Queen’s Speech

Baroness Kramer Excerpts

Monday 13th May 2013 Lords Chamber

[Baroness Kramer]

My Lords, I do not flatter myself that so many noble Lords have remained in this Chamber for my speech, but rather for the speech of the noble Baroness, Lady Lane-Fox, who will follow me—and quite right, too. I very much hope that she will address the issues of entrepreneurship in such a cutting-edge industry. That will be fascinating, not just on a personal level, but because it lends itself so much to the issues of economic growth that we are talking about today.

The opening phrases of the gracious Speech indicated that the Government’s purpose is to focus on building a stronger economy and promoting a fairer society. Let me wholeheartedly endorse those two principles, which must go hand in hand. This country has, at times in its history, pursued one but not the other, and that has damaged us as an economy and a society.

Much of the work of rebuilding the economy is already under way. I will pick up on the latest measure that was in the Queen’s Speech, which is extremely positive, namely the commitment to introduce a new employment allowance of £2,000, not least because its simplicity should make it very attractive to small businesses. We have heard again today, from the right reverend Prelate the Bishop of Birmingham, and others, that small businesses are key to the future of this country’s economy. This should be a spur to new hirers.

I commend the Government on resisting the temptation to constantly think up more legislation in the finance area, where we already have crucial banking reform legislation to deal with. I am on the Parliamentary Commission on Banking Standards, and our report will come out in the next few weeks. The Government slightly surprised me today by saying that that Bill will come to this House before the Summer Recess. It is very important that the issues raised in our final report have the opportunity to be properly considered, and, on many fronts, incorporated into that legislation. I therefore ask the Government to take a serious look at the timing.

I agree with one part of the speech made today by the noble Lord, Lord Forsyth: it is sometimes a relief that we have a Government who do not constantly try to address every problem by producing yet another piece of legislation. When we heard the noble Lord, Lord Eatwell, essentially complaining that there were not enough new laws in the Treasury field for this section, I thought, “Labour’s continuing with its old habits of legislation”. I am glad that he finally agrees that implementation and governance are the right answers, but those are not the words that his colleagues have used.

In these uncertain times in which we live, it is unwise to overestimate green shoots in the economy. However, I have been struck by the very positive tone that I now hear from a wide range of those working in small businesses, in business accountancy, and even in the commercial sector of the banking industry. Help to buy is having a very big impact on the housing market; Barratts has reported the highest demand for five years, and now warns of a possible skills shortage in construction, which it is combating by planning for 600 new apprentices and graduates over the next three years. The CBI report also reinforces the sense that there is momentum.

We have seen these signs before. In 2011 confidence began to grow, but was knocked back with the problems in Greece, and in 2012 we began again to see gathering confidence, which was then shaken by concerns over Italy and Spain. This time, however, there is a broader base, with a pickup in the service sector, non-EU exports, manufacturing output and retail sales. I would love to hear from the Government about retail sales, but I understand that much of the pickup comes from the over-45 age group, which, frankly, was much less impacted by unemployment and by wage compression. That group has the capacity to spend, and if it is starting to again, that is a very important message for the economy.

Of course, any return to recovery has its own risks. A few months ago it was fashionable to suggest that many companies in the UK were essentially zombie companies—the walking dead that would collapse in an economic revival. Thank goodness that theory has largely been discarded because it does not fit the facts. However, it is true that as the economy improves many companies will quickly chew through their cash reserves, and it will be absolutely critical that we have a banking sector able to meet the demands especially of small and medium-sized businesses. I confess that this worries me.

The Government’s decision in the Budget to continue and expand Funding for Lending, with much more emphasis on small business lending, was significant and welcome. The big banks have been clearing their balance sheets and trying to retrain their staff to look at the sector, and they should have enhanced lending capacity—although I remain sceptical about the low levels of demand that they insist exist in the economy. However, as the economy recovers we will definitely see a very significant pickup in demand for credit. It will come not in steady increments but in waves of expansion. We cannot afford for the banks to fail us again. If they are correct that only lack of demand has been holding back the flow of credit, we should see that change. In case they do not, I hope very much that the Government are looking at additional contingencies. It would be terrible to lose the opportunity of a rising economy because our banking sector, which has never focused very much on the real economy in the UK, failed to live up to expectations.

