Buy Now, Pay Later: Regulation

Lord Davies of Brixton Excerpts

Wednesday 7th February 2024 Lords Chamber

Asked by

[Lord Davies of Brixton]

To ask His Majesty’s Government, further to the publication of draft legislation on ‘Buy Now Pay Later’ arrangements in early 2023, when they intend to fulfil their 2021 commitment to regulate such arrangements.

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, the Government’s consultation on proposed draft legislation to bring buy now, pay later into regulation closed in April 2023. In it, the Government reiterated their position that regulation must be proportionate so that borrowers are appropriately protected without unduly inhibiting access to these useful, interest-free products.

[Lord Davies of Brixton (Lab)]

My Lords, I have to say that I find the Answer from the Minister deeply disappointing. It is three years since the Woolard Review concluded that more needed to be done to ensure a healthy, sustainable market in unsecured credit, including, in particular, buy now, pay later. Since that time, the use of buy now, pay later has more than trebled, with the citizens advice bureau warning that consumers are left without vital consumer protection and reporting from its own experience a huge rise in the number of people needing services to deal with the problems created by this form of credit. Is that not just evidence that this is no longer a serious Government prepared to undertake tasks to protect ordinary rank and file people?

[Baroness Vere of Norbiton (Con)]

I disagree with the noble Lord. Obviously, we have received a large amount of stakeholder feedback to the consultation on the draft regulations. We are considering that feedback and it is very varied. In many cases, when provided affordably and used responsibly, interest-free credit can be incredibly helpful to people trying to balance certain payments from month to month. The average outstanding balance of buy now, pay later is £236. These are relatively small amounts of money that can be shifted from month to month, and it is proving incredibly useful to a number of people.

Climate Risk Models

Lord Davies of Brixton Excerpts

Thursday 25th January 2024 Lords Chamber

[Baroness Vere of Norbiton (Con)]

Goodness—that is a very wide-ranging question from my noble friend. I do not think it quite right to say that the Bank of England is committed to the scenarios it used back in 2021. For example, as my noble friend will have seen, two more scenarios were published fairly recently. The Government are not, for example, going to mandate a particular model or scenario for the pensions industry or indeed any part of it, because there are different scenarios out there. They are not forecasts but scenarios, and different groups will feel that different scenarios will come into play. Most pension schemes now have to follow the TCFD requirements, which came into force substantially in October 2022. That will really focus the pension schemes on their climate risks but also the climate opportunities.

[Lord Davies of Brixton (Lab)]

My Lords, I need to mention my entry in the register of interests. Following the question from the noble Baroness, Lady Altmann, I urge the Minister to study the report from the Institute and Faculty of Actuaries, whose central conclusion was that commonly used climate models in financial services are underestimating risk. In particular, it says that the choice of assumptions is not widely understood and they pay insufficient attention to the possibility of overoptimistic scenarios for the future of climate change.

[Baroness Vere of Norbiton (Con)]

Of course, my officials and those who work for the independent regulators will look at all evidence, and one often finds that it is very conflicting. The challenges of the models used have been clearly established. There is a higher number of independent transmission channels than previously thought and a lack of historical data; and, of course, one has to anticipate a firm’s reaction to climate change over the longer term. All those things are being considered. This is an evolving science, as I think all noble Lords will agree. However, I go back to the NGFS, of which the Bank of England was a founding member: it consists of 134 central bankers and supervisors from around the world, who are all working together to improve the available scenarios.

HMRC: Tax Returns

Lord Davies of Brixton Excerpts

Wednesday 10th January 2024 Lords Chamber

[Baroness Vere of Norbiton (Con)]

HMRC is well aware and has forecasts for how many people will be filling in tax returns or required to pay tax. It is prepared and has the workforce ready to do so. But I would ask the noble Lord how many more HMRC advisers it will take to collect the tax for the £28 billion a year that Labour intends to spend.

[Lord Davies of Brixton (Lab)]

My Lords, is HMRC gearing up for the potential problems that will arise because of fiscal drag, as has been mentioned, and the triple lock on state pension benefits and its impact? Income tax is not deducted from state pension benefits directly and has to be paid separately, and many people on state pensions have low incomes and will receive demands to pay their unpaid tax the following year. Is the Minister on board with that, and are we going take action to make sure that people on low incomes do not receive large tax demands to be paid from their low state pensions?

