Bank Accounts

Baroness Kramer Excerpts

Wednesday 19th July 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, as my noble friend has noted, the Government have a shareholding in NatWest Group, but it is managed at arm’s length and on a commercial basis by UK Government Investments and I do think that is the right approach. My noble friend also noted the role of the FCA. He is right that it is for the FCA and other relevant independent bodies to determine whether any breach of regulatory requirements has taken place—so I will not comment on that, but I would expect them to do so.

[Baroness Kramer (LD)]

My Lords, I gently suggest to the Minister that the issue of PEPs and the issue of people expressing their political views and then being treated badly are in fact entangled one with the other. I am just outraged that Nigel Farage was denied a bank account, but I was also denied a bank account at Chase UK this year because I could not produce physical payslips for my husband, who died 17 years ago. That had to be a specious reason, and I suspect that the real reason is that I am a Liberal Democrat who speaks out on issues in a way that the bank does not particularly like.

So I will just say that the PEP regime has got completely out of hand. It has been outsourced to consultants who make their money from dire and irrational interpretations. Will the Government please press the FCA not just to renew sensible guidance but to make sure that it is followed? Could she please tell it to focus its energies on the real abusers and the real money launderers?

[Baroness Penn (Con)]

Well, I can reassure the noble Baroness that that is exactly what the amendment to the Financial Services and Markets Act requires the FCA to do. It should look not just at the appropriateness of the guidance but at firms’ adherence to that guidance. We have asked it to get feedback from those who are affected by this guidance and take particular account of the impact on family members, which is an issue that many noble Lords have raised with me. We expect the FCA to follow that rigorously. The FCA is required to provide an update to this House on the progress of that work within a few months of it starting, and I am sure noble Lords will pay close attention to that.

Consumer Rights Act 2015 (Enforcement) (Amendment) Order 2023

Baroness Kramer Excerpts

Wednesday 12th July 2023 Grand Committee

[Baroness Kramer (LD)]

My Lords, I confess that usually when I speak on a statutory instrument I am trying to look for why it really should have been in primary legislation, not secondary. In this case, this strikes me as a genuine SI. It is almost a moment of great excitement.

I am very happy to say that these Benches support this measure, which, as the Minister says, enable trading standards to investigate more effectively illicit tobacco sales by small operators and retail outlets and to refer evidence of contraventions to HMRC for action, with potential penalties up to £10,000. We know from past surveys that some 18% of tobacco sales have been illegal. That leads me on to a series of questions to the Minister for further clarification.

At this time of cost of living pressures, some people will be tempted to buy cheaper, illegal or illicit cigarettes. I ask the Minister: is illicit activity increasing now at this time of increasing cost of living pressures, or are we continuing to see a diminution? I would be interested to know what the impact is and whether there has been any significant change that requires aggressive action.

When will the relevant guidance for businesses be published? I do not believe that is available yet. Indeed, when will the sanctions be implemented? Perhaps the Minister could give us some sense of the timetable. There is also no statutory review clause, so how will we know how effective these new powers are? If the powers are granted but are generally not used, I think the Minister knows that potential offenders will feel doubly empowered by new rules that then turn out to have no teeth, so it seriously matters that we track this. When we are tracking, will there be any measures to let us estimate the deterrence effect of the measure? That is probably one of its most important aspects.

Behind illegal sales by small and local outlets there is sometimes just a very small-scale operation, but at times it is very much linked to organised crime on a major scale. How is that link going to be investigated as trading standards becomes more engaged in this process?

The sale of tobacco to children is obviously a serious concern to all of us. Are outlets engaged in underage sales to be a particular target? Will there be any prioritisation, as far as the Minister is aware? Will enforcement involvement include the sale of non-compliant tobacco, blunts and shisha, which have sometimes been seen as a way to manoeuvre around the rules in the recent past?

The tobacco industry has a history of offering to help, or provide intelligence to, local trading standards. I have to say that civic society groups that are attempting to decrease smoking tend to view that with deep suspicion as a conflict of interest, designed to basically push tobacco sales from the illicit side but into legal purchasing rather than discouraging purchasing as a whole, and to improve the industry’s general standing and reputation. I wonder how that is going to be handled.

Does this measure also impact on non-compliant sales of e-cigarettes and vapes? We know these products are increasingly being targeted at non-smokers and youngsters, even though we have little information at the moment on what the effects are of the long-term usage of e-cigarettes and vapes.

The Government have a target to make the country free of tobacco smoking by 2030, and we support their goal of achieving a smoke-free generation. Smoking, as the Minister has said, remains a leading cause of premature death and is related to many severe and chronic illnesses and damages lives, as well as being a drain on the NHS. However, the pace of decline in smoking that followed the 2007 ban on smoking in English pubs and clubs has dwindled. How much is this measure expected to focus on reducing overall smoking? I confess that there is always a slight suspicion when HMRC is involved that the focus will be more on increasing revenues to HMRC than on reducing the overall activity—in this case, just moving it from the illicit arena into the legal arena.

If the Minister could add a little more enlightenment, we on these Benches are happy to support the statutory instrument.

[Lord Livermore (Lab)]

My Lords, we support this measure. I shall reiterate a couple of facts mentioned by the Minister. Smoking is the biggest cause of preventable death in the UK. It accounts for some 76,000 deaths each year, with half of all smokers dying of a smoking-related illness. It is estimated that smoking costs NHS England over £2.5 billion every year. Alongside high-level policy, such as the smoking ban introduced by the last Labour Government in the Health Act 2006, evidence suggests that high duty rates have had a positive impact by reducing the number of people who start smoking and increasing the numbers seeking to cut down and quit.

With 21% of cigarettes sold in the UK currently illicit, clearly the illegal trade in tobacco products undermines these important contributions to public health. It deprives the Exchequer of vital revenue and reduces the deterrent effect of high duty rates. We therefore support harsher penalties for those who seek to avoid paying such duties and commensurate powers for trading standards to tackle those who procure, supply and distribute illegal tobacco and profit from the illegal trade.

I would like to ask the Minister three questions. First, she mentioned that the combined application of fines, powers to seize illicit products and the new sanctions is designed to have a deterrent effect on retail outlets and street-level distributors. This point was also made by the noble Baroness, Lady Kramer. Are there any plans to communicate these powers to potential offenders so that the deterrent effect might be enhanced? Secondly, where illicit product is sold through retail outlets, what data exists on whether the owner of a retail outlet is aware of such sales versus illicit sales carried out surreptitiously by an employee, and therefore whether enforcement measures are always correctly targeted? Finally, what communication, co-operation and co-ordination exists between HMRC and the Border Force to tackle the supply of illicit product at source?

Bank of England: Interest Rate Policy

Baroness Kramer Excerpts

Wednesday 12th July 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, I agree with my noble friend that the Bank of England should be and, indeed, is accountable for the decisions that it makes, but it is not for government to comment on the conduct or effectiveness of monetary policy. He is right that high levels of inflation and, therefore, high interest rates, are causing pain. That is why the Government are taking action to support people at this difficult time, including the mortgage charter, agreed by my right honourable friend the Chancellor, that covers around 90% of the market and gives people options when they are facing higher mortgage rates to make sure that their payments continue to be affordable.

[Baroness Kramer (LD)]

My Lords, I have great sympathy with the Question from the noble Lord, Lord Forsyth. I would like to hear from the Minister that there will be no attempt to compromise the independence of the Bank of England, but that that does not mean that improvements cannot be made; for example, to counter what many of us think is an underlying flaw of groupthink and lack of diversity that leads the Bank to decisions that could be made more optimal with a different set of parameters.

Does the Minister also recognise that the Government themselves could influence inflation far more effectively if they focused on doing so? For example—to name just three actions—they could have dealt with the staff shortages that have so driven inflation; they could have done a great deal more, much earlier, to deal with price gouging by many of our major supermarkets; and they could have kept in place the energy price support scheme, which helped SMEs hold down their prices. Will the Government then take responsibility for their share in not taking those steps to stem inflation?

[Baroness Penn (Con)]

On the noble Baroness’s first point, my initial Answer set out that the Government continue to be committed to the independence of the Bank of England. She is right that government policy can also affect inflation. The OBR said that the energy price guarantee brought inflation down by around two points. Our labour market supply measures, including expanding access to childcare, were the biggest supply side impact in a Budget that the OBR has ever measured. If we were to provide direct subsidies to mortgages, as the Liberal Democrats propose, that would have an inflationary effect, meaning that interest rates would be higher for longer.

Finance (No. 2) Bill

Baroness Kramer Excerpts

Committee negatived & 3rd reading
Tuesday 4th July 2023 Lords Chamber

[Baroness Kramer (LD)]

My Lords, this is a Bill of limited scope, despite its enormous size and the Explanatory Notes. It covers a range of issues and, typically, we have debated nearly all of them in this House before, so I will limit my comments. There is a fair amount in the Bill that is not satisfactory.

I start with the issue on which the noble Lord, Lord Leigh, focused: tax credits for research and development. As this House knows, the Government scrapped their original and rather generous scheme because, they claimed, there was so much fraud in the system. I would have preferred that they found a way to deal with the fraud, rather than remove that support to a wide range of SMEs. The Bill brings in a tax credit scheme for SMEs that are heavily engaged in R&D, but it ignores the many other SMEs that had planned on an understanding that the old scheme would be available to them, made a series of investments and undertook a great deal of development. Those programmes have now been interrupted or shelved, because the cuts have not just deprived those companies of tax relief but had the knock-on effect of drying up private funding. There are limited financing options for growing SMEs in the UK.

