Financial Services (Implementation of Legislation) Bill [HL]

Baroness Kramer Excerpts

Committee: 1st sitting (Hansard): House of Lords
Tuesday 8th January 2019 Lords Chamber

[Baroness Kramer (LD)]

We will have amendments discussing equivalence more directly later, but will the Minister confirm that nothing could be done to step away from or undermine equivalence, or does this allow that? That is certainly the way it has been read by most Members of this House.

[Lord Bates]

We will have the debate under the future group of amendments on equivalence. We are not setting here the test or the bar as one of equivalence. We are simply talking about the specific directives and regulations before us and mentioned in the Bill: the 15 here; the four already agreed, which are mentioned on page 1 of the Bill; and the further 11 mentioned in the Schedule accompanying it, which have not yet been agreed. Because they have not been agreed and may be under debate or amendment without the UK at the negotiating table, we are simply adding in that greater level of power to say that the UK, in the event of leaving without a deal, would need to look after the interests of the UK financial and industry sector and could not give a blank cheque in the opposite direction to the EU to pass whatever regulation that we would automatically implement because of adherence to a notion of equivalence. That cannot be right for UK financial services. We need to look at what comes to us, then act within the interests of the UK financial services sector at that time.

I will deal with some of the specific points raised. The noble Lord, Lord Sharkey, talked about the recommendation of the Delegated Powers and Regulatory Reform Committee. I pay tribute to the work it did on this and the quick turnaround and punchy conclusions it arrived at. We are considering its recommendations, which the noble Baroness, Lady Liddell, asked us to look at. I will be happy to meet with noble Lords ahead of Report to discuss where we stand. I thank the Delegated Powers and Regulatory Reform Committee for its work and recognise that it raised some very pertinent issues. We want to look at them in greater detail, and I would be happy to discuss that with noble Lords ahead of Report.

I hope I have gone some way to addressing noble Lords’ points at this stage. We will come to a number of the other points in future debates and groups.

[Lord Bates]

I am happy to do that. As the negotiations on these files continue, further amendments may be agreed, proposed or dropped that the Government will wish to domesticate or remove using the powers under this Bill. As the final outcome on many of these files is still unclear, we need to make sure that we can bring them into UK law in a way that works best for UK markets. This might, for example, include areas where the final parts of legislation could, if unchanged in a no-deal scenario, present inconsistencies with the UK regulatory framework, with global standards or with the UK’s position as an open global financial market. It is important therefore that we have the power to adjust these inconsistencies when bringing them into UK law. I acknowledge that this is a—

[Baroness Kramer]

I am sorry, but the Minister just said that Clause 1(1)(b) allows an interpretation not to remain with the objective described in the European directive. His whole argument under Clause 1(1)(a) was that the words “corresponding” and “similar” provide, in different legal ways, for us to take steps only where it is consistent with the objective of the European directive. He is now directly saying that Clause 1(1)(b) allows us to take steps that are directly opposed to or completely inconsistent with the European directive. Could he provide us with some clarity on this? It seems that the power allows the Government to move in any direction they wish, and that is exactly the issue we are trying to raise here. Under those circumstances, is that for Parliament to decide or for the Treasury to decide through statutory instrument?

[Lord Bates]

I thank the noble Baroness for her intervention. There is a difference between the two elements and between the use of “adjustments” and the terms used earlier, “similar” and “corresponding”. Effectively, they relate to the two different groups that we have here. The first group is those for which we have been party to the negotiations and to agreeing. Following engagement, we know that the industry is keen to see those transposed into UK law, and we support it in that respect. Then there are those other elements that are incomplete, the final shape of which we do not yet know. Once the final shape is known—in all likelihood, that will be after the date in this scenario and once we have left the European Union and the negotiating table—we will have the power to adjust. Those are the two different elements.

[Lord Bates]

That is not the case. I accept that the noble Lord is presenting a caricature of the situation that proves a particular point, but of course that is not what will happen. First of all, certain guarantees are presented in terms of reporting, which we will come on to again later. There are certain processes in terms of scrutiny of secondary legislation, not only by the Secondary Legislation Scrutiny Committee, which does incredible work and of course has a role set out in Standing Orders as to how it must scrutinise secondary legislation. Also, the affirmative SIs must be debated in your Lordships’ House. In addition to that, we have also undertaken that there should be proper engagement with the industry in talking about this and with other stakeholders too. There is a wide range of things.

We will delve deeper into some of the points in the noble Lord’s own amendments later. I appreciate that the role and purpose of Committee is to elicit from the Government further explanations about what these terms mean. We may have a difference about whether the noble Lord’s view is shared by the Front Bench, and whether all these matters should be dealt with by primary legislation in 15 Bills or by secondary legislation, which has been the convention, particularly when it comes to financial services.

[Baroness Kramer]

My Lords—

[Lord Bates]

I will just finish this point if I may. That is why the noble Lord, Lord Tunnicliffe, and I and indeed the noble Baronesses, Lady Kramer and Lady Bowles, spent so much time in Grand Committee talking through various pieces of secondary legislation on financial services. That has been the conventional way in which we have worked. The noble Lord, Lord Adonis, believes that the legislation ought to be primary in this case. That is his view. It is not the Government’s view and it is my job to outline the Government’s view on this. We are following established procedures and providing powers under scrutiny to allow us to deal with a unique set of circumstances, which we have never had to deal with before.

[Baroness Kramer]

My Lords, this is genuinely a question of clarification. Is the Minister saying to me—I cannot read it in the language of the Bill—that Clause 1(1)(b), which states:

“with any adjustments the Treasury consider appropriate”,

excludes the category of in-flight legislation described as,

“specified EU financial services legislation”?

I assume that it includes that. Therefore, the Minister’s argument is that the Government will have to stick with the underlying objective for specified EU financial services legislation—which is what Clause 1(1)(a) is talking about—but the same legislation can then be overturned and dealt with completely differently under Clause 1(1)(b), which frankly allows adjustments as long as a piece of string. That is what I am trying to clarify. I understand that they are two different groups, but paragraph (b) surely applies to both groups.

[Lord Bates]

Perhaps it would be helpful at this stage to agree that these issues will be addressed in future groups. We will choose some wording—if not today, then certainly before Report—that is quite rightly required by the Committee to reassure itself about what is and is not referred to in that respect. With that, and with the undertaking to meet with colleagues specifically on the report of the Delegated Powers and Regulatory Reform Committee before Report, I invite noble Lords not to press this amendment.

--- Later in debate ---

[Baroness Kramer]

I say to the noble Lord—and perhaps to clarify for others—that I think there is a real difference regarding the in-flight legislation, which has gone through an extensive European process that we have been engaged in. That is a highly democratic process involving scrutiny and consultation on a scale that we rarely experience here in the UK. It has gone through the Council and Parliament, and the technical language is nearly all in place. That is in a different category from other provisions, which are typically dealt with in the schedule; everything is at a much earlier stage and—if we leave—we will not be engaged in the on-going process that shapes that outcome.

We can look for some flexibility on the first category. I say that in part because we are all incredibly conscious that just getting through the essentials of the legislation on our plate is overwhelming. The last thing I would wish to see is for us to fall out of equivalence by accident, because the Government put elements on which we have been engaged and on which we agree at the back end of their legislative priority list, and we find ourselves by default stepping out of an equivalent situation. That is a concern, and it is one of the reasons why we would like to explore some of the options my colleagues have been outlining.

[Lord Tunnicliffe (Lab)]

My Lords, I think the two groups of amendments in many ways cover the same issue. They are essentially about how much flexibility the Executive should have in using this new law. Taking noble Lords back to the creation of the withdrawal Act, it was an extremely painful process because we were naturally reluctant to give the extensive powers in the withdrawal Act to government. But we were in a sense battered into the very realistic understanding that, given the volume of work that had to be done, the only way to do it was through statutory instruments enabled by the withdrawal Act.

--- Later in debate ---

[Lord Flight]

My Lords, the hope is that if everything were sensible, the amendment would be appropriate and powerful. As the noble Baroness, Lady Bowles, pointed out, it is possible that the EU may go down paths of regulation that are not very sensible. In that situation, given that the market for the UK’s financial services industry is not just Europe, it may not be practical for the UK to use and follow equivalence. Indeed, there may need to be changes to the benefit of the industry other than vis-à-vis a Europe that has gone off the rails with its regulations.

[Baroness Kramer]

My Lords, I added my name to the amendment because I consider it one of the most important in the range we are addressing today. Two fundamental issues seem to underlie our concerns about the legislation. One issue comes from a constitutional perspective, concerning Henry VIII powers. It matters; we discussed it in other contexts but it is important in this context too. It has an impact on the relationship between Parliament and the Executive, including applying the ability to exercise policy power and Parliament’s role in scrutinising policy.

