Queen’s Speech

Lord Davies of Stamford Excerpts

Wednesday 11th June 2014 Lords Chamber

[Lord Davies of Stamford (Lab)]

My Lords, two grave events have occurred so far this year, the full import of which has not yet been fully appreciated, which threaten in its very foundations the international system with which we have become familiar and have probably taken for granted over the past decades. The Russian annexation of Crimea is the first occasion since the Second World War when frontiers have been changed in Europe by force. It is the first occasion for 50 years that that has occurred anywhere in the world, including outside Europe. I do not need to remind the House of the two occasions when an attempt was made to change frontiers by force, opposed very successfully and bravely by British forces—in the Falklands and, later on, in Kuwait. That is a position that we now face, and we have to ask ourselves what kind of precedent and uncertainties are being created and how the rest of the world will react to these new circumstances and new precedent.

The second grave event is the fact that a British guarantee has been clearly and openly violated—again, apparently, entirely with impunity. We and the United States were both signatories to the 1994 agreement guaranteeing the territorial integrity and sovereignty of Ukraine, which has clearly been gravely breached by the annexation of Crimea. In this country, we used to take our guarantees extremely seriously. The House will recall that we went to war in August 1914, in accordance with the guarantee that we had given to Belgium under the Treaty of London. We went to war in September 1939, in accordance with the guarantee that we had given to Poland some six months earlier. We have to ask ourselves how seriously we, let alone anyone else, will take British guarantees in future. These are incredibly serious matters.

Of course, I do not suggest that the position created by Mr Putin’s aggression is entirely analogous with that of the outbreak of the two world wars. No historical circumstances are entirely analogous anywhere—that is quite clear. But unlike the Germans in the two world wars and unlike the Soviet Union in the invasion of Hungary, Czechoslovakia and Afghanistan, Mr Putin did not just send his tanks or aircraft crudely across the frontier; he used much more subtle means. He displayed his training as a KGB officer, using absolutely brilliantly a mixture of subversion, infiltration and black propaganda. The very close analogy in my view is with the Sudetenland and Czechoslovakia in 1938. That was a time when Hitler was still quite cautious before he had become overconfident. He and Henlein were able to subvert Czechoslovakia, again by playing on the nationalism of the German-speaking Sudetens, and on the international sense of guilt about Germany having suffered unduly under the Treaty of Versailles. I had a terrible sense of déjà vu when I listened to the noble Lord, Lord King, talking about how we had not been sympathetic enough to Russia in recent years. Hitler’s 1938 aggression was enormously successful and very subtle, and six months after annexing the Sudetenland, with international acquiescence, he was able to take over Bohemia and Moravia and turn them into a German protectorate—and Slovakia became an independent country.

We are now facing a period of uncertainty in which many people, not just Mr Putin but others as well, will be looking for the weaknesses in the international system—how the rules have changed and how they might get away with what they had previously never considered possible. In other words, the system is under test. Our international system is under probe. The Chinese, who have recently been extraordinarily aggressive with their neighbours, will be watching events extremely carefully and drawing conclusions from all that.

What should we do? We need to do three things. First, we need to decide on the situation that we face, which I have just described. Secondly, we need to take a view on where Mr Putin is going immediately from here. I think that he is likely to want to embed his gains by doing a deal with the West on the basis of the neutralisation of Ukraine. That may be on the analogy of the Austrian state treaty, as the noble Lord, Lord Kerr, suggested, or perhaps on the analogy of Finland in Cold War days under Presidents Paasikivi and Kekkonen. The neutralisation of Ukraine is not in itself bad, but it would be appalling if it was imposed by the West on Ukraine. What a gruesome and dreadful situation we would find ourselves facing if we in the West accepted that Crimea could exercise the right of self-determination to join Russia but Ukraine could not exercise the right of self-determination democratically to join NATO or the EU if it subsequently wanted to do so. We should not go down that road. Thirdly, we should prepare ourselves for the worst. We should consider imposing effective sanctions. We need to look very carefully at what might happen if we were to impose serious economic sanctions. I have previously suggested sanctions directed at the Russian banks.

We should certainly reverse our cuts in defence spending. In this respect, I totally endorse the powerful case made by the noble and gallant Lord, Lord Stirrup, and my noble friend Lord West. We and the rest of the European Union have been disgracefully cutting our defence spending for years while Putin has been increasing his, year by year, by substantial percentages. By doing what we have been doing, we could not have been sending a more effective signal of our abdication. We must reverse that position. We must also support Ukraine concretely. We should provide arms, training and intelligence support. That is enormously important.

We in the European Union need to reduce our energy dependence on Russian natural gas. I am glad that moves have been made in that direction in terms of putting LNG capability in Germany. We need to look again at putting in pipelines to bring natural gas from Turkmenistan and Azerbaijan, without passing through Russia. That will be expensive, but if we and the European Union have to use public funds, that would be a good insurance premium to pay.

Finally—I know that this will be very controversial in the House—this is the moment when we need to make some progress towards a common foreign and defence policy in the European Union. It should be on the basis of every country being committed to spending 2% of its GDP on defence. This needs to be on an EU-wide basis because there are four neutral EU countries that are not members of NATO. We want to get away from the “free rider” issue and the idea that some countries can take their defence for granted. We need to make sure that we do what the Americans have for a long time been calling on us to do: become capable of taking on a greater defence burden ourselves. On that basis, we shall strengthen our solidarity with the United States and increase our credibility in the world, which so badly needs restoring after the events of the past few months.

EU: Financial Transaction Tax (EUC Report)

Lord Davies of Stamford Excerpts

Tuesday 17th December 2013 Grand Committee

[Lord Davies of Stamford (Lab)]

My Lords, I start by congratulating my colleagues, who did 90% of the work on this report before I joined the committee, on having done some sound work and having revealed, way ahead of the Commission or the Government realising it, the impact on non-participating states of this proposal.

By the way, the Government’s position is quite absurd. Most reasonable, sensible people litigate only when they feel very strongly about something. If they feel strongly about something they are given the opportunity to vote on, they vote against. This Government succeeded in abstaining and then in starting litigation. Their credibility is pretty small.

In my brief time, I will summarise in four propositions what I feel about this proposal, about which I do not take as tragic a view as many of my colleagues. The first proposition is that all taxes are unpopular. Any new tax produces an outcry, sometimes hysterical, from those who are going to be, or might be, impacted. One has to keep one’s cool against that noise.

Secondly, all taxes have perverse economic consequences. I say to the noble Lord, Lord Hamilton, that all taxes, as a first-order effect, reduce GDP because they reduce demand. Whether they ultimately have a negative effect on a net basis depends on how that money is spent by the taxing authority. However, direct taxes are enormously dangerous because they impact directly on incentives to work, to save, to take risks, to set up enterprises and to invest. On the other hand, indirect consumption taxes have the effect of impacting most, by definition, on people with the highest consumption ratios—in other words, the poorest people in society—so they are very unfair. The financial transaction tax has neither of those two disadvantages. If you implemented it around the world, it might be pretty close to being an ideal tax.

Thirdly, contrary to what you might expect theoretically, tax arbitrage, or displacement of financial markets in response to taxation, is actually much less effective and efficient than you might suppose, for a whole host of reasons. One is that people always want to trade in the deepest markets. If you move out of the most liquid, deepest markets, you will find that you are operating against wider spreads, which will more than compensate for any avoidance of tax. That is particularly true if, as in this case, a tax is 10 basis points.

The main reason why the market in trading in UK equities has not moved into derivatives, contracts for difference, the option market and so forth is because people would be paying for much greater spreads than they would be gaining on the stamp duty tax—that tax, of course, is 50 basis points. There are other reasons why there is not so much displacement as you might expect, one of which is the time zone problem, another of which is that financial markets, particularly clearing houses and their principal customers—the major banks—do not like cutting across major tax authorities. They are particularly terrified of the IRS, of course, but they do not want to have an argument with any major tax authority, including, in this case, the Fisc or the Finanzamt. They do not want to have an argument with the Inland Revenue, which is why, when they set up American depositary receipt markets in New York in British equities, the American banks concerned have always paid the stamp duty at the front end on an advance basis: I think it is something like 200 basis points. They have accepted that although I do not think that obligation could ever be enforced in a court of law. Perhaps the Minister will confirm this.