[Baroness Vere of Norbiton (Con)]

As I have said previously, HMRC is prepared for the type of people that may or may not be in the tax system in the future. At the heart of all this is communication. HMRC sends out tens of millions of messages to people each year. It has a social media campaign and also campaigns in the press to ensure that everybody understands how they can pay the right amount of tax at the right time.

Autumn Statement 2023

Lord Davies of Brixton Excerpts

Wednesday 29th November 2023 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, when I first put my name down for this debate, I did so in order to get extremely angry about the announcement in the Autumn Statement on the end of free prescriptions for certain benefit claimants. However, thanks to the right reverend Prelate the Bishop of London, I can save my anger for tomorrow’s debate—save to say that it is a cruel and outrageous proposal that reflects so badly on a Government who have already lost much credibility and honour. Instead, I turn to the proposals in the Autumn Statement relating to pensions, which do not incur my anger; indeed, there are certain aspects that I positively welcome. But I do have some questions.

I welcome the Government’s continued commitment to the triple lock for increases in state pensions. Newspaper columnists and other commentators might speculate about the unpopularity of the cost of the triple lock but, in truth, there is overwhelming support for protecting state pensions, including with the triple lock, which is of particular help to those on low to middle incomes. In truth, the Government did not have any choice. This year’s increases are simply in line with the legislation and did not actually involve the triple lock.

It is worth mentioning here that everyone says pensions were increased by 8.5%, but they were not. No one’s pension was increased by 8.5%. Part of everyone’s pension was increased by 8.5%, but part of their pension was increased by 6.7%, because the triple lock applies only to the basic state pension and the new state pension.

Of course, it was not for want of trying that the Government complied with the triple lock—or the existing law, I should say. A series of kites were flown, clearly in line with government thinking. They might have fiddled with the index, although they did that two years ago and promised never to do it again. Another idea was to fiddle with the time period, but that would have been wide open to legal challenge. So, in the end, they made the right decision and complied with the law—admirable and a true reflection of public sentiment.

Turning to pensions, I welcome the new Minister to her post. I am sure that she will enjoy our future discussions on pensions, because the Autumn Statement included a whole series of proposals relating to pensions; we will have to wait and see whether anything substantial emerges from the proposals. The key of course was the Chancellor returning to his much-touted Mansion House reforms as the basis for

“a comprehensive package of pension reform that will provide better outcomes for savers, drive a more consolidated pensions market and enable pension funds to invest in a diverse portfolio”.

He oversold it a bit, I think; hope is a fine thing. However, I welcome some of the thinking behind these proposals, as they affect pension fund investment. Some of us have been arguing for years that pension funds should be invested in the productive economy and that this should be reflected in the bases used to estimate the contributions required to pay for the benefits promised.

Defined benefit schemes have had a tough time of late, but they still hold substantial funds available for investment, which should be used to grow our economy. Instead, for the past 25 years, they have been increasingly forced by regulatory errors and false concepts of what constitutes safety to invest in what the new City Minister has just called the “safest graveyard”. There was a de facto race to the graveyard for such schemes, with wind-ups seen as the preferred option.

Now, the Government have reversed their approach, with measures being promoted that they say are intended to encourage them to run on, to continue in operation, to continue in active life and to continue to pay benefits. The idea, it is argued, is that larger funds—involving some consolidation—will be able to take advantage of the expertise that is available to invest successfully and, hence, to increase growth in our economy. Can the Minister help us by indicating some sort of timetable for the implementation of these proposals?

A second key theme, looking at defined contribution schemes, is consolidation and the elimination of uneconomic “small pots”. There is also the idea of building on the success of Labour’s policy of automatic enrolment, or, to put it less charitably, “let’s learn from our mistakes so far”. The move here is to what is termed in the Statement as the “lifetime provider” model. How committed are the Government to early implementation of change in this area? I was present at a meeting yesterday with the new Pensions Minister and gathered the impression that the Government were only at an early stage of their thinking.

Finally, I want a commitment on the changes mentioned in the Statement to the rules on when surpluses can be repaid. The use of “repaid” is slightly misleading. The Statement says that this will include

“new mechanisms to protect members”.