One aspect of that is particularly substantial in the Bill. In the two-year period when the regime discussed in the Bill holds sway, we will be in a critical time, determining our future relationship with the European Union and whether our financial services industry continues to have access to European markets for financial services. That is a huge discussion and decision; it should not be handed over to the Treasury to enact simply through statutory instruments. I am exceedingly concerned that using this legislation, we will find ourselves in a position where because of Treasury decisions, our negotiators will find that no matter what they wish at the end of their negotiating period, we will have diverged significantly in financial services, making it almost impossible to reconnect parts of the market. If the industry sees that we will go through a period in which that may happen, it will make decisions about where it puts operations, activities and jobs that would not be in the long-term interest of the UK. That two-year period—exactly the period when this legislation applies—is critical. We will basically delegate decisions on whether equivalence continues to be UK policy that come into effect in this House only through the weak medium of statutory instruments.

I see this measure as a safeguard. I recognise what was said by the noble Lord, Lord Flight: that some things about future European regulation in the financial services industry may be unsatisfactory and that we may decide to diverge from them. But it really should not be the Treasury’s decision to do that and it should not be the Treasury’s decision to shut off the possibility of creating a long-term equivalence regime. That is why I support this amendment. If we accept that within this Bill and the Government decide that there are indeed instances where they want to diverge, they can bring forward primary legislation. It is simply that they could not do that through secondary legislation in the way that this Bill would currently allow them to do so. That is too major and fundamental a decision.

I remind the Committee that the financial services industry is probably the most important sector in our economy. It delivers something like £76 billion a year in taxes which support our public services. To make a decision that will fundamentally impact on key aspects of the industry and with all the consequences that that entails must surely need to be done only through primary legislation and with the full and total engagement of this House. That is why I am particularly concerned about this clause.

--- Later in debate ---

[Lord Bates]

I thank noble Lords for their contributions to this debate. I shall begin by looking at what I think is an area of common ground: we all recognise the importance of the financial services industry to the UK. Perhaps I may pick up on a point made by my noble friend Lord Flight, that one of the main purposes of this Bill is to ensure that the UK remains an attractive and competitive place to do business, retaining our place as a world leader in financial services. To do this in a no-deal context, it is essential that the UK retains sovereignty over our rules. From the perspective of financial stability and protecting the UK taxpayer, it is essential that the Government, the Bank of England and the FCA have the tools available to ensure that the UK markets are appropriately and effectively regulated.

It would be wrong to set a condition over the UK’s regulatory framework that means decisions which are made about the UK’s future regime are determined through the lens of maintaining equivalence to the EU, irrespective of the quality of those rules and how future legislation and the market itself may evolve.

[Baroness Kramer]

I think that there may be a misunderstanding. This would mean that statutory instruments could not be used to create divergence—it does not mean that primary legislation could not be used to do so. That is the underlying point.

[Lord Bates]

The legislation we are dealing with is in its very composition a temporary measure; it is a temporary piece of primary legislation with a sunset clause.

[Baroness Kramer]

I know that we will discuss the sunset clause later. It does not mean that the statutory instruments created under this legislation die after two years, it means only that the powers in the overarching legislation will die. However, those two years are the critical period, so the sunset clause does not have the consequence that I think the Minister might suspect it does.

[Lord Bates]

To go back to first principles, I am saying that the power in this Bill is not in effect to make policy—rather, it is the ability to produce secondary legislation that has a policy content to it and which would then be subject to scrutiny in this House. That power is being put in place for an extraordinary set of circumstances—I think we all agree that these are extraordinary circumstances and in fact I should underscore that we hope that these powers will not be required to be acted upon, because there will be a deal and we will continue to have access to the market in financial services across the EU. That is our aim, but we are preparing for all eventualities.

The noble Baroness will be aware that equivalence determinations are autonomous decisions with the EU and, in turn, the UK retaining autonomy for determining if a foreign jurisdiction has equivalent standards and supervision. The EU takes a varied approach to assessments of equivalence, tailoring its approach to individual regimes with regard to how the assessment is conducted. The Commission itself has stated:

“It is the equivalence of regulatory and supervisory results that is being assessed, not a word-for-word sameness of legal texts”.


Indeed, for a recent example, one need to look only at the EU’s statements on equivalence in a no-deal scenario. Within these, the EU has been clear that equivalence decisions of the UK will be made where justified in the interest of the Union and its member states, with time limits and conditions to their decisions where appropriate. As such, it is very difficult to judge what the EU will take into account in its future assessments and how its autonomous third-country regime will evolve. Such an approach, plus the breadth and variety of considerations that form part of equivalence determinations, from the rules themselves to supervisory approaches, means that it would be very difficult to determine what effect, if any, a change or adjustment that the UK makes to our laws might have on a future equivalence determination in a given area, given that these are autonomous decisions taken by the EU. It is therefore difficult to see how the test set out in this amendment could be met.

Let me reiterate the importance of, in the case of a no-deal situation, retaining the ability to adjust our legislation so that it best serves the aims and objectives of the UK once we have left the EU, as my noble friend Lord Flight has identified. It is crucial to ensure that we can bring into force pieces of legislation in a way that works best for the interests of UK markets. The Government are also committed to doing this as transparently as possible, which is why we have set out the strict reporting requirements to which I know we will return on Report. In the light of that, I invite the noble Baroness to withdraw her amendment.

--- Later in debate ---

[Lord Deben (Con)]

My Lords, I remind the House of my declaration in the register of interests, particularly my chairmanship of PIMFA, the organisation that represents independent financial advisers and wealth managers.

I have to disagree with the noble Lord, Lord Adonis, about the meaning and purpose of this amendment. But I have to say to my noble friend that one of the reasons for this amendment is that many of us are very concerned that the Treasury in particular should take very seriously the issues of the financial services sector and the contribution that it makes to the British economy. That seriousness has not always been evident.

Secondly, the European Commission has been very helpful in listening to the British applications and those of our colleagues in the rest of the European Union and, should we leave the European Union, which I trust will not happen, we would certainly expect to have at least as much access as we have on the present stage and certainly as much influence.

I am concerned because in the past we have sought to pass amendments that asked the Treasury to bear in mind important matters. For example, an amendment some years ago stated that the Treasury should insist that regulators bear in mind the need for savings in our society. That was pooh-poohed by the Government who said that it was entirely unnecessary and of course everybody knew that. The result has been that regulators have not taken that issue into account and indeed pointed out that the Government did not accept when it was suggested to them that saving as part of our society was important. So it is important to bring home to the Government the issues raised with this amendment.

I want to make two further points. First, this is a very competitive world. We need to have legislation if we are not a member of the European Union that enables us to continue to be as competitive as possible. This may not be exactly the right wording, but it carries that meaning. Secondly, small companies find much of the legislation not only burdensome but unnecessary—points that my noble friend Lord Leigh properly made. That is not because one wants lower levels of legislation.

At this point, I want to take serious objection to what the noble Lord, Lord Adonis, said. I happen to be a Conservative. I sit on the Conservative Benches and I have been a Conservative Minister for longer than almost anyone else. But I am very much in favour of this regulation. The industry that I am happy to work in is also very much in favour of sensible legislation because we do not like cowboys either. They produce extremely bad reputations. Nobody can be tougher about the fact that we need proper regulation. There is no question in these amendments that somehow or other we would lower the bar. That is not the issue.

I would agree about some of the remarks made about Singapore. I am deeply upset to have a Foreign Secretary who thinks that Britain should be compared to Singapore. Fundamentally, that is as about as helpful as suggesting that we should be like Liechtenstein. I am sorry, but it is not a sensible comparison for so many reasons, not least because of the autocratic Government of Singapore. I do not want to be associated with them as a comparison.

However, our financial services need proper regulation. We want regulation, but it has to be proper regulation within the context of our competition. Therefore, it is proper to say that we do not want regulation that either makes it more difficult for us to compete or lays a disproportionate burden on the shoulders of small companies. Those seem two such simple and reasonable things to suggest that, on this occasion, my noble friends here and I are helping the Government.

Ministers are always suspicious, particularly when I say that I am trying to help the Government, but I am, on this occasion, trying to help them. I am doing it in great difficulty because I do not like this Bill at all. I do not want to leave the European Union. It is more and more clear that leaving the European Union is barmy, and we are having to spend time talking about barmy things that will take two years and then go away. It is a pretty insulting thing for this House, but that is what we are having to do. So I ask Ministers please to take this seriously and not to take the view of the noble Lord, Lord Adonis, in the way that he put it, but merely to agree that the amendment is sensible. If the Government cannot give us that undertaking, I have to say that the financial services industry will be very suspicious. If the Government are not prepared to do at least as well as the European Union has done in negotiation and discussion, I will be very sad.

I hope that people notice just how good the Commission has been when they attack the European Union for bureaucracy and suchlike. It has been more open and more able to discuss, and more concerned about the issues than any of our governmental structures. We have to remind people that the European Union is more open, more willing to listen and more concerned to be there for industry than the Treasury has been in history, which is why this amendment has been tabled.

[Baroness Kramer]

My Lords, I have to say to the noble Lord, Lord Deben, that every alarm bell went off in my head when I heard the noble Lord, Lord Leigh, basically argue that this would be a route to get naked short selling on AIM. This is essentially a mechanism that will allow people to enter into contracts which they know if they had to fulfil they would be very unlikely to fulfil—talk about risk. That general underlying principle worries many of us who think that a less speculative financial services industry is, in the long run, much more sustainable than a far more speculative financial services industry. That is exactly the point. It is people selling short shares that they will not be able to buy if they are ever forced to close on the contract.