In the long run, new banking players and non-banking players will enter the credit market. We must never again depend on just four institutions, as essentially we do today. I am very pleased that we are close to achieving a proper regulatory framework for peer-to-peer lenders, and that they are getting support from the business bank. I congratulate the regulators, the FCA and the PRA, on a complete about-face in historical strategy. They are now setting out to remove barriers to the entry of new banks. Measures such as seven-day account switching will finally let ordinary people change their banks to get a better service, and will open the opportunity for new players to thrive. The Chancellor has proposed that the regulator should take on the payment system—the plumbing of financial services and banking—which has been in a sclerotic state and made it almost impossible for any new players to enter the market. We are moving towards an environment where competition is encouraged.

I am still concerned that waiting for banking and credit markets to grow organically and provide us with new players of any size will take longer than we can wait, and longer than one economic cycle. For that reason, I urge the Government to look closely at RBS, and possibly Lloyds, and consider splitting them up. People talked about splitting RBS into a good bank and a bad bank. That would have made sense five years ago but we are past that point now. Much more interesting would be a split into a number of regional banks that could identify and focus on the needs of each regional business base. For decades we have let the market shape our banking industry. It has been a disaster; we have seen nothing but consolidation and homogenisation. We now need the Government to tackle the failings in the structure of the industry, not just the failings of individual banks, which they are tackling with capital requirements, ring-fencing and other measures, so that it is fit for purpose, and the purpose is serving the real economy.

I know that Lloyds and RBS have had trouble selling off the pieces of their own banks that they have been forced to sell by European law. Two points are relevant here. One is the appalling legacy technology that the institutions are burdened with, which has not been brought up to date. The other is a general expectation that they will simply consolidate into another new big bank rather than remain sustainable as regional organisations. Economies of scale have dropped sharply and dramatically with modern technology. Highly competitive regional banks have proved viable across the globe. If national banks cannot serve our businesses and regional banks can, we should seize the once-in-a-generation opportunity of returning two major banks to the private sector to build the banking structure that best supports our economy.

Banking: Quantitative Easing

Baroness Kramer Excerpts

Wednesday 27th March 2013 Lords Chamber

[Lord Newby]

I do not think that there is any sleight of hand. Since 1998, the Bank of England has introduced a number of innovative measures within the remit and the terms of the Bank of England Act. Quantitative easing, which, in 1998, many of us could hardly spell, far less understand, has happened on a big scale and finance for lending has been introduced. These innovative things have been introduced under the terms of the Bank of England Act. The remit change reflected in this year’s statement by the Chancellor accepts that there have been a lot of changes since 1998 and suggests that the Bank should look at introducing further innovative operations.

[Baroness Kramer]

My Lords, the Minister will be aware of a recent speech by Spencer Dale, the chief economist of the Bank of England, which identifies the constraint on growth, not on the demand side but far more on the supply side, because the banks are not back to normal lending, so does he see monetary activism as a mechanism to return to normal lending or are we relying much more on actions such as the business bank? Is that where the Government’s emphasis should be placed?

[Lord Newby]

My Lords, we need to pursue more than one course at the same time. The Green Investment Bank and the new business bank are one way forward; further innovation by the MPC is another. We need the full range of tools at our disposal to promote growth.

Budget Statement

Baroness Kramer Excerpts

Thursday 21st March 2013 Lords Chamber

[Baroness Kramer]

My Lords, the Chancellor yesterday gave us a Budget that fits the tough economic times that we all acknowledge. I congratulate him on not succumbing to the blandishments of the Opposition. I listened very closely to the noble Lord, Lord Eatwell, and thought that he summarised his own speech by saying that insanity is repeating again and again the failures of the past. He gave us exactly the formula of spend and borrow that the previous Government pursued and that left our economy so structurally weak that, when the financial crisis struck, we found ourselves in dire circumstances, overburdened with debt, and with a structural deficit, no resilience and a fundamental underlying economy that had been neglected for a generation. He now repeats that formula.

