Financial Services Bill

Baroness Noakes Excerpts

Tuesday 3rd July 2012 Lords Chamber

[Baroness Noakes]

My Lords, I support the formulation of the Minister’s amendment. While I understand what the noble Lord, Lord Eatwell, says about having regard to—not simply blindly following—the Government’s policies, which the Financial Policy Committee might think are irresponsible, my noble friend Lord Blackwell answered that point effectively. It would be intolerable to have a government-owned body in effect running a policy contrary to the Government’s own policies. However, he has a point but it is already dealt with by the ability of the FPC to make regular reports. Where it has to report on its view of financial stability, the FPC has ample opportunity, on a regular basis and without any interference by government, to say what is making financial stability difficult to achieve—if achieving that is indeed the Government’s economic policy. Therefore, we do not need to reformulate it as the noble Lord, Lord Eatwell, suggests.

I do not support the amendment tabled by the noble Baroness, Lady Kramer, because I am slightly appalled by the prospect of the FPC going out promoting government policy, let alone going out promoting various forms of finance being available to the City. That goes way beyond what the FPC was set up to do and is probably way beyond the competencies of the kind of people it has attracted.

[Lord Davies of Stamford]

My Lords, I will comment on the two previous contributions. I very much agree with the noble Baroness, Lady Noakes. It would be quite wrong to put the FPC in a position in which it was simply a mouthpiece for the government policy of the day. It is very important that it is independent. In response to the views of the noble Viscount, Lord Trenchard, on competitiveness—the suggestion that the FPC should pursue competitiveness as an objective in itself—my answer would be that competitiveness is an intermediate objective, not something that one pursues for its own sake. If one has an obligation to have regard to or to pursue—we will come back to the differences in a moment—growth and employment, anyone pursuing or having regard to those objectives is bound to take competitiveness into account because without it we will not get growth or employment. Growth and employment are ends in themselves, unlike competitiveness; that is the distinction.

We have a menu of choices before us this afternoon. All three amendments believe there should be a link between government economic policy, particularly on growth and employment, on the one side and financial stability on the other. No one has contended—nor could they easily do so—that those objectives should be pursued totally in isolation from each other. However, of the three choices before us, the amendment of the noble Baroness, Lady Kramer, and the right reverend Prelate the Bishop of Durham is the most coercive and creates an unqualified statutory obligation to pursue growth and employment. That is very dangerous because it is likely to result in a conflict of objectives. It is a great mistake to place in statute what could be regarded as contradictory objectives. The government amendment in the name of the noble Lord, Lord Sassoon, does not do that because the reference to government economic policy and growth is subsidiary to the obligation to pursue financial stability. The least coercive of the three amendments, and the one that I most incline towards, is that of my noble friend, Lord Eatwell.

It is particularly important that we should discuss this today, because the results of our discussions, deliberations and votes may have a very specific impact on the economy, about which we must all be very concerned. The situation today in relation to the pursuit of financial stability is particularly grim. There are at least a couple of areas where the Government appear, as of this afternoon, to be contradicting themselves very sharply and dangerously—namely, their policies on economic growth on one side and financial stability on the other. I will set out those two examples in the hope of carrying the Committee with me.

One is in relation to quantitative easing. The Government have promoted or encouraged the Bank of England to promote—in all events the 1946 Act makes it clear that the Bank cannot incur liabilities without the Treasury’s agreement, so the Government must be responsible—a policy of quantitative easing that runs into several hundred billion pounds, as we know. That policy was designed to encourage banks to increase their lending by automatically increasing their reserve assets as they received money from the Bank of England in exchange for bills and other instruments that it is purchasing under the quantitative easing programme. It has not worked at all and that has been very marked indeed. The Minister must have noticed the figures that show that the two quantitative easing exercises have not resulted in any increase in bank lending. The bank lending figures do not seem to correlate at all to quantitative easing. The Government need urgently to ask themselves why that is.

One of the extraordinarily perverse and, frankly, foolish aspects of the quantitative easing programme is that the Bank of England is paying the clearing banks or the commercial banks for the deposits that result from the programme. Its whole purpose was to encourage banks to lend and to encourage an increase in the money supply—in M3 or M4. That has not occurred because the banks have been keeping their deposits at the Bank of England. They are not using them under the fractional reserve banking system to leverage out and increase their lending to the rest of the economy, to the private sector. It is extraordinarily foolish to pay interest on deposits at the Bank of England because that reduces the opportunity cost to the banks of not lending—of not responding to the quantitative easing programme by increasing their lending.

When the Minister responds to the debate, can he first tell me the amount of interest—I am not sure whether it is 50 or 75 basis points—paid by the Bank of England on these reserve assets and deposits, which is a completely wrong thing to do? Secondly, why is the Bank acting so perversely? If it did not pay any interest on those deposits, there would be a much greater financial incentive on the banks, given that they would not be earning anything on that aspect of their assets, to lend more to the private sector, which they are noticeably not doing. Had the Bank decided, under the quantitative easing programme, not to buy in instruments from the banking system—the financial institutions—but to go out into the market and buy instruments, such as short-term gilts at the short end or Treasury bills and so on, from the non-financial private sector, it would have automatically increased the money supply. The Bank did not do that, and I do not know why the Government did not decide to do it that way. The way that the Government have done it seems to be somewhat contradictory and it certainly has not produced the desired result.

The Minister will not be surprised to hear my second point because I have made it two or three times already in this Chamber. It is contradictory to pursue a policy of encouraging bank lending to move the economy to greater growth, while at the same time forcing the banks to increase their capital ratios. In an ideal world, it would be a good idea for the banks to increase their capital ratios. It is something that we should have been doing in the good times when banks were running up their assets, perhaps to an excessive level in both quantity, which was too great in relation to their capital resources, and quality, which was subject to the law of diminishing returns as the assets were increased in the boom times. Those were the days when we should have been pursuing such a course. Of course I recognise that the Government of which I was privileged to be a member was in power at that stage, but the Tory party and members of the coalition cannot claim any virtue in this matter, given that, far from urging us at the time to bring in any such measures, they were always urging us to deregulate the banks further. Nevertheless, we are dangerously pressing on the accelerator and the brake at the same time.

The Minister normally replies to me by saying, “It doesn’t matter. These new capital ratios do not have to come into effect until 2018”. That is a somewhat naive approach. Anyone who has sat on the board of a bank, as I have, knows that if you know you have to achieve certain capital ratios in five years’ time, that is the trajectory that you have to pursue from now until the end of that period. In other words, it constrains you in your lending. It means that you have to be much more selective in the loans you take on because you are concerned that otherwise you will not reach the target that has been imposed on you. I recognise it is very difficult, with the present state of the financial markets both here and in the eurozone, to go back on an announced programme of strengthening the capital ratios of banks.

However, it is an almost textbook example—which will probably be cited in business schools and seminars in economics departments for several decades to come—of the Government pursuing two completely contradictory policies and now finding themselves in great difficulty. Even if they want to extricate themselves from this contradiction, they have already engaged in this particular programme and sent instructions to the banks, and it would obviously cause considerable problems in the financial markets if we suddenly announced that we did not want to strengthen the capital ratios of banks.