[Lord Leigh of Hurley]

With great respect, I must say that that is not the situation in respect of the AIM market. This is where market-makers who are bound to make a market respond to requests for specified sums or amounts of shares with quoted prices. I think that the noble Baroness is talking about a different type of short selling.

[Baroness Kramer]

I thought that the noble Lord described naked short selling, which I thought I just defined. Anyway, I am nervous about the idea of policies such as this. There will be enormous pressure to use this opportunity, where the Treasury alone is the decision-maker, basically to loosen the regulatory structure that we have in the UK. That issue is a fundamental one for Parliament.

I would say to the noble Lord, Lord Hodgson, who talked about the need to find the appropriate place and that it is good that we can have those discussions with the Treasury, to have them with Parliament because there is another side to the argument. One reason why the UK been spectacularly successful as a financial centre is because the regulatory environment in which it functions is considered by many to be a global gold standard. If the noble Lord goes to countries such as China, India or other places, the level of trust and respect in financial institutions that are framed within those EU parameters—he could say it is foolish or sensible—is very high. It annoys the United States to heaven and beyond because so often it has loosened its regulatory standards but has not seen the business shift out of the EU into the US.

If you talk to companies, part of that reason is the reputational issue. For many companies, to be able to turn to clients and say, “I operate in the gold standard regulatory environment which means that you can trust me and what I do”, is so key to the future of their business that clients will reply, “If there is a significant loosening of standards, it might in the short term increase my profits but in the long term it will damage my regular relationship with my client base and I will need to move to the place that carries that gold standard kitemark”. Losing the kitemark is significant. That is something that this House and the other House should consider and should not be simply left to a conversation between the industry and the Treasury. It backs up our whole argument that this Bill, by transferring all those decisions simply to statutory instruments, is running into very dangerous territory.

[Baroness Bowles of Berkhamsted]

My Lords, a couple of interesting points have been made in the context of this amendment. As it reads, it looks reasonably acceptable as we do not want gold-plating, which could potentially happen. I echo that the Commission has been particularly good at dealing with smaller companies and businesses. My experience is that that has not always been reflected in the UK when the dispensations have been a matter for the member state. On more than one occasion, I have written to regulators and others about that.

One of the points was about asymmetric effects and the fact that when we are no longer a member state the law will bear down on us when we replicate it, or nearly replicate it, in a different way from when we were a member state. It is not only in financial services legislation that this could potentially happen. It happens with contractual obligations. When we replicate Rome I and Rome II, if the other party is in, say, New York, the penalty for breach of contract will be different in the UK from what it would be in France because we no longer tick the member state box. It essentially means that the higher New York penalty will apply rather than it being limited.

I sit on one of the secondary legislation scrutiny committees, and there have been various occasions when asymmetries have come up. There have sometimes been attempts to balance them, but sometimes not. It depends. These judgments about asymmetries already appear to be going on under the withdrawal Act. From the ones that I have seen, by and large it has not looked as though we could have dealt with them differently, but the issue is worth investigating. To say that the Treasury should do what it can for small businesses is a good thing, whether or not we say that we should not be put in a worse competitive position. Our markets are bigger and, because we have bigger global markets, we may have to regulate in a way that looks stronger rather than weaker. There may be other ways that it does not suit the specificities. I would be a little worried about “no worse competitive position” taken to its extreme, but in the general sense it is possibly more acceptable.

--- Later in debate ---

[Lord Davies of Oldham]

My Lords, I can be brief because we have already had at least four debates this afternoon on the exact issues that this amendment and Amendment 11 in my name and that of my noble friend Lord Tunnicliffe deal with. It all revolves around the fact that we are not prepared to give the Government and the Treasury primary powers over issues that would normally require primary legislation just because this Bill has some exceptional qualities to it. It does indeed have exceptional qualities, as has been pointed out on all sides. It is meant to have a lifetime of a bare two years. The vast majority—I will withdraw that remark; I cannot qualify it. Some people who have spoken today have sought to make some improvements to the Bill but I do not have the slightest doubt that they hope that the Bill will never be necessary and that we will not crash out of the European Union without an agreed position.

Two debates ago, the noble Baronesses, Lady Bowles and Lady Kramer, did exactly what we seek to do with this amendment—that is, to identify just where our limits are with regard to the intention in the Bill and to point out that it is misconceived because it attributes to the Treasury powers that we ought not to allow it to have. We thought that we had spotted the area where the debate would flare up most significantly in Henry VIII powers terms, but in fact these issues have already been discussed without the need to mention that moniker too often.

I therefore move this amendment on the basis that the Committee and the Minister know only too well the strength of feeling on all sides that this Bill cannot be a Trojan horse to allow the Treasury and the Government to introduce measures that they would ordinarily introduce through primary legislation but which they are trying, through the enabling quality of this Bill, to introduce through statutory instruments and Treasury adjustments. We have debated this matter long and hard. We all know where we stand and I therefore beg to move, although I do not expect too much in the way of contributions in support.

[Baroness Kramer]

I will just say from these Benches that we agree.

[Lord Bates]

My Lords, first, I am sure that I speak for the whole Committee in thanking the noble Lord for his succinctness in presenting his amendment. I recognise the old adage that everything needs to be said but not everyone needs to say it. That is a good principle. In following him in that spirit, I will put on the record a few comments that I believe will be helpful for our wider debates.

We appreciate the concerns across the Committee regarding the Henry VIII powers and, where they are proposed, it is clear that their necessity must be well evidenced. In the case of the financial services legislation, to which the power in this Bill will apply, I hope that noble Lords will accept the need for such a power.

An inability to amend existing primary legislation such as the Financial Services and Markets Act 2000 will render it impossible to implement this necessary body of legislation. Further, as noble Lords will be aware, the exercise of many functions under financial services legislation is carried out by the independent regulators—the Financial Conduct Authority and the Bank of England. The capacity and expertise of the financial regulators will be absolutely crucial to the effective implementation of these pieces of legislation and, consequently, to the resilience and prosperity of the financial services sector here in the UK.

The amendment would remove the ability to delegate to the regulators because, as a general rule, a power to make secondary legislation does not include a power to sub-delegate. An inability to effectively delegate powers to the regulators in implementing the legislation contained in this Bill would severely undermine the value of transposing the original legislation into UK law. In many cases, it would effectively render legislation unenforceable, and the Bill would simply not be able to achieve its central goal of ensuring that the UK continues to be an attractive and competitive place to do business in the immediate two-year period post exit, in the unwelcome and unlikely event of a no-deal scenario. Given this context and the context of the previous debate, I invite the noble Lord to consider withdrawing his amendment.

--- Later in debate ---

[Lord Sharkey]

My Lords, given the debate so far I can be very brief. If the Bill proceeds as currently drafted, it will enable the Treasury to create a new set of laws and policies for our financial services industry, all via secondary legislation. These new laws and policies will not have been exposed to proper parliamentary scrutiny and will not have been amendable. This stands in extreme contrast to the careful, detailed and very lengthy scrutiny given to all previous changes in the laws and policies for our financial services industry—scrutiny which has frequently resulted in very significant amendments. This is an entirely unsatisfactory state of affairs, and I know we will come back to this on Report.

But if we are to have legal and policy changes introduced by SI, then we should at the very least have the opportunity to review them after the fact. That is what my amendment proposes. The Bill as it stands contains a sunset provision for the powers in Clause 1. My amendment proposes a sunset provision for the regulations created by the powers in Clause 1. The sunset provision for the powers extends for two years after we leave the EU. My amendment proposes that the new regulations expire two years after that.

This would have two effects. It would give time to assess how the new regulations were working in practice. It would also mean introducing primary legislation to reinstate and/or modify or add to new regulations. This would guarantee what we do not have in this Bill: a means of proper, full parliamentary scrutiny of new laws governing a critical part of our national and economic life. My amendment would restore to Parliament the ability to debate and amend these new laws in the proper context of primary legislation. I beg to move.

[Baroness Kramer]

I want to make one very quick comment to add to those of the noble Lord, Lord Sharkey. There is a real danger that the pattern within this Bill becomes a precedent, and that for future financial legislation we in effect see this process of Treasury decision enacted through statutory instrument. This sunset clause would make that impossible. It would make sure that this was, in effect, a one-off, and that there was a return to normal practice following the end of four years.

[Lord Davies of Oldham]

My Lords, it is time to be kind to Ministers when one gets to this end of the Bill. My advice to the Minister is to indicate what a logjam of SIs there would be four years on from the consequences of this strategy. I understand entirely, and sympathise very much with the intent behind the amendment, but if I were the Minister I think I would point out a few of the practical difficulties.

Student Tuition Fees and Maintenance Loans

Baroness Kramer Excerpts

Tuesday 18th December 2018 Lords Chamber

[Lord Bates]

It is not correct to say that student loans are not on the Government’s books. Of course, the national debt does take into account the full cost of student loans—they are listed there. The question at issue, which was addressed by the ONS, was whether the repayment rates should be reflected in the deficit—the total is in the debt but not in the deficit—and it came down on the side of believing that that ought to be recognised in the year in which the loan takes place, rather than waiting until the end of 30 years to figure that out.

