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.

Green Finance

Baroness Kramer Excerpts

Wednesday 31st October 2018 Lords Chamber

[Lord Bates]

I can see that the Chief Whip is taking note, as many of us were here until the early hours on the Northern Ireland legislation, so I hope my noble friend has not disclosed too much. The point on indices is right; I absolutely agree with that. The very fact that we are having this Question is because indices were produced and people could see where they ranked. The more that people see the data surrounding this, the more they can make informed decisions. That is why it was good that the Bank of England announced a couple of weeks ago that it is going to ask the Prudential Regulation Authority to ask banks and insurance companies to factor the climate into their investment decisions.

[Baroness Kramer (LD)]

My Lords, the Government will be aware from the Ernst & Young report that investment in green projects in the UK is down by nearly 70% this year. Does the Minister believe that that is in any way related to the Government’s decision to sell off the Green Investment Bank, which at one time provided essential seed money and leverage to give these projects lift-off?

[Lord Bates]

The investment going in is substantial. We are a leader in this area. Since 2015, the rate of emissions has fallen faster in this country than in any other G20 country, which we can be proud of. The fact that one in five electric vehicles sold in Europe is manufactured here in the UK is again something that we can be proud of, and we are investing heavily in that. We have a clean growth strategy, and an industrial strategy that has these issues at its heart.

Brexit: Economic Forecasts

Baroness Kramer Excerpts

Wednesday 24th October 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I am tempted to comment on our shocking growth numbers at 1.2% compared with those of the US and the EU, which are close to 6%. The noble Lord is relying on future free trade agreements. I am shocked to learn how low the utilisation of free trade agreements is. The requirements to qualify for zero tariffs under any existing free trade agreement are so heavy in documentation on rules of origin, certification, dealing with royalties and valuation that the overwhelming majority of companies choose to pay the tariff rather than opt for the zero. In some free trade agreements only 10% of qualified transactions opt for the zero tariff because of the costs; at best it is only 60%. Does that not damn the future trading relationships that he describes?

[Lord Bates]

I point out to the noble Baroness that some of the markets in which we are trading most successfully and where growth is increasing are ones that we do not have a formal free trade agreement with and where we operate on WTO terms. But that is not the objective we are setting for the future; we want a good trade agreement with our friends in the European Union and good free trade agreements that we will be able to negotiate with other countries around the world.

Online Marketplaces: VAT Evasion

Baroness Kramer Excerpts

Monday 22nd October 2018 Lords Chamber

[Lord Bates]

There are other ways of approaching the issue, one of which is to crack down on the loopholes. We have introduced successive initiatives and we have spent some £2 billion for HMRC to cut down on evasion. Next April, we will bring in an important measure to address the point made by my noble friend Lord Leigh. It will require that due diligence is carried out on online marketplaces to ensure that people are actually paying the correct amount of tax. Our emphasis and focus is on closing the gap and ensuring that more people pay the tax that is due rather than looking at the rates.

[Baroness Kramer (LD)]

My Lords, despite its expanded powers, HMRC is shockingly poor at collecting VAT from overseas sellers. The number has been 4% of the amount that it is owed, and if I understand the Minister’s numbers, it will not even attempt to get the figure up to 10%. As we go through the Brexit process we run the risk that another 27 countries are going to fall into the same overseas sellers category without the single market and the ECJ to ensure that we can collect VAT from entities that are based elsewhere but selling in the UK. What does he anticipate will be the consequence of that?

[Lord Bates]

We have to recognise that the UK has the largest online marketplace in the EU. We also need to recognise that beyond the EU, this is a global issue. Most of the goods coming in are actually from outside the EU, and that is why the G20 and OECD base erosion and profit shifting initiatives are so important, as well as moving our tax system on to a digital basis so that we can ensure that digital businesses pay the correct amount of tax due.