These are two good illustrations of how easy it is to run into a contradiction between the Government’s main economic policy objectives—which must always be to stabilise the economy, and in bad times, such as we are in now, to increase growth and employment—and the financial stability mechanism. From the menu of the most coercive, the medium and the least coercive amendments before us, I reject, as I have already said, the most coercive. I think that it is a mistake. I am fairly open-minded about the other two. It is very important that the FPC has an obligation to take into account my noble friend’s formulation of “other, wider economic objectives”. It would be very wrong of it to act blindly, as though it were in a watertight compartment. It may be that we can go a little further and place an obligation on it, provided that it is subsidiary to its main obligation in the view of the Government.

This controversy parallels discussions we have had in both this House and the other place. I remember the discussions in the other place 15 years ago, when we made the Bank of England independent, quite well. There were two great examples of successful independent central banks in the world at that time. One was the Federal Reserve system, which had a double objective statutorily imposed on it. Those objectives were price stability and employment, which in the short term can sometimes be in contradiction. It was left to the Federal Reserve board to resolve that contradiction. On the other side was the ECB which, basing itself on the Bundesbank tradition, had a single technical objective of price stability defined by maximum inflation rate of 2%. We had to choose between the two but ended up with something slightly between them, which may also be the right solution on this occasion, in this context.

--- Later in debate ---

[Lord Sassoon]

No, my Lords, it is not wrong. If we are talking about a British bank, it is a British bank, and that is linked to these metrics and to the remit of the FPC. Of course that is captured in the FPC’s remit. I think we are getting ourselves excessively excited about a simple issue that is perfectly well drafted in the Bill, which is that the FPC has a wide and appropriate remit to deal with financial stability in the UK, but that it should properly take account of systemic risks that may arise both inside and outside the UK. That is exactly what the drafting of the two clauses taken together means. If the noble Lord had been critiquing the Bill as it was introduced in another place, he would have proper grounds for questioning that, but we have plugged a possible gap, and the construction now works.

[Baroness Noakes]

I do not wish to be unhelpful to my noble friend, but I am probably going to be. What the noble Lord, Lord Eatwell, says seems to make sense. The systemic risks in subsection (3)(a) and (b) are defined in subsections (5) and (6) as not having any geographic restriction, but subsection (3)(c), which is defined by subsection (7), as the noble Lord, Lord Eatwell, said, relates only to,

“individuals in the United Kingdom and businesses … in the United Kingdom”,

for credit growth, debt, and so on. That ignores the fact that many banks have global balance sheets. As we do not have rigid subsidiarisation, a UK balance sheet could have significant exposures to other territories, depending on how a particular bank’s overseas operations were organised. Many of them are run as branches out of the UK institution and therefore, I should have thought, would be posing the kind of risks on which the FPC would need to keep an eye. I am unclear why we have chosen that formulation. I accept that for the systemic risks it does not matter where it applies, but when we are talking specifically about credit growth, debt and leverage, it is as if it can impact on the UK only if it happens in the UK, and I do not think that that is correct.

[Lord Sassoon]

I shall have another go, because this is tricky but important. The Financial Policy Committee is charged with responsibility for the overall financial stability of the UK: the systemic risks and the macroprudential role. We need to distinguish that from the situation of individual firms which will or may contribute to the overall systemic risk. In this discussion we risk conflating two things. One is the systemic risk in the system, which the FPC is charged with dealing with. That is credit growth, debt and leverage as defined by subsection (7), which is referenced to the United Kingdom. The financial stability of the United Kingdom is the concern of the FPC. That does not mean that risk may not come from the international financial system—that is made completely clear by subsection (6). However, for individual financial institutions for which the PRA will have first responsibility, if the FPC considers that they contribute to the overall situation, it does not rule out or limit consideration of the factors that affect individual financial institutions. The clause and the definitions do not rule that out. We should not confuse what is being defined here. The definitions are not exhaustive of the systemic risks which the FPC should consider. It may consider whatever else it considers relevant.

--- Later in debate ---

[Baroness Noakes]

My Lords, as the noble Lord, Lord McFall, has already said, my name has been added to this amendment. It is one of those that have been put forward in the spirit of co-operation with the other place, and is one of the items left over, in the opinion of the Treasury Select Committee in the other place, at the conclusion of consideration of this Bill there. I was happy to put my name to it so that we could have a proper debate on the issue in your Lordships’ House.

There does not seem to be any fundamental disagreement that some indicators of financial stability should be used in the dialogue about how well financial stability is going along and ultimately, I imagine, how well the FPC is doing its job. Consequently, I am unclear why there has been so much resistance to date to recognising the importance of this in the Bill. The Bank of England rightly said that this should not be hardwired into legislation—that is, the hardwiring of the particular indicators. I do not think that anyone has a monopoly of wisdom at the moment regarding what those indicators should be and it is clear that the nature of the indicators will change over time, so it is wholly inappropriate for specific indicators to be reflected in the Bill. The amendment would merely ask the FPC and the Treasury to agree and then publish a set of indicators, and clearly that can vary over time.

I find it difficult to understand the Treasury’s approach on this. Usually the Treasury likes to get stuck in on practically anything and not leave things to the Bank of England, but it seems quite content to leave the issue of financial stability indicators solely to the Bank of England and to have no direct locus itself. It was curious that when the Government responded to the Treasury Select Committee’s 21st report of 2010-12, when this issue was raised, the response said:

“If necessary, as part of its annual remit to the FPC the Treasury will be able to make recommendations about additional indicators that it feels the FPC should consider”.

I do not understand why we have to have this indirect dancing around recommendations made in the context of an annual remit to the FPC. The measurements that are used to tell whether or not the financial stability objective has been met should be so caught in the dialogue between the Treasury and the FPC that it should be a routine item for discussion, not one left to the possibility of recommendations.

This is all part of the link of accountability from the functions of the Treasury in relation to the FPC to Parliament. The Treasury should be accountable to Parliament for its role in agreeing the indicators and not just say, “Well, it’s really up to the Bank of England and we’ll give them a recommendation if we feel that they’re seriously out of line”. I am struggling to find why the Government have not embraced the very modest idea that the Treasury should be agreeing this issue with the FPC.

[Lord Davies of Stamford]

My Lords, I think that my noble friend Lord McFall and the noble Baroness, Lady Noakes, have been very persuasive on this point. All human institutions—indeed, all human beings—perform best in life and achieve the most when we set ourselves clear objectives, we monitor our performance in meeting them and we are quite clear and honest with ourselves and others about the extent to which we have met them. Clearly, with regard to an institution that has public responsibilities and fiduciary responsibility on behalf of the public as a whole to supervise our financial sector, those criteria and objectives and the extent to which they have been achieved or otherwise should be a matter of public knowledge and public debate. I am certain that matters should proceed like that.