The starting point is that the money in a pension scheme is the members’ money and should be used only where there is a benefit to the member. However, where discretionary benefits require the consent of the employer, it is possible that there is a deal to be done that can suit the employer and the members. But such a deal should be done only with the fullest disclosure to those who matter—the members—and only after consultation with them and the unions that represent them. This is obviously all subject to consultation, but I hope the noble Baroness will reaffirm the commitment in the Statement to protect members.

King’s Speech

Lord Davies of Brixton Excerpts

Monday 13th November 2023 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, we have had presented in the gracious Speech a Potemkin village of a legislative programme: facades with no substance, performative legislation driven solely by the Prime Minister’s perception of short-term and shoddy political advantage. Others have and will deal with the egregious examples of poor and ill-considered legislation in the Speech. For myself, I am particularly concerned about the proposed Economic Activities of Public Bodies (Overseas Matters) Bill, but I will save my remarks on that for Second Reading, other than to emphasise my strong opposition. That is what is in the speech. I want to highlight some of the matters that are missing from the Speech, which ought to be there if we had anything like a serious Government.

First, and most importantly, although technically it does not come under the heading for today, is the mental health Bill. It is shameful that it has not appeared. It was in the Government’s manifesto and was agreed all-party as a matter of high priority, and yet the Government cannot afford the time to put it before the House. I am particularly pleased therefore that my Front Bench in the Commons earlier today announced that it would be a Bill in the first Session of a Labour Government.

More relevantly but also important is the absence of the audit Bill. What explanation can the Front Bench provide for the absence of that Bill? BEIS announced in May last year that there would be an

“audit regime overhaul to help restore trust in big business”.

It said:

“Government will revamp the UK’s corporate reporting and audit regime through a new regulator, greater accountability for big business and by addressing the dominance of the Big Four audit firms”.


That is so important but not important enough, apparently, to justify a Bill this Session. Not that I would necessarily agree with everything in the draft Bill, but these issues need to be dealt with. In this context I need to declare an interest as a fellow of the Institute and Faculty of Actuaries, as the draft Bill includes provisions to regulate the profession.

Lastly, there is no sign of a pensions Bill, so all attention goes to the Chancellor’s Autumn Statement. The focus here is on the so-called Mansion House proposals, with the presumption we must take that the Government can achieve all they wish without legislation. My noble friend Lady Drake has already addressed the issues and problems that are faced, and it may well be true, but it is not as if in the area of pensions more does not need to be done. The lack of a pensions Bill suggests not so much that the Government have run out of ideas but that they have run out of Pensions Ministers, with Laura Trott’s move to the Treasury.

We are looking for leadership here on important policy issues such as collective defined contribution schemes, defined-benefit superfunds, the value for money framework, small-pot consolidation and, not least, the dashboard. Even without a Bill, these issues need to be addressed, and the chopping and changing of Pensions Ministers leaves the pensions industry in despair.

Alternative Investment Fund Managers Regulations 2013

Lord Davies of Brixton Excerpts

Monday 13th November 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, the operation of the consumer panel and other panels of the FCA is a matter for the FCA. I am sure that it draws on all its different panels, as appropriate, when taking forward its work programme.

[Lord Davies of Brixton (Lab)]

My Lords, one recognises the important issue being raised, but the context has to be understood of a financial services industry that does not have an unblemished record, in terms of the personal pensions and endowment insurance scandals. The FCA has to recognise that it cannot take the good will of the industry towards the client as given.

[Baroness Penn (Con)]

My Lords, some of the issues that the noble Lord sets out are why it is important to take forward the programme of reform in a measured way that takes into account the interests of all involved in the sector, whether industry or consumers, and makes sure that we have proper consultation in everything that we do.

Bank Accounts

Lord Davies of Brixton Excerpts

Wednesday 19th July 2023 Lords Chamber

[Baroness Penn (Con)]

I agree with the noble Lord on both points. When it comes to assessing whether that has taken place, that is a question for the regulator.

[Lord Davies of Brixton (Lab)]

My Lords, I have to express a bit of concern about what I take to be the mood of the House. Will the Minister confirm that a PEP regime is essential, albeit one that is properly operated, and secondly, that if people cannot account properly for their income, it is right and proper for banks to refuse to continue an account?