Prudential Regulation Authority: Equity Release Sector

Baroness Kramer Excerpts

Wednesday 5th September 2018 Lords Chamber

[Lord Bates]

The responsibility for that lies directly with the PRA, the responsible regulator. It is in regular contact with the industry on setting new guidelines. That was already done in 2016. Just before the report, to which the noble Lord referred, was published, a new consultation was published by the PRA on this issue—the effective value test, which was used to calculate an appropriate amount that must be held in capital on the balance sheet to reflect the risks being entered into. That consultation is open until 30 September. There are some proposals, which, if they find support, will be implemented by the end of the year.

[Baroness Kramer (LD)]

Is the Minister sure that the PRA is genuinely on top of this issue? We would all agree that it is essential that sufficient capital is held to deal with the risk inherent in equity release guarantees. When evidence was given to the Treasury Select Committee, in the same Session, in February 2017, Sam Woods, speaking for the Bank of England said that the capital required to be held was in the range of £126 billion. David Belsham, speaking for the then PRC gave the figure as only £80 billion. They were presumably part of virtually the same organisation. Does this suggest that there is some coherent thinking within the regulator and that it fully understands the risks it is facing?

[Lord Bates]

What it reflects better is an issue of pricing, which is a fair debate. The no negative equity guarantee, which is very important to lots of consumers, because they do not want to leave their families with the potential liability, is a key part of the offer. The pricing of that, depending on which measure you take, says either that we assume there will be house price growth over the next 15 to 25 years, or that there will be no growth at all, or that interest rates will accrue at 5% to 6% or at 1% to 2%. The variance that the noble Baroness has identified lies in whether you apply the effective value test at a different point between those two extremes to come up with a different number. The purpose of the consultation paper is to get clarity so that all interests are protected.

Taxation (Cross-border Trade) Bill

Baroness Kramer Excerpts

2nd reading (Hansard): House of Lords & 3rd reading (Hansard): House of Lords & Committee: 1st sitting (Hansard): House of Lords
Tuesday 4th September 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I start by saying to the Government that it is a travesty that this Bill comes to the House as a supply Bill. The Government attempted to get it classified as a money Bill in the other place, and they failed. But it was completely unnecessary for the Government to put in the four-word phrase that turned this into a supply Bill. That was done simply to prevent any amendment by this House. No Government would do that if they had confidence in the content in the Bill and the very use of the manoeuvre, frankly, underscores the Bill’s inadequacies.

The Government have claimed on numerous occasions that the Bill is merely technical, designed to enable Customs to function post Brexit. If that were so, the content of the Bill would not presuppose any particular outcome from the ongoing negotiations of our future relationship with the EU. Instead, it sets up barriers to negotiating an arrangement that would allow the UK to remain in the customs union and the single market. Those barriers were reinforced when the Government chose to support the four amendments from the European Research Group—the militant hard-Brexit wing of the Conservative Party. But then, we are beginning to recognise that so much of this process has been about power struggles within the Conservative Party, and the national interest, jobs, the economy and our young people are all relegated to an incidental role in what really matters to the Government—which of them will be Prime Minister. That is why today I am moving the Motion in my name and on behalf of my colleagues, and I will be pressing it to a vote because I disagree with the noble Lord, Lord Tunnicliffe: the attention of the Brexiteers has to be drawn by action and comment, and the kind of action we can take in this House is to vote when we are able.

Some will ask why I am bothering to do that when the Chequers proposal, much of which is expressed in the Bill’s clauses, is already dead. They have a point. The facilitated customs agreement is unacceptable to Barnier and the EU leaders; the Tory Brexiteers absolutely hate it—David Davis and others have said that they will vote against it; and, frankly, most Tory Remainers cannot stomach it. But that is exactly my point: a proper process through this House would have allowed workable structures to be proposed, debated and offered to the Commons.