My colleagues in the other place put down amendments to require a review of the impact of the change in reliefs on SMEs—on their funding, job creation and, more broadly, UK economic growth. The flip-flopping which this policy represents is one of the reasons for the pervasive uncertainty that is undermining growth in the UK economy. I would be glad if the Minister could tell me whether there will be a broader review.

I will pick up an issue that the noble Lord, Lord Eatwell, focused on. The Bill includes an increase in the annual tax-free allowance for pension contributions and the abolition of the lifetime allowance. This should stem the loss of senior doctors, military personnel and others in the public sector who had been put in the ridiculous situation of receiving incremental salary only to find that it triggered incremental taxes far greater than that salary. I honestly suspect that this could have been done through a much more targeted and far less costly set of reforms. It really feels wrong to spend £1 billion a year on some of the best off in our workforce. Will the Government look at a much more targeted approach to achieve this goal, rather than this wider, sweeping giveaway? The scheme fails to touch even the tip of our labour shortage problems, which is where one would have thought this money would be focused. Right now, businesses in the UK and the public sector are foundering for lack of staff.

We have talked endlessly about the windfall tax on oil and gas, and I will not repeat my concerns in that arena. My colleagues in the other place sought to strengthen this country’s green policies with amendments to the Bill to allow generators of renewable energy to offset money reinvested in renewable projects against the energy generator levy. It is offensive that the fossil fuel industry can offset investments, but not renewable generators. When I read this, I felt it was no wonder that the noble Lord, Lord Goldsmith, was so scathing about the current environmental commitment in his resignation letter.

Ironically, the Bill abolishes the Office of Tax Simplification, presumably because it is viewed as unnecessary, but it does so just as it introduces far more complexity into the tax system—a point highlighted not by my colleagues but by Harriett Baldwin, Conservative chair of the Treasury Select Committee. As the noble Lord, Lord Leigh, said, the two top-up taxes designed to discourage profit shifting are welcome but, as he pointed out, they are not going to deliver a lot more money to the Treasury. It is good to get thinking about this area and to try to work through the complexity; but let us not pretend that this will be a flow of cash into the Treasury’s coffers.

Frankly, the problem with the full expensing of capex is that it is a short-term stimulus for three years. All that means is that you upfront expenditure and then drop off expenditure when that period is over. The benefit is an extremely limited stimulus.

I received an email very late in the day from the Local Government Association. I will be very quick in mentioning its contents. It is a real expression of regret from the industry, which the Minister should hear, that the Bill was not used to deal with concerns about the implementation of the building safety levy. As the Minister will know, that was originally designed to deal with high-rise development activity, reflecting the greater building safety risk. However, the Government have broadened its scope to cover frankly all development. It could be rolled into other forms of taxation, such as the residential property developer tax. As it stands, it requires

“309 local authorities to set up separate, individual processes to act as a collection and administration agency for the Levy—with all funds raised being returned to Government.”

It is hugely inefficient and very unreasonable. Frankly, if we kept the Office of Tax Simplification, it would have jumped on that issue.

From listening to the Government in the debates on the finance Bill, one would have assumed that all was well with the UK economy. My great fear is that the Government simply do not understand how dire the cost of living crisis is for so many people. Recent reports that many have exhausted their Covid savings is not good news. The voluntary mortgage contract, much touted by the Government, will delay for some the immediate impact of interest rate rises but those high rates—they will be even higher because of the measures people will undertake—will still undermine family finances for both owners and renters.

Inflation in the UK remains stubbornly high. By contrast, eurozone inflation has fallen to 5.5%. Last week, the Minister claimed that lots of other European countries had higher inflation than the UK. I looked at the numbers, and I realised that she and the Government have taken to comparing the UK not with major economies such as Germany or France but with Hungary and Estonia. When did our economy, in the Government’s eyes, become comparable with those of Hungary and Estonia rather than those of other G7 countries?

Core inflation, which excludes volatile food and energy prices, rose last month to 7.1%. That is the number that is driving interest rate increases and that captures the sheer economic incompetence of this Government, as well as their wholly inadequate trade relationship with Europe post-Brexit: the sharp drop in exports, British firms removed from supply chains, a collapse in business investment, the fall in sterling, customs friction driving up the cost of imports, labour shortages, and incredibly low productivity.

This finance Bill is a missed opportunity. It could have dealt with so much. It seems to confirm that the Government’s primary goal is to engineer a pre-election tax giveaway next year because the fiscal rules might possibly allow it. All I can say to the Government is that the British people will not be fooled.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I thank all noble Lords for their contributions to the short debate that we have had on the finance Bill today. Noble Lords reflected on the economic circumstances in which we find ourselves. We recognise that high inflation increases costs for households and businesses and that, as my right honourable friend the Chancellor has said, low inflation is necessary for growth. The energy shock from Russia’s unlawful invasion has been felt more in the UK, partly due to our historic dependence on gas, and domestic factors such as record tightness in the labour market and high inactivity rates have put pressure on UK inflation, but that does not remove the fact that we are not alone in facing the global challenge of high inflation rates. Despite this, the IMF has said that the UK has taken decisive and responsible steps to tackle inflation, and all major forecasters expect inflation to fall this year.

Turning to noble Lords’ comments around the level of taxation in our economy and the suggestion—I am not sure whether it was from the Labour Front Bench—that we should change the decisions that we made on tax thresholds to consolidate our public finances and that this should be the route that we take to help people with the cost of living, as my right honourable friend the Chancellor has made clear, the Government’s number one priority is reducing inflation. Not only will this be the most effective tax cut for people and businesses across the UK, but we must not to do anything to prolong inflation, which unfunded tax cuts would only fuel.

It is important to reflect on the action taken since 2010. We have increased the personal allowance and the national insurance contribution threshold above inflation, taking millions of people out of paying tax altogether. Consequently, we have some of the most generous starting allowances for income tax and social security contributions in the OECD and the most generous in the G7.

Outside the tax system, to support household we have focused our help on those who are most vulnerable to the impact of rising prices. Our cost of living support includes the energy price guarantee, cost of living payments and the household support fund, as well as uprating benefits in line with inflation. I say to the noble Baroness, Lady Kramer, that the Government recognise the impact that rising inflation and increases in the cost of living are having on households across the country. That is why cost of living support for households totals £94 billion, or around £3,300 per household, on average, this year and next, which represents one of the most generous packages of support in all of Europe. I say to the noble Lord, Lord Sikka, that looking at the impact of the decisions made from the Autumn Statement 2022 onwards, government support for households in 2023-24 provides low-income households with the largest benefit in cash terms and as a percentage of income. On average, households in the bottom half of the income distribution will see twice as much benefit as households in the top half of the income distribution in cash terms.

My noble friend Lord Leigh welcomed the implementation of the G20/OECD pillar 2 rules. We take our international obligations very seriously. We were instrumental in negotiating this agreement and these rules and as such do not see them as at odds with our sovereignty. We retain sovereignty to set our corporation tax rate as one of the lowest in the G7 and to use important tax levers to boost investment in the UK, including our world-leading full expensing regime and our generous R&D tax reliefs. In fact, pillar 2 will boost the international competitiveness of the UK because it places a floor on low and no tax rates that have been available in some countries. It is designed to protect against the risks of harmful tax planning by multinational groups. As my noble friend said, it is important that the UK legislates for these rules now but, to repeat the assurance that the Financial Secretary to the Treasury gave in the Commons, we will provide an update on pillar 2 implementation as part of the forthcoming fiscal event in the autumn and, if necessary, in the spring, too. This will include the latest revenue forecast from the OBR and an update on the status of international implementation.

I turn to my noble friend’s comments on research and development relief. He asked whether I would have regard to the Chartered Institute of Taxation’s detailed comments, in particular in respect of the new powers HMRC has to remove a claim. While it is correct to assert that customers do not have a right of appeal, they do have a new statutory right of representation to provide HMRC with evidence within 90 days if they think the claim has been removed in error. They also retain the right to apply for judicial review if they do not think HMRC has applied the process correctly.

My noble friend also raised concerns about the R&D compliance check. The Government acknowledge that there is currently a high level of non-compliant claims in R&D tax reliefs and that it is right that HMRC takes action, as I think my noble friend also recognised. HMRC has increased the action it is taking, which means addressing more of the non-compliance. As part of this, it has been rapidly upscaling its numbers of people, and this can sometimes come with teething problems. HMRC ensures that less experienced caseworkers can call on technical support or specialist advice from more senior colleagues. HMRC will continue to work with stakeholders to ensure that the department is managing checks professionally and in line with the HMRC charter, and I would happily hear any further representations by my noble friend or others on how we can ensure that we are delivering in this area.

On company tax rates, the noble Lord, Lord Sikka, asked how many companies will pay the full 25% rate, which is an increase in the headline rate of corporation tax. The noble Lord is absolutely right that the small profits rate will keep the rate at 19% for companies with profits of £500,000 or under, and marginal relief is available for companies with profits from £50,000 to £250,000, meaning that companies will pay somewhere between 19% and 25%. That means that 70% of actively trading companies will not see an increase in the rate of corporation tax they pay, and only 10% will pay the full rate.

I am grateful to the noble Lord for giving me the opportunity to make those points. Sometimes, there is concern among those in business that our corporation tax rate is either uncompetitive or targeting smaller businesses. What we have done in changing the rate is to ensure that businesses pay their fair share of returning our public finances to a sustainable footing after the shocks of Covid and the invasion of Ukraine. We have reinstated some of those exemptions to ensure that the smallest businesses do not face those burdens. That is entirely how we have designed our approach.