We do not mark our own homework on this. We follow the existing rules, as all Governments have done. The ONS has offered a view and made a recommendation, and we will follow that through.

[Baroness Kramer (LD)]

My Lords, what most worries me is the distortion in decision-making that results in this silly game-playing with accounting standards. We saw it with PFI and with Network Rail and now, there is a great fear around the House that the student loan programme might be curtailed to improve the cosmetics of the deficit. Will the Government finally simply overhaul the way they handle the public accounts so that they are genuinely clear and transparent? The financial markets that are supposed to be most fooled by this managing of the deficit number simply deconstruct it so that they can see the underlying reality, so there is nothing to be gained except PR—and the danger of distorted decision-making.

[Lord Bates]

We accept the ONS’s rules. The rules that she criticises are the same as those that were in place during the coalition years. People have pointed this out, and there is a debate about whether it is correct to book a loss that might or might not occur in 30 years in the year in which the loan is made. That is a reasonable debate to have. We do not make the decision; the ONS does. It has decided and we will follow it.

Financial Services (Implementation of Legislation) Bill [HL]

Baroness Kramer Excerpts

2nd reading (Hansard): House of Lords
Tuesday 4th December 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, it seems rather strange to be the winder in a short debate like this. My noble friends Lord Sharkey and Lady Bowles laid out the position of these Benches with great clarity and raised a series of questions, so it is not my purpose today to repeat them but to say how much I stand behind them and the comments we heard from the noble Baroness, Lady Liddell, and the noble Lord, Lord Hodgson. I thank the noble Lord, Lord Leigh, because in a sense he made the point for us about the underlying concerns that we have with this legislation.

I think that everybody accepts that it is necessary to have some provision for how we deal with, as it were, in-flight directives or regulations from the EU since they were not covered in the EU withdrawal Act. If it was simply a matter of technically keeping abreast, none of us would have a lot of queries about this piece of legislation. However, as other noble Lords have demonstrated, there is plenty of scope within this for fundamental policy change, and policy change through statutory instrument—an issue which this House has tackled again and again, and which it tackled in the EU withdrawal Act. We are concerned about creating that kind of precedent once again here, as well as the actuality of what may happen under this Bill.

I raise it in the following sense. If we crash out and have a no-deal exit from the EU, the following months will be absolutely critical to the future of financial services within the UK. In those months, firms that have not already made the decision about what they relocate to the EU 27 will make further decisions, and the EU will be establishing its response to our departure and setting in place many of the key elements that it needs to be able to withdraw a significant part of that business to within the supervisory and monitoring powers of the European Union itself. An example that is given in the policy paper is that we may well end up with a location policy—in other words, a requirement from the EU that all financial transactions denominated in euros, or a significant portion of them, need to be repatriated to within the eurozone because of the exposure of the European Central Bank, which is acting as a backstop to liquidity crises with those instruments. Therefore, we may have those kinds of situations. Policy then will be absolutely critical.

I think many people take the view of the noble Lord, Lord Leigh, that the people who will be making change in that period will be the UK, and indeed he sought from the Government assurance that there would be policy action to dilute regulation in areas where he thought it was of interest. My noble friend Lady Bowles made the point that that alone begins to undermine the policy of third-country equivalence across financial services, which the Government, and the City, have seen as an underpinning to keeping our current level of dominance and vibrance. But there will also be changes within the EU, and I know that the City is very afraid of that. If those changes take place, again that undermines third-country equivalence if we are not following suit.

The point I am making is not about where you end up, on which side of this issue, but that absolutely critical policy decisions will have to be made, and those seem to be the kind of decisions that ought to be placed before this House. They will impact the functioning of the largest and most significant industry sector that we have within the UK, which feeds our tax base, which in turn supports our public services. To hand the decision-making around the issues to the Treasury, or to the Treasury working with the regulator, seems exceedingly high-risk. The breadth of power that is requested is not just to enable relevant and relatively minor adjustment; it covers a period of time in which fundamental decisions are made. We may make different decisions two or three years later, but it will be too late: the shape of our future financial services industry will basically be decided within that relatively short period. Amendments will need to be brought forward to try to tackle these issues.

I ask that the Government recognise how fundamental and significant the decision-making—and policy decision-making—will be during that period.

--- Later in debate ---

[Lord Bates]

My Lords, I agree with the noble Lord, Lord Davies: this has been a well-informed debate, representative of the deep expertise in your Lordships’ House, which has been on full display. The areas of agreement were effectively two: recognition of the necessity of preparing for a no-deal scenario, and a united view that we hope never to be in the position of having to exercise the powers in this Bill.

The noble Lord, Lord Sharkey, began our debate by expressing concern about the range of powers, in particular those to include and exclude files. My noble friend Lord Hodgson questioned whether this was a stopgap measure and said that it could not be a substitute for longer-term legislation and a solution in this important area. The noble Baroness, Lady Liddell, having remarked that this is not the most exciting legislation to come before your Lordships’ House, recognised the importance of the financial services industry, to which it relates. She also recognised the role that the United Kingdom has played over many years in the European Union in shaping financial services regulations.

The noble Baroness, Lady Bowles, teed up what will be, if we are fortunate to secure a Second Reading, a Committee stage debate on words such as “implementation”, “proportionality”, “corresponding”, “similar”, “appropriate” and “adjustments”. It will be important to flesh out exactly what is meant by those terms.

My noble friend Lord Leigh talked about the impact of regulations in financial services on small and medium-sized enterprises. He also became perhaps the first Peer to announce in your Lordships’ House his forthcoming listing on AIM. I do not know whether it is appropriate to comment on that, but I wish him well—he is probably getting worried because I wished him well; it was a personal wish.

The noble Baroness, Lady Kramer, talked about the strong role of the financial services in underpinning the fiscal base of the economy, tax revenues and public services. She said it is vital that we retain that strength and continue to exert scrutiny. The noble Lord, Lord Davies, talked about the oft overlooked fact that, when we talk about the financial services, we are talking not just about the City of London but about a national industry, with hugely important centres in Bristol, Leeds and Edinburgh. He also reminded us of the international competitive nature of financial services, and that the UK’s leadership can never be taken for granted but must be earned and restated.

With that, let me move on to some of the points that were raised in the debate. The noble Lord, Lord Sharkey, asked why, if this is so important, other departments are not doing the same, specifically the Department of Health and Social Care. We have already put in place many of the legislative building blocks to deliver our exit from the EU. Since the European Union (Withdrawal) Act received Royal Assent, the Government have started laying statutory instruments to ensure a functioning statute book in all scenarios. Any requirements for further legislation in other areas will be announced in the usual way. I realise that that is not quite the answer that the noble Lord was looking for—or that I anticipated as I began reading out the note. His was a specific question, asking that I speak with colleagues in the Department of Health and Social Care, and I will certainly do that and find out how the particular legislation he referred to might be handled.

The noble Lord, Lord Sharkey, also mentioned the powers to adjust. As the final outcome on these files is still unclear, we need to make sure that we can bring them into UK law in a way that works best for UK markets. This could, for example, include areas where final parts of legislation could, if unchanged in a no-deal scenario, present inconsistencies with the UK regulatory framework, global standards or the UK’s position as an open, global financial market. It is important that we have the power to correct inconsistencies when bringing these into UK law.

The noble Lord then asked why we had chosen some files rather than others. The Bill provides the UK with an interim means to domesticate key EU financial services files that are in the European legislative pipeline. Those are the files that we believe will be the most important for market functioning and UK competitiveness in a no-deal scenario. Those in-flight files not listed on the face of the Bill include those that apply only to eurozone members, which we would never have implemented as a member state, those that the UK has opted out of, and those where there is not a critical need to implement the legislation in the narrow window of time covered in the Bill.

The noble Lord went on to ask what was meant by the word “appropriate”. Once we leave the European Union, we will lose our ability to influence the outcomes of files at a European level—something to which the noble Lord, Lord Davies, and the noble Baroness, Lady Liddell, also referred. As such, we will require the ability to ensure that the files or parts of the files implemented best suit the needs and the structures of the UK financial services market. The power to make appropriate adjustments to legislation is therefore designed to enable the UK Government to ensure that the implemented legislation is the best fit for the UK.

The noble Baroness, Lady Bowles, similarly asked about the power to adjust. The power will only allow the Government to make adjustments to files and not to make entirely new financial services policy not covered within the files. The power will also have to be exercised with the purpose of making similar or corresponding provision to specific lists of files set out in the Bill, so the subject matter of the regulations will naturally be limited. This is simply about ensuring that we implement legislation that is the best fit for the UK.

The noble Lord, Lord Sharkey, asked what was meant by “some criminal offences”. The limitation in the Bill mirrors that in the European Union (Withdrawal) Act. It prohibits the creation of criminal offences for which an adult can be sentenced to a period of more than two years in prison.

The noble Baroness, Lady Liddell, asked about the comparability of low-carbon benchmarks. This is an important issue and I realise that a number of noble Lords have received representations on it. I undertake to look at it specifically and write ahead of Committee.