Finally, the report argues that this tax will impact in practice on a lot of investors, both retail and wholesale, and on a lot of residents—institutional and otherwise, corporate and otherwise—in this country, even though we do not participate in it. If we get none of the benefits because we do not receive any receipts from the tax, of course, and the benefits of displacement from other markets where they are participating directly in the tax are much less than anticipated, there may well come a time when the equation is such that it would be worth our while to join in the tax and join in sharing in the proceeds. This is a matter which we need—if the tax comes in at all—to keep permanently under review.

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[Lord Newby]

My Lords, I will not go through a blow-by-blow account of which member state we spoke to at which point. The view was taken, which I believe was the correct one, that at that stage this proposal was unblockable, because of the political will to which the noble Lord, Lord Liddle, referred. We may think that other member states are misguided. History may prove they are misguided. But there is a slight tendency in the UK to believe that we always know best. We may well know best in this case, but the French and the Germans think they know best, and it is a bold UK Government—or committee of your Lordships’ House—who are unambiguously sure that they know better than a large number of major EU member states.

[Lord Davies of Stamford]

My Lords, I put it to the Minister that the Government’s position is completely absurd. He is saying that the Government did not vote against this proposal because they thought they had a majority against them. Any democratic institution would break down if no one bothered to vote because they thought that at any one time there might be a majority against them. If the Government really felt strongly about something, so strongly that they were prepared to litigate, which is a much more provocative thing to do because it would put at risk all sorts of good will, the least they could have done would have been to have voted against it when they had the opportunity to do so. By not doing so, they lost a great deal of credibility.

[Lord Newby]

As I said earlier, we will have to agree to disagree on that. I do not believe that the Government have lost credibility in the EU because of the stance they took. People believe that the Government understood the political realities.

EU: Fraud (EUC Report)

Lord Davies of Stamford Excerpts

Wednesday 11th December 2013 Grand Committee

[Lord Davies of Stamford (Lab)]

My Lords, I congratulate the noble Lord, Lord Bowness, who was the chairman, and his sub-committee on their decision to focus on this extremely pertinent matter and on the thoroughness of their engagement in this revealing inquiry. I also take the opportunity to welcome my noble friend Lady Morgan to the Front Bench on a European issue. It is the first time I have had the privilege of standing beside her or behind her on a European subject on which she has been leading for my party.

Three particularly striking and salient points emerge from this report. The first relates to the amount of fraud. The Commission suggests that fraud was running at €400 million in 2011—I have taken this figure from the report—which would be 0.28% of the current budget of the EU. That is a very low figure indeed. The committee obviously thinks that that is an understatement and has decided that it wants to multiply that to produce a figure that corresponds to the fraud estimated to exist in this country as a proportion of its public expenditure. It came up with a figure roughly 10 times greater than the commission has proposed. It does not have any reason for that particular multiple and it may be that the truth lies between those two figures. However, what is inconsistent with the picture given by this report is the notion, which is purveyed the whole time in Eurosceptic propaganda, that the European Union is a sink of iniquity in terms of fraud. Clearly the level of fraud is, at worst, comparable with the level of fraud in this country. That is a bad situation. All fraud is regrettable and must be dealt with thoroughly. It should be of particular concern to parliamentarians because it is our job to monitor the performance of governance in this area. Nevertheless, the figures before us will be quite surprising for the British public, who are used to being fed the propaganda line by the media in this country that the level of fraud in the EU is vastly greater than here. Some of the analogies that the noble Lord, Lord Bowness, has cited about British government departments’ records in that area reinforce that.

The second matter is very salient. It is quite clear that the overwhelming majority of fraud, perhaps 99%, arises in the area where national Governments are disbursing EU programmes. It does not arise in the institutions of the Union where fraud is an extremely rare event. That is even more striking in relation to the false propaganda that I referred to. There is an irony here because the Eurosceptic lobby in this country, which is very powerful, as we know, always makes out that this fraud is a consequence of too much European integration and is part of the evil of European integration or, they would say, the evil of European federalism. In actual fact, ironic as it is, it is quite clear from these figures and from the reality of the position that the reverse is true. If in fact these programmes were all run by the European Commission with disbursements under the CAP, the structural funds or the cohesion funds and were the responsibility of European officials, there would not be anything like the same kind of problem. There would be vastly less fraud. The problem is that the national states are disbursing this money, and it is in the national states that the losses, fraud and corruption occur, in some nation states much more spectacularly than in others. I shall come on to that in a moment.

In a way, the reality is not evidence of an excess of federalism in the European Union but an argument for an insufficient degree of federalism in the European Union. I do not suggest for a moment that it is practical to have all the community budget disbursed by an enlarged Commission. In the United States, a lot of federal programmes are actually run by the individual states, and they are responsible for making disbursements under those programmes. Nevertheless, that is a very important and authoritative corrective to the prevailing and utterly false impression given in this country quite cynically by the media purveying a picture that is the exact obverse of the truth.

The third salient point that emerges very strikingly from this report is that there have been quite serious impediments in some of the member states in following up on allegations of fraud or prima facie evidence of fraud that have been brought to their attention by OLAF. I refer noble Lords to the very interesting Table 1 on Page 29 of the report. It is headed,

“OLAF referrals to Member States”.

The left-hand column shows the number of referrals by OLAF of prima facie evidence of fraud. All the columns are interesting but for the sake of brevity I switch right away to the far right-hand column which shows the level of convictions. Noble Lords will see that for all 27 member states—there were 27 at that time—there were 199 convictions out of 1,030 referrals. I calculate that as being roughly 18%. That is the average. One sees immediately that the United Kingdom is slightly below that. I calculate that figure as being about 15%; so in this country we are not quite as good as the average. The worst performers are Italy, Poland and Greece, which all have a record of about 6% or 7% of convictions in relation to the number of referrals. Far and away the star performer is Germany, with almost 40% of referrals resulting in convictions.

OLAF is a single organisation involving people who will be working on different cases involving different fraud allegations in different parts of the Union at any one time, so one can assume that their standard of performance and the solidity of the cases that they make will be the same irrespective of the member state where the fraud happens to have occurred. That means that there is an enormous discrepancy in the extent to which these allegations of fraud are followed up. That is a very serious matter for EU taxpayers as a whole. The question is: what do we do about it?

The report does not avoid the question of what we do about it and the inquiry took a lot of evidence on that subject. For example, I refer noble Lords to the testimony given to the committee and quoted on pages 34 and 35. Paragraph 97 states:

“The Director-General of OLAF”—

that is one perspective, but a very important one—

“gave us a vivid account…of the multi-jurisdictional problems confronting OLAF on a routine basis. He argued that such multi-jurisdictional crimes against the EU’s budget are ‘European by nature, because you cannot say it is specific to this nation or that one’. He was clear”—

this is my emphasis—

“that the solution to this problem is an EPPO”—

in other words, a European Public Prosecutors Office.

“Most of the witnesses agreed … Rosalind Wright QC”—

she is, of course, a former director of the Serious Fraud Office—

“offered two reasons in favour of an EPPO; first, the current unwillingness of the Member States to prosecute these crimes … and, second, the fact that ‘most of these very large frauds are committed across national boundaries’. Drawing on her time at the Serious Fraud Office, she explained that in such cases it had been hard to bring everyone together under one jurisdiction and that an EPPO would help”.

The committee itself, which is an all-party organisation and has always to express itself with great reserve and care—I understand these things because I sit on another sub-committee of this House—is absolutely clear, using parliamentary language. It said that,

“it is unfortunate that the Government have ruled out participation without first having had the opportunity of considering the details of any proposal and without knowing what form an EPPO would take”.

It is quite obvious what is going on here: the Government are not taking into account the national interest. They are not making, or even attempting to make, an objective analysis of where the national interest lies in this matter and what the right solution to those serious problems should be. They are not doing that and should be. It is what they are paid to do and it is what we expect a Government to do in a democratic country but they are not doing it. They are excluding the obvious, pragmatic solution, a priori, without waiting for the details and on the basis of what one can only describe as prejudice or ideology. That is simply not good enough.