[Baroness Kramer (LD)]

Can the Minister tell us—this is not to make a point but just for clarification and to understand the numbers better—is it 70% by number of companies or 70% by a value number of some sort, such as an asset value, a market value or a revenue generation value? How is that number calculated?

[Baroness Penn (Con)]

What I have before me is that 70% of actively trading companies will not see an increase, so I would take it as the former. If it is calculated in a different way, I will write to the noble Baroness to clarify that.

[Baroness Kramer (LD)]

To strengthen the Minister’s own point, it might be helpful if we had a calculation that gave us a better feel. One multinational could easily produce revenues many times those of dozens and dozens of small companies, so she might be getting a bigger tax take than the number that she is using implies.

[Baroness Penn (Con)]

The noble Baroness is exactly right. The increase in the headline rate of corporation tax makes a significant contribution to our public finances and to the consolidation of our public finances after Covid. All I meant to say is that, for some of the reasons set out by the noble Baroness, we have been able to exempt smaller businesses from that increase while also ensuring that bigger businesses—which often benefited a large amount from government support put in place during the pandemic—contributed their share to returning our public finances to a sustainable footing.

The noble Lord, Lord Sikka, also asked why HMRC’s budget had been cut. HMRC will receive a £0.9 billion cash increase over the Parliament, from £4.3 billion in 2019-20 to £5.2 billion in 2024-25, so I do not quite recognise the picture that the noble Lord has put forward. HMRC’s budget includes funding to tackle avoidance, evasion and other forms of non-compliance, to deliver a modern tax system and to support a resilient customs border.

I turn to another area of tax, the energy profits levy, which, I remind noble Lords, has helped to pay a significant proportion of households’ and businesses’ energy costs through the support that we have been able to provide. I want to be clear to noble Lords that the allowances in place are not a loophole. The OBR’s latest forecast is that the EPL will raise just under £26 billion between 2022-23 and 2027-28, inclusive of the EPL’s investment allowances. That is on top of £25 billion over the same period from the permanent regime for oil and gas taxations, totalling around £50 billion.

Abolishing the investment allowance would be counterproductive. The UK is still reliant on oil and gas for its energy supply and will be for several years; reducing incentives to invest would lead to investors pulling out of the UK, damaging the economy, causing job losses and leading to lower tax revenue in future.

My noble friend Lord Leigh asked about the impact of the price floor and the Government’s long-term plans for energy security. By introducing the energy security investment mechanism, the Government are providing certainty about the future of the energy profits levy. This allows companies to invest confidently in the UK and supports our economy, jobs and energy security.

On the long-term fiscal regime for oil and gas, the Government are also conducting a review to ensure that the regime delivers predictability and certainty, supporting investment, jobs and the country’s energy security. I wonder whether that predictability and certainty would be covered in Labour’s review of business taxes. I do not think the oil and gas sector sees predictability and certainty in its policy approach in recent weeks.

I turn to the electricity generator levy. Unlike the EPL, this not a tax on total profits that is calculated after the recognition of total revenues and costs. Instead, the EGL is payable only on the portion of revenues that exceeds the long-run average for electricity prices. The Government took into account the potential impact on investment when setting the benchmark price.

The Government are supporting renewables deployment through a range of policy levers, including the contracts for difference scheme, through which generators have received almost £6 billion net in price support to date. The electricity generator levy will not be payable on renewable generation produced under contracts for difference, which is the Government’s main form of support for green energy and will account for most new large renewable generation.

I turn to the point raised by the noble Lord, Lord Livermore, on non-doms. The Government recognise that issues of taxation come down to fairness. We need to have a fair but internationally competitive tax system which brings in talented individuals and investment that contribute to growth. Reforming the non-dom regime could potentially damage the UK’s international competitiveness, leading to a loss of international investment and talent. There is a great deal of uncertainty over the wider economic impacts of complete abolition.

Non-doms play an important role in funding our public services through their tax contributions. They pay tax on their UK income and gains in the same way as everyone else, and they pay tax on foreign income and gains when those amounts are brought into the UK. The latest information shows that that non-UK domiciled taxpayers are estimated to have been liable to pay almost £7.9 billion in UK income tax, capital gains tax and national insurance contributions in 2020-21 and have invested over £6 billion in the UK using the business investment relief scheme introduced in 2012.

Income Tax Threshold

Baroness Kramer Excerpts

Tuesday 4th July 2023 Lords Chamber

[Baroness Penn (Con)]

On the first point, I absolutely agree with the noble Lord. As I said in answer to my noble friend, bringing inflation under control is the most effective tax cut we can give to families across the country. On the second point, I will have to check the record; it was at least a decade before I was born.

[Baroness Kramer (LD)]

My Lords, I do not suggest cuts in the tax take in our current financial condition, but I question the distribution of the tax burden. Can the Government explain why they have chosen to use the threshold rather than the tax rate? By using the tax rate, they could certainly target the higher level of tax against those with the broadest shoulders most able to carry it. By using and freezing the threshold, they have dragged into the higher tax rate many people on very middling incomes, who are now experiencing the highest increase in taxes, according to the IFS, since 1979. Those are the people who, as the noble Lord, Lord Balfe, said, drive our economy, but they are also the group suffering severely from the cost of living increases.

[Baroness Penn (Con)]

I reassure the noble Baroness that the income tax system is still highly progressive: the top 5% are projected to pay nearly half of all income tax in 2023-24 and the top 1% are projected to pay more than 28% of all income tax. The noble Baroness is right that those on middle incomes are feeling the squeeze; that is why we are absolutely focused on supporting the Bank of England in its mandate to get inflation down.

Mortgage Charter

Baroness Kramer Excerpts

Wednesday 28th June 2023 Lords Chamber

[Lord Livermore (Lab)]

My Lords, when the Chancellor made his Statement on Monday, he did so against a rapidly deteriorating backdrop for Britain’s mortgage holders. Interest rates have risen 13 times to a 15-year high of 5%, but inflation is stuck at 8.7%. The average two-year fixed-rate mortgage has increased from 2.6% to well over 6%. Average mortgage costs this year will increase by £2,900. Multiple lenders have withdrawn all new mortgage deals from the market, just as 1.5 million homeowners are set to come off fixed-rate mortgages.

The Resolution Foundation estimates that home owners will pay a combined total of £15.8 billion more in mortgage payments every year by 2026. Data from the Institute for Fiscal Studies shows that, on average, mortgage holders will see their payments rise by £280 per month, equivalent to 8.3% of their disposable income, with some 1.4 million people losing a huge 20% of their disposable income. The latest data from the Bank of England shows that the value of outstanding balances with arrears increased by 9.5% in the first quarter of this year. These figures all show the level of pain among mortgage holders, which will only grow in the months ahead.

We should, of course, remember that those who have bought their own homes have done nothing wrong. They have worked hard, saved for a deposit and taken pride in having a home of their own. But the security that comes with that has, for many, turned to dread, as month after month they receive a letter from their lender telling them their bills are going up by hundreds of pounds a month.

The Government often argue that responsibility for this rapidly deteriorating picture lies in global factors, yet the figures suggest a different story. The latest data show that a typical household in Britain is now paying over £800 more per year for their mortgage than in Germany, £1,000 more per year than in Ireland and £2,000 more per year than in France. The UK has the highest inflation in the G7, with core inflation last month rising to 7.1% in the UK, a 31-year high, while in other advanced economies, including in the eurozone and the US, it has started to fall. Food prices in the UK are currently rising 20% faster than in France, 30% faster than in Germany and more than three times the rate in the US.

Interest rates first spiked dramatically last autumn when the Government gambled with people’s livelihoods in their disastrous mini-Budget, sending markets into meltdown. Since then, things have only got worse, as the instability the mini-Budget created has continued. Now, with inflation higher for longer in the UK than in other similar economies, the two-year gilt yield today stands at 5.24%, a new 15-year high, half a percentage point above that at the time of last year’s mini-Budget, and above its US equivalent. Markets now see a 70% chance of rates over 6% by the end of this year.

In this context, with millions of home owners struggling to pay their mortgages and with private sector rents rising by more than 10%, the Government’s new mortgage charter is clearly necessary, but it is also clearly insufficient. It is insufficient because, while many banks and building societies are doing the right thing by their customers, a purely voluntary set of measures will leave more than 1 million households missing out on the mortgage support they need.

Last week the Labour Party set out proposals to help people across Britain who work hard, pay their mortgages and rents and are now being hit hard by rapidly rising payments. Labour’s measures are compulsory, across the board and required of lenders. We would require lenders to allow borrowers to switch to interest-only mortgage payments for a temporary period, or to lengthen the term of their mortgage. We would require lenders to reverse any support measures when the borrower requests it. Were we in Government, we would bring in a renters’ charter to end no-fault evictions and introduce four-month notice periods for landlords. It is also important to say that we should not see a big fiscal injection into the economy at this time. If that happened, interest rates would go up even more, crippling the hopes and opportunities of the very people we seek to help.

I therefore ask the Minister the following questions. The Chancellor said in his Statement that the voluntary measures would cover 85% of the mortgage market. That leaves more than 1 million families who are not covered because their lender has not signed up to this scheme. Will the Government now consider making the measures in their mortgage charter mandatory? The Chancellor did not mention renters in his Statement, but many are paying higher rents because their landlords’ mortgage costs have gone up. What plans do the Government have to help them? Despite recent increases in the rates that lenders are charging on mortgages, there has not been an equivalent rise in the rate they offer on savings. This gap has grown by more than 50% for two-year products. What action will the Government take to ensure that savers see the full benefits from higher rates, just as borrowers are feeling the full pain? Finally, why does the UK continue to have the highest inflation rate in the whole G7? I thank the Minister in advance for her answers to these specific questions.

