Autumn Statement

Baroness Wheatcroft Excerpts

Wednesday 5th December 2012 Lords Chamber

[Lord Sassoon]

My Lords, the question of corporation tax in Northern Ireland continues to be considered. The key thing is that we are making the United Kingdom as a whole a more competitive place and in corporate tax terms the most competitive place to do business among our major competitors. Of course, the position in Northern Ireland will continue to be debated.

As far as the reduction in VAT is concerned, this is a case that is made regularly. We believe that what we have announced today—the two-year increase in the investment allowance—is a better way of targeting the limited resources that we have, in addition to what we have done on the basic rate of corporation tax.

[Baroness Wheatcroft]

My Lords, I add my congratulations to my noble friend on what he has achieved in his time in the House. I wish him well in whatever he chooses to do next. I agree that it is depressing that he has to leave us on the back of a Statement that shows the growth forecast having to be lowered.

It is worth noting that in the Blue Book the GDP fall in 2008-09 has been revisited and has come down by a massive 6.3%. Given that background, it is hardly surprising that the efforts to rebuild the economy are proving difficult. Nevertheless, in this Statement there are several things that will make a major contribution to improving the economy, and I congratulate my right honourable friend the Chancellor on the things he is doing to encourage investment and infrastructure investment.

Does my noble friend share my concerns and those that were voiced recently by Sir Mervyn King, the current Governor of the Bank of England, that one thing that is going to hold back growth in the economy is if the banks do not acknowledge the real state of their balance sheets and take the hits that they should?

[Lord Sassoon]

Again, I am grateful to my noble friend for her kind words. It is also important that the House recognises that the damage done by the fall in GDP as a consequence of the structural position and the mess left behind by the previous Government, combined with the financial crisis, continues to be assessed as worse and worse. As my noble friend said, it is now estimated to be a fall in GDP of an extraordinary 6.3%.

I also agree with my noble friend that it is important that the banks are realistic about the state of their balance sheets. Linking back to the debate on the Financial Services Bill that we had earlier this afternoon, it is important that the new Financial Policy Committee—up and running now for a period in shadow form—is beginning to get to grips with these issues. These sorts of things were never debated and put on the table by the authorities in the past, when the punchbowl should have been taken away. So my noble friend is completely right.

Financial Services Bill

Baroness Wheatcroft Excerpts

Monday 26th November 2012 Lords Chamber

[Baroness Wheatcroft]

My Lords, I am very grateful to my noble friend for taking up the issue of auditors. Clearly, auditors did not emerge well from the financial crisis. The clean audit reports that they delivered on banks that were on the verge of bankruptcy, as later became apparent, were evidence of deep failings in the system. Much as I am grateful to my noble friend for attempting to address that, I am not entirely convinced that these amendments go far enough.

I am unclear about what these amendments might achieve. As far as I can see, they do not go much further than reiterating what is already in the Financial Services and Markets Act but failed to deliver. I hear what my noble friend says about the approach being much harsher but I am not sure. Section 342 of FiSMA contains a power for the Treasury to make,

“regulations prescribing circumstances in which an auditor or actuary must communicate matters”

to the FSA. Equally, there are provisions allowing the FSA to communicate matters to the auditors. These amendments may contain a subtle increase in the duty that is imposed, but I am not convinced that they go far enough.

My original amendment was intended to heighten the duty on auditors to report on the risks they found. I continue to believe that it is essential that they should not be able to give a nearly bust bank a clean bill of health. The Financial Reporting Council takes that view and has made changes to its corporate governance code that increase the duties on directors and auditors. It remains to be seen whether these will be effective. The FRC is also launching a consultation into changes on the interpretation of “going concern” and “liquidity risks” following the Sharman inquiry. Directors would be required to give greater disclosure on the risks in their business and how they were being addressed, and auditors would be required to report on whether they concurred with the directors’ report. On past performance, I am not sure we should be confident that auditors will take issue with directors, who, after all, pay their fees.

We should be putting more of an onus on auditors to voice any doubts that they might have about the risks being taken by any business, but particularly by a bank. The FRC says that it is keen to encourage what it terms “professional scepticism”. I hope that the Minister will forgive me if I remain somewhat sceptical about these changes and I hope that he will at least undertake to keep under review the effectiveness of the amendment that he is now proposing.

[Baroness Noakes]

My Lords, unfortunately I was not able to be present when my noble friend’s amendment was debated in Committee, but I read Hansard and noted that my noble friend had undertaken to take the issue away and bring an amendment back. I was surprised when I looked at the amendment and saw what it was trying to deliver. It seems to me, as my noble friend has just pointed out, that there are already provisions in FiSMA, which covers the relationship between auditors and financial institutions. In addition, the Minister said that these are things that could and should have been done—but they are being done.

I have a copy of the code of practice for the relationship between the external auditor and the supervisor. This was refreshed after the financial crisis and is dated May 2011. It sets out a number of principles. Principle one states:

“Supervisors and auditors shall seek an open, cooperative and constructive relationship”.