My noble friend Lord Hodgson asked about the reporting duty of the Government and whether that would include a statement on why a power is used. The report will provide an overview of how the power has been used in the first year and how the Government propose to use the powers in the second year. In the meantime, the Government will undertake extensive engagement and co-operation with key stakeholders throughout the process, ahead of and during each use of the power, and Parliament will have the opportunity to debate every SI under the affirmative procedure. He also asked whether it would be advisable for the Treasury to consult transparently ahead of each use. We agree, which is why, within the policy note accompanying the Bill, we have committed to undertaking extensive engagement and co-operation with key stakeholders throughout the process, ahead of and during each use of the power. In that term “stakeholders”, we very much include Parliament and your Lordships’ House.

The noble Baroness, Lady Bowles, asked whether it would be helpful to change the wording to “corresponding and similar”. This is classic territory for Committee and a well-worked amendment around that will elicit a more in-depth and appropriate response from the Minister at that point. She asked a specific question, which was also referred to by the noble Baroness, Lady Kramer: namely, whether the power could be used to remove the bankers’ bonus cap. While remuneration policies were introduced as part of the EU’s Capital Requirements Directive IV, they are due to be updated through the Capital Requirements Directive V, which is included in the Bill. The Bill allows us to choose not to implement certain files or to implement parts of them. At this point we are not proposing specific policy changes or decisions. Before bringing forward any secondary legislation using the powers in the Bill, we will engage with a wide range of stakeholders, including the financial services sector.

The noble Baroness, Lady Bowles, asked about legislation regarding pension firms. Again, this is something that might best be covered in a letter ahead of Committee. She also asked why we do not just do this through primary legislation in order to get proper parliamentary scrutiny. Given the number of files in question and the potential requirement to implement them at pace to respond to market developments and meet international obligations, it would not be feasible to rely exclusively on primary legislation in every instance. The Bill requires the use of the affirmative resolution procedure for every statutory instrument made. She went on to ask why the Government will not make a full report about concerns and the approach to policy in this Bill. At this point it is very difficult to say which files or parts of files we would seek to implement and whether and what adjustments would be made. This is because we do not know the exact context in which these decisions will be made and what the final versions of many of the files will look like.

My noble friend Lord Leigh asked about the potential negative impacts on, for example, CSDR. We recognise that there are aspects of these files that are currently under development which different parts of the sector may not fully support. The Bill allows us to choose not to implement files, to implement parts of them and to correct deficiencies in them, as well as to make adjustments to ensure that the legislation works best for the UK, subject to appropriate safeguards.

The noble Baroness, Lady Kramer, asked about the so-called Henry VIII powers being used. Of course we understand the concerns around the breadth of powers, and that is why we have included a number of safeguards within the Bill to address them, including explicitly listing the relevant files on the face of the Bill and sunsetting the powers to two years, consistent with the European Union (Withdrawal) Act.

The noble Lord, Lord Davies, asked about adjustments to powers. It would be possible under the terms of the power only to make adjustments to any EU file we would be implementing and not to completely change its intent. This power would allow us to make provisions which are broadly equivalent to the original file and which therefore seek to achieve a similar outcome in a way that best fits the UK. However, it would not be possible for the Government to use this power to implement something completely different from the original file.

Again, I thank noble Lords for their contributions to the debate.

[Baroness Kramer]

This may be extremely petty, so I ask for the compassion of the Minister. However, subsection (9) is completely incomprehensible. Three of us read it and we came up with entirely different conclusions as to what it meant in terms of both the preparation and publication of this report. Is he able to provide clarity now or else to do so by the time we get to the Committee stage? It may not be contentious at all—it is just that it is impossible to work out exactly what it means.

[Lord Bates]

I can understand that. It is a fairly short Bill, but I will undertake to write a more substantial letter between this Second Reading and Committee if it is granted by your Lordships’ House. I will cover and expand further on that point.

We will carefully consider all the points which have been raised in this debate. I thank noble Lords for bringing their expertise and knowledge to bear on this important piece of legislation. I request that the Bill now be given a Second Reading.

Brexit: Bank of England Report

Baroness Kramer Excerpts

Thursday 29th November 2018 Lords Chamber

Asked by

[Baroness Kramer]

To ask Her Majesty’s Government what is their response to the Bank of England’s report, EU Withdrawal Scenarios and Monetary and Financial Stability.

[Baroness Kramer (LD)]

My Lords, I beg leave to ask the Question of which I have given private notice.

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, the Bank of England’s analysis has been produced for the Treasury Committee and Parliament, and it is rightly produced and presented by the Bank independently of government. The analysis shows that under an economic partnership similar to the Government’s deal, there could be an improvement in the economy’s performance for the next five years compared to the Bank’s latest forecast. Over the long term, our economy will remain fundamentally strong. We are confident that the deal we have agreed provides certainty, is the best available for jobs and prosperity and allows us to honour the result of the referendum.

[Baroness Kramer]

My Lords, in its scenario looking at terms closest to the May deal, the Bank of England analysis actually shows that GDP by 2023 will be nearly 4% below the pre-referendum trend—below what it would have been under remain. Will the Government now tell the British people very clearly that their chosen deal leaves the country not just marginally but significantly poorer, less productive and with a smaller economy than remaining in the EU? Will the Government now treat the country fairly and allow the people to vote with this full information at hand?

Brexit: Economic Analysis of Various Scenarios

Baroness Kramer Excerpts

Wednesday 28th November 2018 Lords Chamber

[Lord Bates]

The choice before us is clearly between a deal and no deal. Many people have speculated over the past two and a half years as to what would happen. They said that no agreement would be reached in December and that we would not get the EU (Withdrawal) Act through Parliament. Both those things have happened. Also, crucially, they said that we would not reach a deal this November, which the Prime Minister has secured. It is a good deal for this country, which is being put before Parliament as promised. Also as promised, we are supplying, in a transparent way, the economic analysis of that, included in technical notes, so that the House can come to an informed decision.

[Baroness Kramer (LD)]

My Lords, the Chancellor this morning—I am sure quite inadvertently—suggested in a number of media interviews that the deal being presented to Parliament would offer a level of prosperity only marginally poorer than that of remaining in the EU. Of course, he was reading from the wrong column of his own report. Is he now willing to make the correction and confirm, as the Institute for Government and others have, that the nearest comparison to the proposed deal is the column entitled “Modelled White Paper with 50 per cent NTB”—non-tariff barrier—“sensitivity”, which blows a complete cannonball through that assertion and, indeed, shows that the option on the table is far more damaging even than the EEA or Norway option?

[Lord Bates]

The analysis shows a range of possible outcomes because we do not know, at this stage, what the outcome will be of the negotiations. We have set out a proposal in the White Paper that is backed up by the political declaration, and we want to see that achieved. To help the House and indeed others to prepare for that, we have provided for a whole range of scenarios. That includes sensitivity analysis, which would allow for just the point the noble Baroness has highlighted—about different types of trade outcomes—to be factored in before people come to a conclusion.

Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018

Baroness Kramer Excerpts

Wednesday 21st November 2018 Grand Committee

[Baroness Drake (Lab)]

My Lords, I welcome the order. The FCA’s greater range of powers allows for tougher regulation to address the conduct issues and other problems that we are familiar with in the CMC market. The reauthorising of existing claims management companies will ensure that they can comply with the new regime, and the senior managers regime can be used to hold managers accountable for the actions of their businesses. All this is to be welcomed.

Is there any estimate of how many existing claims management companies will not get authorisation under the new regulatory regime? What will happen to the cases that such companies are handling if they are not authorised? The previous regime required only one permission to enable claims management activity across all six sectors—personal injury, financial products and services, employment, industrial and criminal injuries, and housing disrepair. The order creates seven different permissions across those sectors, which again is a positive because it strengthens and focuses the regulation of the CMCs. However, it maintains the same exclusions and exemptions from FCA regulation that existed in the previous regime, even though there have been a number of responses to consultation suggesting that additional sectors should be brought into scope, particularly claims about cavity wall insulation, aviation and timeshares.

Ofgem’s response to the Treasury consultation, by way of example, was prompted by an increase in correspondence with claims management companies dealing with cavity wall insulation, which are not regulated under the current regime. In eight months it received over 2,250 such requests compared with only 80 in the same period for the previous year. The energy company obligation scheme, which Ofgem administers, places an obligation on larger energy suppliers to deliver energy efficiency measures, including cavity wall insulation, particularly to individuals in fuel poverty and therefore vulnerable households. Ofgem considers that the significant increase in the number of subject access requests reflects claims management companies looking to pursue claims for clients against failed or wrongly installed insulation.

Somewhat wryly, Ofgem observes that over 6.2 million homes have cavity wall insulation under government schemes. It is clearly an emerging area for claims management companies, and it is in the interest of consumers for this area to be regulated. The Government’s response was to the effect that further work was needed to understand whether this and other claims sectors should be regulated. Against that, though, we are hearing from an authoritative regulator telling the Government that there is an escalating problem that needs to be addressed. I ask the Minister to confirm the extent to which the order allows for additional claims sectors to be included in the new regime and to what extent a further statutory instrument is required to extend its scope. When can we expect a decision on the inclusion of cavity wall insulation claims? What other sectors are the Government currently considering whether to include?