As the noble Baroness has just said, the amendment would not in any way hardwire specific metrics or criteria into the legislation; it says merely that the FPC and the Treasury would have to agree among themselves what particular objectives or criteria they were going to adopt for a foreseeable period, and then we could watch to see whether they were adopted or not. I do not have any specific objectives or criteria to put forward except perhaps an addition to the sort of principles that my noble friend Lord McFall referred to. We should at least mention something that, while it is quite obvious, the public would expect to be there, such as that the FPC would expect to intervene sufficiently early and to be sufficiently alert to the difficulties that can arise in order to avoid situations where the Bank of England has to supply either solvency support to banks by way of deposits in a crisis or indeed liquidity support or solvency support if it requires accuracy or nationalisation. These are extreme examples of how things can go badly wrong. They have gone badly wrong over the last few years and there should be an explicit commitment to avoid those mistakes and those disasters in any agreed criteria which may come out of the discussion between the Treasury and the FPC foreseen by the amendment.

--- Later in debate ---

My noble friend Lady Noakes questioned in particular the Treasury’s role in all this. It is important to stress the independence of the FPC and, although this was not what my noble friend was suggesting, for the avoidance of doubt, it is important that the Treasury ought not to be able to tell the FPC definitively which indicators to consider. I can imagine the situation if the Treasury said, “We do not want you to consider house-price growth”, for example. This would be a serious curtailment of the FPC’s independence.

[Baroness Noakes]

My Lords, my noble friend is mischaracterising what I was suggesting in relation to this matter. The amendment states merely that the Treasury and the FPC,

“must agree and publish a set of indicators”.

There is no suggestion that the Treasury could use this mechanism to tell the FPC not to look at certain things. The issue is whether or not the Treasury should take the responsibility of agreeing a range of indicators that are appropriate to the FPC’s objectives, just as the Treasury does in relation to the indicator that is set for the MPC. We know that it is radically different from the MPC, and that a single indicator cannot be set and that it cannot be the sole responsibility of the Treasury. However, the Treasury should have some responsibility for agreeing with the FPC the range of indicators that will be used.

I hear the cry of a child in the Public Gallery. It is amazing the effect that one has when talking about financial stability.

It is important that the Treasury should be engaged formally in the process, and it should not just leave it to the Bank of England. Equally, the Bill should not be silent and leave it to the Bank of England to choose whether or not to put forward indicators. I agree that it is doing so at the moment, but is it wise to legislate that there should be no requirement for it to do so?

Financial Services Bill

Baroness Noakes Excerpts

Monday 11th June 2012 Lords Chamber

[Lord Foulkes of Cumnock]

My Lords, it is seldom that the noble Lord, Lord Hamilton, and I agree. We were introduced into the House on the same day and I found it a privilege to be introduced on that day. However, I fully agree with him on this issue. I returned from the Recess to find this Motion on the Order Paper. I was not aware of it before and, as far as I know, there was no consultation about it. Members did not know that it was going to be remitted to a Grand Committee. I may have shown a lack of acuity in picking this up but I have discussed today the fact that many Members were not aware that it was going to be suggested that this important Bill should be committed to a Grand Committee.

As the noble Lord, Lord Hamilton, said, this is an important issue. It may not be politically contentious but it is vital. As the Minister said, it arises to some extent from a major financial crisis that hit the headlines. He described the Bill as major legislation and, after talking with Members who have been in the House much longer than me, I believe it is very unusual for such major legislation to be remitted to a Grand Committee for discussion. As the noble Lord, Lord Hamilton, said, it would be normal for it to be taken on the Floor of the House.

There may be other reasons—far be it from me to suggest them—why the Government want to remit the Bill to a Grand Committee, but our decisions as Members of the House should be on the merits of the Bill and not on any secondary reasons beyond the basis of the Bill.

It would be unfortunate if we had to divide on this, so I urge the Minister to withdraw his Motion on the basis that there will be further discussion and consultation with all parties and all sides of the House. I hope he will see fit to do so.

[Baroness Noakes]

My Lords, it is a great pleasure to be in complete agreement with the noble Lord, Lord Foulkes, which is not an occasion I find often to celebrate.

Having been in his position for many years, I understand completely the noble Lord, Lord Eatwell, who expressed earlier his view that we could have a more intimate discussion about issues with the Minister in Grand Committee. Equally, when I was in his position, I always took the view that Bills of major significance, which this one is, should be considered in the Chamber.

There is a particular reason for that. When a lot of issues have to be debated and decided, the only time you can divide in Committee is when a Bill is considered by the whole House, not in Grand Committee. In Grand Committee you have one fundamental opportunity to test the opinion of the House, which is on Report because there is a restricted ability to test matters at Third Reading. So for a Bill like this, with quite a lot of issues, it would be much better for the whole House to consider them so that we can settle them in Committee. Otherwise we will have one of those invidious things where we have to consider how many issues we can deal with by 7.30 in the evening before people go away. You have to take things over from Grand Committee to the whole House on Report.

This Bill is very significant and covers many issues. That has been reflected in our debate over the past seven hours or so. It is our responsibility as a revising Chamber to do this in the proper way by considering it not in Grand Committee but by the whole House.

[Lord Myners]

My Lords, I rise briefly to add my support to the views expressed by the previous speakers. There are significant issues in this Bill which require attention. They are not issues that divide on party political lines, and it is clear from today’s debate that there is a wealth of information and understanding in the House. Having previously taken legislation through Committee both in the House when I was a Minister and in Grand Committee, I have no doubt that this Bill should be appropriately considered by the whole House in order to be able fully to draw upon the knowledge and expertise of your Lordships. I would enjoin the Minister to withdraw the Motion that the Bill be taken in Grand Committee in order to allow further time for discussions through the usual channels—taking into account the views which have been expressed this evening from all sides of the House.

--- Later in debate ---

[Baroness Kramer]

I have relatively little experience in this area, but it is my understanding that one of the advantages of Grand Committee is the easy access to officials. If the Government are seriously considering a range of amendments, as the Minister has indicated in the debate today, I presume that the ability to discuss and negotiate those and to make sure that government amendments come forward that meet the required standard will be easier within the Grand Committee context. I am something of a novice on this, so I would take the guidance of the House.

[Baroness Noakes]

Perhaps I may challenge the suggestion made by the noble Baroness, Lady Kramer. While officials sit rather nearer to the Ministers in Grand Committee, I think that they take no active part. All we have is that the same number of officials sit rather closer to the Minister, so it makes very little difference in terms of determining government policy. In practice, because no decisions are made in Grand Committee, or at least they are made very rarely there, the proximity of officials is of no account whatever.

[Lord Sassoon]

My Lords, I hear the opposition to this Motion loud and clear. Rather than put ourselves through the agony of going through the Division Lobbies at this late hour, let me withdraw the Motion and let some more discussions go ahead.

Financial Services Bill

Baroness Noakes Excerpts

Monday 11th June 2012 Lords Chamber

[Baroness Noakes]

My Lords, our rules say that, on behalf of the whole House, the noble Lord, Lord Bilimoria, should welcome the maiden speech of the noble Lord, Lord O’Donnell, but I hope that I may be permitted to add my congratulations on his forthright and interesting speech. I hope in particular that eurozone Ministers heeded his wise words on leadership. I should declare my interests as set out in the register of interests. I am a non-executive director of RBS and a shareholder in a number of financial services companies.