Principle two is that they should “engage in regular dialogue”. Principle three states:

“Supervisors and auditors shall share all information relevant to carrying out their respective statutory duties and in a timely fashion”.

That code is already in existence and governing the dialogue between the FSA and auditors. Under the current legislative framework there is no reason for this not to continue when the PRA takes over its functions. I am struggling to see what it is that adds any substance to the current arrangements. The Government have brought forward an amendment, which is—and I hate to use this term—window dressing.

Financial Services Bill

Baroness Wheatcroft Excerpts

Tuesday 6th November 2012 Lords Chamber

[Baroness Wheatcroft]

My Lords, I share the qualms that have been voiced about this group of amendments. I believe that the court needs to exercise far more power than it has appeared to in the past, although I am intrigued to hear the noble Lord, Lord Myners, say that when three members of the court tried to make their views and their concerns known, they had no impact at all. That would seem to be a failing of the Government rather than the governance of the court.

The amendment that causes me particular concern is Amendment 3B, which proposes that the Bank’s strategy should for the time being be “prepared” by the Court of Directors. It does not seem to me that “preparing” a strategy should be for the non-executives. It may well be, and should be, their right to determine whether that strategy is the right strategy. However, we want them to “determine” rather than “prepare”.

[Lord Flight]

My Lords, it seems to me that none of these things makes any difference. The real issue is that if a board of directors cannot sack the chief executive if it thinks that he is not doing his job properly, then it is an enfeebled board. That is the fundamental issue. As long as we have the chief executive appointed for a term period and not able to be removed by the board, then there will be an issue about the effectiveness of that board.

--- Later in debate ---

[Lord Myners]

My Lords, I support the amendment in the name of the noble Baronesses, Lady Noakes, Lady Wheatcroft and Lady Kramer. I, too, have been struck by the potency of the Walker report appendix on group effectiveness, drafted by the Tavistock Institute. My experience leads me to conclude that the larger the group, the less effective it becomes. The R-squared is actually extraordinarily high and making the FPC any larger would not be the right solution, although it would be better than doing nothing.

Amendment 4 is, in my judgment, significantly superior to Amendment 5 and I think the noble Baroness, Lady Noakes, has, as she so often does, put her finger on the issue. It is almost certainly the governor who is insisting on having this right to appoint additional people to the committee. The past culture of the Bank is that it speaks with a single voice and that voice expresses the opinion of the governor. The more people around the committee table who therefore speak with that single voice, the better it is from the perspective of the executive. From the perspective of a functioning committee, that is almost certainly not an optimal outcome. In fact, if the Tavistock Institute had been invited to comment on the existence of a cabal or blocking group within a committee, I am sure it would have been even more powerful in its views about its appropriate constitution.

The central thrust of everything we are doing in helping the Government get this legislation through Parliament is to try to ensure that we have as many checks and balances in place as is appropriate. One of them must be a check on the strength of the voice of the executive of the Bank on these committees and, while both of the amendments put forward by the noble Baroness, Lady Noakes, will achieve that, Amendment 4 is preferable to Amendment 5.

[Baroness Wheatcroft]

My Lords, Amendment 4 will achieve an improvement in the balance of the FPC and I support the other amendments in this group, tidying-up amendments which would bring the number of extra appointees from the Bank down to one instead of two. It is obviously better to have a balance, if we can, between the Bank team and the outsiders—as they will undoubtedly feel that they are to start with.

We have heard about groupthink. There obviously has been a fair amount of groupthink at the Bank in the past, although it is worth remembering that on the Monetary Policy Committee the Governor of the Bank of England has been outvoted on several occasions, so it is possible for people to disagree with the governor and for the committee to go against him. However, on the basis that a balance would be better, bringing down the level of Bank people represented on the FPC would be an improvement.

[Lord Deben]

I merely suggest that in these detailed discussions, when we hear mainly from those who are very expert, it is as well to consider views from outside, from business as a whole. A trick which all businessmen know is that there are two ways in which you can control a committee. One is to have a very small committee mainly related to you, and the other is to have a very large committee in which you know very well that you can organise the dynamics. I am much impressed with the arguments of the noble Baroness, Lady Noakes, who has put her finger on a very important issue. I hope that the Government would accept that nowadays there is a good deal of expertise looking at these matters and the Tavistock Institute has much of it. I would be unhappy if we suggested that we knew better than its experience, over a very long time, of how best to do these things. I hope the Government will see this as a perfectly reasonable thing, a balanced situation. The noble Baroness, Lady Noakes, and I do not always agree on matters—indeed, there are lots we disagree on—but on this occasion, coming from my understanding of trying to run boards and companies, this would be a good thing to do and not to do it would seem a little perverse.