[Baroness Kramer (LD)]

My Lords, I rarely speak to such a thronged House. The number that we should focus on is core inflation, which removes the volatile issues over which we have little control and which has shockingly risen to 7.1%—a 31-year high, as the noble Lord, Lord Livermore, said. This number is key to interest rate rises and captures the sheer economic incompetence of the Government, as well as their wholly inadequate trade relationship with Europe post Brexit—the sharp drop in exports, British firms removed from supply chains, a collapse in business investment, the fall in sterling, customs friction driving up the cost of imports, labour shortages and incredibly low productivity.

Three groups of people will be particularly hard hit by the sharp and continuing rise in interest rates: mortgage holders with variable-rate or expiring fixed-rate mortgages, renters whose landlords face significantly higher mortgage costs and small businesses with short-term loan exposure. The mortgage charter will help some to push the pain into the future, but at a price. The hardest hit who face repossessions will feel the full force only after the next general election; I understand the Conservative strategy there.

Unlike this Government, I do not think it acceptable for the hardest hit, who face the destruction of their family finances, to take the bullet for the economy as a whole. Will the Government now put in place the emergency proposals that these Benches have made to assist those in the toughest position, who will get no help from the banks because they are regarded as unattractive customers? This is a voluntary system and the banks will use their standard approach of favouring customers with whom they want long-term relationships and denying opportunity to those with whom they do not.

Reversing cuts in the bank levy and the surcharge would do more than cover the cost of this, and I am with the noble Lord, Lord Livermore, in saying that the banks are really in a position of profiteering at this point because of their rejection of any pressure to share higher interest rates with their savers.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I thank both noble Lords for their contributions and their questions. The reason we are having this Statement today is the action the Government took on the back of the announcement by the Bank of England last week to raise interest rates to 5% as the UK, like other countries, grapples with high inflation.

There are many different international comparators that can be used in this debate, but the primary drivers of the inflation we are seeing in the UK and across the world are the global shock to energy prices, the impact on supply chains still coming out of the Covid pandemic and, in the UK and countries such as the US, tight labour markets. Interest rates are higher in the United States, Canada and New Zealand, and that will all be impacting mortgage payments. When it comes to inflation—and noble Lords have talked about the measure of core inflation—the UK is not alone here either, with 14 EU countries having core inflation higher than the UK’s.

First and foremost, the Government’s aim is to tackle inflation; our number one priority is to halve inflation by the end of the year to ease the cost of living pressures for everyone. That means that we back the Bank of England in its work to drive down inflation and we will not take measures that would potentially make this worse. We have looked at what we can do to help families who are struggling with the higher interest rates that we now see. We already have a big package of support in place to support families with the higher cost of living that we are seeing—one of the largest support packages in Europe, worth £94 billion, or £3,300 per household on average.

On Friday, my right honourable friend the Chancellor went further, with the mortgage charter for families up and down the country. The noble Lord, Lord Livermore, asked whether we would make the mortgage charter mandatory. I say to him that, when the mortgage charter was announced on Friday, it covered 75% of lenders but by Monday that had extended to 85%. We encourage all lenders to sign up to the charter.

There is the question of how one might make the charter mandatory. The Bill that we have just completed could potentially have had a power of direction within it towards the regulators, but I do not believe that is something that the Labour Party supported; in fact, it welcomed that such a power was not in the Bill. Thinking about the powers by which we can implement policies is perhaps something that we have to consider more carefully in government than in opposition.

The noble Lord asked what we are doing for renters. He mentioned the Opposition’s commitment to end no-fault evictions. I am sure that he was pleased to see the Renters (Reform) Bill that has just come before Parliament, which will do just that—the result of a commitment by this Government, long-standing for a number of years, to take action there. As has been noted, the action through the mortgage charter where landlords are mortgage holders may also provide some help and support to renters along with our wider cost of living support.

The noble Lord rightly said we should not do anything to inject money into the economy right now. It is for the Labour Party to explain how that squares with their own plans to borrow £28 billion a year until 2030. For the Government’s part, we will continue to focus on getting inflation down, supporting the Bank of England in its work and showing responsible fiscal policy.

The noble Lord asked about action to ensure that rising interest rates are not just passed on to mortgage holders but that savers would also see the benefit of those changes. My right honourable friend the Chancellor met the FCA again today along with other regulators, including the CMA, Ofcom and Ofwat. Among the measures agreed at that meeting, the FCA agreed to deliver a better deal for savers by driving competition, including reporting by the end of July on how the savings market is supporting savers to benefit from higher interest rates. The Government fully support the FCA’s review and the new consumer duty, which gives it stronger powers to take action if necessary.

We stand by families who are facing higher costs at this time, with both direct help to support the cost of living and specific help to support mortgage holders, all the while remaining committed to tackling high inflation. That is the core of the challenge that we face today and is the Government’s number one priority.

[Baroness Kramer (LD)]

My Lords, could I ask the Minister, when she goes back, if she could look a little more closely at the numbers she provided us with for core inflation? I just took a quick look to make sure that I had not got this wrong. The European Union as a whole has core inflation at 6.13%. In the eurozone it is significantly lower at 5.3%. There are some outlier countries, such as those which have particularly taken Ukrainian refugees. Hungary has a distorted number, as have a couple of the other countries which are very close, such as Estonia and Latvia. For the kind of economies against which we compare ourselves, we are definitely on the high-water mark and by some measure.

[Baroness Penn (Con)]

My Lords, I am always happy to go back and double-check my figures. The two averages quoted for the euro area and the eurozone are not what I was referring to. I simply said that 14 countries in the EU have core inflation that is higher than the UK’s. That would not just indicate a few outliers, but of course I am happy to go back and double-check and write if I need to.

Financial Services and Markets Bill

Baroness Kramer Excerpts

3rd reading
Monday 19th June 2023 Lords Chamber

[Baroness Chapman of Darlington (Lab)]

My Lords, I thank the Minister for her kind words as she introduced this Third Reading. The Bill leaves the House in a much better condition than when it arrived. We have made changes to the Bill on the treatment of politically exposed people, financial inclusion and the FCA’s accountability to Parliament, and through measures that help to protect the environment. I thank all Members of the House who contributed to our consideration of the Bill, from both sides, and from the Liberal Democrats and Cross Benches, especially those from Peers for the Planet. I also thank the doorkeepers and House staff teams, and everyone who enables us to do our work.

I thank the Minister for her open and welcoming approach to our discussions. I particularly thank my noble friend Lord Livermore for doing more than his fair share of the work from Report onwards, and of course my noble friend Lord Tunnicliffe who led the Labour Party—he did not lead the Labour Party but led for the Labour Party; that was quite a thought experiment—throughout the long Committee stage. His advice and support have been invaluable. Lastly, I thank the outstanding Dan Stevens for his impeccable advice, preparedness and thoughtfulness.

We hope that the Government accept the Bill as amended and do not feel the need to bring it back to the House for further amendments.

[Baroness Kramer (LD)]

My Lords, I join in the thanks to the Minister, who has been very generous with her time, as has the Bill team, and who provided us with explanations and listened to our issues and concerns. I also give particular thanks to my noble friends Lord Sharkey and Lady Bowles on my Benches, who bring extraordinary expertise and analysis to all these issues. They covered for me while I was recovering from surgery, and I very much appreciate their willingness to pick up and carry that burden.

I join in the good words about the noble Lord, Lord Tunnicliffe. He has been an absolute stalwart on this entire portfolio. He is phenomenal in dealing with statutory instruments especially—an area that most of us avoid. I will miss the opportunity to be with him on these Benches, as it were, when these issues come forward again. He might have made a very good leader of the Labour Party, I should say. I also thank the noble Baroness, Lady Chapman, and the noble Lord, Lord Livermore, for the final stages and their close working. The Cross Benches have been quite exceptional on this Bill, as, frankly, have some on the Back Benches of the Conservative Party. It has been an excellent example of cross-party working in the interests of better governance.

A striking feature of the Bill has been that common concern, particularly focused on the issues of parliamentary scrutiny and the accountability of regulators to Parliament. There have been modest steps to improve the Bill on those issues, but there is a great deal more to be done. I remain concerned, as do my Benches, about the risk being injected back into the financial services sector, but again, that is business for another day. We hope that the Bill will go through unamended in the other House. The improvements that come particularly from Peers for the Planet and from those involved in financial inclusion have been important. Again, my thanks to the attendants and the others who have supported us so well throughout this entire process.

[Baroness Hayman (CB)]

I join in the gratitude expressed to the Minister, who has been her usual courteous and committed self in discussing the considerable amendments that were needed to this Bill, bringing through something far better than we had at the start of the process. The noble Lord, Lord Vaux, and the noble Baronesses, Lady Wheatcroft and Lady Boycott, were all highly involved in the process. Like others, I believe we made some important changes in terms of forest risk and making certain that nature as well as climate are involved in this Bill. My only plea, the Minister will not be surprised to hear, is that I hope very much that when the Bill is considered in the other place, those amendments hold and we do not have to have the argument all over again in this House.

Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) (No. 2) Order 2023

Baroness Kramer Excerpts

Thursday 15th June 2023 Grand Committee

[Lord Davies of Brixton (Lab)]

My Lords, I support the order, but it raises some issues that bear significant further thought. The exemption from the ring-fencing requirement is clearly an issue, so it was discussed in the Chamber earlier in the week. The Government have said that ring-fencing is a key part of their package of banking reforms designed to increase the stability of the UK financial system and prevent the costs of failing banks falling on taxpayers—this was following the financial crisis. Clearly, it is important, and any decision to have some exemption needs careful consideration. I shall not deal with the issue in detail; I heard what the noble Baroness, Lady Kramer, said about it in the Chamber earlier in the week, so I can say in anticipation that I very much agree with her remarks.

I want to say something about the resolution process and what we learned about it during this episode. The Bank of England is responsible for taking action to manage the failure of financial institutions—the process known as resolution. The Bank said that the financial system needs an effective resolution framework, and that was one of the key lessons from the global financial crisis of 2008. Resolution reduces the risk to depositors, the financial system as a whole and the public finances which could arise following the failure of a bank. The object of resolution is to reduce the risk of bank failure as well as to limit its impact when it occurs. To be effective, a resolution authority needs powers that ensure that any losses will fall on a failed bank’s investors but without risk to financial stability or to the broader economy.

To achieve those objectives, the Bank has powers that affect the contractual rights of counterparties and investors in the failed firm, so there have to be statutory safeguards for creditors and counterparties. The requirement in general is that shareholders and creditors must absorb losses before public funds can be used. The Bank has a range of powers to enforce insolvency, which was the initial expectation in this case, or to transfer all or part of a firm’s business either to a private sector purchaser or to a temporary bridge bank established by the Bank pending a sale or transfer.

At the point of failure, Silicon Valley Bank UK had a total balance sheet size of about £8.8 billion and a deposit base of approximately £6.7 billion—that is, assets greater than liabilities to depositors. In that sense, it was solvent. However, the scale of the deterioration of liquidity and confidence meant that the Bank and the Prudential Regulatory Authority—PRA—concluded that the position was not recoverable. It is what the Governor of the Bank of England has described as “banking 101”.

Having consulted the Treasury, the PRA and the Financial Conduct Authority—the FCA—the Bank of England decided ultimately to use its resolution powers to transfer the bank to a private purchaser. My question for the Minister is: what lessons have the Government learned from this episode about the resolution process? The process is relatively new and untested, which means that each example must be explored in detail. The idea of testing the resolution regime is of course problematic; you would not want to test your home insurance by burning down your house, so we have to learn where we can.

Now, getting to the crux of what I am talking about, the example was discussed at the meeting that the House’s Economic Affairs Select Committee had with the Governor of the Bank of England on Tuesday, which I attended. Unfortunately, we do not yet have the official transcript, so I cannot quote what the governor said, but I can give the Committee my impressions of what issues need to be explored based on what was said at the meeting.

The first issue is whether the resolution regime worked. Was there a clear and predictable set of rules upon which depositors could rely or was it, in practice, totally ad hoc? It may be that what worked was the right approach in the circumstances, but we need to be clear about that. The governor appeared simply to rule out certain approaches—for example, a bridge bank—largely, it would seem, because of the impact on the public purse. Manifestly, the wish to avoid splitting the assets and liabilities led to the decision to break the ring-fence.

Another thing that was clear is that resolution is inevitably an intensely political process. When the bank said it consulted HMT, it certainly was not just officials. Certainly, the Chancellor but also the Prime Minister were involved in what in banking terms does not really count as a large institution but that on the face of it had wider financial implications. I do not want to downplay the significance of the event. It appeared that at one stage of the process it was suggested that a failure to resolve the matter satisfactorily would “really set back curing disease”—so no pressure.

Finally, the underlying question is whether we are heading in the direction that means that it will, in practice, never be acceptable to impose losses on uninsured deposits. We must remember that in this case the deposits were generally commercial, not personal, deposits. These issues are being discussed, and there is ongoing discussion about a digital currency, but it would be best if they were discussed clearly, openly and together.

[Baroness Kramer (LD)]

My Lords, I am delighted to follow the noble Lord, Lord Davies of Brixton. I am very glad that he has had an expanded discussion of resolution. I will refer to that very briefly in what I have to say.

I have a lot of questions for the Minister on this area. She will not be surprised by them because I and others had questions in March when we debated the SI that provided the temporary exclusion of HSBC from the ring-fencing provisions. This time we are looking at a permanent exclusion.

First, let us look at this permanent exclusion. A few moments ago, the Minister said that there are constraints and conditions. Indeed, when we discussed the first SI she led us to believe, I do not think with any ill intent, that when we saw the SI including the permanent exclusion we would find constraints and conditions on either the activities of Silicon Valley Bank UK or the ability of HSBC to transfer unlimited funds to it, in a way that would give us reassurance that this was a very limited busting of the ring-fence, not something with fundamental implications.

I am struggling to understand that because the Minister made it clear just now that Silicon Valley Bank UK could not expand into being a major retail bank. None of us ever thought that HSBC, as a major retail player, would be setting up Silicon Valley Bank UK to be a major retail bank. So long as Silicon Valley Bank UK does not become a retail bank, I cannot see how the PRA is in any way able to limit its activities. Presumably it would limit those activities under Section 55M of FiSMA—“Imposition of requirements by PRA”—and those would not apply if it was not engaged in regulated activities. I am struggling to understand quite how the role of the PRA would work to limit the range of activities carried out by Silicon Valley Bank UK.

Secondly, let us look at those activities. If anybody wants to know what they are, I suggest that they take a look at the Silicon Valley Bank UK website; they will see that it is heavily engaged in supporting both venture capital and private equity. That takes us into that investment banking, high-risk activity that has, since the changes post the crisis in 2007, been separated out from retail banking. We also know, just from discussions, that it is heavily involved in a range of derivatives.

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the date on which the sale took place. The noble Baroness asked—

[Baroness Kramer (LD)]

Just for clarification: HSBC could pass as many billions as it wishes through to Silicon Valley Bank UK to use for venture capital, private equity, structured derivatives and whatever other products Silicon Valley Bank provided to its customers on the date of its purchase—is that correct? So there is no constraint on the amount or where within that pool of activities the funding can go. It would be helpful for us to understand that.

[Baroness Penn (Con)]

If I might press on, I shall address at least part of the noble Baroness’s subsequent questions. Just to correct a perception: as the governor outlined to the Economic Affairs Committee yesterday, SVB UK typically provides corporate start-up banking services rather than investment banking. I think that difference is important in this context.

[Baroness Kramer (LD)]

I want to pick up on that “typically”. As far as I can see, there is nothing in this which says that the proportionality of commercial banking deposits with regard to the other activities has to stay constant. Carrying out one transaction in an area would bring it within the scope of future activities, would it not?

[Baroness Penn (Con)]

To answer the noble Baroness’s question about whether SVB UK will be permitted to use unlimited amounts of retail funding from HSBC’s ring-fenced bank, the ring-fencing exemptions are subject to conditions that restrict the amount of SVB UK’s core deposits and the type of business that it can operate, as I have set out and as is in the SI. In addition, the PRA has granted HSBC UK and SVB UK temporary waivers to remove constraints in the PRA Rulebook relating to the capital requirements regulation—CRR—on the intragroup lending and funding from HSBC to SVB UK. These waivers, along with the modification to the regime the Government made in the first SI, allowed HSBC to provide emergency liquidity to SVB UK.

As is usual practice with PRA waivers, they are time-limited. One of the waivers expires on 17 September 2023 and the other on 17 June. Whether these waivers are extended or modified is a matter for the independent regulator. The waivers are part of the range of tools that the PRA can use to ensure the effective supervision of HSBC UK and SVB UK. If these waivers lapse, the constraints in the PRA Rulebook regarding intragroup lending and funding from HSBC to SVB UK will come into effect, which would mean that SVB UK would not be able to be funded to an unlimited extent from HSBC UK’s retail deposits.

The noble Baroness, Lady Kramer, said that she took no comfort from either the provisions in this SI or the PRA’s wider supervisory and regulatory powers. What I would say is that the PRA has confirmed its support for provisions in this instrument. Sam Woods has stated that the SI and its conditions support the PRA’s primary statutory objective of safety and soundness and limits competitive distortion. He outlined that the PRA has a range of tools that it can and will draw on to ensure the effective supervision of HSBC and SVB UK and ensure the protection of retail deposits. It will continue to supervise both HSBC UK and SVB UK in line with its usual supervisory approach.

The noble Baroness asked me about Section 55M of FiSMA. I suggest that I should perhaps write to the noble Baroness and the Committee on this point. I have the outlines of an answer, but I think that it might be better delivered in writing for complete clarity. To come back to her point, more broadly, about parliamentary scrutiny or control over the process around the ring-fence and changes to it, the actions in this case are entirely in line with powers granted to the regulators in terms of operating the resolution regime. What we should not do is to think that the powers used under the special resolution regime are indicative of the Government’s or regulators’ approach to reforming the ring-fence more broadly. Any fundamental reforms to that ring-fencing regime would require changes to primary legislation. There is nothing in this process that has changed that.

To turn to the question from the noble Lord, Lord Livermore, on lending to the sector, or sectors, that formed a large part of the customer base for SVB UK, he is absolutely right that it is essential that tech and life science firms have access to the capital that they need to start up and scale up. We support that through the British Business Bank, which has several programmes tailored specifically to the needs of the UK’s life science and technology companies, including the £200 million Life Sciences Investment Programme and the £375 million Future Fund Breakthrough programme, which is specifically aimed at increasing the supply of growth-stage venture capital to UK-based companies working in capital and R&D-intensive areas, such as quantum AI, life sciences and clean tech. There is the National Security Strategic Investment Fund, which invests commercially in advanced technology firms and aims to accelerate the adoption of the Government’s future national security and defence capabilities.