The measures in yesterday’s Budget were focused on helping ordinary families with the cost of living, on stimulating new jobs, especially in small and medium-sized businesses, and breathing life into the housing market. Let me make just a few comments on each of the three.

Ordinary families, as we all know, have been feeling the squeeze on their finances. For that reason, I am particularly pleased with a further lifting of the income tax threshold to £10,000 next year. My party promised it and it will be delivered a year early. With this step, nearly 3 million people will be out of income tax altogether; 24 million people will pay £700 a year less in income tax—a genuinely meaningful amount of money; and a person earning the minimum wage will have seen their income tax bill cut in half. I find it frankly extraordinary that, rather than embracing this progress, Labour wishes to substitute a 10p tax band. Under Labour, poorer people would today be paying more income tax than under the coalition. I find that the most extraordinary notion of “fairness”. If one adds to that the measures on fuel duty, childcare and even beer, one sees that ordinary working families now have a little more breathing space.

Childcare is an area where I once worked on Liberal Democrat policy. We made a very difficult decision not to include plans much like those announced this week in our manifesto, because when we looked at the economy that Labour had left us we saw that it was clearly unaffordable in the face of the economic collapse and uncontrolled borrowing environment. But childcare is one of the most challenging issues for working families. I took evidence from many mothers, and sometimes fathers, trying to weigh the long-term financial benefit of growing a career by returning to work against the immediate burden of the most expensive childcare in Europe. The coalition has already made 16 hours a week of free care available to two year-olds in the least well-off families and taken a more intelligent approach to the staff/child ratio in childcare, but we have all known that more is needed and this scheme will make a real difference to working families.

However, I agree that the question of growth is the one on which we have to focus. I looked at Bank of England numbers yesterday which came out ahead of the Budget and the OBR’s forecast. They made it absolutely clear that the most significant cause of undershooting our growth projections is the weakness in the eurozone and the damage it has done to our exports.

Despite that, the private sector has created 1.25 million new jobs, and many of those are in SMEs. Twenty per cent of all the SMEs in the EU are here in the UK. Small and medium-sized businesses are providing more than half the jobs, more than half the exports and, even now, more than half the patent applications. The Government’s employment allowance is therefore just what SMEs need to start adding that “one more job”. Often, that one more job will be a young person, especially if we continue to provide support through apprenticeships and the youth contract. It is right that the employment allowance should become a permanent feature of the structure of British business taxes.

The abolition of stamp duty for AIM will also make a difference, although it must be just part of building a proper framework for raising finance in this country. I have talked now to quite a number of small businesses that simply sold out to the Americans because they could not access the equity that they needed to grow. I have not seen the announcements that my colleague Vince Cable is making today, but if we can combine a revived AIM with the business bank, that, together with proper reform of our still dysfunctional banking system—and I address the noble Lord, Lord Eatwell, who structured this dysfunctional banking system, and the party opposite—we can get a vigorous and rebalanced business base that will provide well paid jobs for our people, especially our young people, who deserve the best.

Earlier in this coalition, we returned large areas of decision-making to local communities but not the funding that would give real power to that decision-making. Last week’s decision to draw departmental money for local growth schemes into a single fund, known now as the Heseltine pot, should overcome that. My noble friend Lord Shipley will speak more extensively for my party on these issues because he is the expert, but I just want to say this, particularly to noble Lord, Lord Deighton, because he is a man of wonderful practicality: I seriously hope that the Heseltine pot will finally release the capacity to get TIF 1 and TIF 2 going—tax increment financing for infrastructure projects, small as well as large, identified by local communities as key to growth.