Infrastructure (Financial Assistance) Bill

Baroness Wheatcroft Excerpts

Tuesday 23rd October 2012 Lords Chamber

[Baroness Wheatcroft]

My Lords, I will return to the narrow interpretation of the Bill, which is about infrastructure rather than employment figures. We all know that this country needs investment in our infrastructure which is second class. Our housing stock is too small. The Government are trying to address these problems. The Bill is a welcome contribution, although it is just one of many measures now being implemented, as the noble Lord, Lord Adonis, pointed out. However, as I listened to him and to the noble Lord, Lord Skidelsky, and their criticism of projects postponed, I had to disagree. The noble Lord, Lord Skidelsky, may well term me an economic illiterate, but it was right to postpone these projects because it was a simple matter of the accounts.

When the Government came to power, they were faced with a dreadful deficit, and their priority, quite rightly, was deficit reduction. However, not only were they seen to be reducing the deficit, but they had to persuade the financial markets that they were serious. Clearly, they have succeeded in persuading them of that and that is why we have the ratings we now have. Under the previous Government there was much talk about prudence, and prudence with a purpose, but profligacy was the reality. We now have a more prudent approach, and it is only because of that approach that the Government are now in a position to bring forward the scheme in this Bill.

We heard much talk from the noble Baroness, Lady Maddock, about the rise in rents and the problems that this is bringing to housing benefit. Providing housing benefit for those who cannot meet their rent now costs taxpayers almost twice as much as it did three years ago. We cannot afford that bill, let alone more. We need more affordable homes to rent and we need to enable those who want to own their own home to get a foot on the housing ladder. This Bill will help by giving backing to those who will provide the new homes. However, our needs go far beyond housing. If we are to compete as an economy, we must make long-overdue improvements to our road and rail networks, to our energy supplies, and to our airports. We cannot wait too long for that.

This Bill pledges some useful support for projects that need a helping hand, but the private sector can, and should, finance most of the infrastructure projects, with the Government in the role of enabler. I am glad to say that, as we heard from the noble Lord, Lord Newby, the Treasury is looking at £257 billion worth of projects to come forward over the next five years. I gather that 180 projects are now earmarked for development. These include the new, and crucial, nuclear power stations. Negotiations with the suppliers have now reached a very critical stage, when they have to be persuaded that there will be some guarantee of long-term price stability. I do not know how that can be done, but it is clearly extremely important that we should have nuclear power. The question is: how are these to be funded? The Government are now striving to find some innovative ways of securing that funding, because banks will not provide long-term funding. Five years is the longest that many of them will now contemplate.

We are due to hear more about these funding plans in the Chancellor’s Autumn Statement. It is interesting that, thanks to the Indian summer we have just had, autumn now comes in December. Apparently, the Statement will include details of the new-look PFI. I do not want another PFI. They are profligate, foolish, and inept, and we will be paying through the nose for many years to come for too many of those schemes that came forward through the old-style PFI.

The public were duped into believing that we could have new schools, hospitals and bridges without paying a penny. If it looks too good to be true then it is; and it was. Too many of the investors, many of them offshore, have made fortunes out of PFI, while the public have been saddled with long-term future commitments. These were heads-I-win, tails-you-lose commitments. We do not want PFI again, or anything like it. We need something new and innovative, and I hope that the Government will come forward with some means of providing funding that will not leave the public sector on the hook, as it has been. For example, as regards roads, the need for improvement is clear; there are potholes everywhere. However, if we are to have new roads, someone has to pay, and the Government simply cannot afford to. Surely it is right that those who use the roads pay; whether through tolls or through other electronic means of road pricing. That is surely the way forward. We have to avoid things such as the M6 toll road, where Macquarie, in its various guises, is now said to be making a return of about 150% a year.

There are sources of long-term financing that we need to tap into for such projects. The insurance and pension funds have long-term liabilities which could fit neatly with these schemes. The noble Lord, Lord Giddens, made mention of the pension funds. Clearly, they are right to have some qualms, but the Government are working with various trade bodies, including the Association of British Insurers, to try to devise ways in which the funds with long-term liabilities might come together to provide funding for major infrastructure projects. I hope that we will be able to hear more about that in the Autumn Statement. The talking has gone on for a while; it would be good if we were soon to see some action.

Finally, I am grateful to the noble Lord, Lord Skidelsky, for reminding us that this country can do infrastructure rather well. We should not lose sight of the fact that the Olympics were a great success, and the gold medal tally was pretty good too. However, we can do infrastructure and we need to get moving on it.

Financial Services Bill

Baroness Wheatcroft Excerpts

Monday 15th October 2012 Lords Chamber

Moved by

[Baroness Wheatcroft]

188: Clause 39, page 124, line 20, at end insert—
“( ) In section 340 of FSMA 2000 (appointment of auditors and actuaries) after subsection (2) insert—
“(2A) Rules must require auditors of deposit taking institutions to provide a narrative report on the institution’s risk management policies and its exposure to risk as part of the audited accounts of the institution.””