Further to that, at the Budget, the Government extended the British Patient Capital programme by a further 10 years. Alongside that, the Government launched the long-term investment for technology and science initiative to aim to spur the creation of new vehicles for investment into science and tech companies, tailored to the needs of UK defined contribution pension schemes. The contribution of pension scheme capital in this area is something that we discussed quite a bit yesterday, and the Government have further intentions to take forward action in this area.

Mortgage Market

Baroness Kramer Excerpts

Wednesday 14th June 2023 Lords Chamber

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the underlying causes of high inflation, as we all know, are driven by higher energy prices as a result of the war in Ukraine and a tight labour market. There are complex factors as that plays out but the Government are absolutely clear in their commitment to get inflation down. We have seen inflation begin to fall, and institutions such as the IMF have recognised the Government’s action in this area and that we are set on the right path to reduce inflation, which will help ease the pressure on not just mortgage holders but all people facing higher prices at the moment.

[Baroness Kramer (LD)]

My Lords, will the Government set up an emergency mortgage protection fund, potentially recouped by a bank levy, to ensure that those struggling the most will not lose their homes and face financial wreckage and wreckage of their lives?

[Baroness Penn (Con)]

My Lords, I hope the noble Baroness will take some comfort from the fact that mortgage arrears and repossessions remain below pre-pandemic levels. I reassure her that, if a borrower falls into financial difficulty, guidance from the FCA requires firms to offer tailored support and deal fairly with customers facing difficulties in meeting their payments. The Government also have a range of schemes in place to support borrowers, not least the support for mortgage interest scheme.

Financial Services and Markets Bill

Baroness Kramer Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Baroness Kramer (LD)]

My Lords I rise because this amendment allows me to do two things that I do not do very often. One is to thank the Minister because the amendments that she has brought forward are constructive, as others have described. The second is to say to the noble Lord, Lord Moylan: finally, a benefit from Brexit. One down, which pleases me, I have to say.

I want to ask the Minister if, in the course of the review, she will look at the industry that has mushroomed from the vetting of PEPs. I dealt with the American Express problem that others have described. I filled in my forms and still have my card—I am afraid that the BA miles win me over. I decided that I would open a savings account at Chase Bank as they were offering some good rates but discovered that I was caught up in this PEP process and the bank asked for a raft of information that, frankly, I should have never been asked for. The breaking point was a phone call asking me for payslips for my husband. On his death, I had inherited from him and therefore the bank wanted historical payslips. My husband died 17 years ago and I do not know how many people still have their payslips from 17 years ago, never mind those of a dead spouse.

To me, that was typical of the overstepping and exaggeration—gold-plating is almost an understatement —that has been going on in this process. It caused me to go on to the web and discover that there is a raft of consultants, advisers and legal entities that have become engaged in this process and taken straightforward guidelines from the FCA and blown them up into something extraordinary and complex. I am furious with the FCA because it does not enforce the guidelines; I hope the Minister will convey that and that the Government will become furious with the FCA for not enforcing its own guidelines. I hope that she will also encourage it to use the review to look at the vast industry that has burgeoned and makes its profits from making life an absolute misery for anybody it can catch in the system.

[The Earl of Erroll (CB)]

My Lords, I should like to add to this because I have had enough trouble with the PEPs issue for a long time. First, I thank the noble Lord, Lord Moylan, for explaining an important point about why I can get no information from Northern Trust on administering an investment trust in which my wife owned shares in Ireland. We had to get probity in Ireland, but the trust will still not release the money and will not say why. I am getting an absolute blind spot. Even Barclays, which wants money over here to pay off something does not seem to be getting any joy. I suspect that it is because the trust is not allowed to tell us that we are under investigation. That is wrong. If there is a problem, we could unlock it if the trust could just say, “We are trying to investigate this because we think we have to”.

I personally find it offensive that I am deemed to be a risk and a crook. I thought that in this country we were innocent until proven guilty. Actually, this is the other way around. Just because I happen to be a Member of the House of Lords, it is assumed that I am corrupt. This has caused a lot of problems for me and my family, but I am not going any further into detail. We have heard good stories from others, but I do not understand why we are PEPs. I have no access to government contracts and there is no reason to bribe me, sadly. I do not understand the logic behind that, and something should be done. The classification of PEPs should be looked at and revised because a lot of other people who are not PEPs are in places handling government contracts. As far as I know, they are not under permanent scrutiny, so I think you have got the wrong people and it is a nightmare.

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[Viscount Trenchard (Con)]

My Lords, I declare an additional interest as stated in the register as a provider of geostrategic advice to Safe Security (SSL) Ltd. I will not repeat the arguments so well put by my noble friend Lord Attlee, who has given much voluntary military service over the years. I have added my name to my noble friend’s Amendment 98, but I also support both Amendments 99 and 100.

The Export Control Organisation at the former Department for International Trade grants export licences for controlled goods for military purposes. Its online export licensing system is called SPIRE. The organisation’s website states:

“We advise that you register your company on SPIRE, benefits include: More Control … Time Saving”.


I understand that it takes much time to obtain a SPIRE licence, but I am not convinced that it saves any time in carrying out this control business. It is of course right that companies wishing to receive licences to conduct this kind of business should be properly vetted and undergo the most stringent checks. However, once they have done that and been granted SPIRE accounts, why do they then find that the money laundering regulations prevent banks opening accounts in order to execute this kind of business under any circumstances?

In Committee, my noble friend the Minister acknowledged that

“the government process for the granting of export control licences focuses on the end use of goods rather than the source of funds paying for them”.

She told the Committee that the Treasury has

“engaged with the Export Control Joint Unit, the Financial Conduct Authority and other partners on this issue”.

She said that she was

“not aware of a systemic issue”,—[Official Report, 21/3/23; col. GC 297.]

but would “act to address it” if the Government identified one. I rather think there is a systemic issue here, because banks run a mile when anyone, particularly an SME, tries to open a bank account to do this kind of business. Banks are not aware of the SPIRE system and give absolutely no recognition to any licence granted under it to a prospective customer. The result of this, at least in some cases, is that the business is being carried out in other jurisdictions, such as Finland, that do not apply these regulations in such a stringent manner. This obviously deprives the Exchequer of corporation tax revenues and results in the official statistics understating the extent of British support for Ukraine.

This does not apply only to military equipment but includes the provision of vehicles to be used as field ambulances. I want to ask the same question of my noble friend the Minister as that asked by my noble friend Lord Attlee: do the Government think that absolute observation of the money laundering regulations is more important than permitting those who are licensed to do this business to do so?

[Baroness Kramer (LD)]

My Lords, we should thank the noble Earl, Lord Attlee, for raising a set of significant issues. I have no specialist knowledge in this area, but I am very well aware that SMEs generally are disadvantaged under our current framework arrangements. As the Minister will know, individuals and micro businesses—usually a small sole trader or somebody of that ilk—fall within the FCA’s regulatory perimeter, but the SMEs that have just been described fall outside of it.

Therefore, where there are gaps or where their treatment is completely inappropriate, they have nowhere to turn. In those circumstances, they face significant disadvantage compared to their competitors across the globe. So I hope the Minister will understand that this is a reflection—I think “tip of an iceberg” was the correct term—of something that is quite systemic in many different ways, and an area where the Treasury, and the regulators, need to focus attention.

[Baroness Penn (Con)]

My Lords, as I set out previously in Grand Committee, I commend my noble friend Lord Attlee for his strong role in supporting Ukraine and bringing the value of his expertise in support of efforts to provide Ukraine with vital supplies. I understand that my noble friend wishes to ensure that the money laundering regulations do not hamper the private export of armoured vehicles or military vehicles to Ukraine. However, this cannot come at the expense of weakening the regulations in a way that would allow them to be circumvented by those wishing to launder money or finance terrorism.

The Government are committed to providing economic, humanitarian and military support to Ukraine. That is why the UK is proud to have pledged £6.5 billion in support of Ukraine, including £1 billion of World Bank guarantees to go towards closing Ukraine’s 2023 financing gap and £2.3 billion in military support for 2023. In 2022, 195 standard individual export licences and three open individual export licences were granted for the export of military items to Ukraine.

I recognise that my noble friend has concerns about a wider issue relating to provision of banking services to those involved in the defence industry and the refusal or withdrawal of services for other reasons connected with money laundering or ethical concerns. As I said in Committee, I am not aware that banks are taking a blanket approach to such customers. I am grateful to my noble friend for setting out some further specific cases today and I am glad that he had the opportunity to meet my noble friend the Defence Minister. The Treasury would be happy to look further into these cases with my noble friend and the Ministry of Defence. Equally, if the defence industry has wider concerns, I would encourage it to bring them to the attention of the Government and the regulators.

My noble friend made a comment on the Government’s ESG policy and its impact on defence companies. Our ESG policy is focused on delivering the net-zero commitment and there is nothing in that policy framework that prohibits or otherwise disadvantages defence companies and the war in Ukraine—

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[Earl Attlee (Con)]

My Lords, during my research into the money laundering problems identified in the previous group, I identified another problem for SMEs: the availability of performance bonds from the financial markets to cover stage payments in capital projects. I do not need to explain to your Lordships what stage payments are or how bonds work, and it is certainly something that I do not have any expertise in. The difficulties are that the banks require so much collateral that the system is intractable. It is not a problem for large firms with correspondingly large balance sheets; this problem affects only SMEs and tends to keep them small. I talked to a manufacturer of hovercraft, and if all their current enquiries came to fruition, they would simply not be able to secure the necessary bonds to finance the work. I beg to move.