It is proposed that the exemption afforded to claims management activity by independent unions, if they adhere to a code of practice, is maintained. Again, in my view that is a positive because thousands of trade union members get service through their union. The existing code applicable to trade unions will be replaced by a new code to be published by the Treasury in time, I understand, for the regulatory transfer on 1 April 2019. What is the process for consulting the trade unions? Could the Minister give a steer on what areas in the code the Treasury is looking to change?

The Minister referred to solicitors carrying on claims management activity also being exempt if that activity is carried on as part of their ordinary legal practice because regulation comes via the Solicitors Regulation Authority. If a solicitor is not acting in the ordinary course of their legal practice but is carrying on claims management activity separately, the exclusion does not apply. Again, I noted that several responses to the Treasury consultation questioned that exemption or expressed concern about the robustness of the Solicitors Regulation Authority, suggesting, as one sees if one reads the submissions, that a risk of regulatory arbitrage could arise where the presence of a legal professional in a company allows it to seek SRA authorisation rather than meeting the more robust FCA process. Although the SRA and the FCA can develop memorandums, which I am sure they will, what assurances can the Minister give that this risk of regulatory arbitrage will be closely monitored, and does this order allow the FCA to revoke that exemption—that is, if it wants to consider that exemption, can it do so under this regulation?

Finally, under the General Data Protection Regulation 2018 and the Data Protection Act 2018, where personal data is obtained through an unlawful cold call, further use of it is prohibited. This is something that many of my colleagues were concerned about during the debate on this matter in the House. I know from reading the documents that the FCA is consulting on requiring claims management companies that buy leads from third parties to carry out due diligence to determine whether the lead generator is authorised and complies with the relevant legislation and regulations. However, again, I ask the Minister: when will the FCA conclude what is required of claims management companies—that is, to undertake due diligence and ensure that the leads they are buying are authorised—and will that be available before April 2019?

[Baroness Kramer (LD)]

My Lords, given the hour, I shall try to be very brief. I support this statutory instrument but want to reiterate some of the points made by the noble Baroness, Lady Drake, and others.

Obviously, I support the transfer of supervisory responsibility to the FCA and the Financial Ombudsman Service, but it will be effective only if the FCA decides that it will use its powers. The notes accompanying the statutory instrument refer to the senior managers and certification regime, which has been in place for two and a half years. The industry was initially very afraid of that regime and the discipline that might follow, but it is not so any longer. Can the Minister tell us or ask his officials to write to us setting out how many actions have been taken under that regime? Obviously, you do not expect anything in the first months but, by now, given the fairly constant level of misbehaviour within the financial services industry, we should be seeing something coming through. I fear that the number will be quite low—possibly even zero.

I also reflect the concerns that the noble Baroness, Lady Drake, expressed about exemptions. The Minister referred in particular to the concerns expressed in consultation about the exemption for the legal profession, and he talked of the Solicitors Regulation Authority. I am afraid that its reputation is not good, and it is certainly not one of a body that is rigorous in its enforcement. I understand that there will be a memorandum of understanding and some sort of joint regime between that body and the FCA, but it would have been handy to have sight of that before we saw the SI. Can the Minister expand on that to give us some level of confidence both that these two bodies will work together and that they will be determined to be rigorous—something that, frankly, sits in neither’s history?

I pick up the issue of cold calling, which the noble Baroness, Lady Drake, addressed. As the Minister knows, we have been very concerned that there is not a much more vigorous prohibition on using data obtained in an unauthorised way, and cold calling was a particular issue. The fact that no penalty will be paid by those who use the information is a really significant loophole. Can the Minister give us any update on whether there will be action in this arena? He will know that, although Parliament has provided many powers for regulators to tackle cold calling, anecdotally we are aware that its incidence has not slacked; it has just become much more targeted against vulnerable people. That is almost the worst outcome that any of us could have anticipated and something that needs to be dealt with very rapidly.

Lastly, I turn to the issue of new areas. This industry has a long history of producing one new wheeze after another. We could use some assurance that the FCA and others will be able to move rapidly as it begins to become evident that the industry has found yet another way to target individuals in some abusive form. I do not want to damn all claims companies. Some of them are very good; some are extremely responsible, but it is an industry that has managed to draw in quite a number of rogues. We all want them to be expelled as soon as possible.

Brexit: Economic Effects

Baroness Kramer Excerpts

Wednesday 21st November 2018 Lords Chamber

[Lord Bates]

Yes, I can. The position will be contingent on the outcome of the Council, but if there is agreement there on the proposal put forward in the withdrawal agreement, and also on the crucial element of political declaration on the future partnership, we would expect to produce that analysis and put it in the public domain next week.

[Baroness Kramer (LD)]

My Lords, yesterday the FT City Network—a forum of more than 50 senior city figures—spoke out in favour of a people’s vote. Another wave of City members wrote to the FT today with exactly the same message. The IoD, to its own surprise, found that a survey of its members produced a majority in favour of a people’s vote. Will the Government finally consider a people’s vote? For business, while no deal would be a catastrophe, the proposed May deal is so second-rate that it diminishes them.

[Lord Bates]

Talking to the British Chambers of Commerce, CBI and all the business organisations, I find that the one thing they all want is for a deal to be done. They want certainty. They want to understand where they are so that they can continue to trade and move forward. That is what the Prime Minister has put before us, that is what the Cabinet has agreed, and that is what we hope will be agreed at the European Council next week. That is the best way forward for Britain, and it is the best way forward for business.

Economy: Budget Statement

Baroness Kramer Excerpts

Tuesday 13th November 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I begin by echoing the words of the noble Baroness, Lady Noakes, in reference to the loan charge. I am also on the Finance Sub-Committee of the Economic Affairs Committee. This House will know that, in the other place, my colleague Stephen Lloyd, the MP for Eastbourne, put down an Early Day Motion on this issue; 100 MPs have signed it across all parties, reflecting the experiences of their constituents. These are ordinary people such as hospital cleaners, social workers and nurses, who found themselves moved out of their normal employment and did not have the scope or understanding to realise that they were being put into tax-fragile arrangements when they were moved over to work as contract workers. I ask the Minister to take this back. The public pronouncements that have been made, both by the Chancellor and the Financial Secretary, seem to suggest they do not understand that this is the kind of person affected rather than a handful of glamorous celebrities or footballers. It is crucial that that is drawn to their attention.

That was the first of the wind-up speeches; it is clear that the big announcement in the Budget was the £20.5 billion for the NHS. However, I pick up the point made by the noble Baroness, Lady Jolly, that this equates—if one looks across the whole budget for the Department of Health and Social Care—to a rise of only 2.7% in 2019-20, which is £3.2 billion short of the minimum increase of 3.3% necessary for the NHS and the full department just to stand still.

There is an impression created by the Budget that the problems in health have been solved. They have not. Health is still facing continuous cuts year on year. We have to be honest about that and many of us are very worried. Again, on mental health, to which the noble Baroness, Lady Jolly, drew attention, the money promised of £2 billion falls about £1.5 billion short of delivering the programme that was described. While additional money is welcome, it is well below the necessary promise. On social care, £650 million barely touches the borders of an overwhelming problem.

The noble Baroness, Lady Altmann, talked about how unprepared families are to deal with social care issues, saying that this Budget could have been used to deal much more widely with that underlying problem. The noble Lord, Lord Kerslake, and others referred to the LGA work which shows that by 2024-25 adult social care alone will face a £3.5 billion gap just to fund the national living wage and maintain existing standards of care. So even in health we are still in a cutting regime.

On the subject of non-protected budgets, the noble Lord, Lord Haskel, talked about further education but I should like to focus on schools. There was money for bits and bobs but we need £2.8 billion a year just to reverse the real-terms cuts per pupil since 2015. Schools need teachers to function but that has not been dealt with in this Budget.

Other non-protected budgets are those for prisons, police and local government, the latter of which was referred to by the noble Baroness, Lady Eaton. Picking up the point made by my noble friend Lord Fox, there are a few patches for this year but non-protected budgets will still be facing a 3% cut per person in real terms by 2023. I think that everyone in this House recognises the inadequacies of many of those departments when it comes to delivering the services needed by a reasonable and civilised society.

The noble Baroness, Lady Stroud, congratulated the Chancellor on the additional money for universal credit. However, I do not think it is adequate and nor, quite frankly, do most Members of this House. The money put back into work allowances equated to only about half the cuts made in 2015. The benefits freeze continues for another year and the newly self-employed continue to face overbearing minimum income requirements.

The noble Baroness, Lady Stroud, also talked about the tax credit debt rollover problem. According to the IFS, £4 billion more in welfare cuts is still to come—something that I think we all find reasonably challenging. I personally find it very unacceptable, and I wanted to pick up the point made by the noble Lord, Lord Horam. I am appalled that nothing has been done in this Budget to tackle the waiting time problem for people going on to universal credit. I have a personal friend—so I see it personally—who, because of the loan she had to take out to cover that period, is trying to live on £20 a week after rent. That is simply impossible and we should not have a universal credit system that puts people into that situation. The Chancellor missed an opportunity.