[Baroness Wheatcroft]

This is a simple amendment which I believe could have significant effect. Your Lordships will recall that just before our major banks admitted catastrophic losses resulting in multibillion-pound bailouts and the Government becoming a major shareholder in Lloyds and Royal Bank of Scotland those banks were each given clean audit reports. The annual reports which the auditors signed off were packed full of numbers and told us nothing. The auditors received huge rewards for their efforts, yet within months of them signing off those accounts without any qualification the taxpayer was having to fork out £65 billion—that is £1,000 for every citizen in the country.

In February 2007 Northern Rock, which had a hugely risky business model, was given a clean audit report for its 2006 accounts. Within months it was clamouring at the door of the Bank of England for support as the queues mounted outside its branches. In February 2008 Lloyds and RBS each produced accounts for the preceding year. To judge from the unqualified audit reports each received, these were businesses which would happily carry on trading, yet just months later the Government were having to orchestrate a massive rescue package. Audit fees for those accounts were more than £13 million at Lloyds and £17 million at RBS. For what?

Audit is a profession in which the UK has played a dominant role but the profession’s role in the financial crisis does it no credit. The Economic Affairs Committee of this House has done some admirable work looking at the role of auditors but now we need action.

I do not believe that the auditors who signed off those bank accounts could have been entirely sanguine about what they were doing. They must have been aware of the perilous exposures that were building up, not just in derivatives but in loan books which were loaded with extraordinarily generous loans made against a ragbag of properties and businesses. Some of those still sit on the books at valuations which might be deemed “optimistic” at the very least. Yet such is the narrow interpretation placed on the duty of auditors that they were able to give those banks what is seen as a clean bill of health just as disaster was about to fall. Shareholders took comfort from those audit reports, only to see their investments shattered. The Economic Affairs Committee concluded that while the auditors may have carried out their duties properly in the strict legal sense, they had not in the wider sense, and that wider sense is surely crucial.

This amendment would change the requirement of an audit report for banks. It may be that other sectors would benefit from such a change but this is the Financial Services Bill and, as we have learnt, banks are not as other businesses. The amendment would require auditors to provide a narrative report on the risks they perceive in the bank they have audited. How different might those Lloyds and RBS reports have looked had this been the case then?

The Minister may feel that the content of annual reports is a matter for the Financial Reporting Council but this need not always be the case. This month the FRC has launched a consultation on guidance for the audit of financial instruments. I commend it to your Lordships as an exercise in overdosing on acronyms. Whether or not it would improve the audit of financial instruments, I do not feel qualified to judge, but it will certainly take a long time to wend its way through the FRC process. The Government can and regularly have intervened through the Companies Act to determine the shape of annual reports. Only recently the Business Secretary has decided to change the way in which remuneration is reported in annual reports. If there is a belief that the demands made on auditors and banks need to be strengthened, then the Government can use this legislation and provide the change that is required.

I have no illusions that asking auditors to report on perceived risks will go down well with everyone in the profession but some would welcome the wider remit. They would have to exercise judgment over what constituted genuine risks and they would be doing a service to shareholders as well as the wider community. Those familiar with company prospectuses will know that the list of risk factors can be comprehensive, bordering on the ludicrous, but it is not beyond the auditing profession, perhaps working with the Financial Reporting Council, to come up with ground rules that would make this a useful exercise. If all banks had to have such a narrative report, it would give auditors the opportunity to do their job properly. It would stop them being prone to any bullying tactics from executives. It would give shareholders and the community a better picture of what is truly going on in their financial institutions. I beg to move.

[Lord Lawson of Blaby]

My Lords, I would like to support very strongly the amendment moved by my noble friend Lady Wheatcroft. I shall speak briefly but my brevity does not indicate that this is not an important issue. It is a very important issue indeed. We are debating in the shadow of the worst banking crisis of our lifetimes and possibly the worst banking crisis there has ever been. As my noble friend pointed out, the Economic Affairs Committee of this House produced a report called Auditors: Market Concentration and Their Role which was published in March 2011. It was extremely critical and rightly critical of auditors in the context of the banking collapse that we have seen. This was, as is common with reports of Select Committees of this House, a unanimous report, but unanimity can be got in various different ways. This was unanimity where everybody of all parties who sat on that committee and heard the evidence was totally committed to what the report said. My noble friend Lady Wheatcroft mentioned one thing from the report. Let me quote one other thing from paragraph 204. It states:

“There was no single cause of the banking meltdown of 2008-09. First and foremost, the banks have themselves to blame. … But we conclude that the complacency of bank auditors was a significant contributory factor”.

This has to be addressed. How will we prevent—as far as we can—this sort of thing happening again?

In discussion of an earlier amendment, the noble Lord, Lord McFall, referred to the banking commission of which I, too, am a member. It is quite possible, such is the importance of this, that the banking commission will decide to look into the question of bank audits and auditors, and indeed auditing standards and IFRS, which leave a lot to be desired and are probably a step in the wrong direction. However, we must do what we can in the Bill to rectify the position.