Now, I am very familiar with this Eurosceptic prejudice—it is nothing more than that: a refusal to look pragmatically and open-mindedly at issues involving anything to do with the European Union. That is very pervasive in the Tory party and was one reason why, seven or eight years ago, I left the party. We have before us now a Minister who is a Liberal Democrat. I did not think such prejudice was pervasive in the Liberal Democrat Party and look forward with great interest and expectation to see how he will defend the actions, or deliberate inaction, of this Government in a case where an important national interest is being explicitly and deliberately neglected.

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[Lord Newby]

My Lords, it is a slightly flexible definition. The best I can do is draw to the Home Office’s attention the strength of feeling that clearly exists in your Lordships’ House that this decision should now be taken quickly.

Moving on to the European Public Prosecutor’s Office, the Government accept that multijurisdictional crime against the EU budget is European in nature but believe, as noble Lords pointed out, that an EPPO is not the only or the right solution to the problem. The noble Lord, Lord Rowlands, gave some of the arguments for that, but I repeat our view: a centralised European prosecutor with harmonised powers to initiate investigations and order investigative measures is incompatible with the division of responsibilities in many EU countries where law enforcement and prosecutors have different roles from that of the independent judiciary. As such, it would require fundamental changes to those member states’ legal systems and existing operational structures to implement the Commission’s vision of a supranational body with powers of investigation or prosecution within UK jurisdiction.

The Committee asked how the UK would address the shortcomings in existing processes for tackling fraud in the absence of being a participating member of the EPPO. The Government will continue to focus on preventing and tackling fraud against the budget and draw on their new approach to policing fraud. On the response to identified crimes, the Serious Fraud Office uses a similar model to the EPPO by bringing prosecutors and police together to fight serious fraud but there are differences. There are limits to the SFO’s statutory investigative powers but the existence of the SFO at national level is evidence of a domestic model that is similar to the EPPO proposal. Further, the creation of the National Crime Agency’s Economic Crime Command means that we have an opportunity to pull expertise in anti-fraud work into a dedicated policing unit. The ECC will work closely with national police forces and partners as well as the EU and international equivalents.

[Lord Davies of Stamford]

I am grateful to the Minister for giving way. If, as on the Minister’s own admission, the Serious Fraud Office and the ECC have structures that are very similar to the proposed EPPO in that they combine investigative and prosecuting functions, what is the ideological objection to accepting the EPPO? It appears that we have already accepted that those two functions should be shared by the same agency. The Minister will know that there is no suggestion that the courts—the judicial function—should be combined with the EPPO. The EPPO having decided to prosecute would have to do so in front of judges who would be quite independent from it.

[Lord Newby]

As I said, among other things there are differences between the SFO’s investigative powers and the EPPO proposal’s powers. As I should have said, it was a component of the coalition agreement that the UK would not support our involvement with such an organisation. That remains our view.

[Lord Davies of Stamford]

I am grateful for what is clearly a very honest and frank statement by the Minister. That gets to the heart of it. His previous remark left the impression that he was desperately trawling around to find some minor detail of difference between the structure of the SFO and the proposed EPPO to justify a decision that cannot be justified on pragmatic grounds. As he said, it is essentially a political decision. The Committee, the House and the public will be grateful for his frankness.

[Lord Newby]

My Lords, I think that the noble Lord is slightly confused about the difference between a political decision and a sensible decision. Just because something is in a political agreement does not mean that there are not very serious substantive reasons for it, apart from any reasons that he would disapprove of. I am sure that that is the case in this particular example.

There were two final things that I wanted to pick up on. The noble Lord, Lord Bowness, asked about the relationship between OLAF and the Supervisory Committee and what could be done and might be happening. This is an extremely unfortunate dispute that has arisen, and there is a limited amount that the UK Government can do on their own to resolve it. We accept that the Supervisory Committee has an important role but, equally, it is important that it does not operate in such a way as to impede OLAF’s work. We are trying as best we can not to knock heads together—that is perhaps too strong—but to use what influence we have to get these two bodies to work together. It is extremely depressing to read that part of the committee’s report and evidence because it is the kind of thing that legitimately gets the EU and its ways a bad name.

The final issue that I want to address, which the noble Baroness raised, is on how we would engage with committees on the PIF directive. This has raised difficult issues for the UK, and Ministers across government have been considering how best to approach the proposal. Discussions within government are now reaching their final stages, and we hope to be in a position to offer the relevant scrutiny committees a fuller explanation shortly. At the same time, we will seek to address the concerns about the opt-in trigger point.

This has been an extremely useful debate on an extremely important issue. I hope that I have been able to explain how the Government are tackling it. I realise that I will not have satisfied noble Lords in every respect, but I will speak sternly on noble Lords’ behalf to colleagues in the Home Office so that we might make progress at least in that respect.

Finally, I thank the committee for its work and for holding the Government to account in this area of our work.

Payday Loans

Lord Davies of Stamford Excerpts

Wednesday 11th December 2013 Lords Chamber

[Lord Newby]

My Lords, a real-time database is one of the things that the FCA will be looking at. In some of the countries and US states where they have effective caps on the cost of payday loans, such systems have been seen to work efficiently and be very effective.

[Lord Davies of Stamford (Lab)]

My Lords, we heard a moment ago about the danger of lenders from other EU countries undercutting any legislation or regulation that we introduce in this country. Has the noble Lord considered discussing with the European Commission the possibility of legislating on an EU-wide basis for the single market as a whole?

[Lord Newby]

My Lords, this is a rapidly moving area. If you go back five years, it was not an issue. We are discussing with other member states the operation of the consumer credit directive, for example, and the way in which the market is evolving. As the FCA moves towards putting in place a cap of the total cost of payday loans, we will see exactly how the system is working in the majority of those member states that already have a cap and whether there is any real advantage in moving to a Europe-wide system, or whether the series of national caps is proving effective.

Financial Services (Banking Reform) Bill

Lord Davies of Stamford Excerpts

Tuesday 26th November 2013 Lords Chamber

[Lord Davies of Stamford (Lab)]

My Lords, I remind the House that for a number of years I was a director of a quite large British investment bank—in those days called a merchant bank. We had a substantial lending book as well as a much bigger investment banking business. The firm was the basis of the present London activities of Deutsche Bank.

The noble Lord, Lord Lawson, said earlier that we were focusing on an area where we could actually use legislation to address effectively a major human problem. It is not always possible to address human problems with legislation—he is absolutely right about that. We have spent much of the afternoon talking about separation and ring-fencing, which is important because there is a theoretical risk that any institution could be destabilised for example by speculation in high-risk instruments such as derivatives and that could undermine the rest of the business. That is a theoretical risk; it is sensible to address it and think about it. It has to be managed. It is not actually the reason why we had the collapse in 2008 or any of the recent banking difficulties.

Similarly, the much praised Glass-Steagall regime, which existed in America between the 1930s and 1980s, was premised on the theoretical risk that if an institution could be involved in both underwriting securities and making loans, and that if the underwriting losses were such as to compromise the capital of the bank, the deposits of the bank would be at risk. Again, that is a straightforward, plausible, coherent risk that it is sensible to address but that was not the reason for the banking crisis in America in the 1930s. I will not waste time by going into the reasons for that crisis. Nevertheless, it was a sensible thing to do.

We have been talking up to now about theoretical risks. I do not resent or reject that and I very much agreed with—and just voted for—my noble friend Lord Eatwell’s amendment to try to deal with some of those risks. Now, however, we are on the really key ground, because Amendments 21 and 51, in the names of my noble friend Lord Eatwell and the most reverend Primate, address the real problem that we have encountered face to face in this country in the past few years. That is human error, and even worse than human error, human negligence—and even worse than that, systematic human negligence and systematic human incompetence. I do not think that those words are in any way excessive to describe the activities of the British banking system, and banking systems elsewhere, in the past decade and a half.

Before 2008 there were an enormous number of bankers who appeared to be able to persuade themselves, and their boards, that when yields were coming down in the market, they could somehow preserve their yields without increasing their risk. In other words, fantastic sums of money were paid to people who appeared to be competent, whom the regulators seemed to trust—as we now know, the regulators were asleep at the time—and who appeared to have completely forgotten the first rule of financial theory, which is that there is always a positive relationship between reward and risk: if you get more of one, you will always have more of the other. That is an extraordinary state of affairs to have in a sophisticated society, but that is exactly what we had.