The facilitated customs arrangement is unworkable; it does not provide for a frictionless commercial border between the UK and the 27 for goods, never mind that it utterly neglects services, which, as we often point out in this House, are 80% of the UK economy and often wrapped into, not separate from, manufacturing. The FCA’s complexity in dealing with imports and tariff differentials is an invitation to fraud on an industrial scale, especially when it comes to parts and bulk imports. There is no hope of policing a system of this extraordinary complexity with so many loopholes and difficulties inherent in it. It deals only in very limited part with the Irish border issue, which is surely critical to all of our negotiations, and it is completely confused over the handling of country of origin requirements. Indeed, as best I can work out, it expects the EU to renegotiate every trade deal, of which there are 40, so that for exports UK parts are treated as local EU content. Yet it also insists that for imports the EU and the UK will operate separate country of origin regimes—in other words, a completely non-reciprocal arrangement. That is just the beginning of some of the many complexities around country of origin. It also loads on to businesses layer after layer of form-filling and activity tracking along with, as I say, country of origin being only one of those intensely complex burdens.

I talked to someone running a small business manufacturing party goods for sale across most of Europe who is very much up on these issues. He has calculated that the cost of the new paperwork alone would lose him every single one of his European customers. Frankly, it is death to his business. The FCA requires us to leave the EU VAT area so that VAT would have to be paid at the time goods cross the border in both directions. The cash-flow hit would wreck many companies, especially small ones. Our biggest manufacturers are writing to us with desperate pleas for resolutions, guarantees of no delays at our borders and no trade or non-trade barriers. The FCA and its reliance on authorised economic operator status for the big players is costly and cumbersome, even for those that have a whole legal and technical department to begin to grapple with its requirements.

I would love to hear from the Government what the real cost is to businesses of their Chequers proposal. Which businesses will be unable to survive? Which will have to lose customers or leave the UK? Which jobs are under threat, and where? Moreover, what about the costs to the Government? Our major ports have struggled to manage existing international trade, which is why the European Commission is taking us to court for a number of failures. Many of our smaller ports have no customs staff to speak of and our key trade arteries, our roll-on roll-off ports, cannot cope with even a two-minute delay.

Therefore, I say to the Government: show us the numbers and tell us the cost of leaving the customs union. Or is this simply a political decision with the implications for our economy merely being sketched in effect on the back of a fag packet? The Government counter any questions with a complacent discussion of “no deal” and are advising warehouse building, stockpiling and planning to move activity to the 27. Frankly, that will be an economic disaster. I will not spend more time talking about “no deal” because I am sure that others will pick up the issue in the course of the debate, but I do not believe it is something any Government should contemplate, and I am shocked by constantly hearing that we will be able to enjoy a prosperous future, deal or no deal.

I have not even touched on the constitutional issues. The Delegated Powers and Regulatory Reform Committee has done its usual outstanding job, and I am sure other speakers will talk more extensively about them. But once again we are seeing Henry VIII provisions, and especially in this case a significant expansion in the use of public notices. All of this underscores once again why the Bill should go through this House being subject to detailed scrutiny, which would tackle exactly that kind of issue.

From pretty much every perspective, this customs Bill is inadequate and wrong-headed. It should at the very least allow our continued membership of the customs union and the single market; it should require a proper economic assessment of leaving the customs union, and it should respect Parliament and the balance of power. Given that it does none of these, frankly, I would argue that the people should be able to have a say again, on both this shambles of a negotiation and any final deal. For those reasons, I have tabled the Motion to amend that stands in my name.

--- Later in debate ---

Moved by

[Baroness Kramer]

At end insert “but expresses profound concern that the proposals in the bill are based on the Government’s flawed commitment to leave the single market and Customs Union, that the Government have failed to produce a comprehensive economic assessment of the consequences for the United Kingdom’s economy of being outside the Customs Union, that they have sought to limit the role of Parliament, and in particular the role of this House, in the revision and scrutinising of the bill, and that they have failed to provide an opportunity for the people of the United Kingdom to have a vote, prior to the United Kingdom’s departure from the European Union, on the terms of the new relationship between the United Kingdom and the European Union”.