I say en passant that what concerned me a great deal when the big four auditors gave evidence to us was the extent to which they seemed to think that they had simply to satisfy the management of the banks at the time, when under law their duty was to the shareholders. Furthermore, the putting in place of a proper system of audit for business and industry as a whole, but particularly for the banks, is a public duty; auditors had a duty to the wider public to do a good job, quite apart from their duty to shareholders of the banks—and they failed lamentably.

What can we do about this? I do not think that my noble friend Lady Wheatcroft would say that her amendment is the complete answer. Of course it is not: a lot more has to be done. However, it is very important that the Bill addresses this question, and I believe very firmly that the amendment before the House tonight is an important part of the answer, even though it is not the whole answer. I strongly support my noble friend’s amendment.

--- Later in debate ---

[Lord Sassoon]

I certainly agree that if we can get more value out of the auditors we should do so. It should be on the basis of something that helps people—I am not sure whether that is the regulator or directly the public—towards a better understanding of the risks embedded in bank accounts. On that basis, as I say, I will take the issue away. I ask my noble friend to withdraw her amendment, which would, of course—I should say for the benefit of my noble friend Lord Marlesford, who asked me to mention credit card debt—wrap up credit card debt and many other things if we can get this right.

[Baroness Wheatcroft]

I thank the Minister for his reply and for his willingness to at least consider this issue. Like my noble friend Lord Lawson, I do not see this as a total answer to the huge problem. However, I ask the Minister to consider whether the complacency of auditors might have been due to the fact that so little was required of them, and thus requiring rather more might be a step in the right direction. I look forward to hearing what he comes forward with and, if it is not very much, reserve the right to push this a little further. I beg leave to withdraw the amendment.

Amendment 188 withdrawn.

Financial Services Bill

Baroness Wheatcroft Excerpts

Tuesday 26th June 2012 Lords Chamber

[Baroness Wheatcroft]

My Lords, I speak in favour of Amendment 6. The amendment concerns the corporate governance of the Bank, and we have heard much this afternoon about perceived gaps in that. I understand the desire to strengthen the court, but I think that this can be achieved without drastic changes either of name—as the noble Lord, Lord Eatwell, said, “What is in a name?”—or in structure. In particular, I have qualms about giving strong new powers to the Treasury Select Committee. Having heard my noble friend Lord Turnbull, I think that if we go in that direction, perhaps it should be the whole House that gets to answer the question of who should be the future governor.

However, we need not do anything quite so drastic yet. If we wish to strengthen the governance of the Bank, it seems to me more appropriate to do so by giving the court—or supervisory board, if you want to call it that—an enhanced role. The government amendments that will be moved later this afternoon go some way towards doing that with the formation of the oversight committee. It certainly enhances the remit of the non-executives from where it is currently perceived to be. It may be retrospective, but the power of being held to account retrospectively is quite a powerful force with regard to current behaviour.

Nevertheless, the court already has significant powers. The Bank of England Act 1998 stipulates:

“The court … shall manage the Bank’s affairs, other than the formulation of monetary policy”.

Some have interpreted that as being little more than looking after the housekeeping, and it has sometimes appeared that way. However, the Act goes on to say that,

“the court’s functions … include determining the Bank’s objectives (including objectives for its financial management) and strategy”.

Surely the ability to determine strategy is a pretty powerful one.

The noble Lord, Lord Burns, has pointed out that within the court there is pretty much the structure of a corporate board. Perhaps it has not always seemed that way, but we need the court to feel empowered to use the powers that it has. Much will depend on the ability and willingness of the members of the court to take a tough and challenging line; and there is no reason why they should not if they are well qualified and strong.

We have heard about the need for challenge; the court should be providing it. However, I believe that the Government need to send a firm signal about how important they believe the role of the court to be. In a normal company, the crucial role of the chairman is to ensure that the company has the best and most effective chief executive. Companies thrive best when the chairman and the chief executive have a constructive relationship and mutual regard. Is it not therefore imperative that, even though the Bank is no ordinary company, the chairman should at least have some involvement in the appointment of the chief executive?

This amendment does not call for drastic change, but in demanding that the Chancellor should consult with the chairman of the court—or the supervisory body, should that be preferred—it would underline the importance of the court and the notice that the Government want to take of it. It would encourage the court to be brave, perhaps braver than it has been in the past. Formal discussions may go on now between the Chancellor and the chairman of the court, but there is no mistaking what a low-profile role the chairman has had—indeed, some thought that the governor was the chairman of the court. I think that we need the chairman of the court to have a rather more effective, higher-profile role. That could start with a formal requirement that the Chancellor should negotiate and discuss the future governor.

[Lord Peston]

My Lords, I shall speak to Amendment 8A in my name and that of the noble Lord, Lord Barnett. In doing so, I shall not comment on Amendment 6 in the name of the noble Baronesses, Lady Kramer and Lady Wheatcroft, simply on the grounds that the subject is totally beyond me. I am no expert on governance whatever, and I could not tell good from bad governance if it hit me over the head. However, what the noble Baroness said sounded very persuasive, and I am sure that she is right.