I was absolutely thrilled when the right reverend Prelate the Bishop of Chelmsford raised the green agenda, which we did not hear much about during this debate. This was a real opportunity to put down a marker, as the right reverend Prelate said, particularly after publication of the intergovernmental report on climate change. Why do we not have a 5p levy on plastic cups? I would have thought that the Treasury would welcome the money, as well as the impact that it would have on the overall plan to reduce plastics. Surely this would have been an opportunity to ban single-use plastics within three years, which is entirely doable.

The noble Baroness, Lady Altmann, talked about ultra-low emission vehicles and electric cars, the subsidies for which were cut, even though there were goodies in the Budget for oil and gas. That industry has real potential for the future of the UK. This would have been the occasion to reinforce that future and to make a substantial difference to the environment and the critical circumstances that we face.

I join various people in this House who have talked about our need to face up to the challenge of raising additional taxes. I think that we have a broken tax system and this should have been the Budget that began to deal with it. If we are to restore public services to the level at which we wish to see them and to do so in a fiscally responsible way, tax will be necessary. I do not just want a conversation on this; I want action. I have no problem with raising the personal allowance threshold for low earners, but at this time and in these circumstances it is surely inappropriate to raise the threshold for higher earners. I suspect that many, if asked, would gladly have forgone the promised £520 for the average high earner in order to help those left on the fringes of society. As one friend said to me, “It’s pretty hard to think I’m a priority when I see homeless people asleep in so many doorways”.

The Government could have made real headway with our public services and welfare crises if they had supported Liberal Democrat proposals to put a penny in the pound on income tax and dedicate it to the NHS and social care. Although they did not talk about the amounts, the noble Lords, Lord Kerslake and Lord Macpherson, pointed out the benefits of a hypothecated tax. The Government could have made real headway if they had returned corporation tax to 20%—I do not think that a penny of investment has been stimulated below that level. If they had restored capital gains tax to equate with income tax, if they had overhauled inheritance tax—many people talked about the importance of the challenge of taxing wealth as well as income—and if they had changed pension relief as we proposed, they could, as I said, have made real headway with our public services and welfare crises, delivering something like another £29 billion a year by 2020 to spend on those necessary and fundamental services.

Here I disagree with the noble Lord, Lord Skidelsky, because I think that fiscal responsibility is absolutely key to the future, and that is why I turn to tax-raising measures. I remember the Brown Government, and spending being based on the assumption that boom and bust had ended for ever. However, never underestimate the cycle—it comes back to bite you. His Government assumed that there would be no external events but we ended up with a phenomenal banking crisis. They also assumed a flow of taxes based on very high profits within financial services that, frankly, derived from abuse. When that abuse was ended, that revenue source disappeared. Therefore, I disagree fundamentally that there was no need for adjustment.

[Lord Skidelsky]

I intervene simply because the noble Baroness mentioned me. I am not against fiscal responsibility. Why on earth does she think that I am? I think that fiscal responsibility includes preventing crises, such as the one in 2008, and taking the right measures when a crisis has happened to restore the economy. I am not against fiscal responsibility. In fact, who is?

[Baroness Kramer]

I think that we will have to debate this off-piste or I will talk for too long.

[Lord Hain]

I am sorry to intervene. I was agreeing with everything that the noble Baroness was saying until she embarked upon a disastrous defence of her party’s complicity in Tory austerity for five years. If she looks at the record until the banking crisis blew everything out of the water, she will find that borrowing was lower than we inherited from the Tories, the deficit was lower than we inherited from the Tories and debt was lower than we inherited from the Tories. Those three indices were much lower than the average of comparable countries.

[Baroness Kramer]

And Liam Byrne left us with the message that there was no money left. I shall try to move on quickly.

Much more could have been done for small businesses. It is time to deal with the underlying problem of business rates, which is a defunct way of taxing. I very much recommend that the Government look at our call for a land value tax—the commercial landowner levy—which would reward people for investing much more in both machinery and equipment.

Much of this debate has been about growth. I say to both the noble Lord, Lord Bates, and the noble Baroness, Lady Noakes, that I join others who are stunned that the Government are satisfied with the growth rate forecast that we face. Over the next five years, the best number is 1.6%, and it looks as though it will be 1.3% this year. That is awful and completely unacceptable. I am very worried that the Government are complacent about a number like that, and the noble Lord, Lord Livermore, highlighted that issue as well. Productivity is forecast to be at a trend rate of 1.2%, which will produce no future for any of our children. This year, I think that it is running at 0.8%.

On growth and investment, this year private investment has fallen from 3.3% growth, which is much closer to its norm, to 1%. The Bank of England has said that business investment growth has been 3% to 4% lower over the past two years as a result of the referendum. Those investment numbers are absolutely devastating. When people point to full employment, I ask them to look at the demographics. We have a demographic shortage of working-age people. It is not hard, in those circumstances, to have full employment. I ask the Minister to check the dependency ratio, because—although my calculation may not be right—I believe it is currently 1.7:1. So one person supports themselves plus 0.7 of another person, rising rapidly to 1.9:1, which is completely unsustainable.

We have to face up to the issues of productivity, our rising pensioner tail and our falling working-age population. With our migration policies, we are about to make that situation significantly worse. We are certainly not going to achieve economic recovery in a Budget like this.

I have not even touched on Brexit; many people raised it and it is absolutely pertinent, as it sets the framework. We know now that there is a technical agreement between the EU and the UK. It will be fascinating to see whether tomorrow, by the time the Conservative Party has worked through it, there is anything more substantial than that.

No matter what we do, by the Government’s own figures there is no scenario for Brexit that does not harm prosperity—a point made by the noble Lord, Lord Livermore, in great detail, and by the noble Lord, Lord Kerslake. From talking to City players today, I understand that the financial services industry has either paid, or is committed to pay, something in the range of £15 billion to cover the cost of adapting to Brexit—this assumes not that there will be a no-deal Brexit but a Brexit more in the Chequers mould. I have no idea what is falling on manufacturing, but those numbers are quite damaging to any kind of economic future.

This was a sticking-plaster Budget. In this atmosphere of uncertainty, without knowing where Brexit goes, the Chancellor has chosen—perhaps rationally—to do only the few things that impact on this year. Let us not overstate what he has done. We still face huge cuts to public services on every front. We have not dealt with the challenge of putting our taxes on a long-term and sustainable basis and we have not dealt with the underlying challenges of growth and productivity.

Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018

Baroness Kramer Excerpts

Tuesday 6th November 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I am afraid your Lordships have the reserve team from these Benches, since my noble friend Lady Bowles was the intended lead on this series of statutory instruments. However, with the change in the timing of the debate in the House today, she has had to go to the Economic Affairs Committee, so I am a very last minute stand-in. I am grateful to the noble Lord, Lord Kirkhope, for asking some of the most insightful questions, and I look forward to the Minister’s answers.

Underlying this, we appreciate that the Treasury is trying to do this, and do it sensibly and properly. At one time there was a fear that the Treasury might try to use these SIs as an opportunity to extend powers in a way not intended. It is not doing that, and we on this side very much appreciate it. It is also necessary to say that payment services are absolutely core to the financial life of this country, so getting this right is critical, and we appreciate that range of issues.

To return to SEPA, which the Minister described and the noble Lord, Lord Kirkhope, raised, I too am trying to understand the implications of allowing Monaco, San Marino, and possibly Andorra into that club. Whether or not that is a template for a third country to remain involved in SEPA, I understand that there are underpinning monetary agreements between the EU and those entities. Can the Minister enlighten us as to the characteristics of those entities, which presumably we would need to echo if we were to have third-country membership? We would find that extremely helpful. I also underscore that the only way we will get reciprocity in our arrangements in this area is if we are a player within SEPA, so it is exceedingly important for both individuals and businesses in the UK.

I will also pick up the issue of transitional—temporary—permissions and their extendability. I understand that the initial temporary permission can be extended, but I am slightly unclear whether it involves Parliament in any way. It appears from reading these documents that this is a decision of the regulator combined with HM Treasury. Can the Minister enlighten us on how that issue is to be handled and whether it would be appropriate for Parliament to have some sort of engagement or oversight on something pretty fundamental to the economic life of the country?

We have also noticed in the reading of the temporary provisions for European entities that receive such permissions—these are intended to last through the transitional or implementation period, or whatever one chooses to call it—that this is not intended to be a long-term arrangement. The implication is that entities with branches in the UK—I give just one example—would need to create subsidiaries instead, a far more costly and burdensome approach, which many have suggested they would not be willing to take. However, it suggests they will have to create subsidiaries and I believe the SI allows for that. However, it does not deal with how to prevent a disruption when moving from a temporary permission—under the branch arrangement, for example—to the new entity that would come in as a subsidiary. Presumably, any kind of hiccup would be of real concern. How is the SI intended to deal with those issues in a relatively short period, as we might soon be facing that set of problems?

