Indeed, the Government are currently developing policies to meet these objectives, so legislating a review would pre-empt the outcome and might delay the speed at which the Government can make the changes necessary to incentivise investment in high-growth companies. Therefore, given all the work under way, I hope the noble Baroness feels able to withdraw her amendment.

[Baroness Chapman of Darlington (Lab)]

My Lords, I am grateful to everyone who has taken part in this debate. The Minister’s response was not awful. It was encouraging to hear some of the things that she had to say, and we recognise the work the Government are leading on this issue. However, the benefit of taking the approach outlined in the amendment, notwithstanding some of the comments that have been made about it, is that it would give focus and prominence to this issue and would bring together some of the threads that the Minister referred to. It is an important piece of work that, given everything the Minister said, ought to be not too onerous and is something that the Government ought to be a little more enthusiastic about starting—because it needs to start. This is something we would like to see proceed quickly. I think there has been sufficient support for the amendment from all sides of the House, and I wish to test the opinion of the House.

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[Baroness Bennett of Manor Castle (GP)]

My Lords, I rise briefly, having spoken on this issue both in Committee and back in the last financial services Bill, just to put a human face on this. In doing that, I remind the Minister of the representatives of the mortgage prisoners whom we heard from at the meeting in the Treasury a couple of months ago.

The face I have chosen to put on is that of 63 year- old Jacqueline Burns, who spoke to the I newspaper in April about what her life is like now that she is a mortgage prisoner. She said:

“I am cutting back on food because I can’t afford to eat … I am so stressed out right now, I am at the end of my tether”.


The story, as Ms Burns told the I, was that she bought her home in Cambridgeshire for £69,000 in 2006 from SPML, which was an arm of Lehman Brothers. Ms Burns remembers that the broker “was really nice” and “pushed me … towards SPML”. We can all probably imagine why that was. The situation in which Ms Burns now finds herself is that she is on the standard variable rate and owes £109,000; remember that she paid £69,000 for the house. Because of the rise in interest rates, her mortgage payments have gone up from £333 a month to nearly £700 a month. She simply cannot pay.

She is in this situation because of a failure of government regulation, and because of arrangements made by the Government that made a significant profit. There is a huge moral responsibility. If we think about the costs that must be being imposed on the NHS by people who eventually become homeless and need council homes et cetera, it is clear that the Government should look not just at their moral responsibility; they also need to ensure that people get a fair deal and do not end up—even if the Government are not thinking of anything else—costing the taxpayer a great deal.

[Baroness Chapman of Darlington (Lab)]

My Lords, we are grateful to the noble Lord, Lord Sharkey, for bringing back this amendment and for his persistence on this issue over many years. We are also grateful for the work of the APPG, particularly to Rachel Neale, who herself is a mortgage prisoner and has become a champion for those people who have been affected by this problem. I also want to mention my colleague in the Commons, Seema Malhotra, who is doing a lot of work on this issue.

We are hugely sympathetic towards mortgage prisoners, who have endured difficulties over so many years now, and wish that the Government had acted earlier to ease the burden on them. We were pleased to back this amendment during the passage of the Financial Services Bill in early 2021, when it passed by 273 votes to 235. However, we are mindful that at that point the House of Commons rejected that amendment, and did so at a time when a much larger proportion of the population was experiencing issues with mortgage affordability. In recent weeks, however, we have seen hundreds of mortgage products pulled and rates hiked on those that remain available. A number of major banks have even temporarily withdrawn offers for new customers, putting the brakes on the aspirations of many first-time buyers.

Of course, mortgage prisoners are in a different position, in that they have been facing problems for many years and are just not able to simply switch products in the way that others can. As the Minister will no doubt outline, while this amendment did not make it into the Financial Services Act 2021, it did prompt some new and welcome actions from the Treasury, regulators and banks. New advice was available and a number of lenders relaxed their criteria in certain cases. We know that the elected House has already rejected this proposal and, realistically, it is unlikely to reconsider in the current context, but more does need to be done. Can the Minister let us know whether the Government intend to respond to the recommendations that were made by the LSE in its report? If they are, when will that response be forthcoming? The Government urgently need to get a grip on the issues facing the mortgage market generally and, once that situation has calmed, we hope they will be able to do what they can to ease the difficulties faced by mortgage prisoners.

[Baroness Penn (Con)]

My Lords, I thank all noble Lords who have spoken in this debate, and in particular the noble Lord, Lord Sharkey, for tabling this amendment. I start by emphasising that the Government take this issue extremely seriously. We have a great deal of sympathy for affected mortgage borrowers and understand the stress they may be facing as a result of being unable to switch their mortgage. That is precisely why we, and the FCA, alongside the industry, have shown that we are willing to act, and have carried out so much work and analysis in this area, partly in response to prior interest from this House, as alluded to by the noble Baroness, Lady Chapman. This has included regulatory changes to enable customers who otherwise may have been unable to switch to access new products.

The Government remain committed to this issue and welcome the further input of stakeholders. For this reason, during Committee, the Government confirmed that they were carefully considering the proposals put forward in the latest report from the London School of Economics. Since then, as noted in the debate, I have met with the noble Lord and further members of the APPG and representatives of the Mortgage Prisoners Action Group to discuss the findings of the report and the issue of mortgage prisoners more widely.

The Economic Secretary to the Treasury has also written to the noble Lord, including to provide further clarity on the proceeds from the sale of UKAR assets. The LSE report recommends free comprehensive financial advice for all. That is why the Government have continued to maintain record levels of debt advice funding for the Money and Pensions Service, bringing its budget for free-to-client debt advice in England to £92.7 million this financial year.

The other proposals put forward by the London School of Economics are significant in scale and ambition. While the Treasury has been engaging with key stakeholders, including the LSE academics behind the report, for some time, including since Committee, we have concerns that these proposals may not be effective in addressing some of the major challenges that prevent mortgage prisoners being able to switch to an active lender. For example, the proposals would not assist those with an interest-only mortgage ultimately to pay off their balance at the end of their mortgage term.

We continue to examine the proposals against the criteria put forward originally by then Economic Secretary to the Treasury, John Glen, to establish whether there are further areas we can consider. I remind the House that those criteria are that any proposals must deliver value for money, be a fair use of taxpayer money and address any risk of moral hazard. This does not change the Government’s long-standing commitment to continue to examine this issue and what options there may be. However, it is important that we do not create false hope and that any further proposals deliver real benefit and are effective in enabling those affected to move to a new deal with an active lender, should they wish to.

I will not repeat the arguments against an SVR cap, as we discussed them at length previously in this House. An SVR cap would create an arbitrary division between different sets of consumers, and it would also have significant implications for the wider mortgage market that cannot be ignored. It is therefore not an appropriate solution, and I must be clear that there is no prospect of the Government changing this view in the near term. In the light of this, I ask the noble Lord to withdraw his amendment.