My first point on this Bill is that it misses opportunities to ensure that UK plc is at the heart of financial services legislation. Bodies such as the CBI have pointed out that none of the new regulatory bodies is due to inherit the FSA’s current requirement to,

“have regard to the international character of capital markets and the desirability of maintaining the competitive position of the UK”.

The misguided reason given in another place is that this was associated with light-touch regulation and its disastrous consequences, but that is not good enough. Just as important, as other noble Lords have pointed out, is that the FPC’s remit does not have an explicit requirement to have regard to growth in the UK. When I read the attempt made by my honourable friend the Financial Secretary to the Treasury to justify this in another place, I nearly lost the will to live.

The financial services sector is a crucial part of the UK economy both directly in its contribution to GDP and tax yields and indirectly in its underpinning of the rest of the economy. It would be truly disastrous if the new bodies created by this Bill were merely technocratic and divorced from the needs of the wider economy. I hope that the UK’s economic success will be hard-wired into this Bill and that we will avoid the stability of the graveyard.

I cannot pretend to be enthusiastic about everything in this Bill. In particular, I believe that the twin-peaks approach may well create as many problems as it seeks to solve. That the FSA failed as a part of the tripartite arrangement is beyond doubt, but it is less than clear that the Bank of England would have made a better fist of prudential supervision before the financial crisis or that separating out conduct will be net positive.

The FSA was expensively created in the late 1990s and now we are even more expensively creating new arrangements that will have different gaps and overlaps. I can sense the law of unintended consequences waiting to spring into action. My noble friend will be relieved to hear that I am not going to fight a rearguard action, and shall instead concentrate on other areas of the Bill where I believe improvements are required.

I support the creation of the Financial Policy Committee to give focus to the Bank’s financial stability objective, but the Bank and the Financial Policy Committee must operate in an accountable and transparent way. My noble friend has helpfully confirmed that the Government will make changes in the Bill as it goes through your Lordships’ House, and I hope that this will go beyond the Bank’s own suggestions. I hope that my noble friend will heed the wise words of several noble Lords on this topic, including the noble Lord, Lord Myners, and my noble friend Lord Lamont.

I am sure that creating new macroprudential tools that will be available to the FPC can make a significant contribution to financial stability, but they are much too important to be created and operated in an accountability vacuum. As a minimum, the super-affirmative procedure will be necessary to give parliamentary oversight to their creation.

If we are to have the twin peaks of the PRA and the FCA, they must be made to work together. I am concerned that the solution in Clause 5 rests on a memorandum of understanding, the very mechanism that demonstrably failed the tripartite authorities. My noble friend may already be aware that there is concern about the practical impact on regulated firms of the separation of the FSA into the two arms that will shadow the PRA and the FCA.

There is no requirement in the Bill for the PRA and the FCA to consult on the creation of the memorandum of understanding; nor is there any parliamentary approval of the arrangements or provision for independent review of the effectiveness of co-ordination. This area of the Bill seems decidedly weak, and we need to strengthen it.

The Government have usefully set out in the Bill the regulatory principles to be applied by the PRA and the FCA, including the rather elusive concept of proportionality. This is described in terms of burdens being proportionate to benefits—which sounds okay—but is then qualified by “in general terms”, which of course begs a lot of questions. The London Stock Exchange believes that this needs to be explained in much more detail and that it should be calibrated both internationally and by reference to specific sectors. We need to look at the detail of this in Committee.

The PRA will be charged with operating judgment-based supervision, which of course marks a radical departure from the last decade or so under the FSA. It is important that the PRA gets this right. I do not understand why the FCA will have a practitioner panel that it must consult but the PRA does not. The Joint Committee thought that this might lead to regulatory capture but wanted to see the PRA’s approach to consultation laid out. We have now seen that approach and it has been described as “dismissive” by the British Bankers’ Association and “insufficient” by London First. I am sure that we will need to look again at the way in which the Bill mandates consultation.

I know that the FCA has a number of supporters, who see it as a consumer champion. But we must not forget that the FCA also has responsibility for wholesale markets and as the listing authority. It is the FCA that will have the UK’s seat on the European Securities and Markets Authority. We will need to look carefully at the proposed membership of the FCA and its objectives to ensure that it will be properly focused on its whole range of responsibilities.

The FCA will have many powers and responsibilities in relation to consumer protection, including product banning powers. We will need to scrutinise these carefully to ensure that they are proportionate and balanced and that they do not stifle product innovation, which could very easily happen.

I would like to mention three final areas before concluding. First, I welcome the Treasury’s new powers of direction. However, like the noble Lord, Lord Eatwell, and the chairman of the Treasury Select Committee in another place, I believe that those powers should be very considerably extended.

The consumer credit responsibilities of the OFT are to be transferred to the FCA, which is a good idea in principle, but a number of practical issues have been raised by market participants, in particular the Finance and Leasing Association, and I hope that we will be able to deal with those in Committee.

Finally, important clauses in Part 5 of this Bill lay the ground for independent inquiries. My test for these clauses is whether or not they would have made the Bank of England set up reviews of its own role in the financial crisis earlier and more comprehensively. I suspect that we need to amend Part 5 so that duties rather than powers are created.

In conclusion, I hope that my noble friend will be receptive to the many improvements to this Bill that our debate today is showing to be necessary.

Euro Area Crisis: EUC Report

Baroness Noakes Excerpts

Monday 21st May 2012 Lords Chamber

[Baroness Noakes]

My Lords, the noble Lord, Lord Harrison, and his committee have produced an excellent report on the most critical issue facing the European economy since the start of the EU. They are to be congratulated on it.

Given all that has happened—and indeed has not happened—in the eurozone since the report was published in February, I am sure that the noble Lord, Lord Harrison, is not expecting all speakers to stick rigidly to the report and the Government’s response. I hope I may be forgiven for straying a little outside the narrow confines of the report.

However, I shall start with the report. The committee was rather exercised about the December 2012 European Council and the circumstances surrounding the Prime Minister’s use of the veto—it seems rather a long time ago now. Unlike the committee, I have never been curious about who said what to whom before the veto was deployed. The most important thing was that the UK demonstrated that we can—and will—use the veto to protect our national interests, and I was extremely proud of the Government that day.

I am well aware that some noble Lords have criticised the UK’s veto as an isolationist strategy which will harm our role in Europe. I am quite sure that some in Europe are extremely vexed by our stance on the crisis and the chatter in Brussels may well be negative. The European project has never liked independent thought or action. However, I have seen no evidence of extra harm since last December and would certainly trade some unpopularity within Europe for a clearer understanding that the UK’s own interests are paramount.

The Government’s position on the eurozone, which I completely support, is that it is for the eurozone countries to sort out their own mess. When the euro started life, we could see that our economy was so unlike those on mainland Europe that we were more likely than not to be damaged by being tied into policies not designed around our needs. We could also see that the countries which became eurozone economies were insufficiently convergent for the one-size-fits-all interest rate to be good for the whole euro area.