I also apologise to my noble friend Lord McFall. I just did not notice his Amendment 10. If I had done so, I would have tabled an Amendment 10A as I have tabled Amendment 8A.

I take noble Lords back to the Bank of England Bill, which the noble Lord, Lord Barnett, and I played a full part in debating. Indeed, one thing that I still remember with enormous pleasure and some amusement is the fact that, while the noble Lord and I were enthusiastically in favour of the Bill and said so, Conservative noble Lords who were then on the opposition Benches were doubtful. One of my tasks was to try to persuade many Conservative Peers that what Gordon Brown was doing was not only the right thing but that it was a very strong move in a Conservative direction to give independence to the Bank of England for monetary policy. I still give the odd lecture, and I sometimes boast that I was once involved in educating the Conservative Party in the correct way in which to run monetary policy.

In the course of debating the Bank of England Bill, all references to feeding back were to the House of Commons. The noble Lord, Lord Barnett, and I put down an amendment—I think that it was the only one that was accepted from us—to say that wherever the word “House of Commons” appeared it should be deleted and replaced with “Parliament”, and the Bill was changed so that Parliament became the body, meaning that it included the House of Lords. That established the fact, on which Lord Williams of Mostyn got a definitive opinion from the Clerk of the Parliaments, that the House of Lords is fully entitled to look at any matters of this kind and to be consulted on them. The Commons does not have to take any notice of us on these matters, but we can certainly exercise our rights. That is why I object very much to the form of Amendment 10 in my noble friend’s name and feel that the correct wording should be, “Treasury Committee of the House of Commons and the Economic Affairs Committee of the House of Lords”. This is a matter of principle for your Lordships’ House. I am personally not persuaded by any of what might then happen, but that is another story. If it is going to be done, I feel very strongly that both Houses should have access.

That was all about appointment, which comes up several times later on other things, but I shall make one speech do for all the other times it comes up. In my total naivety, it never occurred to me that there was any question of removal from office being a serious matter. That is another reason why I apologise to my noble friend. I would probably emigrate if we got to a state in our society where we were dealing with the removal from office of the Governor of the Bank of England. I hope that that was what the noble Lord, Lord Turnbull, was saying as well. We are all very keen on science fiction, but I think that we can go a little too far.

--- Later in debate ---

[Lord Sassoon]

My Lords, just before the noble Lord, Lord McFall, sits down it may be worth being clear for the record that when I said the governor can be fired if he or she proves to be unfit to perform the role, that was completely right. In answer to the question from the noble Lord, Lord Peston, about whether the governor can be fired for wrecking the economy, I would suggest that at that point the Bank would probably decide that the governor was unfit. Without getting into a long debate about where unfitness comes into it, it is worth saying that at that point, unlikely though the scenario might be, wrecking the economy might lead the Bank to decide that the fitness test would apply.

[Baroness Wheatcroft]

I thank my noble friend the Minister for his reply; I confess I found it disappointing and I thank those noble Lords who spoke in support of my amendment. I was trying to find a simple means of showing that the court was held in some esteem and had powers to exercise. I do not doubt that informal conversations go on but I am slightly reluctant to rely on informal arrangements when we are trying to strengthen the corporate governance of the Bank. Not just to strengthen the corporate governance but to strengthen the perception of that corporate governance. I would ask my noble friend to think about this matter and maybe other ways in which he might strengthen perceptions of the corporate governance of the Bank. However, I shall not move my amendment.

[Lord McFall of Alcluith]

With a request to think again, I beg leave to withdraw the amendment.

Banking Reform

Baroness Wheatcroft Excerpts

Thursday 14th June 2012 Lords Chamber

[Baroness Wheatcroft]

My Lords, I welcome the White Paper and the accompanying Statement. Separating risky banking from core retail banking is essential but we have to be careful that the ring-fence does not become a Chinese wall. It will take some policing. We also need to be very careful in watching to what extent the hedging that will be allowed within the ring-fence is monitored by the various authorities. I have some qualms about that.

I am also concerned about the timetable. I am delighted to hear that the 2019 deadline will stay but I am puzzled as to why that needs to be the case for more than the capital requirements. I would have thought that the ring-fence might have been installed sooner than 2019, which sounds a long time away. My final point is about why on earth households would put their money into a ring-fenced bank. I cannot see why their money should be guaranteed if they put it in a riskier institution. Perhaps the Minister will answer that.

[Lord Sassoon]

I would very much like to respond to those points but I see that the clock has reached 20 minutes. I do not like to do this but I had better write to my noble friend Lady Wheatcroft on these important points.

Financial Services Bill

Baroness Wheatcroft Excerpts

Monday 11th June 2012 Lords Chamber

[Baroness Wheatcroft]

My Lords, I shall begin, if I may, by congratulating my noble friend Lord O’Donnell on his masterful maiden speech. I hope that it is not the prospect of speedy abolition of this House that is making him contemplate another full-time job so quickly when he could be such a great asset to the work of this House.