[Baroness Kramer]

My Lords, in the light of the need for scrutiny, so illustrated by this debate, I beg to move the amendment standing in my name on the Order Paper.

Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) (Amendment) Order 2018

Baroness Kramer Excerpts

Wednesday 18th July 2018 Grand Committee

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

My Lords, in just under five months, the ring-fencing regime will be fully in force. It requires structural separation of core retail banking from investment banking for UK banks with retail deposits of more than £25 billion.

Ring-fencing is one of the key parts of the post-financial crisis reforms and will be important in preserving financial stability in the United Kingdom. It was the central recommendation of the Independent Commission on Banking, chaired by Sir John Vickers, which the Government accepted and legislated for via the Financial Services (Banking Reform) Act 2013. It will support financial stability by insulating retail ring-fenced banks’ core activities, whose continuous provision is essential to the economy—that is, retail and small business deposits and payments services. It will protect them from shocks originating elsewhere in the global financial system.

The continuous provision of core services—namely, retail and small business deposits and payments services—is essential to the economy. Ring-fencing means that banks that provide those essential services become simpler and more resolvable, so core services can keep running even if a ring-fenced bank or its group fails. Details of the regime are set out in secondary legislation passed in 2014. As part of restructuring to comply with the ring-fencing regime, banking groups may be required to move some accounts from one legal entity to another. For example, they may need to move a retail depositor’s account into a new ring-fenced bank. However, some of the holders of those bank accounts are subject to financial sanctions, which prohibit the movement of any funds that the said account holders own, hold or control.

There is a clear conflict between the two regimes. This means that, at present, some banking groups are unable to move accounts held under sanction, which in turn means that they are not compliant with the ring-fencing legislation. The order resolves the otherwise conflicting requirements between the ring-fencing regime and financial sanctions regime by amending the Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014. The order amends the definition of “core deposit” so that accounts whose account holders are or have been subject to financial sanctions—as defined in Section 143(4) of the Policing and Crime Act 2017—at any time in the last six months are no longer included in the definition. This means that banking groups will not be required to move retail accounts whose holders are subject to financial sanctions into ring-fenced banks. They will be outside the scope of the ring-fencing regime. Banking groups will have six months from the removal of sanctions to move retail accounts of those account holders previously subject to sanctions inside the ring-fence. This ensures that the regime remains consistent once the sanctions have been lifted.

The order will ensure that banking groups that cannot otherwise comply fully with the ring-fencing regime due to sanctions legislation are not deemed non-compliant under the ring-fencing legislation. The amendment does not alter the location and height of the ring-fence or the timetable for ring-fencing: banks in scope must be ring-fenced by 1 January 2019 and, together with the Prudential Regulation Authority and the Financial Conduct Authority, we are monitoring their progress closely. I commend the order to the Committee.

[Baroness Kramer (LD)]

My Lords, as a member of the Parliamentary Commission on Banking Standards, I am a very strong advocate of ring-fencing. I am pleased that the process is now well under way. Obviously, I remain vigilant for any opportunity for any person to try to find a way either under or over the ring-fence. Therefore, I would look very carefully at any change or exemption. In this case, the order seems entirely logical and a suitable way in which to deal with the conflict between two good pieces of legislation, finding the simplest path to reconciling them.

I have two simple questions for the Minister. Can he give us some sense of the scale that we are talking about? To be honest, I have little idea of how many accounts are sanctioned at any typical time. I do not know if we are talking about six accounts or 6,000. The reason why I ask is that it makes a difference in monitoring—that is, whether it is a relatively small number or a challenging number. I just have no idea. I do not know if the Minister will be able to throw light on that.