Again, this was systematic. It was not just one bad apple, or one bad individual. In the process of trying to preserve their yields, banks were putting enormous amounts of their assets into new instruments such as CDOs—collateralised debt obligations, which were, basically, securitised mortgages and other loans—without ever investigating what they actually contained. They acted simply on the basis of endorsements by rating agencies that were themselves incompetent. It is hard to imagine the state of Denmark being more rotten than the state of the City at that time. It was an extraordinary systematic problem. People were, for example, lending on real estate with 5% or less equity. They were making absurd and dangerous mistakes, doing things we cannot imagine they were not told about when they were 25 and doing their accountancy exams, or an economics course. We have to focus on that human area and ensure that we have procedures, filters and incentives that are robust and not perverse. Evidently, in this area we have been absolutely inadequate up to the present time.

We are making some progress this afternoon. These two amendments are moves in the right direction. We must ensure that we have the right professional qualifications and the right conduct standards, so that people are being properly monitored. We could—indeed, we should—go further afield and do more, particularly in terms of making individuals responsible. In the United States, when there are serious cases of negligence and breach of the rules, not only is the institution fined—institutions are fined here—but individuals are regularly fined. Individuals are never fined here. In this country, the people making the appalling mistakes that I just referred to have got away scot-free, without paying a penny. That is a national scandal; indeed, it is a national stupidity. It means that there is a real moral hazard: if you can get away with the irresponsibility, the money is for you—“Well done, congratulations”—and if you do not get away with it, you still will not pay anything.

That is why we had the appalling culture of bonuses, in which people in lots of institutions were regularly piling on to their book a whole lot of supposedly high-yielding rubbish and then taking massive bonuses based on the discounted present value of the supposed yield over future years. Then, when they got a large bonus on that completely bogus basis, they would move on to another institution and spread their poison further through the system in that way.

I have described this in dramatic language, and I do not think that I have exaggerated in any way. That is the awful reality of the situation. It is something that regulators—and the public—ought to think about. It is certainly something that legislators must think about. I congratulate the most reverend Primate and my noble friend on their amendments, which we should put to the vote. I hope that they do so, and I look forward to supporting them.

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[Lord Newby]

It is not saying a huge amount, but it is saying something, and I hope that because we are talking about a much smaller number of amendments we will be able to concentrate the entire brainpower of the Treasury on them so that we can bring them forward with the maximum possible notice.

[Lord Davies of Stamford]

Does the noble Lord agree that if we are to make a real difference this time—and he will sense a scepticism about that, which we face in this country and even in this House as a result of the appalling situation that we have had—we will need to emphasise, and really substantially emphasise, the issue of personal responsibility? Would it not in that context be necessary that individuals in this country should in future be subject to fines for regulatory breaches, as happens elsewhere?

[Lord Newby]

My Lords, that is the key focus of the senior managers regime—that, for the first time, senior managers and their banks will have to tell the regulators what the specific responsibilities of those people are, and we are introducing enhanced penalties if people do not stick to those responsibilities and break the rules. I think that we are indeed doing what the noble Lord requires us to do. I hope that when the noble Lord, Lord Lawson, and the most reverend Primate see our amendments, they will feel that we have done everything we can to meet their requirements.

Amendment 21, proposed by the noble Lords, Lord Eatwell and Lord Tunnicliffe, is an amendment which we saw in Committee. As I explained on that occasion, it would really just rename the existing approved persons regime as a “licensed” persons regime. The only extra feature in the proposal is for annual validation of competence by the regulator. This would have the effect of increasing the number of approved person applications from around 30,000 to around 150,000 a year. This would mean an unnecessary and costly extra burden on firms and regulators.

The Official Opposition’s amendment would not deliver the real reforms proposed by the parliamentary commission, which Clauses 14 to 26 of the Bill deliver and which we will enhance. It would just add to regulatory burdens without producing any real improvement in standards of conduct in the industry. I hope, therefore, that the noble Lords, Lord Eatwell, will agree to withdraw his amendment.

EU: UK Membership

Lord Davies of Stamford Excerpts

Thursday 24th October 2013 Lords Chamber

[Lord Davies of Stamford (Lab)]

My Lords, I congratulate the noble Lord, Lord Wrigglesworth, on a very confident and able maiden speech. It is great to have someone of that experience and background in our House. We look forward to future contributions. I congratulate also the noble Lord, Lord Shipley, on managing to get time for us to debate this matter today—a lot of time, actually six minutes per person; a good deal better than we have ever had before.

It is almost unimaginable to me that any sane or responsible person would want to take his or her country on economic grounds out of the world’s largest trading bloc; a trading bloc which other countries are queuing up to join, which no one has ever wanted to leave and with which those who cannot join for geographical reasons are desperate to sign a free trade agreement—which is very much a second or third best. But so it is. We have people who are entirely sane and responsible—for example, the noble Lord, Lord Stoddart, and the noble Baroness, Lady Noakes—who have been taking that line today.

I believe it is sometimes useful for these debates to be responsive and reactive so I am going to spend all of my time addressing some of the points that they have made. First, the point of the noble Lord, Lord Stoddart, has already been answered. If this country were to remain as part of the single market in any form, it would, of course, continue to have to make budgetary contributions, so there would be no saving. The suggestion of the noble Lord, Lord Stoddart, that we do not have access to the single market, is a very dramatic suggestion and I think one that he might want to think through.

It is possible to talk all day about how many of the 3 million to 4 million jobs in this country which depend on the single market we would lose if we immediately left the single market. Obviously, there would be some and the number would tend to accumulate over time. We will never agree on what that number might be, but it would be a number, certainly. As the noble Lord, Lord Shipley, said, an even greater threat is the future loss of investment, which we would have if we stayed in the single market, which we would not have if we left the European Union. I think that would be quite dramatic. It would be dramatic in manufacturing. It is difficult to see how we would get any manufacturing at all, where manufacturing is generally producing for more than 50 million to 60 million people. People will want to put in a new facility at great expense only where they can address the single market. They would certainly not come here.

However, the loss is not merely to manufacturing. I want to read to the House briefly from the evidence given by JP Morgan and Goldman Sachs, the two biggest investment banks in the world, to the Parliamentary Commission on Banking Standards on this subject. They are quoted in the excellent note we have had from the Library as saying:

“We believe that a key risk to London’s retaining its status as a financial hub is an exit by the UK from the European Union. In common with financial institutions across the City our ability to provide services to clients and engage in investment activities throughout Europe is dependent on the passport that London-based firms enjoy to operate on a cross-border basis within the Union. If the UK leaves, it is likely that the passport will no longer be available, thereby forcing firms that wish to access EU markets to move their operations to within those markets”.

It could not have been put more clearly. It is also quite clear that what they are talking about is being a full member of the single market—a full member of the regulatory system or structure. That is what they want, otherwise business will move across the water to the continent. If we ignore such a warning, I think that we are being anything but sane or responsible.

How is it that intelligent people such as the noble Baroness, Lady Noakes, come to a different view? She is not one of those people whom one can dismiss as being driven by some sort of primitive emotion—the kind of people who get a kick out of waving flags and telling foreigners to go to hell. There are such people in our country but the noble Baroness is undoubtedly not one of them, so I shall try to address some of the points that she raised.

She made a number of very interesting points. Like many Eurosceptics, she is becoming a little more sophisticated. They are saying, “Maybe we wouldn’t go for a deal like Switzerland or Norway because clearly that would involve us becoming”—my phrase, not theirs—“a kind of satrapy of Brussels. We really would be ruled by Brussels then”. That is the rhetoric you get from the Daily Mail today, but that would be the reality because we would have no role whatever in the decision-making structure and no chance of making our views known and influencing events, yet we would have to implement the legislation that came from Brussels. That would not be an intelligent thing to do, and the noble Baroness, Lady Noakes, thinks that she could do better.

Indeed, a Eurosceptic friend of mine—a former Conservative Minister with whom I have been discussing Europe for 20 years—said to me the other day, “We could do better than Switzerland and Norway”. I asked how and he said something very similar to what the noble Baroness, Lady Noakes, has said. He replied, “We’ve got great power because we have a balance of payments deficit with the European continent—with the other members of the EU—so we could really put the pressure on them and cut off their exports to the UK”. I said, “So what you are actually planning is to declare war not merely on the EU but on the WTO—on the international trading system”. He did not really have an answer to that. I do not think that it is a practical possibility. It is extraordinary to think that we would leave the EU with all the risks involved to go into some uncertain future.