It is now plain that the low interest rates within the eurozone, which suited Germany’s economic strategy, have done massive harm in terms of inflation and asset price bubbles to other eurozone economies. The euro arrangements lacked any instruments or incentives to require economic reforms, so southern Europe remained unreformed. But entry was voluntary and those volunteers must now find their own solutions.

As noble Lords are well aware, I am a confirmed Eurosceptic—sceptical about the whole project and about the euro—but I take absolutely no pleasure in seeing the current problems in the eurozone. The UK’s economic success is still too closely bound to that of the rest of Europe for problems across the channel to be any source of joy. My great regret is that the UK has tied its economic fortunes so closely to Europe and hence is vulnerable to economic success or failure there. We depend on European markets for roughly 40% of our exports. Our history as great exporters is in the past. Somehow, we have let the emerging markets grow without us, and it is shameful that we export more to Belgium than to India and China combined. Lessening our trading exposure to the eurozone should be a government priority.

I turn to the position of Greece, which dominates the headlines. Greece lied and cheated about its economic affairs and, at one level, there is a certain satisfaction that it is now getting its comeuppance, but the medicine that has been forced down the throats of the Greek people by the German-led eurozone group is more than tough and more than painful for them. The imposition of an unelected Government was a particularly shocking development and it is no surprise that the Greeks now reject austerity and what is demanded of them. Greece needs devaluation, and it simply cannot get that within the euro. It seems to me obvious that Greece cannot survive within the euro and should be encouraged to take an orderly exit. The longer that the European core tries to hold Greece in while imposing impossible economic conditions, the more likely it is that an exit will be disorderly. The signs are not good.

In the past few months, there has been deposit flight from Greece. Corporates routinely sweep any cash out daily. Anecdotal evidence suggests that wealthy Greeks have been transferring large sums of money to other, safer eurozone territories—in particular, Germany—or beyond the eurozone. Now ordinary Greeks seem to think that keeping their money in the banks is not a clever thing to do, and a real bank run could bring the Greek problem to a head.

I am sure that a lot of work has been done throughout Europe to model the consequences of a Greek exit, with best, worst and intermediate cases. I know that my noble friend cannot give market-sensitive information, but I would be interested to hear what he feels that he can say about the impact on the UK of a Greek exit.

Of course, the bigger danger is contagion. Cyprus and Portugal might well be early casualties—the former because it is so intertwined with Greek banks and the latter because it is a weak economy. They, too, could probably exit with few repercussions. The real problems lie elsewhere, as the noble Lord, Lord Harrison, said. We have seen the cost of borrowing in Spain and Italy rise towards levels which could easily be unsustainable. The cost of credit default swaps are also, unsurprisingly, rising for those countries. Those are the judgments of markets. Financial markets have judged that the actions to date have failed to deliver a sustainable solution. For example, last week’s overdue recapitalisation of the Spanish banks was nothing like enough to deal with the underlying problems, which is why Spanish bank yields continue to rise.

Markets want comprehensive solutions. Common issuance eurobonds would probably be a popular solution with markets, because they would involve a common commitment to a long-term economic solution. The committee examined that. Markets need Germany’s financial commitment to the whole eurozone, not just to economic policies, but Germany cannot or will not deliver that at present. If eurozone leaders come up with more half-baked packages which depend on extraordinary feats of austerity or are based on wishful thinking about growth measures, markets will reach their judgments and other weak countries in the eurozone will be exposed.

The G8 summit last weekend failed to do anything to reassure markets that the euro crisis will be dealt with. If the position of Spain or Italy within the euro becomes untenable, the consequences would be severe for Europe as a whole, including the UK. That is why I support the efforts made by my right honourable friend the Chancellor to urge the eurozone countries towards fiscal union.

I certainly would not have started with fiscal union. Indeed, I would not have started with the euro at all, but there is no example of successful currency union without fiscal union, and if that leads eventually to greater political union—the dream of the European federalists—so be it. It is a fact of life that the euro exists, so breaking it up is going to be very painful and it is therefore in the British interest to push the euro to its logical conclusion. The Government’s first priority is to protect Britain’s interests, and Britain’s interests will be protected if the euro does not go into a disorderly break-up.

If there is closer fiscal and political union within the eurozone, that will at least lay to rest the question that seems never quite to go away about whether we should join the euro. It will at the same time throw into sharp relief the whole nature of our relationship with the rest of Europe. I am not optimistic that the distinction between the internal market, which we will want to participate in, and the economic governance of the eurozone, which we will not, will stand the test of time. It seems that the eurozone will be driven more closely together, and that that will drive the UK and the other “euro out” countries away. The EU as we know it almost certainly could not survive a break-up of the euro.

As we have had a trade deficit with the EU for a long time, we should not get paranoid about those problems. The eurozone countries need our markets more than we need theirs, so we should be able to achieve our trading aims without the need to conform to every directive or regulation designed by the eurozone countries.

Of more immediate concern is the direct financial exposure of the UK. I congratulate the Government on bringing to an end our liability to the European financial stability mechanism, which the party opposite committed us to after it had lost the general election but before it conceded defeat. It will be important to avoid any further commitment. My noble friend the Minister was only partly reassuring on this front when he answered a Question from the noble Lord, Lord Empey, last week. He refused to say in unequivocal terms that the Government had no intention of providing further funding for the euro bailout. I hope that he can be clearer today. The question is: will the Government rule out providing any further financing to bail out the eurozone? It is a simple question and requires only a simple yes or no answer.

Queen’s Speech

Baroness Noakes Excerpts

Wednesday 16th May 2012 Lords Chamber

[Baroness Noakes]

My Lords, it is a bit rich that the party opposite has tabled its amendment to the Motion for an humble Address. It seems to have collective amnesia about the economic mess that it left this country in only two years ago. Let me remind it that it left behind a very large deficit. There is no doubt that some of the ballooning of the deficit was down to the financial crisis, but the Labour Government had been consistently spending beyond their means in the run-up to that crisis. They failed to reform welfare spending and failed to deliver efficiency in the delivery of public services. They had overcommitted the defence budget by £38 billion. They left behind a legacy of debt and forecasts of more deficits to come, but they also left no credible plans to reduce them. That was not just our opinion; that is what the IMF and the OECD told us.

Since my Government came to power, we have delivered firm action to control public expenditure and to eliminate the structural deficit. We have balanced the defence budget. Debt will be falling as a percentage of national income by the end of 2015-16. It is through that resolve that we have reduced the cost of borrowing and kept it low. Yesterday, gilt yields were at their lowest for 300 years.

The noble Lord, Lord Myners, who is no longer in his place, is wrong about interest rates. They are a reflection of market confidence, as anyone can find out by looking at what is happening to eurozone interest rates. I hope that, when he winds up this evening, the noble Lord, Lord Davies of Oldham, will tell the House what he thinks interest rates would have been today if his party had continued to manage the economy.