Of course, though, the big news in the Budget was housing. We have a housing shortage at crisis levels, particularly in affordable housing and especially in London and the south-east. We are building scarcely one-third of what we need. Housebuilding played a key role in enabling the UK to avoid the worst of the Depression in the 1930s, and it has always seemed a no-brainer to drive forward house construction now. I have a strong suspicion that when Vince Cable wrote in the New Statesman that the Government could use their ability to borrow cheaply to support new infrastructure, especially housing, he had this expansion of help to buy in mind.

Help to buy uses existing institutions, so it should be able to take off pretty quickly. It is a massive injection into the housebuilding industry. I am going by the newspaper estimates of £12 billion in total. I notice also that on the back of this announcement, new shares in the housebuilding industry immediately soared—Barratt Developments was up 6.5% by late yesterday—and that response tells you that the market sees this as a way to get construction going. Once again, my noble friend Lord Shipley will say more.

I would very much like the opportunity for a more extensive discussion of monetary policy and monetary activism, because this is a new arena and it cannot be dealt with in the context of a brief debate like this. However, I am so glad that we are engaging in imaginative thinking and opening our minds, not just sticking constantly with conventional wisdom. This is a new opportunity. We are building a stronger economy in a fairer society, and this Budget furthers that goal.

Bank of England: Monetary Policy

Baroness Kramer Excerpts

Tuesday 19th March 2013 Lords Chamber

[Lord Newby]

My Lords, inflation has been higher than the 2% target for a number of years. The MPC has taken the view that the target would be met in the medium term and that, because the principal reasons for inflation did not include excessive domestic demand and are therefore less capable of being moderated by increases in our own interest rates, it was wiser to “see through” the temporary increase in inflation above 2% but to work, as the MPC has, on the basis that, in the medium term, inflation would indeed come down to 2%.

[Baroness Kramer]

My Lords, Paul Tucker has floated the notion that the Bank of England could charge banks for holding reserves at the Bank as an incentive to get them to lend to the real economy. Is that an issue that has been actively discussed with the Treasury and what is the Government’s view?

[Lord Newby]

My Lords, again, that is a matter for the Bank of England. To the extent that the Chancellor—and the Treasury—wishes to change the way in which the Bank of England operates, he will have an opportunity tomorrow to set out what any changes might be.

Taxation: Avoidance

Baroness Kramer Excerpts

Thursday 14th March 2013 Lords Chamber

[Lord Newby]

Yes. This is an area to which DfID is giving increasing priority. Last year we supported 48 programmes in 20 countries and spent £20 million in this area. Of course, the extent to which we can do it in any country depends on an assessment of that country’s capacity to take advice and act on it.

[Baroness Kramer]

My Lords, I very much support the GAAR, the general anti-abuse rule, which the Government are bringing in to deal with abusive tax avoidance, but would the Minister agree that the version that the Government are looking at is very narrow, with the double reasonableness test? If it proves ineffective, would it not be wise to review that test sooner rather than later?

[Lord Newby]

The road to the GAAR, as it were, was long and difficult. As the noble Baroness will know, it was resolutely opposed by the party opposite when it was in government. We are making a proportionate start, and hope that it will be successful in dealing with the most egregious tax avoidance schemes. The great thing about it is that it is a deterrent. It will definitely be kept under review, but it is a big step forward, and we should not underestimate that.

EU: Eurozone Financial Transaction Tax

Baroness Kramer Excerpts

Tuesday 5th March 2013 Lords Chamber

[Lord Newby]

My Lords, we have some examples of where this kind of thing has been done in the past. In 1989, Sweden introduced its version of an FTT and in the first week the volume of bond trading fell by 85%, even though the tax rate was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. Not surprisingly, Sweden is not now supporting the idea of a Europe-wide FTT.

[Baroness Kramer]

My Lords, the original concept of the financial transaction tax was that it would be global and that the funds would be used to assist the developing world. Have the British Government considered that, as many politicians on all sides support those concepts, they might take leadership in this global role, which might strengthen their hand in these much more parochial negotiations with the European Union?