[Baroness Penn (Con)]

My Lords, that is why it is important to distinguish between the PEP regime, which has caused problems for people, and questions about banks’ actions in relation to freedom of speech or political views. It is important, though, in both circumstances, whether you are a PEP or you have expressed any view that is lawfully held, that you have access to bank accounts. In taking forward our work on PEPs in particular, we are mindful of always maintaining our commitment to international standards in this area, and our amendments to the Financial Services and Markets Act do just that.

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

Lord Davies of Brixton Excerpts

Thursday 15th June 2023 Grand Committee

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

My Lords, as the Committee will be aware, Silicon Valley Bank UK Ltd—SVB UK—was sold on Monday 13 March to HSBC. The aim of this sale was to ensure that customers of SVB UK could access their deposits and banking services as normal; to limit risks to our tech and life sciences sector; and to safeguard some of the UK’s most promising companies.

We have achieved these outcomes—the best possible—in short order, without any taxpayer money or government guarantees. There has been no bailout, with SVB UK sold to a private sector purchaser. This solution is a win for taxpayers, customers and the banking system. The IMF has said that the UK’s response to SVB UK restored market confidence and contributed to the UK’s upgraded growth forecast. It now expects the UK to avoid a recession this year.

On Monday 13 March, the Economic Secretary to the Treasury laid in both Houses a statutory instrument, using the powers under the Banking Act 2009, to facilitate the sale of SVB UK to HSBC. That instrument has now been approved by both Houses. It granted HSBC’s ring-fenced bank an exemption so that it could provide liquidity on non-arm’s-length terms to SVB UK on an ongoing basis. This was needed to facilitate the sale of SVB UK to HSBC, because it ensured that HSBC was able to provide the necessary funds—over £2 billion in the immediate days after—to its new subsidiary. The exemption also ensures that HSBC UK can provide liquidity to SVB UK as needed.

The Economic Secretary to the Treasury has now laid this second statutory instrument, which we are debating today, to provide an ongoing exemption from ring-fencing requirements for SVB UK, beyond the existing four-year transition period. This exemption is subject to conditions relating to the size of SVB UK’s core deposits, and the type of business it can undertake.

The first condition is intended to ensure that SVB UK, or its subsidiaries, will not be able to hold core deposits—typically, retail and SME deposits—above the existing core deposits threshold in the ring-fencing regime; that is, £25 billion. The threshold is used to determine whether a bank becomes subject to the ring-fencing regime. The second and third conditions are intended to ensure that SVB UK, or its subsidiaries, will be allowed to undertake only new business activities similar to SVB UK’s existing business at the time of the acquisition by HSBC.

These conditions are intended to ensure that the exemptions from the regime are limited to what was needed to facilitate the sale of SVB UK. Together, they minimise risks to financial stability and limit any competitive distortion.

Indeed, Sam Woods, deputy governor for prudential regulation and chief executive of the Prudential Regulation Authority, has confirmed the PRA’s support for the provisions in this instrument in a letter which the EST has laid in the Libraries of both Houses and which I sent to those who spoke in the debate on the first SI relating to SVB. It states that

“the statutory instrument and its conditions supports the PRA’s primary statutory objective of safety and soundness, and limits competitive distortion”.

The letter also confirms that the PRA has a range of tools to ensure the effective supervision of HSBC and SVB UK.

This amendment, along with the previous exemption, was crucial to the purchase of SVB UK by HSBC and protected taxpayers and depositors. The UK has a world-leading tech sector, with a dynamic start-up and scale-up ecosystem, and the Government are pleased that a private sector purchaser was found. I hope noble Lords will join me in supporting this legislation. I beg to move.

[Lord Davies of Brixton (Lab)]

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

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

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

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

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

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

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

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

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

[Baroness Kramer (LD)]

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

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

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

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

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

--- Later in debate ---

[Baroness Penn (Con)]

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

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

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

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

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

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

[Lord Davies of Brixton (Lab)]

Do we have a date for that?

[Baroness Penn (Con)]

I believe that at the Spring Budget the Chancellor said that he would report back in the autumn on the further work undertaken in that area—so quite soon, I would say.