There is a fundamental error in what the noble Baroness, Lady Noakes, said about the rest of the world. She seemed to think that there is a trade-off in our trade with the rest of the world and the single market in the sense that, if you have more of the one, you have less of the other. In fact, there is a negative trade-off: if you have more of the one, you have more of the other. The whole point of the single market is that with a greater specialisation within that market, the greater competitiveness that emerges as a result of that specialisation, the economies of scale and the longer production runs, you are more competitive outside the EU. Therefore, far from the EU being an incubus for us in developing non-EU markets, our presence in it is actually a major gain. That is a very important point which should not be forgotten.

I have very little time left in which to speak but I want to say that it seems that we have a difficult and very risky decision to take. It would be extraordinarily irresponsible for us, as a country, to make a decision which could have enormous costs without being absolutely clear about what we were going forward into. Some of the things that have been said today about the Tim Congdon and Patrick Minford studies simply do not stand up to scrutiny. It is quite clear that we would continue to have some regulatory costs and that is not being taken into account.

I am getting signals from the Front Bench and so I shall wind up. Once again, I pay tribute to the noble Lord, Lord Shipley, for giving us the opportunity to have this debate.

Sterling: Exchange Rate

Lord Davies of Stamford Excerpts

Tuesday 25th June 2013 Lords Chamber

[Lord Newby]

My Lords, the Government have no policy in terms of the exchange rate. Equally, the MPC does not target the exchange rate. However, the Governor of the Bank of England, before he retired in recent months, said on a number of occasions that he thought that the level of sterling is, in his view, now about right.

[Lord Davies of Stamford]

Is it not the case that under the brilliant economic management of this Government we have got the worst of all possible worlds? We have had a devaluation and the classic cost of that—an inflation rate which is about twice the eurozone average—but we have had none of the advantages: the balance of payments has got worse; the deficit has increased not fallen; growth has been imperceptible; we have the third lowest rate of capital investment in the EU; and under the most recent growth and employment figures, it appears that productivity is either static or declining.

[Lord Newby]

I do not agree with the noble Lord. The April trade figures show a deficit in goods and services of £2.6 billion, compared with a figure of £4.6 billion 12 months ago.

Economy: Growth

Lord Davies of Stamford Excerpts

Tuesday 29th January 2013 Lords Chamber

[Lord Davies of Stamford]

My Lords, I begin by adding my voice to the many expressions of congratulation and welcome which the noble Lord, Lord Deighton, has received warmly and genuinely from all sections of the House this evening. It is very good to think that there is now going to be someone in government with an economics background. However, I have to tell him—if it is not already blatantly apparent—that he has joined the board of a company that has been extraordinarily mismanaged over the past two and a half years. The record is extremely bad and was quite unnecessary. In the first two quarters of 2010, our growth rate was 0.3% in the first quarter and 0.7% in the second quarter. Then it just fell off a cliff because of the negative confidence impact of the declarations of the new Government.

In the light of experience, there must be very few people in this country who are not politically signed up to the Government or otherwise engagés in a party-political sense who would not agree that it is very regrettable that we did not continue on the trajectory set out by Alistair Darling in his Budget of March 2010 to reduce the deficit on a much slower path. That would have been a much better idea.

Remarkably, those things were predicted by a number of people at the time. Everybody has to pay tribute to my right honourable friend Ed Balls, the shadow Chancellor, who did something which I would never have dared to do as a Minister or shadow Minister, which was to make a very specific economic prediction. He said that the policies adopted by the new Government would bring about a double-dip recession. Sadly, he was all too right. The dangers which the Government were running were quite clear at the time, but so far we have had not a word of recognition of their mistakes. Not only was the basic macroeconomic judgment clearly wrong, but the manner in which economic policy has been adopted has been extraordinarily cack-handed and clumsy over that time. I will give one example in relation to VAT, which I mentioned in this House at the time.

I thought that it was quite reasonable to increase VAT, but not by 2.5% at one go, and certainly not to do so on 1 January. If you want to increase a consumption tax like VAT, and maximise the revenue impact but minimise the negative demand impact, which presumably any sensible person would try to do, the one thing you do not do is to deliver it on 1 January. Any shopkeeper, restaurateur, car salesman or anybody else could have told the Government that that is the lowest seasonal moment in consumer demand in the course of the year. The effect of putting on an enormous consumption tax at that point is to exacerbate the downturn of the economy and increase the volatility of the economy, when the aim of a stabilisation policy should be to reduce it. That was not a very intelligent thing to do, and it is a very bad record. That is the first, and fundamental, mistake. I will list five fundamental mistakes—five stupidities—of which this Government have been guilty over the past two and a half years, and that is the first one.

The second stupidity relates to infrastructure. Of course, it is a rather good thing to spend money on in a recession, because factor costs, labour costs, land and interest rates are lower. I am sure, by the way, that the noble Lord, Lord Deighton, learnt all that when he studied economics under my noble friend Lord Eatwell all those years ago. Indeed, in what he said this evening he showed signs of having done so and genuinely wishes now to put them into effect. I congratulate him on that. Perhaps this is a new broom in the Government, which is very welcome.

He mentioned infrastructure; the trouble is that a lot of opportunities have been lost irrevocably. We should have been spending that money on infrastructure over the last two years, as we have been in recession. It is not much use—or it is better than nothing but very much less use—now to plan to spend more money on infrastructure several years hence. In the case of HS2, that money will not be spent until the 2020s. I hope that we shall be back in power long before then and that the economy will be booming. That infrastructure spending might be contributing to an overheating of the economy, requiring an increase in interest rates. It will still be a desirable investment for the long-term productive capacity of the economy, but opportunities have been lost.

Particularly important opportunities have been lost—the broadband plan has been mentioned. They were all ready to be implemented in 2010, but the new Government simply cancelled them. The third runway at Heathrow was all ready to be implemented. Work could have been going on now—we really could have done with that infrastructure spending. Those opportunities have been gratuitously lost by the Government.

The third stupidity perpetrated by the Government relates to monetary policy. I can quite see that with such a very restrictive fiscal policy the Government’s only hope of generating some demand and compensating for the collapse of private sector demand was through monetary policy. Monetary policy obviously cannot be conducted by reducing interest rates, considering the level at which they now stand. A number of people around the world have come to the conclusion that quantitative easing is the best tactic in current monetary conditions, and one can understand that. An argument is to be had as to whether the type of quantitative easing adopted by the Bank of England in this case was the right one, or whether it would have been much better to have bought paper from the non-banking sector, thereby putting money directly in the pockets of the private sector, rather than to buy paper from the banking sector.

Be that as it may, it was completely crazy to pay interest—and as far as I know the Bank of England is still doing this—on the deposits of the Bank of England, which were being inflated in this way. I think that the interest rate that the banks receive is 75 basis points; the Minister can perhaps correct me if I have got that wrong. I should be delighted if the Minister tells me that this particular stupidity has come to an end. It really is quite extraordinary. There is no point whatever in having the banks simply accumulate deposits at the Bank of England. That is not the money supply; it may be a figure included in some of the indices, but it is not conceptually the money supply, it is not at all cash held for the purpose of transactions in the economy, and is absolutely useless from the point of view of investment, consumption or demand. The only purpose of this exercise is to get the banks to leverage on those deposits by extending their lending; by credit creation. The penalty for not doing that is being reduced by paying the banks for keeping those deposits on deposit at the Bank of England, by paying them the 75 basis points. To put it another way round, this is reducing the incentive for the banks to lend. This, therefore, is a question of the Government putting their foot on both the accelerator and on the brake—not perhaps as much on the brake as on the accelerator—but why do that? It is completely crazy.

I see that the Minister is good enough to nod. I hope that one of his early tasks will be to look at what is going on in this particular field, come to the right conclusion and get rid of this particularly foolish policy. That is what I believe it to be.