I also want to look at safeguarding and the “keeping money safe” regime. As the Minister said, given our current membership of the Single European Payments Area, UK banks are able to keep clients’ money safe in accounts anywhere within the EU. In fact, this may be outside SEPA; it might relate to EU membership—I am not entirely clear, as my noble friend Lady Bowles would have been. In any event, the regime of keeping clients’ money safe anywhere within the EU is now to be extended globally, provided consumer protections are in place.

One of the fundamentals of the regime of permitting UK banks to keep those deposits—which are cash deposits—anywhere within the EU is that there is a common jurisdiction making it possible to act to ensure that money is kept genuinely safe. The arrangement of just recognising that another country has suitable consumer protection is a far weaker standard. The Minister compared it to the rules that apply to invested assets, but those can be tracked and identified in a way that cash never can. There is always a good deal of anxiety about cash sitting in deposits that can disappear and be untraceable. Can he comment on that regime and whether there are concerns and risks embedded in the change of which, frankly, we should be aware?

I shall make a couple of further points. HM Treasury was kind enough to give us an electronic link to its policy guidance associated with these SIs. In that—it was not in the Explanatory Notes—we identified that cross-border payments regulation is not included in the new arrangements. If I understand correctly, that is because this is a cross-border issue. Obligation to the EU end cannot be ensured and therefore the rationale is that there should be no cross-border payments regulatory scheme at the UK end. I hope that good sense and discussion will make sure that we keep cross-border payments regulation, in which case is the SI missing the relevant powers for the UK end or is there some other mechanism by which they can be introduced? That is important because, as the Minister will know, we have cross-border payments regulation to prevent unhealthy price competition driving deposits out of one country and into another.

--- Later in debate ---

On the point raised by the noble Baroness, Lady Kramer, about whether EEA firms would be required to set up a subsidiary, the electronic money and payment services SI provides powers to the Financial Conduct Authority to create a temporary permissions regime that will enable EEA payment services providers who currently provide payment services under financial services passports to continue providing services in the UK for a limited period after exit. An EEA payment firm will be required to set up a subsidiary on leaving the temporary permissions regime if it wishes to continue providing payment services, as it would then be a third-party country for those purposes.

[Baroness Kramer]

The point that I was trying to understand is that we have two entities—company Y and subsidiary company Y—dealing with the same customer base, the same transactions and the same business. Is a mechanism included to enable a smooth transfer from one to the other, or do we have a potential hiccup of significance in place?

[Lord Bates]

We are trying to address that through the whole strategy of enhanced equivalence, which seeks to make sure that our regulations that we are introducing here are as compliant and consistent as possible with those that already exist and that we have transposed into UK law from the European Union. So we hope there would not be the potential for the hiccup that the noble Baroness referred to.

The noble Baroness also asked whether we could keep the cross-border payments regulation. The CBPR sets limits on charging for cross-border euro transactions. Were the CBPR to be automatically retained in UK law, it would be inoperable. Applying the CBPR to UK payment service providers making cross-border euro payments to the EEA would place obligations on them which they could not fulfil. These SIs are for a no-deal scenario. They do not prejudge the outcome of any future agreement.

On the safeguarding front, we believe that the most prevalent method used to safeguard funds is for firms to hold them in a segregated account with a credit institution. A significant number of UK firms hold safeguarding accounts in the rest of the EU and they will still be able to do so once this SI comes into force.

The noble Baroness, Lady Kramer, and the noble Lord, Lord Tunnicliffe, asked what happens if an EEA passporting payments firm does not apply to enter the temporary permissions regime. Firms should enter the temporary permissions regime which will allow them to continue to carry out their business as before, writing new contracts and servicing existing contracts. This will enable them to obtain UK authorisation and transfer business to a UK entity as necessary.

My noble friend Lord Kirkhope asked about the geographic scope of the SI. It is broadly in line with the geographic scope of SEPA. However, it does not include three existing non-EEA country participants within SEPA: Switzerland, San Marino and Monaco. This is because EU law does not include those three countries and therefore it is not possible to include them in UK law under the EU withdrawal Act.

The noble Baroness, Lady Kramer, and my noble friend Lord Kirkhope asked what the criteria are for participating in SEPA as a non-EEA country. A number of the provisions are here but I will not go into all the detail about the tests. However, for the record and in response to the specific questions, they will cover areas such as the capital requirements directives, the money laundering directives and the Rome convention on the law applicable to contractual obligations. Finally, they must demonstrate that all United Nations Security Council financial sanctions are implemented to the same extent as they are implemented and regulated within the EU itself

My noble friend Lord Kirkhope asked about the justiciability of part 2 statements. Part 2 statements made about these instruments are statutory requirements under the EU withdrawal Act and are intended to assist the House in considering the proposed exercise of the powers under that Act.

The noble Lord, Lord Tunnicliffe, asked what would happen to these SIs for a no-deal scenario in the event of a deal. I think I have covered that. The Government White Paper on the EU withdrawal agreement Bill states that provision may be needed to defer, revoke or amend SIs and that is likely to be included in the withdrawal agreement Bill.

My noble friend Lord Kirkhope asked me to explain the consequences of the sunset clause referred to in paragraph 7.4 of the Explanatory Memorandum. The power in the EU withdrawal Act to fix deficiencies in retained EU law falls away two years after exit day. This was debated during the passage of the Bill—now the Act—but instruments made during that two-year period will remain in force after it ends.

The power to revoke was addressed by my noble friend Lord Kirkhope and the noble Lord, Lord Tunnicliffe. This relates to the credit transfers and direct debits regulations. The entirety of credit transfers and direct debits in euro regulation would be revoked in those circumstances. The relevant articles of the Payment Services Regulations could be revoked via the negative procedure by statutory instruments.

I turn now to the question of the noble Lord, Lord Tunnicliffe, about what will happen if the UK is unsuccessful in its application to SEPA. I mentioned that UK Finance has submitted an application. SEPA enables efficient, low-cost euro payments to be made between participants. In the unlikely event that the UK does not maintain participation in SEPA, UK consumers would face higher transaction costs and longer transaction times when making euro payments. That is why we want these provisions in the event of no deal, but it remains the firm resolve of Her Majesty’s Government to seek a deal so that these no-deal scenario provisions are not required.

The noble Lord, Lord Tunnicliffe, asked about the criteria for participating in SEPA as a non-EEA country. I mentioned the criteria earlier in terms of capital requirements and anti-money laundering et cetera.

The noble Lord then asked about impact assessments. I began by explaining the situation there and where we are coming from. I would just add that we have prepared an impact assessment and hope to publish it shortly.

On the whole, these SIs will reduce significantly the costs to businesses in the event of a no-deal scenario; without them, the legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would disrupt their businesses substantially. In making these changes, we have attempted to minimise the disruption to firms and their customers, as well as maintain continuity of service provision. That is the purpose of the SIs. I beg to move.

Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018

Baroness Kramer Excerpts

Tuesday 6th November 2018 Lords Chamber

In summary, this gives the Government the legislation necessary to ensure that the rules governing the UK’s deposit guarantee scheme and the other elements mentioned function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that noble Lords will join me in supporting these regulations and I commend them to the House.

[Baroness Kramer (LD)]

My Lords, I will be relatively brief on this statutory instrument. Again, it makes sense, but I have a couple of questions. One was raised by the Minister’s comment: I think he said we could be in a situation where we had an EEA entity effectively being supervised by the UK regulator, but its deposit guarantee scheme would be an EEA scheme. That sounds like a recipe for serious trouble. Surely one would expect the deposit guarantee scheme and the supervision to go together. Perhaps he could enlighten me as to whether I misunderstood that point.

Noble Lords will be aware that the reason there is a single, cross-EU level of deposit guarantee is to stop countries competing with each other. I think that Ireland at one time provided unlimited guarantees, so deposits flooded from across the EU, including the UK, into Ireland to take advantage of that greater level of protection. This was to try to bring everybody into a fairly narrow range, so that that unhealthy competitive element would not be there distorting the financial markets. Is it the Government’s intention to stay in line, basically, with the EU in this arena? If so, we come across a couple of curiosities. At the moment the UK guarantee is fixed at £85,000. If I understand the SI and the Minister correctly, that remains the level until a review in 2021. Of course, since that period we have had a devaluation of sterling, so if one was to do a current valuation of the €100,000 cap, it would be something more like £87,500. I understand that there is no need to review that till 2021, but a discrepancy is building.

I note that the Statutory Instrument says that:

“The first review … must not commence before 2021 unless unforeseen events necessitate an earlier review”.


Many people would say that a no-deal scenario would inevitably lead to a very sharp devaluation in sterling. Would that be considered an unforeseen event? I think it might be considered to be a foreseen event by many people, but for the purposes of this would it be considered an unforeseen event such as would necessitate an earlier review? It would be helpful to know, and to understand the intent that sits behind all that. Will the Minister help me with those issues?

[Lord Tunnicliffe (Lab)]

My Lords, unlike with the previous SIs, I feel that I actually understand what the regulations do, and the Minister has said nothing to shake my faith in that belief. They seem to have fallen within the overall government assurances, in introducing no policy change but smoothing the scenario, and I have nothing more to add.