No one can doubt the need for change in the way in which we regulate financial services. Even if the euro had not imploded, the huge build-up of debt in the UK in recent times would have ensured that a messy denouement was inevitable. Regulation that was supposed to be light touch had become not only light touch but blind. The Bill should improve the way in which we regulate although we should never lose sight of the fact that regulation is only ever as effective as those who apply it. The regulatory structure, whether it be twin peaked, three peaked or, as my noble friend Lady Kramer suggested, an entire mountain range, is not as important as the quality and attitude of the regulators themselves.

The structure of regulation set down in the Bill is already being implemented. The crucial point is that we are moving from a rules-based system to a judgment-based system of regulation. That has to be right. Judgment should have told any regulator that to allow a bank to lend 120% of value on a property to an individual on the basis of self-certified earnings would be potentially catastrophic, and so it proved. I applaud the general direction of the Bill and as a member of the pre-legislative scrutiny committee, which made many recommendations for amending the legislation, I am pleased that the Government accepted many of our suggestions. However, there are still areas where I believe there is scope for further improvement.

I should declare that I am on the board of a regulated entity and hold a small—very small—shareholding in another.

Much has been said about the governance of the Bank of England. The governor’s role is no sinecure at the best of times but now with his—or perhaps, at some stage, her—powers and duties significantly enhanced under this legislation, it is indeed an onerous role. It has not always seemed that the court at the Bank provided any foil to that power and we have heard much along those lines today, not least from the noble Lord, Lord Myners, whose recollections of his time on the court do nothing to allay one’s qualms. I must say that his recollection of the Mansion House dinner in 2007 leads me to believe that I must have been at a different Mansion House dinner in 2007 because, at the dinner I attended, the governor voiced great qualms about what was going on in the debt markets, particularly on the CDO front, and he talked of a real threat to global financial stability.

Those qualms over the governance of the Bank exist. It has responded to some extent by establishing an oversight committee to review the work of the Bank and its committees and to summon outside assessment and advice. This is progress. While I am not overly concerned about whether the non-executive directors of the Bank are called a court or a statutory body, I feel that there is scope for them having increased accountability. Clearly, this is something that will be discussed at some length in Grand Committee. If the court is to have sufficient clout, there should be provision for the Government to consult the chairman of the court or the statutory board on the identity of the next governor.

This brings me to the make-up of the Financial Policy Committee—a committee of the Bank. The Bill lays down that there will be only four truly external members on this vital committee. However, there is a strong case for having a majority of non-executives—and not just people with experience of the financial services sector. We want people there who know what is going on in the real world of manufacturing and construction. This is a crucial committee; we must get the membership right.

The remit of the committee is, and has to be, very clearly to protect and enhance the stability of the financial system of the UK. Nothing should be allowed to detract from that. As the Minister pointed out, we do not want the stability of the morgue, and many noble Lords talked about the need for a growth objective. The Bill requires the FPC to have an eye on growth, but the wording is strangely negative. The FPC’s responsibilities,

“do not require or authorise the Committee to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term”.

I suggest that we might be able to improve on that triumph of drafting. A secondary growth objective seems a logical thing to impose in the Bill. While never jeopardising the primary objective of the Financial Policy Committee, we must have regard to growth.

We must look also at relationships between the Treasury and the Bank, which have been the focus of much attention. The Bill makes it clear that when the Bank tells the Chancellor that there is a financial crisis, the latter is in charge. However, as my noble friend Lord Lawson pointed out, there must be regular communication between the Chancellor and the governor. This should happen naturally in the course of events, but occasionally there might come a time when the odd psychological flaw gets in the way and communication will not work as effectively as we would like. This is another thing that the Grand Committee should look at.

I turn to the quality of information. Noble Lords will recall that banks were decreed by auditors to be perfectly healthy—until it became apparent that they were not. The Joint Committee recommended that the PRA and the FCA should meet regularly with auditors to ensure that the dialogue would continue. We need to go further, and the Bill gives us the opportunity. My noble friend Lord Lawson of Blaby pointed out the need to recognise the flaws in bank accountability and accounts. The executive director of the Bank of England, Andrew Haldane, pointed to the problems with bank accounts and described getting an accurate view of them as like trying,

“to pin the tail on a boisterous donkey”.

As we have seen, bank accounts are full of numbers that tell us nothing. It should be incumbent on auditors to spell out the risks that lie behind the numbers. This would enable regulators to monitor and limit risk-taking even more than they will do by their own efforts. Auditors need to shine a light on the risks that banks are taking rather than to obscure them.

Finally, we must acknowledge, for the time being at least, that Europe will shape much of our financial regulation. We need to be clear that we have the right structures to properly liaise and influence such regulation. In particular, we need to hold on to the right to set our own minimum requirements on capital ratios rather than be put in a straitjacket by European minima.