[Lord Newby]

My Lords, the noble Baroness will recall that in 2011 the French Government proposed such a tax at a global level in G20 and there was widespread opposition to it from, among others, the US, China, Australia and Canada. Sadly, there is nowhere near a global consensus on whether such a tax is a good idea, and, equally, there is no consensus, even within the EU, about where the money should go. The French were, and are, keen that at least part of the proceeds should go to development aid, but the Germans, for example, propose that any receipts from the FTT should simply go into the central tax pot.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2013

Baroness Kramer Excerpts

Monday 4th March 2013 Grand Committee

[Baroness Kramer]

My Lords, I shall try to keep my comments brief and, if I may, to follow the order in which the noble Lord, Lord Eatwell, addressed the orders to make life a little easier for the Minister. On those elements of the order that attempt to make sure that the FCA and PRA rulebooks appropriately intermesh, and on the comments of Andy Haldane on the risks that arise when you manage through rules rather than through structure, can the Minister give us some assurance that, behind the clarification of the rules, is the cultural commitment to act together as a coherent unit? The fear that Mr Haldane and others have expressed is that, once the institutions see rules, their first reaction is to attempt to game them. I suspect that it is not the number of rules that is the general concern but the coherence of the regulators in making sure that gaming is not a practice that they will permit.

The heart of today’s discussion is to do with LIBOR. I have a general question on the participation of banks in the LIBOR-setting process. It was the strong wish of many that more banks should participate in the process. At the moment, many seem in effect to get a free ride by allowing others to be the participants in the rate-setting process. They then use the rate across the many instruments and transactions that they sign up to, but because they did not participate themselves, they were in many ways getting a free ride, not exposing their internal positions to public view in the way that the participants were and making it much more difficult for other banks to compete against them when some were being transparent and others were not. I wonder where that process has got to. I understand that it was to be voluntary, and I do not know whether we have had any change in who is involved in rate-setting at this point or are likely to in the near future.

At the heart of my questions for the Minister are the sanctions of themselves. We all strongly support the new offence of making false or misleading statements and false or misleading impressions in the submission of benchmark information in the setting of a rate such as LIBOR. One of the underlying concerns has been the way in which the regulator approaches such violations, which is to come down increasingly hard on the individuals who have been clearly and directly involved in that false submission but not to look upwards to those who create the culture and environment in which that behaviour takes place. Tracey McDermott has said on several occasions that the appropriate way to enforce is to find the problem and then follow the trail and to stop questioning at the point where the trail goes cold. That obviously creates for senior management an advantage in wilful ignorance and makes it beneficial for them not to know in any detail what is happening in their organisation, certainly for there to be no trail that would be easy for a regulator to follow. Many of us have come to the conclusion that the regulator needs to have a way to look through that to make senior members of a company accountable for behaviour that is happening on their watch and which they do not know about through negligence, in a sense, rather than through deliberate deceit on the part of those carrying out the wrongful behaviour. Can the Minister make any comments about that?

The underlying concern is that the regulator has sanctions that are strong enough. Many of us have noticed the distinction between the kind of sanctions that a US regulator can use versus those available in the UK. I know that that is not a direct discussion within the order, but it is so closely tied to it that I wonder whether the Minister would comment.

[Lord Newby]

My Lords, I am extremely grateful to noble Lords who have contributed to the debate and will attempt to answer the questions they have raised. The first questions related to the effect of the tearing up, or bifurcation, of the rulebook and how continuity will be retained. I hope that the cultural commitment which the noble Baroness, Lady Kramer, mentioned, pervades those at the head of the new organisations and that it will be carried forward. In formal terms, consistency will be maintained by the operation of the memorandum of understanding between the two bodies, the PRA and the FCA, which we discussed in relation to other orders last week.

This is of course not the first time that there has been an attempt to reduce the number of pages. The FSA at one point consulted on it, but the answer it got back was, “Actually, we do not want the number of pages reduced significantly, because they tell us what to do, and if you reduce the number of pages, that puts more of a requirement on us to exercise our own judgment”. That is the balance that we are grappling with here. On the one hand, everybody wants less regulation, but when the consequence of less prescriptive regulation is that people have to exercise more of their own judgment, sometimes they become less keen.