I pay tribute to my right honourable friend the Chancellor of the Exchequer for delivering this impressive result. The economic headwinds have not been favourable in the past two years. He could have lost his nerve and taken the advice of the party opposite to spend our way out of trouble. However, Labour has never explained the magic by which spending more will not result in unsustainably high levels of debt and rising interest rates. Perhaps the noble Lord will do so today.

Our economic policies are often given the label of “austerity” but we are not in the same league as Greece. Our public expenditure will continue to rise. At the same time, we are taking 2 million people on the lowest incomes out of taxation altogether. We are managing to escape from the millstone of a 50p tax rate and reducing corporation tax rates to more competitive levels to support our economy.

There is no doubt that the economic outlook continues to be troubling. The uncertainty created by eurozone instability is a big problem. I can see no future for Greece remaining in the euro and the best thing for it would be to exit, or “Grexit” as Willem Buiter would have us say. Other eurozone countries are also struggling. Spain and Italy are again having a bad week in the bond and credit markets. We need the eurozone to sort itself out, which is why I support the Bill, which has already been introduced, to endorse the eurozone stability mechanism. However, there is not much else that the Government can or should do to support the eurozone. We should certainly not put our cash into any eurozone rescue fund.

The Government can do things to support growth in our economy and have done a lot already. However, there is more to be done and I would have liked to see more in the gracious Speech to support UK businesses. In particular, I would have liked to see a commitment to reverse more of the regulatory burdens and employee rights imposed by the previous Government. These are the very things that make running businesses, especially at the small and medium-sized end of the spectrum, particularly tough.

There are some parts of the legislative plans in the gracious Speech about which I am not entirely enthusiastic. We are promised legislation to reform competition law to promote enterprise and fair markets, which sounds good in theory. However, competition law has often ended up being a big stick with which to beat our most successful businesses. A wholly blame-free company can end up with a lot of costs and huge distractions from running its business if the OFT launches an unnecessary investigation. Let us see whether the Bill really promotes enterprise.

In the same Bill we are promised the green investment bank, about which some noble Lords seem enthusiastic. It is not a bank in any real sense. It will put money into things that sensible banks would not touch with a barge pole. It will be gambling with taxpayers’ money. Even the cheerleading report on the green investment bank commissioned by BIS goes no further than to say that,

“it is unlikely to have a significant impact on economic growth … in the short term, but there might be some benefits in the long term”.

We are paying homage to the green religion at just the time that other countries are seeing that green policies are expensive luxuries. We do not have any spare money for such luxuries. We could spend the £3 billion that has been committed to it on so many more things that would promote our economic growth.

We are also promised a Bill on the reform of the electricity industry. But, in plain English, that means more subsidies for green energy, which in turn means more costs for British businesses and domestic consumers. I hope that the Government will start to understand that the cost of energy in this country is a very real burden. They need to find ways of reducing it and not increasing it. This is another unaffordable green luxury. Last year, my right honourable friend the Chancellor of the Exchequer got it right when he said that he would not save the planet by putting our country out of business. When these Bills come forward, they must be justified against that background.

Finally, I turn to the promises of legislation on the financial services sector. There will be two Bills; namely, the Financial Services Bill, which was carried over from the previous Session, and the banking legislation. I agree with the noble Lord, Lord Myners, on the need to look carefully at the powers of the governor. However, there is one thing that is not likely to be covered in either Bill, which I hope that the Government will want to address. The Bank of England has resisted calls to publish an assessment of its role in the financial crisis. I do not understand how we can be expected to consider legislation explicitly designed to remedy deficiencies that arose during the financial crisis without that background. How will we know whether the problems related to the crisis have been dealt with? I hope that my noble friend the Minister will have an answer to this problem before he brings the Bills before your Lordships’ House.

European Union Membership (Economic Implications) Bill [HL]

Baroness Noakes Excerpts

Friday 25th November 2011 Lords Chamber

[Baroness Noakes]

My Lords, if I have a sense of déjà vu in approaching today's debate it is indeed because we have been here before, as the noble Lord, Lord Pearson, whom I still like to think of as my noble friend, has already reminded us. I supported his last Bill and I support him today. The previous debate on a Bill of his was handled by a Foreign Office spokesman and I am very pleased today that the Government have recognised that this Bill is, first and foremost, about the economic analysis of our membership of the EU. I look forward to my noble friend Lord Sassoon responding for the Government later. I hope that when my noble friend winds up, he will confirm that an understanding of the costs and benefits of our membership of the EU is crucial. It has to be in the public interest that the debate that is already happening about our future in the EU is well informed.

The noble Lord, Lord Pearson, has an immaculate sense of timing in bringing forward his Bill, with the turmoil that is happening in the eurozone. The eurozone is not the subject of this Bill, but it is inextricably linked with the EU. President Barroso has been telling us frequently that the euro is an essential part of EU membership. The euro was meant to be the crowning glory of the European project, but it is now threatening not only its own members, as Germany found out this week with a failed bond auction, but the rest of Europe, which includes us, and the global economy.

The euro was flawed at the outset. It was constructed on two downright lies: first, that the eurozone countries met certain economic tests; and, secondly, that their economies were genuinely convergent. The euro was then flawed in its operation. The European Central Bank delivered the German economic preference for low interest rates. Ireland and Spain have paid the penalty for this one-size-fits-all madness with property booms that have bust their economies, and now the euro is flawed in its inability to deal with failure. The foolish architects of the euro designed it with no emergency exits. Germany and France, as self-appointed guardians of the euro, are still ducking the real issues, and so the profligate, unreformed, book-fiddling Greece and Italy have nowhere to go and suffer the indignity of unelected officials now running their countries.

Fortunately, we have our opt-out. I have absolutely no doubt that our country would be in a very much worse economic position had we become a part of the eurozone. Even though we have kept out of the euro, there is still a centrifugal force in the EU that keeps sucking us in. Mr Blair saddled us with the Social Chapter. That, together with the inexhaustible stream of single market directives, has resulted in our businesses being weighed down by rules and regulations that choke the life out of them. We ceded significant powers when the Labour Government colluded with the rest of Europe and allowed the constitution to be dressed up as treaty changes, thus denying people a referendum, and I am not proud of my party’s failure to rectify that. Brussels has used the recent financial crisis to pursue policies that are naked attempts to ruin the UK’s successful financial services industry. Our Government have woken up to that, but it may be too late.

The noble Lord, Lord Pearson, has already explained the existing analysis of the costs and benefits of the UK’s membership of the EU. Suffice it to say that the best the studies ever show is that the effects might be marginally positive, but most show the disbenefit rising to as much as a quarter, as the noble Lord pointed out. Since the trend in Europe is of an increase in regulation, the trend will be for that analysis to get worse over time for the UK.

The main point for those of us on this side of the argument is that it is pretty clear that there is a cost of staying in the EU, that the cost is significant and that the benefits are limited. Those on the other side of the argument tend to avoid being drawn into the specifics of cost-benefit analysis. They tend to rest instead on rather broad, often irrelevant or incorrect, assertions of benefit, and the noble Lord, Lord Pearson, dealt with some of them. I very much regret that even Conservative Ministers in the coalition Government do this, although I hope my noble friend the Minister will not do so today.