My fourth example of quite gratuitous stupidity on the part of this Government is, again, a contradiction between two different policies adopted simultaneously by the Government. One is the Government’s desire to see the banks lending more; to see greater credit creation, which is a sensible objective. The real problem for credit creation is confidence. The Government are doing nothing to contribute to confidence, so against that background, all these other technical attempts to generate greater bank lending are unlikely to be enormously successful. Nevertheless, the Government are apparently sincerely signed up to the cause of increasing credit creation in this country. However, at the same time, they are telling the banks that they are about to impose on them higher capital adequacy ratios, introducing Basel III.

I had this out several times in this House with the noble Lord’s predecessor, the noble Lord, Lord Sassoon. When I raised it, he said, “Ah yes, but we have had two or three exchanges in this House on this subject in the past two years. These new capital adequacy requirements will not come into force until 2018, so that’s all right”. It is not all right. I hope that the noble Lord will look at this again, because it is certainly not all right. I sat for a number of years on the board of an investment bank, with a lending book of many billions of pounds, and I can assure him that if the regulators—the Bank of England in those days—had said to us, “We want to increase your capital ratios in five years’ time”, we would have had to start right then. At the next board meeting we would have been discussing how to change our policies. In a market in which it is very difficult to raise new capital because the bank shares are on the floor, and for the same reason you cannot really reduce your dividend, and banks, for less estimable reasons will not reduce their bonuses, there is no way of achieving higher capital adequacy ratios other than reducing their lending book.

Banks will, therefore, now be adopting policies that are designed to follow a trajectory to get them to the capital adequacy position they need to get to by 2018. That goes completely counter to the Government’s expressed desire to get banks to increase their lending. It does not make any sense at all. Again, it is a complete and utter contradiction, and I hope that the Government look at that again and not take too long about it.

Finally, the fifth stupidity the Government have gone in for—again, not for very creditable reasons—is the decision to hold a referendum on our membership of the EU. This, of course, is a subject which I know we shall have a chance to debate in greater detail in two days’ time, and I will not trespass on this ground for very long. Nevertheless, it must be brought into an economic debate. This is a way in which a Government, who should have as a priority the creation of the maximum degree of confidence in the economy, reducing the risk of the environment in which investment and consumption decisions will be taken, are doing exactly the opposite. They are gratuitously, deliberately and unnecessarily creating a whole new area of risk, which is about whether or not this country will still be part of the European Union in a few years’ time. In the past three weeks, two Cabinet Ministers have said that from their point of view they can quite easily see their way to our leaving the European Union. You cannot do a worse day’s work in terms of undermining confidence in the economy than to do what this Government are doing on that particular front.

Once again, just as some infrastructure decisions such as abandoning the third runway at Heathrow were basically driven by party-political considerations, marginal votes and seats in west London and so on, I fear that this decision about a European referendum has been based on party-political considerations such as the need to appease the eurosceptics in the Tory party at the expense of the national interest. It is time that the national interest came first and last, because this economy is in a very difficult situation and we need to get out of this recession as quickly as possible. It is about time that the Government, in addressing that task, make sure that they adopt a position that is purely based on national interest, not on such short-term party-political considerations.

--- Later in debate ---

[Lord Deighton]

I thank my noble friend for reminding me about unwinding quantitative easing. In summary, the central scenario predicted by the OBR is that it is expected to make a profit over its lifetime as the scheme is wound down but, as always with these things, that depends on a number of assumptions about the future yield curve, the exit, the pace of that exit, bank rate policy at the time and, of course, any changes to the size. However, those are the variables that go into that decision.

I think that all those who spoke about banking reform agreed that it was important to develop financing, particularly for smaller businesses, and that the Funding for Lending scheme, although in its early days, was showing every sign of being a successful scheme, so we are delighted with that introduction.

On the broader question of structural and regulatory reform, I could not agree more with the comments of a number of my noble friends that although it is absolutely critical to ensure that we have more resilience in the banking system so that the same mistakes are not made again, we have to be extraordinarily careful—I think the timing of the introduction of some of the measures reflects that—that we do not overshoot and significantly damage the banking system which exists to provide finance to the real economy. In my own mind, the real issue with many of these institutions has less to do with capital or liquidity rules and much more to do with the culture of leadership and management in those firms. We are beginning to see some promising signs of improvement there.

As regards the supply side, we have had many interesting contributions on small and medium-sized enterprises. I apologise to the noble Lord, Lord Mitchell, for the SME labelling, and note the comments of the noble Lord, Lord Birt. The United Kingdom is an extraordinarily successful incubator for small businesses. I absolutely take on board what my noble friend Lady Kramer said about thinking small. Two days ago I attended a small business forum. Everybody there was very supportive of all the initiatives that are going on. The discussion was all about implementation and taking advantage of things that are happening.

We have had a number of contributions on planning. No one ever puts forward the case that there should be more red tape, so we are all heroes in terms of our desire to cut it out and to enable faster planning permissions. As I think I mentioned in my opening speech, we have already cut 1,500 pages of planning policy and have speeded up the rate of approval of planning applications. My personal approach to this will be to follow through some of our projects to see where there are barriers and to use those as pilots for seeing where there are thematic problems that are holding up our delivery in the broader economy.

My noble friend Lord Lang referred to the defined benefit pensions issue. Rather than going through the details in my response, I will write to him separately on that. On the question of industrial strategy, I have sat in a number of meetings with my colleagues in BIS and they are absolutely focused on picking out where this country has competitive advantage and reinforcing that advantage in every way the Government can.

There has been a lot of debate on the subject of infrastructure. I want to focus on the fact that our investment in infrastructure is not about pump-priming the short-term economy. It is about modernising and improving our economy so that, over the longer term, its productive capacity is significantly enhanced. If, in the short and medium terms, that has the extremely attractive by-product of generating a significant number of jobs and short-term growth, then that is a dream package. However, that is the way around we should refer to it. There was quite a lot of discussion about roads: the ones that we have announced and have not built yet. There are a very large number of roads that we are currently building that were announced the time before: those are the lag periods. I am very interested in looking at schemes which allow us to take a longer-term perspective on creating the right investment package to support them.

The noble Lord, Lord Mitchell, was rightly concerned about broadband rollout. I have been focused on that as part of our rural broadband rollout and the urban strategy. Last month, the Chancellor announced a further £50 million to help 12 more cities deliver their ambitions for superfast broadband and I am working closely with my colleagues in DCMS and Broadband Delivery UK as well as the Economic Affairs Committee to drive delivery of that important rollout.

I see the value of smaller infrastructure projects, particularly those in local areas. This is highly consistent with implementing the reforms contained in the report by my noble friend Lord Heseltine, No Stone Unturned. For example, we have already launched 27 schemes with local authorities to help deliver that.

[Lord Davies of Stamford]

Before the Minister sits down, may I thank him for his answer to me that the interest rate paid by the Bank of England on bank deposits is 50 basis points, not the 75 basis points that I thought? Does he agree that any interest rate paid by the Bank of England to banks in those circumstances is undesirable, because it runs counter to the whole object of the exercise, which was to maximise the incentive on the banks to lend as much as possible?

[Lord Deighton]

I thank the noble Lord for the follow-up question. The scheme which we have employed to encourage banks to lend—the Funding for Lending scheme—is a very effective mechanism to improve lending to businesses and households.

[Lord Davies of Stamford]

That is not an answer.

Motion agreed.

European Banking Union: EUC Report

Lord Davies of Stamford Excerpts

Thursday 24th January 2013 Lords Chamber

[Lord Davies of Stamford]

My Lords, it has happened more times than I can recall since I have been in this House, nearly two and a half years, that I have had the pleasure of following the noble Lord, Lord Hamilton, or he has had the task of following me. Although I rarely agree with him about very much, it is a great pleasure to debate with him. However, I did agree with two things that he said this afternoon. First, I share his view that the ECB, in practice, is likely to have a dominating and increasing intellectual influence on the EBA. Secondly, I very much agree with his characterisation of the way the European Union makes progress as two steps forward, one step back. Although he probably would not agree, I think that is a very sensible, sound and prudent way of advancing in difficult territory, and I am very content that that has been and continues to be the process. Had he put the order the other way around, I would have very much disagreed with him, but his judgment and mine are very much the same in that way.