There has also always been a concern, in particular from the sanctions perspective, that people who do bad things—and, typically, if you are going to be sanctioned, you will have been doing something that we think is a bad thing—will look at the opportunity to use aliases, false names and so on to front their various accounts. There is always the possibility that, if those accounts are not recognised as being linked to the individual who is to be sanctioned, they can end up being moved over into the ring-fenced bank. With accounts in two locations, it may become much harder to recognise that they are the accounts of the same individual and ought to be treated in the same way. I am fairly sure that those who are sanctioned will look for any mechanism possible to escape it, but I have no idea if there is a mechanism within all this that provides us with some comfort that we are alert to the use of this particular change as a mechanism that might make life a little easier for those who wish to avoid the sanction that they are due.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing this order and the noble Baroness, Lady Kramer, for asking at least one of the questions that I had in mind, particularly on scale. I do not have quite the exalted background of the noble Baroness as being a member of the banking commission but, because I failed to duck, I have been involved with this legislation since 2010. I saw it through and feel a certain loyalty to it. When this conflict arises, like the noble Baroness, I want to see that conflict resolved. However, I did think, “Why are they going to spoil this beautiful banking legislation, which I have sought to understand over the past several years? Why can we not change the sanctions legislation?” I decided to try to understand the sanctions legislation to see if there was a way in which it could provide the flexibility rather than the banking legislation. I dived into Section 143(4) of the Policing and Crime Act 2017, but I have to say that, at that point, I hit a brick wall. For the life of me, I could not understand from that how the sanctions regime functions. I hope that the Minister can shed light on how the regime works—or perhaps he will write to me at some point.

To what extent has the alternative way of solving the problem been considered—creating flexibility in the sanctions regime to allow movements across the ring-fence that are required for other legal purposes and hence keep the accounts hosted on the right side of the ring-fence?

Financial Exclusion

Baroness Kramer Excerpts

Wednesday 4th July 2018 Lords Chamber

[Lord Bates]

I am not aware of that particular scheme. Of course, pressure is now being brought forward. One particular body, the Equality Advisory Support Service, oversees how this operates for people with disabilities. It can report and require the Financial Ombudsman or the Financial Conduct Authority to look at these areas and take action. I am happy to look further into the matter raised by the noble Baroness.

[Baroness Kramer (LD)]

My Lords, many small businesses are still part of the cash economy. Where both the banks and the post office are closed, they face a conundrum: they cannot travel long distances during the day to get to facilities so where do they take their cash in the evening? Old banks used to have cash boxes in the wall where they could deposit cash safely. We are creating a serious security problem for many small businesses.

[Lord Bates]

That reason, among others, is why the Government announced in March a review of and consultation on cash and digital payments in the new economy. That is precisely the type of question that is being looked at now as part of that consultation, to which we will bring forward a response in the autumn.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2018

Baroness Kramer Excerpts

Monday 25th June 2018 Lords Chamber

[Lord Lexden (Con)]

My Lords, I shall comment briefly as a member of the Joint Committee on Statutory Instruments. The committee’s recent 26th report drew the attention of the House to this instrument, on the grounds that it appears to make an unusual use of enabling powers conferred by the Financial Services and Markets Act 2000. It is a long-established principle of the joint committee that, where an affirmative instrument imposes new duties significantly more onerous than those that existed before, and where it requires those affected to adopt different patterns of behaviour, there should be a period of at least 21 days between the making of the instrument and its commencement, to give those affected a reasonable chance to adapt to the changes required. This instrument allows only one day.

My noble friend explained that very few firms—possibly only one—would be affected by this change. He also made clear that the Government were responding to a grave concern expressed by the London Stock Exchange that the continued failure to amend the permitted arrangements for alternative investment finance bonds is damaging the competitiveness of UK markets. The committee was unpersuaded that the changes to the law made by the proposed order are so urgent that they must have immediate effect. If the need for amendments was really so pressing, the draft order should have been laid before Parliament much earlier, with a commencement date of 1 April 2018 to coincide with the tax changes referred to in the Treasury’s memorandum

Because of frequent and recurrent poor practice, the Joint Committee on Statutory Instruments has recently published a special report, Transparency and Accountability in Subordinate Legislation, to remind the Government of the need for new law to be published promptly, so that those affected by the changes it makes are protected from being subjected to them before they have had a reasonable opportunity to understand and prepare for them. That is a general principle to which the Government should always adhere. I commend the committee’s important recent report on the major issues of transparency and accountability to my noble friend and all his colleagues in this House and the other place. I hope the House will have a brief opportunity to consider it in due course.