I shall read through the transcript of this debate and look to ensure that where I have not fully answered the questions raised I write to noble Lords. Although it has been a short debate, it is an important area and I want to make sure that we get all the facts clearly on the record.

Mortgage Market

Lord Davies of Brixton Excerpts

Wednesday 14th June 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, interest rate decisions remain a matter for the independent Monetary Policy Committee of the Bank of England, but I say to my noble friend that high inflation is also bad for the economy. To have high growth we must first have low inflation, so we absolutely support the Bank of England in its task of pursuing the 2% inflation target and the difficult decisions it will have to take to achieve that.

[Lord Davies of Brixton (Lab)]

My Lords, I cannot resist the temptation to draw to the House’s attention the fact that this is the 278th anniversary of the Battle of Naseby—I am not picking a fight with the noble Lord.

My question concerns the fact that this is going to have a massive effect on the buy-to-let market. We are expecting further increases in interest rates, given recent news. A report in the Times last week showed the relationship between increases in the bank rate and the knock-on effect on “underwater” buy-to-let owners. This will cause severe damage to the buy-to-let market. I have mixed feelings about that market, but to the extent that owners of such properties cannot maintain their property properly, this will have a deleterious effect on the UK’s housing stock. The Government should be seized of this issue. To me, the solution is that the Government should provide funds to local authorities in order that they can take over these underwater buy-to-let properties—interestingly, a large proportion of them are ex-council properties anyway—so that local authorities can address the housing problems in their local areas.

[Baroness Penn (Con)]

My Lords, the noble Lord will know that the Government have given local authorities many more powers and more discretion in how they approach housebuilding and house supply in their area in recent years. He is right that the changes to interest rates will affect those in rented accommodation as well as those who have mortgages through channels such as he described. The Government are putting in place further support for renters. We have a series of reforms coming in through the Renters (Reform) Bill which will improve quality and security in the private rented sector. For those on benefits, the Government boosted investment in the local housing allowance in April 2020 by nearly £1 billion, and rates have been maintained at this increased level.

Financial Services and Markets Bill

Lord Davies of Brixton Excerpts

Report stage
Tuesday 13th June 2023 Lords Chamber

[Lord Blackwell (Con)]

My Lords, I am concerned that, while seemingly innocuous, this amendment might turn out to be the thin end of the wedge of government intervention in pension investment. Clearly, the obligation on pension trustees should be to do their best to get the right returns for their investors. Once we start incentivising trustees to take decisions based on incentives offered to them, that raises the question of who then bears the consequences and the responsibility if those investments turn out in the long term not to be the right thing for their pensioners to be invested in.

I do not dispute the point that pension fund investments have not been optimal in the past, but to my mind that is to do with regulatory restrictions that have been placed on pension funds and the requirements to meet those restrictions. I think there is a case to look at the regulations around pension funds that restrict their investment choices and to enable them to invest in a wider set of assets, but I do not think the right way to do that is to start proposing incentives that would turn into the Government mandating the way that pension funds should be invested.

[Lord Davies of Brixton (Lab)]

My Lords, I support the amendment. I still think of myself as a relatively new Member of the House, so it is useful to remind the House of my lifetime spent working in the pensions industry, broadly in support of scheme members. I have been a scheme trustee, I have chaired the Greater London Council investment panel and I have advised trustees of pension schemes as the scheme actuary. I am just stating my expertise here.

I support the amendment because I think a review is required. I take on board the remarks about the thin end of the wedge, but unless we have the review those concerns cannot be addressed. As the noble Baroness, Lady Bowles, said, there is now a big conversation about using pension scheme money to promote the British economy. There is actually a long history of that sort of proposal going back over many years, but it seems to have reached a crescendo over the last year or so.

It is essential that we have a review. What is also essential, of course, is that the review is undertaken by those who know what they are talking about, but that has not necessarily been true about all the comments made so far. For example, I draw the attention of the House to the recent useful report produced by the Pensions and Lifetime Savings Association—not a body that I consistently agree with—on supporting pension investment in UK growth and thinking up quicker and simpler ways to promote pension fund investment in our economy.