I want to add my own word of tribute to the noble Lord, Lord Harrison, and to everyone on the committee for having brought forward a very interesting and timely report. I want to address just two of the issues on which the committee focused in drawing up that report, and then to say a few words about the position of the British Government. First, I recognise that the testimony that the committee received was rather conflicting. A very important and fundamental issue is whether it is right to have the monetary authority—in this case, the European Central Bank—as the supervisory authority for the banking system. It seems to me that it is right. There is often said to be a conflict of interest between financial stability and monetary policy. I see it not so much as a conflict of interest but of objectives. It is not the sort of conflict that can be eased or solved by separation of responsibilities. On the contrary, it is the sort of conflict that can be made a great deal worse by the excessive separation of responsibilities, because if there is a problem and in difficult times the supervisory authority feels it necessary in the interests of financial stability to provide more liquidity to the market, for example, or to support a particular bank by replacing deposits that may be fleeing elsewhere, or otherwise, that decision would immediately have monetary consequences and could be implemented anyway only by the central bank.

The central bank needs to be brought in—inevitably, it must be brought in—and the earlier the better. What is more, the central bank is in a very good position because of its open market operations, because it can see to what extent banks are varying their levels of deposit with itself, and because it knows about any drawings through the back door by banks in its area of responsibility. It is in a very good position to see whether liquidity problems are emerging for institutions in their area. Therefore it seems to me extremely important that the supervisory authority and the central bank should work together anyway. The idea of having two different directorates within one institution—the ECB—responsible for stability and for monetary policy seems to me a very good solution. I personally have the greatest confidence that, if there is a difficult decision to be made—as there will be, inevitably—it should be Mario Draghi, a person in whom I have the greatest confidence, who has the responsibility of making that decision.

The other issue that I want to address, which was dealt with in the committee’s report at some length, is whether it is desirable or acceptable for the banking industry come in in stages. Only the first stage so far has been agreed. Of course, it cannot be certain that there can be any agreement with the second or third stages, the first stage being the supervision regime and the second and third stages being retail deposit insurance and resolution procedure and mechanism. Clearly, it is not ideal; it is not the way one would wish these things to be, but I think it is a reasonably acceptable situation on a temporary basis, and a good deal better than nothing. I am glad that we have the process going.

I have to say that I think the Germans are not being rational. Maybe the Germans, and the Dutch, are resisting a European Union-wide resolution and retail deposit insurance system simply because if there were a problem and a run on the banks in one member state because in that particular context depositors no longer had confidence in the credibility of the retail deposit insurance system, and if that confidence depended entirely on the credibility of the national Government, unsupported elsewhere in the EU, there would inevitably be a systemic crisis. Similarly, if it was necessary for a particular member state to recapitalise the banks, and that task was out of proportion to the financial resources of that particular member state, that would engender immediately a sovereign debt crisis for that country.

What is more, such a crisis would never be limited to one member state. There would be knock-on and systemic effects for the whole of the European Union. If Greece went down, we know that there would be effects elsewhere, or if Portugal went down again there would no doubt be strong effects in Spain. The consequences of that would be that German and Dutch banks—to take the examples of the two countries that are resisting the logic of the banking union, which I think they are—would find that they are making great write-offs of their assets that were exposed to these particular markets and deposits with those banks, and so on. They could be supported only by their own banks, which would have to be recapitalised by their own national Governments.

The cost of such a bailout would be enormous and vastly greater than any credible drawing in respect of one, two or three particular institutions on a retail deposit insurance scheme. I think that the Germans are being quite illogical about this. They are not looking at the matter in the long term or in the round. No doubt intellectually they might agree with me, but they find themselves under political constraints. I hope that with the various events that are in the pipeline in the coming months they will find that it is politically possible to do what I think is the rational thing to do.

I now want to say something about the position of the British Government in all this, which seems to be perfectly ludicrous, if I may say so. I understand that they see the banking union as a good thing for others but not for us. That immediately is a slightly suspect argument, and one wonders why it is the case. I looked at the committee report to see what the British Government’s analysis of the national interest was, and why it was not in our interests to join the banking union if it made sense for other people. There is no such explanation in the whole document. I shall read what passes for an explanation to the House. Paragraph 129 states:

“The Government have repeatedly stated that the UK will not participate in the banking union proposals, on the grounds that the measures logically flow from monetary union and are designed to secure the success of the single currency”.

That is a quite unconvincing argument. If someone buys a car, a pharmaceutical product or a piece or electronic gadgetry, he is not worried about who the product was originally designed for; he is worried about whether it is suitable for him, and whether it will work for him. That is the argument that needs to be addressed, but it has not been addressed by the Government at all.

[Lord Marlesford]

Surely what the noble Lord has just been saying is precisely the reason why the British Government do not want to join the banking union. They are saying that there must be mutualisation through the European Central Bank and the banking union of the debt of banks in the euro area. Is he really suggesting that it would be sensible for the British Government to share in that liability, and that if, as he described graphically, there were to be a run on one of the banks in Greece, we, too, should have our share in picking up the pieces?

[Lord Davies of Stamford]

Indeed, I am suggesting exactly that to the noble Lord and to the House. It would be very much in our interests to do so, for the reason that I thought I had explained. Perhaps the noble Lord did not follow my argument, which was that if there were a run on the banks in a member state, left to itself it could engender a systemic crisis that would be far more costly to us, because British banks would write off a very large portion of their assets as a result of collapses elsewhere. In order to restore those banks to financial viability, we would need to recapitalise and support them in ways that would be much more expensive than the likely cost of any contribution to the system. I do not want to detain the House for too long, but I believe that we should have interventions such as this, so I will give way to the noble Lord.

[Lord Marlesford]

In that case, why did the American banks not recapitalise the British banks that went bust?

[Lord Davies of Stamford]

It is obviously necessary, if we are going to get involved in any kind of obligation of this kind, to make sure that we come under the same supervisory authority and that everybody works according to the same rules. That is palpably not the case with us and the United States.

The position of the British Government is clearly that they are not interested in making a dispassionate and functional analysis of the national interest in this area. If they were interested in doing so, it would have been quoted in the report and we would all know about it. They have simply decided that on party political grounds, because of the need to conciliate the Eurosceptics in the Tory party—we know that this is the way the country’s foreign policy is now being run; it is being bear-led by the Eurosceptics—it is impossible to do the rational and sensible thing, so they have simply excluded a priori any possibility of our joining the banking union, even as a participant that is not a member of the euro. A large number of countries will join on that basis—almost certainly a good deal more than the four that have already announced they will. I expect that every east European country other than the Czech Republic to come into that category. As the noble Lord, Lord Kerr, very convincingly argued, that would cause great problems for us. It is absurd for the British Government to say that one of the major difficulties here is the voting system, because the problem would be resolved if we were part of the system, and at least one of a minority of nine or 10.

If we do not join the banking union, there are only three logical possibilities. I do not think that any Member of the House will want to argue with my logic, which is very basic and elementary. The first is that we have a supervisory system that in practice simply tracks that of the ECB; we will do exactly what the ECB does in its area of responsibility, for example in matters of licensing, authorisation, intervention and guidance to banks. That would mean that we were de facto part of the system, with the important difference that we would not be part of the decision-making mechanism and would not have the kind of influence within the system that otherwise we would have had.

The second possibility is that we adopt a supervisory system that is somehow stricter and more severe than that adopted on the continent by, for example, the Republic of Ireland under the ECB. That would mean that banks here would find that they were at a competitive disadvantage doing their business out of London as opposed to doing it out of Paris, Frankfurt or somewhere else. That would not be a very intelligent thing to do.

The third possibility is that we adopt a regime of supervision that is lighter and more complacent than that adopted by the ECB. In the short term, that might attract institutions that do not like the stricter regime on the continent, but in a crisis we would be much more exposed because we would have a lesser degree of credibility. It would be considered that our institutions and banks were less safe and sound than those across the Channel, or indeed across the Irish Sea. That, too, would be a bad day’s work for the country. We would face a situation in which either we would have no advantage at all, but the disadvantage of not having the influence that we ought to have and that is commensurate with the importance of the City, or we would be otherwise disadvantaged either in competitive terms or in our ability to withstand crises. That would be a profoundly bad day’s work for the country—and it is exactly the day’s work that this Government have done. I deprecate it very strongly indeed.