[Baroness Kramer (LD)]

My Lords, this is an issue that I have raised in the House before, having run into the same set of issues—I suspect with some of the same companies down in the West Country involved particularly in large-scale exports which require performance bonds to be able to meet their contractual obligations. In these instances, performance bonds were denied by the banks unless the collateral included the homes and personal possessions of the directors and senior managers of the company. This was despite the fact that the firms had long-standing records of being able to deliver on the projects they engaged in and indeed the customers at the far end had reputations, again, of being excellent payers.

It is a real weakness in the system that we have no one who deals with market gaps, particularly when it applies to SMEs. I attribute part of this to the regulatory perimeter, but regardless of where the fault lies, there needs to be a remedy if we are to build a future economy which will be based very largely on SMEs and, hopefully, very significantly on exports.

[Lord Harlech (Con)]

My Lords, the Government recognise the importance of ensuring that SMEs are able to access appropriate financial products, including performance bonds, and of ensuring the availability of useful information on such products. As noble Lords are aware, performance bonds are a type of financing product that provides a financial guarantee to one party in a contract in the event of the failure of the other party to fulfil its obligations.

More broadly, SMEs already benefit from a diverse financial market, made up of high-street banks, smaller banks and a range of non-banks, to ensure they can continue to access suitable finance. The Government support SMEs’ access to finance through a variety of debt and equity finance programmes through the British Business Bank. These programmes were supporting more than £12 billion of finance to more than 94,000 smaller businesses as of June 2022.

The British Business Bank also produces several reports on access to finance on an annual basis, including the Small Business Finance Markets report, providing expert and independent assessment of the availability and options within the wider funding landscape for SMEs. Fundamentally, the commercial terms that banks and insurers offer, including the collateral they require for performance bonds, are a matter for the firms, subject to meeting the relevant regulatory requirements.

The Government remain committed to maintaining the highest international standards of regulation, and the Financial Services Act 2021 granted the PRA the powers to implement the latest international standards, known as Basel III.1. These include revised capital requirements for performance bonds for banks. The PRA recently consulted on its proposals and specifically requested comments and data from firms and wider stakeholders on its proposals for capital requirements for products such as performance bonds, and it will be considering feedback provided by respondents in formulating its final proposals. For insurers providing performance bonds, the Government are reforming one of the capital requirements, the risk margin, removing a barrier to lower product pricing.

As noble Lords are aware, under the provisions in the Bill, our independent regulators will take on new responsibilities. This means that the PRA will take on responsibility for setting the relevant regulatory requirements that are currently set through retained EU law, acting within the framework set by the Government and Parliament.

As we have discussed a number of times in relation to the Bill, when making rules designed to ensure the safety and soundness of financial services firms it is also important to consider how those firms can support the wider UK economy. That is why the Government have introduced the new secondary growth and competitiveness objectives, which will require the regulators to act to facilitate the competitiveness of the UK economy and its growth in the medium to long term. The PRA’s current consultation has been undertaken before the provisions in the Bill will come into effect. However, the Financial Services Act 2021 requires the PRA to “have regard” to the Government’s economic policy, including investment in SMEs and infrastructure, as well as the effect of its requirements on the UK’s international standing and the provision of finance to businesses and consumers in the United Kingdom on a sustainable basis.

Measures in the Bill also allow for parliamentary scrutiny of the regulators’ performance, including how they have advanced their new secondary competitiveness and growth objective. In addition, the Bill requires the regulators to produce statements of policy on how they will review their rules. Recent government amendments will require these statements to include information on how stakeholders can make representations to review rules, and on the arrangements for ensuring that these representations are considered.

In conclusion, the Government are committed to ensuring that SMEs have access to suitable financial products which are subject to suitable prudential safeguards to appropriately manage any risks. This is particularly important to ensure that UK SMEs are accessing finance to support their goals and contribute to the UK’s growth agenda. I therefore ask my noble friend to withdraw his amendment.

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[Baroness Altmann (Con)]

My Lords, I too apologise to the House for being late.

I have added my name to my noble friend’s amendment. I urge my noble friend the Minister and the House to think very carefully about what possible advantages there could be relative to the disadvantages of having a central bank digital currency. We have seen so many people lose so much money, and so many money launderers, thieves and so on make so much money from digital currencies. This may be one of the biggest scams of the century.

It is very difficult to see why we need digital currencies at all. The risks for money laundering and economic crime, the lack of transparency and security for anyone putting money in, and the opportunity that this would offer to rogue states and actors to try to undermine our entire financial system require significant warning. The possibility that this could be introduced without primary legislation seems to me to be unconscionable and a dereliction of our duty to make sure that we are looking after the currency of this country.

[Baroness Kramer (LD)]

My Lords, I had the privilege of serving on the Economic Affairs Committee, with the noble Lord, Lord Forsyth, as chair, when it produced the report. Your Lordships will gather that my views on whether we adopt a digital currency are distinctive somewhat from others who have spoken today. It is not that I am some enthusiast for it; I recognise all the issues and disadvantages that have been named today, particularly financial stability and privacy. However, 18 countries will be adopting a central bank digital currency this year—including China, initially for its domestic market. It has been piloting it in 12 cities, but eventually it will become an offering that it takes to the many other countries where it expects to exercise influence, in both Asia and Africa.

I am afraid that we are facing potentially a King Canute situation: we may not particularly want such a currency but might simply have to accept that to remain in the forefront and in play within financial services and as a major exporter and participant in global trade, we may have no choice but to go down this route. But I absolutely share with every other speaker the view that this should be determined by Parliament in primary legislation. The issues are sufficiently fundamental and far-reaching. They carry risk, and they require judgment and perspective—and it is in debates in the other place and here that that can happen.

It seems to me that something so fundamental as currency surely is the responsibility of a democratic Parliament. It cannot be transferred, in effect, to either the Treasury to run through an SI, or to the regulators to not even bother with an SI but largely to put it in place through various regulatory changes. So, here we have absolute common ground; this should be on the face of the Bill. I am concerned that this may be the last piece of legislation coming forward where we have the opportunity to put it in the Bill. There might be a further opportunity in a year’s time, but it depends on the speed of change that we experience.

Guarantees from the Government would be good. I am glad that a letter has been written to Harriett Baldwin and the noble Lord, Lord Bridges, but we need something that recognises the significance and importance of doing this through primary legislation.

[Lord Livermore (Lab)]

My Lords, we welcome the amendment in the name of the noble Lord, Lord Forsyth, which has enabled this short and informative debate on the process for establishing a central bank digital currency. As technology develops and people’s habits change, it is vital that we keep pace. Therefore, the principle of a digital pound has much to commend it, although the arguments, implications and details clearly need to be properly worked through. The introduction of a digital pound would represent a significant step, and it is therefore right for the noble Lords, Lord Forsyth and Lord Bridges, to ask about the underlying processes, though it is a novel experience for the two noble Lords to be asking for commitments from this side of the House.

We very much welcome the clarification offered by the Chancellor in his letter to the noble Lord, Lord Bridges, and the Economic Affairs Committee that there would be primary legislation before a digital pound could be launched. We agree that this is an important safeguard.

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At the very least, I hope the Minister can see the merits of adopting this review and promoting the idea that there are important reasons why the long-term investments of our domestic pension funds, which had been the jewel in the crown of our financial system for many years, should be directed to work to the benefit of the economy and the pension scheme members themselves.

[Baroness Kramer (LD)]

My Lords, I speak from these Benches on behalf of my party, as a group of realists. The current Government, and any future Government, look at the pools of money in pension funds, whether defined contribution or defined benefit, and see them as a tempting source of investment in the area of scale up and infrastructure, where we are desperate to find additional investment. I point out that pension funds are not disadvantaged in investing in investment-grade assets in any way. It is in investing in sub-investment grade assets where they carry a burden under the current arrangements.

These investments in scale up and infrastructure are, by definition, high risk and illiquid, and we have to face up to that. Some 40% of scale-ups fail and infrastructure projects run notoriously late, and well over budget. I challenge people to come up with a very long list of infrastructure projects that have come in on time and on budget. It is hard to identify virtually any project that meets that test. It means that pension obligations must be fully protected if we are to open up these funds to be able to invest in a far more illiquid and high-risk way.

That is why I am comfortable with this amendment, because proposed new subsection (2) insists:

“The review must consider how best to do this while protecting the safeness and soundness of pension funds”.


I was also pleased that the noble Baroness, Lady Chapman, introduced the additional consultee identified by my noble friend Baroness Bowles—the Pension Protection Fund—in this process, because that is clearly a mechanism which could provide the kind of protection for pensioners who may be exposed if we change the risk profile of pension fund investment.

I insist that the first responsibility of a pension fund is to pay out its obligations on time and in full. I suspect that everyone who is invested in a pension believes that that is, and must continue to be, true. Often when we discuss these issues the Canadian pensions funds are cited because they do indeed invest in illiquid and high-risk assets, but anyone reading the credit rating agencies discussing those pension funds will find that the pension funds are pretty much backstopped by the Canadian Government.

What I hope will come out of this review process are new opportunities to fund our economic growth but also protections commensurate—it may not be the same strategy but through some mechanism—with those that the Canadians have put in place, to make sure that our pensioners will still be paid on time and in full. If that no longer remains true, we end up in a very serious pickle but, having read through this set of amendments, I think they get us to the right place to be able to achieve that.