I am not advocating today, as the noble Lord, Lord Pearson, is, that we withdraw immediately from economic membership. I note in passing that the committee that this Bill would set up is entitled a “committee of inquiry” into withdrawal from the EU, although it is very clear that the matters to be covered as set out in Clause 1 deal with the costs and benefits of membership, so I think that the noble Lord has indeed prejudged the outcome of the inquiry by calling it a withdrawal study. I would like to see whether there is any mileage in a Europe in which we can assert more positively the rights of nation states to run their own affairs. We have to be able to have less Europe in our daily lives, not more.

Until recently, I had some hope that a way could be found for the UK to participate in Europe on a more voluntary and less extensive basis. I still think that it is worth a try but I am becoming less optimistic. In particular, the turmoil in the eurozone has emphasised that if the euro survives—and that is now a big if—it seems likely to involve more central control within the eurozone. The prospect of caucusing within the eurozone will become a very real threat to our interests, and I firmly believe that we should remain outside that. So, ever closer union within the eurozone means ever more likely divorce from the EU for us. On this basis, it would be wise for the Government to prepare for all eventualities in our relationship with Europe. That is why I support the Bill.

Of course, there ought to be no need for the Bill. The Government are aware that the EU is not popular, that three-quarters of the population want a referendum on it and that over half think that we should withdraw. The debate is already out there and the Government should positively want to have good-quality information guiding that debate.

There are some things in the noble Lord’s Bill that could be improved in Committee, but for today I hope that the House will give the Bill a Second Reading and that the Government will give it their full support.

Sovereign Credit Ratings: EUC Report

Baroness Noakes Excerpts

Tuesday 15th November 2011 Lords Chamber

[Baroness Noakes]

My Lords, I had not originally intended to take part in today’s debate. I had seen the report of the EU sub-committee chaired by the noble Lord, Lord Harrison, and agreed with its balanced view and recommendations. I also agreed with the Government’s response to that report. Then I noticed, as the noble Lord, Lord Harrison, has already pointed out, that the noble Lord has cleverly timed this debate to coincide with the expected announcement of the EU Commission’s latest regulatory onslaught on credit rating agencies. So here I am.

I start from the position that we have to push back at the relentless tide of regulation from Europe and that any more regulation has to have the highest level of justification. I also believe we should make a start on returning powers to the UK, but stopping further regulation from Europe is not a bad place to start.

Looked at dispassionately, it is not clear that the rating agencies deserve the degree of punishment that has been meted out to them in the wake of the global financial crisis. Both Europe and the G20 needed scapegoats to cover up the fact that neither Governments nor their regulatory and prudential agencies had the faintest idea of the financial mayhem that was stalking the world in 2007. So the credit rating agencies, which certainly did not cover themselves in glory in relation to structured financial products in that period, ended up subject to a range of regulatory interventions and technical standards.

As is well known, the European Commission has never intended to let the financial crisis go to waste. The noble Lord, Lord Harrison, and I attended a breakfast briefing last week where a senior member of the Commission’s staff positively bragged that the crisis had led to 29 pieces of legislation affecting the financial services sector. His justification for this onslaught was, to say the least, minimal, but he evidently relished the opportunity to increase the regulatory reach of Brussels, and credit rating agencies have been caught up in this Commission land grab.

As the noble Lord, Lord Harrison, has noted, the Commission now wants to ratchet up the regulatory pressure on the rating agencies even further. This appears to be retaliation for their alleged failings in relation to the stressed eurozone economies. There is no doubt that Ireland, Portugal, Greece, Spain and Italy have not enjoyed having their credit ratings reduced—the reductions were late and sudden—but those countries had to face up to the fact that their credit ratings had been overstated for too long.

I completely agree with the report of the sub-committee chaired by the noble Lord, Lord Harrison, that the credit rating agencies did not precipitate or exacerbate the euro area crisis. I also agree that they did a rather bad job of not identifying the real risks in those economies. However, this is not a sufficient excuse for additional regulation.

It took me rather a long time today to confirm whether Commissioner Barnier did in fact launch his latest round of regulatory assault on the credit rating agencies. In fact, one blog this afternoon reported that Commissioner Barnier himself had been downgraded from “punctual” to “tardy” because he was late for the relevant press conference. However, a couple of hours ago I managed to track down a one-page summary of the proposals.

As the noble Lord, Lord Harrison, has noted, one of the things being mooted as part of the proposals is one which would allow credit rating agencies to be silenced if a country was in some kind of crisis intervention. That idea should have been killed at birth and never taken into the heart of EU policy-making. Constraining the credit rating agencies from placing their sovereign debt evaluations in the market is contrary to free speech. It is also impractical because the rating agencies would presumably have to declare that they were unable to issue a rating, which could well trigger a panicked response in the sovereign debt markets. The creation of an information void—or, at least, one with only government-controlled information—is likely to have the worst possible effect on credit markets. Fortunately, the Commission has stepped back from the brink on this and the matter is now marked, in the summary that I saw, as “for further consideration”. I hope that that means that the proposal is gone for good, but we have yet to see.

A dodgy proposal that has survived is that of compulsory rotation of rating agencies every three years or every 10 issues. I share the view of the committee and the Government that greater competition in the rating agency market would be a good thing, but there are problems with the rotation proposals. First, as most issuers already use more than one agency, the impact of the rotation proposal is huge turbulence in what is a very small market. It might well give the smaller agencies an opportunity to improve their position, but does that end actually justify the means? Creating further competition through turbulence has no respectable precedent.

Secondly, there are likely to be real impacts. Certainly, issuers will be faced with varying increased internal costs in dealing with additional rating agencies, possibly annually if they do a lot of issues. More importantly, it is far from clear that the markets which look to credit agencies will accept any new players at face value. Disruption in corporate credit markets, and through that disruption in the real economy, may be the only certain result of these proposals. It is not surprising that the Association of Corporate Treasurers is deeply concerned about these proposals and it wrote to the Commission in clear terms recently. It was disappointing and unsurprising in equal measure that Commissioner Barnier’s spokesman dismissed the association’s views as “a typical lobbying move” that “smacks of desperation”.

A further bad idea is the proposal to create a European framework for civil liability. The sub-committee chaired by the noble Lord, Lord Harrison, had it right when it said that civil liability is best left to member states. It is clear that S&P’s foolish error last week on the rating of France has touched a raw nerve, and has strengthened the resolve of those at the heart of the European project to control and punish credit rating agencies. But anybody who has looked at France’s economic position might marvel that it has hitherto escaped the analytical stringency applied to others in the eurozone. Credit spreads are now telling their own story on France. The mistake was unfortunate, but do we want a credit rating sector terrified of making a mistake, or one which is not prepared to boldly challenge received wisdom? What the markets want and what, for example, France might want, may not coincide. I have not had time to look in detail at the Commission’s proposals in this area, but I hope that they do not live up to the rhetoric of punishing mistakes that was being bandied about last week.