[Baroness Kramer (LD)]

My Lords, I think that we all recognise that Islamic finance—the sukuk market—is the fastest growing global financial sector, with growth of 10% to 12% a year. The current stock is some $3.5 trillion, with $100 billion of new issuance a year. The UK plays a very important role, as the most significant western market. As the Minister said, in June 2014 we became the first non-Muslim country to issue a sukuk.

I have no problems with the content of this statutory instrument. It is an “oh, oops!” and should have been included in the April order. This underscores the complexity we now have in dealing with FSMA 2000. It is now so complex that it is not at all unusual for real issues to fall through the cracks. If ever there was a candidate for a piece of consolidated legislation, it is this whole financial area. In 2012, we found ourselves with a Bill that, when tracked through the legislative trail, required the Governor of the Bank of England to appoint himself. Another issue, which we could not find a way to get rid of, was the Governor of the Bank of England being required to write himself a letter to update himself on what he was doing. Those are slightly humorous examples, but this one is a real “oh, oops!” and I hope that the Government will take that on board.

Picking up the point made by the noble Lord, Lord Lexden, there is a growing sense that the Government do not quite respect the procedures of this House and this Parliament. There is a rationale for saying that there should be a period between an order being approved and it being implemented. In this case, it seems that only one company may be involved, but for that company it makes no difference whether there was one day’s notice or 21. It would have been an opportunity to show that the general procedures of this House are treated with that kind of respect and are followed, unless there is a genuinely exceptional circumstance; I do not think it can be argued that there is in this case. The concerns of the London Stock Exchange would have been met by the approval. It did not require that the order should become effective instantly.

Electronic Presentment of Instruments (Evidence of Payment and Compensation for Loss) Regulations 2018

Baroness Kramer Excerpts

Wednesday 13th June 2018 Lords Chamber

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

My Lords, payment systems sit at the heart of our economy. They allow money to flow between households and businesses, allowing the prompt and proper exchange of goods and services. The Government are therefore committed to ensuring that the United Kingdom’s payment systems are efficient and meet the needs of end-users, taking advantage of technological developments as they arise.

Cheques continue to form a vital part of the British payments landscape. While there is no denying that there has been a decline in their use over the years, cheques are still important for many smaller charities, voluntary organisations and those members of our society who are often the most vulnerable. In the first quarter of 2018, more than 65 million cheques were cleared, with a value of over £80 billion. That is an average of 1 million cheques cleared per working day.

Before we discuss the new legislation I am presenting to the House today, I shall briefly explain how the current cheque clearing system works. Under the current model, cheques deposited into a bank or building society are transported to their associated processing centre where the essential details are read. Afterwards they are transported to an exchange centre, where the cheques are physically passed to the bank of the customer who originally drew them. Finally, the cheques are taken to the relevant processing centre of the paying bank, which ensures that the cheque is genuine before releasing the funds.

Under that anachronistic process, it takes six weekdays before a cheque fully clears and the recipient can be certain that the money is theirs. That is why Parliament legislated to allow UK banks and building societies to accept the receipt of cheques and similar instruments by electronic image. The new cheque image clearing system cuts down clearing times to the next weekday by sending a digital image of the cheque for clearing. Cheque imaging will also facilitate further innovation in the industry—for example, by enabling customers to pay cheques through their mobile banking app.