--- Later in debate ---

[Lord Newby]

Yes, of course. It will not be a comprehensive letter in the sense that not all the countries have expressed a position, as I said, but one or two have and we can collate those relatively easily.

The noble Lord referred, as I did in my introductory remarks, to the importance of the MoU between the Bank and the ECB. We agree with him that it is crucial in setting the tone for the supervisory relationship. The Bank and the FSA are already working with their ECB counterparts and both sides, as it were, are keen to ensure that we have a robust approach to supervision of cross-border banks and cross-border financial services activities.

The noble Lord, Lord Hamilton, was the gloomiest voice in the debate. I would like to comment on two of the points that he raised. The first was about accountability and the extent to which there is a democratic deficit. The ECB is accountable to the European Parliament and the European Council. National parliaments of participating member states will be able to hold it to account through questions. I think that for the foreseeable future national parliaments will play a larger role in terms of the profile of the accountability than does the European Parliament, given its low profile. This debate here is an example of the kind of thing that one hopes would be happening across the EU.

The noble Lord, Lord Davies of Stamford, raised a number of issues and came up with three logical outcomes in terms of our supervision compared with that of the ECB: either we do what it says or it will be more or less strict—I paraphrase the noble Lord. That is slightly misleading, given that we are working towards a common rulebook. So the supervisory approach will be broadly common. For example, the recovery directive is one way in which there will be a broadly similar approach across the EU, with or without the banking union.

[Lord Davies of Stamford]

I am very grateful for the Minister’s comments. Of course, the rules themselves—such as those relating to liquidity ratio, capital ratios, capital adequacy and so forth—will be set up by the EBA, and there will be a common rulebook. However, supervision is about how strictly the banks’ activities are looked at, and that affects authorisation, licensing and review of the asset quality of the banks concerned. In these areas potentially there will be very considerable scope for a difference of approach by different supervisors. That is exactly what I meant by more and less strict approaches.

[Lord Newby]

To the extent that there will be, in effect, two major supervisors—ourselves and the ECB—I think that the MoU will help in that respect.

The noble Lords, Lord Dykes, Lord Flight and Lord Liddle, all talked about the role of London and what the impact of this will be. Undoubtedly for many companies, particularly financial services companies, the City is their entry point to Europe and to capital markets more generally. Regardless of whether they are successful in actually trading in Europe to the extent that they want, that is undoubtedly the way it is seen. It is very important that we work extremely hard, as we go forward, to make sure that the single market is embedded and strengthened and that we protect the City at the same time. I would love to have a long debate with the noble Lord, Lord Desai, about the future of the eurozone economy, but I fear today is not for that.

The noble Lord, Lord Liddle, asked whether we had looked at being a member of the banking union. The truth is that once we had decided that we were not going to join the euro, that was off the table. All parties have agreed in recent years that joining the euro is not for the UK at this time; sadly, that is where we find ourselves. I agree with the noble Lord that there is a real problem about social and political consent for the austerity packages across the EU. Nevertheless, in some countries—Ireland is probably the best example—there is a real sense of a corner having been turned and major new foreign investment in that country, which suggests that foreign investors also think so.

The Government support comprehensive banking union in the eurozone, and we will do what we can to promote its development while safeguarding the UK’s role as a regional and global banking centre. We look forward to being informed and influenced by the noble Lord, Lord Harrison, and his committee.

Financial Services Bill

Lord Davies of Stamford Excerpts

Wednesday 28th November 2012 Lords Chamber

[Baroness Howe of Idlicote]

My Lords, I thank the noble Lord, Lord Sassoon, for what he has said; it sounds like an interesting and potentially successful solution, but I am still quite confused as to whether we will get to the right conclusion on time. I thank the noble Lord, Lord Mitchell, and congratulate him on tabling his amendment, to which several of us have added our name. I am glad to have been able to hear the comments of the right reverend Prelate the Bishop of Durham, because he gained great expertise in financial matters in his career before he joined the Church.

There has been plenty of support for the amendment of the noble Lord, Lord Mitchell, from other areas around the country, from councillors and from MPs. For my own part, having sat through the Welfare Reform Bill, with its drastic consequences for the poor and disabled, and subsequently witnessed for the same group the extent to which voluntary legal aid and advice services were being curtailed so that they were not getting the help that they had had in the past, my first reaction to the amendment was that it was far too weak. However, I have listened to what people have said and accept that consumers without bank accounts or with no credit history—that is some 25% of credit users and 23% of payday loan users, I was amazed to find—have no choice when facing a financial crisis but to resort to these loans. Nor should we forget, as has been pointed out by the noble Lord, Lord Mitchell, and by Which? reports, that some 78% of payday loans are used for basic essentials such as food or household bills. So if these organisations—I am tempted to call them by less pleasant names—are to stay, undoubtedly the amendment of the noble Lord, Lord Mitchell, will be a huge help. It may be that it will be a reserve weapon, as it were, but it will nevertheless be a very important weapon. I hope that I can feel confident at the end of our discussions. I want reassurance from the noble Lord, Lord Mitchell, that he is sufficiently satisfied with what he has heard, that otherwise he will bring back further amendments at a later stage, and that that will be acceptable to the whole House.

[Lord Davies of Stamford]

My Lords, it is a pleasure to speak after the noble Baroness, Lady Howe. Like her, I felt that the amendment of the noble Lord, Lord Mitchell, was the very least that we should be doing in this area and I would have been happy with something even stronger. I congratulate her, my noble friend Lord Mitchell and the right reverend Prelate on their initiative in bringing this matter before the House and, indeed, before the country.

I am going to say something which I think needs to be said this afternoon and is probably best said from the Back Benches—that is, I think the Government should be hanging their head in shame. They have had many months to prepare the Bill and bring it forward and have not brought forward the clause that they are now promising, although they had every opportunity to do so. It is only because of the determination and initiative of my noble friend and his colleagues and the great moral force brought to this matter by the right reverend Prelate that, at the last minute, the Government have decided that they have no alternative but to do the right thing for once. That needed to be said; this has been a very dramatic afternoon when we have seen a U-turn.

This evil we have been talking about—and it is an evil—has, of course, got worse, for the reasons given by my noble friend, over the past two years, but it has been with us for a long time. It is an evil that I was well aware of when I was a Member of the House of Commons; most people with constituency experience came across it. The normal trick of loan sharks is to persuade people to borrow so much money at such a high rate of interest that they can never get around to repaying the principal because any cash they happen to have simply goes to servicing the debt by paying the interest. Essentially, they lend someone £500 and have their thugs go around every week, or every two weeks, collecting at their door whatever the poor family concerned can pay—£20 here, £30 there—which all goes towards the interest. The interest piles up and the principal is never going to be repaid but the lender makes a return on his capital of hundreds, maybe thousands of per cent every year.

I remember coming across a particularly nasty scam in my constituency, which I fear may still be going on. It is the targeting of people who have some equity in their house but very low cash flow in relation to their debts and persuading them to consolidate their unsecured debt into a secured loan, something one should never do, in principle, except in very exceptional circumstances. These people are, generally, financially very naive and agree to do it; they take out a secured loan of whatever amount, but they can never afford to service it at an APR of, perhaps, 20%. The lender knows perfectly well that they will default, that they do not have the cash flow to service the loan, but he has security of several thousand pounds of equity in the house and he puts into the loan agreement enormously expensive penal clauses, so that, in the event of default, thousands of pounds will be paid by way of compensation or penalty interest. He knows, of course, that the borrower is going to default; he hopes that the borrower will default at the first interest payment date, not the second or the third, because that way he turns his capital over more quickly. As soon as the borrower defaults the lender forecloses on the loan and takes all his additional thousands of pounds in penalty interest, a very large slice of the remaining equity in the house. It is extraordinarily cynical, extraordinarily cruel, and this kind of scam and others like it thrive in what we like to think of as our civilised and humane society.

We need to do something about this very rapidly indeed. What has been put forward this afternoon is an absolute minimum; I would have been much happier with something along the lines of the anti-usury laws. I am so glad that the right reverend Prelate is a churchman and not afraid to use old-fashioned but eternal concepts such as usury. I would have been happy with the sort of anti-usury laws that some American states have. We are not going to go that far this afternoon. I hope that the government amendment lives up to the promises that have been made this afternoon by the Minister.