The only good aspect of the latest proposals is that the Commission has dropped the barmy idea of establishing the European credit rating foundation, which the noble Lord, Lord Harrison, has referred to. I understand from the press that there is now a suggestion in Brussels that another non-credit rating agency approach might be adopted, possibly using, for example, the European Court of Auditors. Will the Minister say whether the Government will give any support to an EU move to take credit rating agencies out of sovereign debt ratings? More generally, will my noble friend say whether these new proposals from the Commission will be subject to the UK’s veto, or can they be bulldozed through by qualified majority voting?

The Government’s official response to the committee’s report agreed with the committee that further changes should take effect only once the existing raft of changes had had time to bed in. Will my noble friend confirm that the Government will stick to that position?

Independent Commission on Banking

Baroness Noakes Excerpts

Monday 12th September 2011 Lords Chamber

[Lord Sassoon]

All I can say is that my noble friend Lord Flight makes three important and interesting observations which we need to dwell on as we take all this work forward.

[Baroness Noakes]

I declare my interest, as recorded in the register, in particular as a director of the Royal Bank of Scotland, although my views are and always have been entirely my own.

My noble friend the Minister will be aware that there remain concerns, not least from organisations such as the CBI, about the impact of these proposals on the availability and cost of lending to smaller businesses. There are also concerns about the impact of the proposals on the strength of our financial services industry, which is and will remain a significant contributor to the economy. I therefore welcome the emphasis in my right honourable friend the Chancellor’s statement on cost-benefit analysis being carried out before implementation. Will my noble friend say a little more about when this cost-benefit analysis will be undertaken?

[Lord Sassoon]

I am grateful to my noble friend Lady Noakes. We will get on with all the consideration of the detailed recommendations and the cost-benefit analysis as soon as possible. I cannot be more specific than that, but as my right honourable friend said, it may be that some things can be brought forward for the financial services Bill, which is an indication of the speed with which we will go at this.

Greece: Default Contingency

Baroness Noakes Excerpts

Monday 20th June 2011 Lords Chamber

[Lord Sassoon]

I am not able off the top of my head to break down the analysis of our exports, and I am not quite sure where my noble friend would draw the line between hard and soft. The critical point here is that more than 40 per cent of our exports go into the eurozone. Of course, they are generally distributed in relation to the size of economies, with Ireland, as we discussed in relation to the Irish package, having for historical reasons a disproportionately large share. My noble friend makes the point that it is absolutely in the UK's interest to ensure that the eurozone economies are successful, because that is where the largest part of our exports go.

[Baroness Noakes]

Does my noble friend think that a new set of arrangements made within the euro area by the IMF for Greece will work this time? It did not work last time. Unless there is some confidence that new arrangements made to support Greece will work, in the sense that they can restore the Greek economy—there is very little sign that the Greeks are able to take any medicine which would restore it to health—would we not be better served by working within Europe to help our European friends understand that letting Greece remove itself from the eurozone and take the default that it clearly is in is in everybody's interest?

[Lord Sassoon]

My noble friend Lady Noakes asks a very good question. It is inevitable that people will ask: was the package appropriate? One should take comfort from the fact that the IMF has a long and successful record of implementing restructuring programmes. The IMF programme for Greece was put in place in market conditions and with a market outlook somewhat different from that which Greece and the eurozone subsequently encountered. The first requirement is for the Greek Government to be encouraged to get back on track, to stick to the agreed fiscal consolidation path. Beyond that, it is for the IMF to see what needs to be done. The key thing is for the original plan to be back on track. I therefore think that we should not at this point second-guess whether the plan is or is not appropriate.

I will not be drawn into whether the Greek situation would be better in one hypothetical scenario or another.

Consumer Insurance (Disclosure and Representations) Bill [HL]

Baroness Noakes Excerpts

Monday 13th June 2011 Grand Committee

[Baroness Noakes]

My Lords, I shall try to be brief in my contribution to this Second Reading debate. Until late last week, I had not intended to take part in the debate so I did not attend the briefing meeting that I understand my noble friend the Minister arranged. I also apologise to him for not giving notice of the points that I will be making, which arose only late last week. Indeed, some of my briefing arrived only late this morning. I should say at the outset that I fully support the Bill and endorse what my noble friend the Minister and the noble Baroness, Lady Kramer, said about its importance.

While the Bill is about consumer insurance, its impact will not be confined to consumers or insurance companies. Insurance is often sold through people other than insurance companies, which is where the BBA’s members come on to the scene, because banks typically sell insurance products alongside other financial products. It is important, therefore, that the banks can implement the new requirements effectively. Implementation is the topic that I want to address.

Clause 12 deals with the timetable for implementation and provides in broad terms that the legislation will not come into effect until an order is laid, which cannot be for a year after Royal Assent. Implementation could be from some time after next summer. The Minister will be aware that when banks and, indeed, others sell financial products, they have to ensure that their documentation is compliant with legal and regulation rules. Importantly, they have to train their staff and support them with such things as standard scripts to ensure that the rules are complied with.

As the briefing provided by the Financial Ombudsman Service today makes plain, the emphasis of the sales process for insurance products will, as a result of the Bill, shift much more towards asking relevant questions and obtaining specific information. Banks will need to ensure that their staff ask the right questions and then probe the answers to those questions in the appropriate way. More importantly, they will have to assemble the right evidence in all this so that, if necessary, they can determine and prove whether a customer has taken care in providing relevant information.

Many banks sell face to face and do not have the ready evidence provided by telephone or internet sales, so the evidence aspect to this is important. In addition to addressing the sales process, banks obviously have to review and perhaps modify compliance systems. Inevitably, there will also be changes to and investment in information systems. I should stress that the BBA, in briefing me, has no problem with that at all. The issue is not any changes that might be necessary but timing.

As the Minister will be aware, the FSA is in the process of requiring implementation of its retail distribution review, with an implementation date of December 2012—some 18 months away. The changes that will come about through this Bill will involve to some degree the same systems, processes and people to be trained as the RDR; they will not be exactly the same, but they will be in the same area. In addition, the industry will look to the impact of the new simplified advice area, which could well have an impact on insurance sales. The industry is still awaiting FSA guidance on simplified advice and hence does not know what implications that will have for the sales process. If it does have implications, it will be in exactly the same area.

The banks and doubtless others affected by the RDR and simplified advice want to be in a position, if possible, to implement all the changes in one go. It does not make business sense to carry out one set of modifications to systems, processes, training and so on and then to follow it a matter of months later with another similar set in the same area. In theory, it can be done in sequential implementations, but that is not the most efficient way in which to proceed. It adds cost to the system and probably increases implementation risk. How do the Government see the implementation timetable of the Bill? Will it be harmonised with that for the RDR and simplified advice?

The BBA has also raised the issue of the interaction between the Bill and IMD 2—that is, the proposed revision to the insurance mediation directive. The Commission is currently conducting an impact assessment of the changes and expects to produce a revision to the existing directive by the end of the year. This could well also produce changes in the same sorts of areas, raising the same sorts of issues. Have the Government considered the impact of the Bill in relation to IMD2? I hope that my noble friend can reassure me that the Government will be mindful of the burdens on those who need to implement changes in the interface with consumers when they determine when to bring the Bill into effect.