[Baroness Penn (Con)]

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

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

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

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

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

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

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

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

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

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

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Moved by

[Baroness Kramer]

106: After Clause 71, insert the following new Clause—
“Protection of banking reform: ring-fencing and SMCR
(1) Parts 1 (ring-fencing) and 4 (conduct of persons working in financial services sector) of the Financial Services (Banking Reform) Act 2013 and amendments made by them to FSMA 2000 may not be modified or revoked except by an Act of Parliament.(2) No change or revocation may be made by secondary legislation, including by the PRA and FCA, to—(a) the requirements for ring-fenced bodies, and(b) the senior managers and certification regime, or other rules for the conduct of persons working in the financial services sector,that departs from the principles set out in the final report of the Parliamentary Commission on Banking Standards.(3) For the avoidance of doubt, subsection (2) includes secondary legislation that would allow ring-fenced bodies permanently to carry out excluded activities.(4) This section may not be amended except by an Act of Parliament.”Member’s explanatory statement
This amendment would prevent the Government from making substantive changes to the policy on ring-fencing and SMCR by statutory instrument, and would prevent policy from being amended in a way that departs from the report from the Parliamentary Commission on Banking Standards.

[Baroness Kramer (LD)]

My Lords, in Committee the Minister reassured the House that the principles of ring-fencing and the senior managers regime which protect our banking system could be changed only by primary legislation. Then came the Silicon Valley Bank UK crisis and we discovered that breaking down the ring-fence in particular can be done by simply using statutory instruments and without the full engagement of Parliament. My Amendment 106, which is written from the two tabled in Committee, is intended to reassert the fundamental principle that change has to be driven by primary legislation and it removes the loophole which we experienced with Silicon Valley Bank.

I shall explain very briefly the Silicon Valley Bank issue. As part of their agreement with HSBC to acquire SVB UK, the Government permitted HSBC to transfer funds from its ring-fenced retail bank into SVB UK, which is outside the ring-fence. The transferred funds can now be used for activities which the HSBC retail bank would be prohibited from, including high-risk and speculative transactions.

If this was a temporary state of affairs, I could understand this awkward response to an emergency, but on Thursday the Minister will bring a statutory instrument to this House to make that breach of the ring-fence for HSBC permanent and notably with no limits on the amount of funds that can be transferred from ring-fenced to unring-fenced. Unless I misunderstand the SI, there are no conditions on the use of those funds, even though last month the Minister seemed to imply that we could expect conditions or limits. In effect, the ring-fence is now fully breached for HSBC. Its rival banks, not surprisingly, expect further government action soon to give them exemptions in order to level the playing field. We have in effect destroyed the ring- fence.

Ring-fencing and the SMCR, I would argue, are vital protections against another 2007 banking crisis. They limit the incentives and mechanisms for banks to mingle the culture and capital behind retail banking with the very different and high-risk world of investment banking, with the SMCR establishing individual responsibility for bad or abusive management. The Government have posited in discussion that these protections can be safely weakened because banks now have resolution plans to protect the taxpayer from a bank failure. But that presumption, frankly, has been blown out of the water. Both the Swiss and the US regulators in the last few months facing bank failures—one Credit Suisse and the other the three regional banks in the US—decided that, in the circumstances, resolution would be far more damaging to their economies than seeking taxpayer support to extract those banks from their predicaments and failure.

We have had an illustration that makes it clear that the resolution plans that we have in place for banks may work in certain limited circumstances but very often, particularly when there is high risk in the economy, may indeed not work and are more damaging to use than to discard. In that situation, it is absolutely crucial that we return to the protections provided by ring-fencing and the SMCR.

That is my view. If the Government disagree with me and believe this is time for weakening the ring-fence or diluting the SMCR, I argue they have to come to Parliament and do it under primary legislation, not through the backdoor that we experienced over the last couple of months through the mechanism of the purchase agreement for Silicon Valley Bank UK.

I am not asking this House to make the decision on whether we keep ring-fencing or the SMCR. What I am saying is that it is this House and the other place that need to actively understand and make the determination if that change is to happen. It is fundamental to the financial stability of our country and therefore that is the way this issue would be addressed. My Amendment 106 combines into one the two amendments from Committee and adds a clause to require primary legislation for any permanent exclusions from ring-fencing rules, closing the loophole used by the Government and reasserting the original intent of the law. I beg to move.

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[Baroness Penn (Con)]

My Lords, it has been over 10 years since the Independent Commission on Banking recommended important structural changes, including the introduction of ring-fencing for the largest UK banks, and the Parliamentary Commission on Banking Standards recommended the introduction of the senior managers and certification regime, or SMCR, to embed a culture of greater accountability and personal responsibility in banking. I pay tribute to the important work of these commissions and their lasting legacy in improving the safety and soundness of the UK’s financial system. Amendment 106 from the noble Baroness, Lady Kramer, covers the ring-fencing and SMCR reforms.

In response to my noble friend Lord Trenchard, the legislation that introduced the ring-fencing regime required the Treasury to appoint an independent panel to review the regime after it had been in operation for two years. That independent review was chaired by Sir Keith Skeoch and concluded in March 2022. The review noted that the financial regulatory landscape has changed significantly since the last financial crisis. UK banks are much better capitalised and a bank resolution regime has been introduced to ensure that bank failures can in future be managed in an orderly way, minimising risks to depositors and public funds.

In the light of these considerations, the independent review concluded that changes could be made in the short term to improve the functionality of the ring-fencing regime while maintaining financial stability safeguards. In December, as part of the Edinburgh reforms, the Chancellor announced a series of changes to the ring-fencing regime that broadly follow the recommendations made by the independent review. The Treasury will consult later this year on those near-term reforms. The panel also recommended that, over the longer term, the Government should review the practicalities of aligning the ring-fencing and resolution regimes. In response, the Government published a call for evidence in March. This closed at the beginning of May and the Government are in the process of considering responses.

The noble Baroness, Lady Kramer, and other noble Lords referenced the resolution of Silicon Valley Bank UK, which was sold to HSBC on Monday 13 March. The Government and the Bank of England acted swiftly to facilitate the sale of SVB UK to HSBC after determining that action was necessary to protect depositors and taxpayers and to ensure that the UK’s world-leading tech sector could continue to thrive. To facilitate the sale, the Government made modifications to the ring-fencing regime that apply to HSBC only in relation to its acquisition of SVB UK.

It is critical that the Government have the necessary powers to act decisively to protect financial stability, depositors and taxpayers. The power under the Banking Act 2009 enables the Treasury to amend the law in resolution scenarios. Parliament gave the Treasury this power recognising the exceptional circumstances that can arise. However, I say to the noble Baroness that the changes made to the ring-fencing requirements are specifically in relation to the acquisition of SVB UK and should not be viewed as an indication of the future direction of government policy on ring-fencing. The Chancellor has been clear that, in taking any reforms forward, the Government will learn lessons from the crisis and will not undermine financial stability.

The core features of ring-fencing are set out in primary legislation, which generally may be amended only by primary legislation, so the Government are already constrained in one of the ways that this amendment seeks to ensure. In passing that legislation, Parliament delegated certain detailed elements of the regime to the Government to deliver through secondary legislation, given its technical nature and to allow it to evolve over time, where appropriate. Parliament also included clear statutory tests and objectives within the framework, which the Treasury and the PRA must satisfy when making changes to the regime. These statutory tests continue to reflect the underlying objectives and purposes of the regime. The Government are of the view that they remain appropriate and that no further constraints are necessary.

Turning to the SMCR, I can confirm to the House once more that the framework of the SMCR is set out in primary legislation, so it is already the case that significant amendments can be made only via primary legislation.

Let me also reassure the House that the Government continue to recognise the contribution of the SMCR in helping to drive improvements in culture and standards. The principles of accountability, clarity and senior responsibility that are emphasised by the PCBS report were reflected in the SMCR. We should take confidence from the findings of separate reports by UK Finance and the PRA, which both show that these principles are now more widely embedded in financial services than before the introduction of the regime.

The Economic Secretary made it clear to the Treasury Select Committee on 10 January that the purpose of the review was to seek views on the most effective ways in which the regime can deliver its core objectives. It is important to review significant regulation from time to time to ensure that rules remain relevant, effective in meeting their aims and proportionate to those aims. The Government are grateful to those who have submitted responses to the SMCR call for evidence. This information will help the Government, alongside the regulators, build a proper evidence base for identifying what, if any, reforms to the regime should be taken forward.

I hope that I have sufficiently reassured noble Lords that the Government remain committed to high standards of regulation, and to the important reforms introduced following the global financial crisis. Therefore, I ask the noble Lady, Baroness Kramer, to withdraw her amendment.

[Baroness Kramer (LD)]

I thank the Minister, but she has essentially repeated the speech she gave in Committee. At the time, I took her assurances at face value that primary legislation would be necessary to make a fundamental change to the structure of the ring-fence. I was therefore frankly shocked when, within a matter of days, the Government took a different point of view in the acquisition of Silicon Valley Bank UK by HSBC. There is no reason why HSBC should have used its ring-fenced arm to make the purchase of SVB; it chose to do so because it got, as a consequence, this opportunity to take that ring-fenced money and put in into non-ring-fenced activities, with no constraints whatever in terms of amount or activity.

The Government are bringing forward another statutory instrument to make that change permanent for HSBC. It is unconscionable that our largest bank should have a competitive advantage like that and other banks not be given it. I am extremely concerned about the way in which statutory instruments are being used to undermine the principle that changing the principles should be only by primary legislation. Therefore, I wish to test the opinion of the House.