Queen’s Speech

Baroness Wheatcroft Excerpts

Wednesday 16th May 2012 Lords Chamber

[Baroness Wheatcroft]

My Lords, Governments cannot legislate for growth, we have been reminded today. Nevertheless, Governments can remove some of the obstacles to growth. The regulatory reform Bill announced in the gracious Speech does that with changes to employment law, reductions in red tape and with the inspection regime. I welcome those changes almost as much as the noble Baroness, Lady Turner of Camden, regrets them. The changes have been particularly welcomed by small businesses, which are also being encouraged with a new loan guarantee scheme and even the possibility of rent-free office space in empty government buildings. However, for significant growth in the economy, it is to bigger business that we must look. The majority of small businesses stay small. That may be because of the nature of the business or because of a lifestyle decision. There are many founders who do not even like the idea of having to manage hundreds of employees.

It is the big companies that will help to do away with some of the unemployment that now dogs this country. The latest figures are encouraging but there is still a long way to go. Big business must be encouraged to expand but, as pointed out by the right reverend Prelate the Bishop of Durham and others, big business is sitting on cash rather than investing. The right reverend Prelate referred to the survey from the ITEM Club. This showed that at the end of last year, the holdings of currency and bank deposits by the UK’s non-financial companies had reached an astonishing £754 billion. That is half the country’s GDP—maybe they should have bailed out the banks. Why are these companies not investing? We have just heard my noble friend Lord Broers call for more expenditure on research and development. How right he is: failure to invest in the future consigns businesses to the past.

Nervousness about the prevailing economic climate is understandable but it is not holding back companies in China and India from investing. Our companies have to compete with them if they are to survive. I believe that they are fearful of the reactions of their shareholders. A recent survey asked chief executives how they would react to a potential investment proposition that would be for the long-term good of the company but would have a short-term dampening effect on financial performance. The vast majority, under the comforting cloak of anonymity, admitted that they would not make the investment. As my noble friend Lord Tugendhat suggested, some of them may well have been influenced by pay structures, but those structures are moving more towards long-term incentives. I suspect the major part of the problem is that they do not have owners interested in the long-term good of those businesses.

The ownership of the UK’s quoted companies is fickle, often fleeting. The term investor flatters many who are little more than traders. It is the same as the ironic misnomer “investment bank” for organisations which do just the opposite. The insurance companies and pension funds which, as recently as 1993, held over half the stock in UK quoted companies had, according to the Office for National Statistics, fallen to holding below 14 per cent by the end of 2010. Individuals, who had accounted for 54 per cent of shareholdings in 1963, were down to holding 11.5 per cent at the end of 2010. The shareholder spring has certainly shocked one or two people and been achieved by a few active investors, but there are not nearly enough of them. This is an area where a little bit of government help might make a difference. More could and should be done to encourage employee share ownership. Who better to take a long-term view of their company than those who work in it? Research, including some by Oxera, has shown that companies with significant employee shareholdings are more productive than those without.

Now, I am clear about the Government’s need to keep tight limits on spending. Those who would encourage them to spend, spend, spend, believing that Keynes has the solution, forget that Keynes would not have started from here. He would have used the good times to husband the cash and pay down the debt. Sadly, the previous Government just kept borrowing, so this Administration are very limited in what they can do. However, they have taken the view that reducing corporate taxes will enhance long-term growth and have moved strongly to lower those rates. I suggest that employee share schemes should be expanded, the tax relief involved being an investment in growing a stable shareholder base.

Today, the monthly maximum for a save-as-you-earn scheme is £250, and the annual limit on a share incentive plan is just £1,500. These limits have not moved since 2000. Companies that operate the schemes are convinced that, if the limits were raised, more money would flow into the schemes and their employee shareholding would grow. This has to be a desirable outcome.

With my time running out, there is only one other point that I would like to make. It concerns the comment of the Foreign Secretary, who urged business not to get on its bike but to jump on board planes. Would that it could. Our airports do not have direct flights to the potentially lucrative markets that we need to reach. Germany and France do not disadvantage their businesses in this way. We need increased airport capacity. If we cannot have a third runway at Heathrow then let us have “Boris Island”, but let us not vacillate any longer. Let us take the decision, and do it.

Economy: Private Capital Investment

Baroness Wheatcroft Excerpts

Tuesday 20th December 2011 Lords Chamber

[Lord Sassoon]

My Lords, the best measure of the expected effects of the fiscal measures that I outlined in my first Answer is what business organisations have had to say. For example, the EEF, the engineering employers organisation, has said that the R&D tax credit,

“will send a powerful signal that government intends to make the UK the number one choice for R&D investment and is another step on the road to making the UK the most competitive tax system in the G20”.

I could give the noble Lord similar quotes from the CBI and others.

[Baroness Wheatcroft]

My Lords, large companies are sitting on almost unprecedented amounts of cash rather than investing it. Would the Minister consider means of encouraging those companies to invest in smaller companies and nurture them?

[Lord Sassoon]

My Lords, we are always open to new and imaginative suggestions. Large companies have been talking to us positively about how to develop the supply chain and encourage their smaller suppliers.