Economy: Rating Agencies

Baroness Kramer Excerpts

Wednesday 27th February 2013 Lords Chamber

[Lord Deighton]

The noble Lord makes some very important observations. First, as I am sure he knows, one of the rating agencies is being sued by the US Government, reflecting the very concerns that he brings out. With respect to relatively simple credit considerations, and in terms of the UK economy the information is all out there, the Chancellor’s economic policy and the performance of the UK economy is evaluated every second of every day by the financial markets. The verdict of those markets is reflected in our historically low gilt yields. This morning we were trading in the 10-year gilt below 2%, which is the most profound commentary on the success of the UK Government’s current economic policy.

[Baroness Kramer]

My Lords, the underlying issue is surely growth. Yesterday, Paul Tucker, deputy governor of the Bank of England, floated the idea of levying a penalty on banks that park their money at the central bank rather than putting it into the real economy. What comment does the Minister have to make on that strategy?

[Lord Deighton]

My noble friend raises the question of monetary policy. We have had a number of debates on creativity to restore a focus on growth and not purely on short-term inflation targeting. All these ideas are welcome and demonstrate the importance of generating growth. We should have the debate but be very focused on sticking to a monetary policy that understands the importance of the medium-term inflation target, while accepting a degree of flexibility around output.

Some specific measures that the Government have taken, such as FLS, were recommended in the Moody’s review as a very positive sign, so other ideas should certainly be debated and considered.

Banking: LIBOR and EURIBOR

Baroness Kramer Excerpts

Tuesday 12th February 2013 Lords Chamber

[Lord Deighton]

The penalty levels are a matter for the FSA. In 2010, it re-established the code under which it assesses the fines to make them more transparent. It is an area which has been recently reviewed.

[Baroness Kramer]

My Lords, may I at least commend the FSA for a new penalty regime which affected misbehaviour after 6 March 2010 and finally had some serious fines behind it? However, I still recommend the US system of triple damages. Does the Minister agree that it is crucial that the Government and all politicians stand behind the regulator in fierce enforcement and tough penalties? It was the slack that we saw cut for the banks under the previous Government that demonstrated to people that government and the regulator seemed to be on the side of the banks and not the people or the taxpayers?

[Lord Deighton]

My noble friend makes an extremely good point that under the new regime it is critical that government and regulators are seen to work together and to represent the interests of the consumers.

Banking Reform

Baroness Kramer Excerpts

Monday 4th February 2013 Lords Chamber

[Lord Newby]

My Lords, I smile with amusement when the noble Lord accuses the Government of not taking this issue seriously. When his party was in his power, and we and I suggested to it and him that they do exactly that, we were told that it was irrelevant to the problems that we were facing and that we should definitely not do it. I will certainly not take any lessons from him about the importance of this issue.

As for whether the legislation should include reserve powers to implement full separation across the sector, this was put to the Governor of the Bank of England, who said that he did not want such reserve powers. More importantly, general reserve powers would give huge power outwith Parliament to tear up the provisions of the Bill as we envisage it, and fundamentally change some of the ways that we see it working. The Government think that if you got to the point where that was a possibility, or you wanted those powers, the appropriate way to do it would be to come back to Parliament, rather than leaving it to the regulator to exercise what would be very sweeping powers indeed.

[Baroness Kramer]

My Lords, I will not repeat the question on reserve powers. I have a feeling that this House will take it on if the Government do not.

May I ask a question about the competition aspects of the Chancellor’s speech? His comments were welcome but to be able to change from one bank to another when all those banks are essentially alike is not real choice. Will the Government look seriously at splitting up some of the major banks, especially those in which we have ownership? I have not read the Statement but can he comment on whether Chancellor or the legislation will allow the FPC to set the level of the leverage back-stop so that it could be higher than the rather modest levels proposed under Basel III?