I was going to raise two issues. One has already been explained clearly by my noble friend Lord Eatwell: the funding standards that have been established work against the principles that I am sure we all support. Another problem that we have is the Conservative Government’s introduction of freedom and choice. It is difficult to oppose freedom and choice but, when you come to pensions, which are long-term arrangements depending on long-term investment, giving people freedom of choice weakens the very basis upon which they are being organised. It is all very well saying to pension funds, “You’ve got to invest in infrastructure”, but if the members of that scheme have the right to pull their money out at any time, it is very difficult to take the long-term view. That is a fundamental incoherence behind the so-called policy of freedom and choice. Those issues need to be addressed in the review.

I also hope that the list of consultees for the review is not a complete list; to the extent that it is possible to consult the scheme members, they should be consulted as well. I also hope that the issues can go somewhat broader than those listed in the amendment.

In general terms, a review is needed, and I hope it will lead to the objective being clearly set out of promoting the UK economy.

[Baroness Altmann (Con)]

My Lords, I fully support and have added my name to this amendment. It is a pleasure to follow the noble Lord, Lord Davies. We both go back a long way in the pensions industry. My entire career has been in pensions—examining occupational pension schemes as an academic, then managing occupational pension investments in the City, then advising schemes and Governments. I have also been a trustee on investment committees for pension schemes.

I have to say that the current position that members of pension schemes find themselves in—both members of defined benefit schemes and members of too-often-forgotten defined contribution schemes—has not been positive in terms of the experience of the 2022 markets. As we have heard, trustees and managers of pension schemes have been encouraged to believe that the right way in which to invest a pension fund is in supposedly low-risk—which actually also means relatively low-return —investments, rather than in the traditional and older-fashioned way of managing schemes that persisted until the noughties, which was to try and maximise returns.

We have now moved to a position whereby we were supposed to be minimising risk, but I argue that that entire movement away from supporting the British economy and away from supporting UK equities and UK growth assets has been underpinned and misled somewhat by quantitative easing. The Bank of England’s policy, which effectively offered a natural large buyer that underwrote and underpinned the government bond market, perhaps led people to believe that that was the best or safest way in which to invest pension funds. That was partly because the long-term value of the liabilities, as well as their present value, is discounted and measured as of today by using the gilt yield or bond yield measure. In corporate reporting it is double-A corporates; in actuarial valuations it is typically gilt yields.

In 2022, conventional gilts lost 20% and index-linked gilts 30% of their value. The FTSE 100 rose a little. Yes, smaller companies did not do so well, but the idea that pension schemes were investing in a low-risk manner was actually confounded last year, and I would argue that, as we move into a post-QE world and as we have recognised and I have been warning since 2011, or even earlier than that, the policy of quantitative easing is a significant danger for pension scheme investments and members.

We must recognise that we do not fully understand what investment risk means any more. The capital asset pricing model is based fundamentally on the idea that gilt yields are the lowest-risk assets and all assets are more risky—even if they offer more returns, potentially they are more risky—and may need to be considered with a little more circumspection.

That leads on to the idea that, if we do not quite know whether gilts and fixed income are indeed low risk in the way that we thought they were and they have been in the past—because central banks are going to need to offload at some point and are certainly no longer underpinning the markets—diversifying investments and supporting the domestic economy in the way that this review would be investigating must come into the public debate.

--- Later in debate ---

[Baroness Bennett of Manor Castle (GP)]

I will speak very briefly to offer Green support for the amendment in the name of the noble Baroness, Lady Kramer, and the most reverend Primate. The amendment, in a way, is a smaller and lighter version of my attempt to strike out the competition clause, on setting a competitiveness objective, which has sadly remained in the Bill.

In November last year, City Minister Andrew Griffith told the Financial Times:

“The overall thrust of things is to allow more risk … you shouldn’t be risk”


averse;

“we just need to manage that in an appropriate way”.

He went on to say that the aim of reducing ring-fencing was

“to release some of that trapped capital over time”.

I acknowledge that the Minister said that before the collapse of SVB and Credit Suisse, and the other crunches in the American banking system.

In an April piece in the Financial Times, Martin Wolf said:

“A shock like this should make mindless deregulation less appealing to politicians”.


As has been clearly outlined already, the amendment does not actually make anything happen; it just ensures parliamentary oversight. When we get to the dinner break business, my noble friend will seek to ensure that parliamentary oversight is included there. Surely, this is what democracy is supposed to be about.