The purpose of the legislation under discussion today is to ensure that the electronic clearing of cheques has no detrimental impact on cheque users. It makes provision for two measures to achieve this, which will help to protect customers as the image clearing system rollout intensifies over the second half of the year. The first concerns the use of cheques as evidence of payment. Under the current model, a customer can request a copy of the paper cheque that they drew from their bank. This paper cheque can then be used as evidence of payment. To ensure that this right remains available, the measure ensures that a copy of the cheque, along with some additional information, can be provided to the writer of the cheque upon his or her request, and that this copy has the same evidential value as a paper cheque.

The second measure concerns compensation. In cases of fraud or error, the rules for compensation are set out in scheme rules by the Cheque and Credit Clearing Company. There is, however, no legislation stipulating under what circumstances customers must be compensated, or by whom. To prevent any potential harm for consumers from what is a fundamental change to cheque processing, the Government consider it necessary to legislate to ensure that cheque users are not left out of pocket if they incur a loss.

The second measure therefore provides that, where a customer incurs a loss under the image-clearing system and prescribed conditions are met, including that compensation has not already been received, the bank of the customer receiving the cheque must pay the compensation. Similarly, if the bank of the customer writing the cheque incurs a loss, where prescribed conditions are met, the recipient’s bank must again provide compensation if none has been forthcoming.

The Government believe that the existing industry-led approach works well. Indeed, the optimal solution is that the legislation need never be used as the scheme rules continue effectively to resolve losses from fraud or error. In summary, the Government believe that the legislation is necessary to ensure that customers can continue to trust that their cheque will be valid proof of payment under the new image clearing system and to provide a backstop for compensation. I hope this is helpful to colleagues and I commend the regulations to your Lordships’ House.

[Baroness Kramer (LD)]

My Lords, first, I am delighted to hear the Government reaffirm that there is still a place in our financial lives for cheques. I remember that there was a time when the Treasury was considering their abolition. From looking at countries where cheques have in effect disappeared—talking to relatives in Germany, for example—it became clear that the way in which people compensated for that was to carry a lot more cash and leave a lot more cash at home. Much of that seem to be an invitation to petty thievery and street mugging, by which I do not think that any of us would be terribly charmed, so I am very glad that the Government have restated that today.

I looked through the regulations trying to think of something to say without finding very much. I have bank accounts in the United States, a legacy from my 20 years living there, and many states—I am not sure that it is all of them—already use this system of electronic presentation of instruments, so I have seen it first-hand and have never heard of any particular problems. There is a very good article in the Penn State Journal of Law in December 2015. The one issue it raises is that it is crucial to ensure that the rules minimise any surprises in any conflicting claims between the paper copy and its image. I understand from what the noble Lord, Lord Bates, said, that he feels that that issue is covered. If he can give me that assurance, I am delighted to welcome the regulations.

[Lord Tunnicliffe (Lab)]

My Lords, I, too, have worked my way through the instrument and the accompanying Explanatory Memorandum—I also spoke to James Evans of the Treasury—and feel that I understand it. I have no objection. It would seem a sensible, modern improvement to the system.

In looking around the instrument, I alighted on the fact that it is a further extension of the computer systems which underline modern banking. Reflecting on recent press comment, I started to look at just how many computer problems the banking system had had over recent years. I counted at least four for RBS since 2012, three from HSBC, three in Barclays, three at Lloyds and, of course, the recent TSB event where 1.9 million customers were locked out of their online and mobile services.

As we know, banks have a special role in our society. If they fail, the impact is not a mere difficulty, as it is when any large enterprise fails; it is catastrophic to our society. The Bank of England has put an enormous amount of effort into creating an effective resolution regime which, because I have been in this role since 2010, I have seen all the legislation on. It has a resolution directorate staffed with people ready to move in if there is a problem with a bank to solve it over a weekend. But the problem seems to me to be that, just as a bank cannot be allowed to fail for financial reasons, it is increasingly true that a bank failing because of its technical capability—because of its computer services—would have an equally catastrophic effect on society.

I therefore ask the Minister whether, as we hand further tasks to these ailing computer systems, the regulators have an equivalent regime to ensure that the banks’ computer systems will never fail.