[Lord Davies of Brixton (Lab)]

My Lords, I support the amendment. We will return to these issues on Thursday, when we discuss the regulations in Grand Committee. However, it is worth mentioning to the House the clash today between this Bill and a meeting of the Economic Affairs Committee, of which the noble Baroness, Lady Kramer, and I are members. By chance, the committee was interviewing the Governor of the Bank of England. The issue of this arrangement arose, and the governor was quizzed on these very issues. It will be useful on Thursday to explore further why and how this action was taken. The governor provided a justification, but, in the light of his remarks, it will be worth while exploring these issues in more detail when we get the regulations.

[Viscount Trenchard (Con)]

My Lords, the noble Baroness, Lady Kramer, and the most reverend Primate have retabled as a single amendment—Amendment 106 —the two amendments that were debated in Grand Committee: Amendment 241C on ring-fencing, and Amendment 241D on the senior managers and certification regime.

As my noble friend Lady Noakes said during that debate, these amendments are trying to set in stone for all time the conclusions of the report of the Parliamentary Commission on Banking Standards. Times change, and I cannot support this amendment because it introduces an inappropriate degree of rigidity.

As my noble friend also pointed out, the lesson of the HSBC and Silicon Valley Bank episode was that the ring-fencing rules were not, after all, considered inviolable. It was necessary to provide HSBC with special statutory exemptions from the ring-fencing rules to enable it to acquire Silicon Valley Bank. That exemption has brought permanent changes to the ring-fencing regime for HSBC which affect it alone. Can my noble friend say whether that means it has a permanent competitive advantage over rival ring-fenced banks in the UK?

In any case, I rather doubt whether the introduction of ring-fencing has reduced the risks to which bank customers’ deposits are exposed. I disagree that it is therefore important to make it very difficult to weaken the ring-fencing regulations in any way. As I said in Committee, I worked for Kleinwort Benson for 23 years, for a further 12 years for Robert Fleming and then for Mizuho. All three banks operated both commercial and investment banking businesses. Internal Chinese walls between departments made it quite impossible for customers’ commercial banking deposits to be diverted to risky investment banking activities. As I said in Grand Committee, there is no positive correlation between the two cash flows of retail and investment banking. It follows that universal banks are in fact gaining diversification benefits. There is little global evidence that splitting up the banks has made them less likely to get into trouble.

Following the Lehman shock, is it not interesting that the US Government did not go for the reintroduction of a kind of Glass-Steagall Act? I am not convinced that ring-fencing is a good thing, and in general I am opposed to market distortions of this kind, which actually make the consumer less safe rather than safer. Ring-fencing also makes it harder for smaller banks to grow, because they must compete for a small pool of permitted assets against the capital of the larger banks. Will the Government conduct a review of the effectiveness of ring-fencing?

As for the senior managers and certification regime, I am sceptical as to whether it has been effective, because there is no hard evidence that it has been used as the stick that was originally intended. Most well-run banks operate in a collegiate manner, and I think it rather odd to attempt to attribute personal responsibility to managers and directors of banks for the decisions and actions of those banks, beyond the responsibilities that the directors carry in any event.

The SMCR has especially inconvenienced foreign banks operating in London. As an example, I refer to the Japanese megabanks. It used to be their practice to assign a very senior executive to London to take responsibility for all the bank’s activities in the UK and in most cases the whole EMIR region. Often, this might be the executive’s last major management position before retirement, and would typically be for two to three years leading up to his retirement date. Such executives have typically worked for 40 years or more for that bank and have managed regulated financial businesses in Japan for many years. However, the FCA has consistently been extraordinarily slow in approving those executives under the SMCR.

Therefore, the Japanese banks have given up on this strategy and feel compelled to appoint as head of their UK and EMIR operations not the person most appropriate for the job, but the most senior person who has already been working in London for three years or so, merely in order to meet the criteria of the SMCR regime. This has caused considerable inconvenience, because it is unreasonable to send a trusted senior executive overseas for five or six years in the last years of his active career, rather than a more reasonable stretch of two to three years. I know that the SMCR is much resented by Japanese and other foreign banks and I ask my noble friend if she will agree to conduct a review of how it is being implemented by the FCA.