Financial Services Bill

Lord Davies of Stamford Excerpts

Tuesday 20th November 2012 Lords Chamber

[Lord Davies of Stamford]

My Lords, I was struck by my noble friend’s amendment. In reading it, I wondered whether this was already a provision which applied, quite outside the passporting context in which she moved it, to deposits in this country. I cannot see any reference to a rule of this kind elsewhere in the Bill. It may be that it is already part of statute law or part of the rule book of the FSA—and the FCA to come—but, looking back on my own experience, I do not normally have deposits which are greater than the threshold, which I believe is £85,000. On any such occasions when I have, I do not recall a bank telling me that part of my deposit was not subject to the national retail insurance scheme or to consumer protection. That seems to be a great weakness in the system and I would be grateful if the Minister could tell me what the rules are relating to the taking of deposits. Is this or is this not an obligation of a bank taking a deposit now which is in excess of that ceiling? I may be wrong in saying it is about £85,000, as it may have increased since I last heard a figure. If not, such an amendment should be made and this Bill presents us with an opportunity to do so.

I think we all agree that a balance needs to be struck here. No one is suggesting that the state should guarantee all banking deposits. That would be a massive moral hazard and would mean that depositors no longer had to interest themselves in the quality of the banks with whom they are investing. Equally, I think we all agree that it is unreasonable for small depositors to make a credit assessment of the banks with which they are depositing small amounts of money. It is not just a question of looking at the solvency ratios or capital adequacy ratios. You need to look beyond that if you want to assess the credit-worthiness of the bank. You look at the quality of the assets of the bank and the quality of its deposits. These are areas where it is not only difficult for an individual to come to a judgment but where we know that there has been fantastic regulatory failure throughout the world, particularly in this country.

The FSA’s behaviour in this matter was negligent to an extraordinary degree. It never seemed to interest itself in the declining quality of the assets of many British banks, which were buying more and more CDOs, for example. It never seemed to interest itself in the deteriorating quality on the liabilities side of the Northern Rock balance sheet and the fact that Northern Rock was becoming excessively dependent on wholesale deposits. If the regulators fail so badly, it is all the more important that the protection available for small or medium depositors is great.

It is very important that people should know because, as I have explained, even though I try to take an intelligent general interest in these matters I do not know exactly where the threshold currently lies. In my experience, I have certainly not had a notification from a bank that I may be placing deposits with it that are not in any way subject to such a guarantee. That is an enormously important aspect of the risk involved in such a transaction and, clearly, it ought to be brought to the attention of retail depositors. Is this currently part of statute law? Is it currently part of the rule book and, if not, is this amendment an opportunity to make it so or should we take another opportunity in this Bill to bring forward an amendment of that general kind?

[Lord Newby]

My Lords, I think everyone is agreed that the regulators should require banks to make their customers aware when their deposits are not covered by the Financial Services Compensation Scheme.

[Lord Davies of Stamford]

Did I hear the noble Lord say that it is a requirement from regulators that banks should notify their depositors when they are covered? If so, that is quite wrong. They should be notified when they are not covered. That is the important thing. It is no use notifying them when they are covered and saying nothing at all when they are not covered, for that is when the risks arise.

[Lord Newby]

My Lords, as I was saying, the regulators make considerable existing requirements in this area and I will explain what they are. Firms from the EEA that passport into the UK are covered by their home-state compensation scheme rather than by the Financial Services Compensation Scheme. It is obviously right that consumers are made aware of it but, as we have said before, this already happens. The FSA already has rules requiring this in the COMP 16 section of its handbook. Explicitly, EEA firms passporting into the UK are required to inform their customers that they are covered by their home state scheme. This is already included on customers’ bank statements and notices are prominently displayed in their branches.

This is what the text says:

“Your eligible deposits with [insert name of firm] are protected up to a total of 100,000 euro by [insert name of compensation scheme]”—

depending on which country is involved—

“… and are not protected by the UK Financial Services Compensation Scheme”.

Any deposits you hold,

“above the 100,000 euro limit are not covered”.

This wording is already being displayed and circulated to potential customers of these branches. In tandem, the FSCS has launched a programme to raise awareness of the scheme in general and to inform consumers how they can check whether they are covered by the scheme, so it is clear to us that this amendment is simply unnecessary. The FSA and FSCS are taking action in this area already and we strongly believe that that will continue once the new regulatory system is in place. It is right that the regulators and the FSCS have the flexibility to address this issue in the way that they see as most appropriate. On this basis, I trust that the noble Baroness will feel able to withdraw her amendment.

[Lord Davies of Stamford]

The noble Lord has read out the text of the communication which banks in this country must make to depositors who are resident in other EEA countries when they deposit more than the threshold amount of €100,000. Can he read out the text of the communication that banks in this country are obliged to make to depositors resident in this country when they deposit with them amounts over the threshold of £85,000 or whatever it is?

[Lord Newby]

I will check what I said, but it may have covered what the noble Lord is looking for. If it does not, I shall write to him with the relevant wording.

Financial Services Bill

Lord Davies of Stamford Excerpts

Monday 8th October 2012 Lords Chamber

[Lord Davies of Stamford]

My Lords, my noble friend and namesake has put forward a most valuable amendment, and I support it.

I have a long-standing interest in the subject—no longer a financial interest but in the past I have served on the boards of both financial and non-financial companies and institutions. Until I joined the Government I was chairman of the remuneration committee of the largest building and concessions group in the world, Vinci, which had then more than 150,000 employees and €30 billion in turnover. I was therefore in a fairly prominent position with regard to remuneration decisions.

I have no financial interests at all now in industry or business but I still have a great continuing intellectual interest in this subject and a very pressing policy interest, for exactly the reason that my noble friend has set out. The excesses of remuneration that we have seen over the past few years, both in this country and elsewhere in the EU and the US, have contributed greatly to the malaise we currently face, and of course a great many of the worst abuses—although not all—have arisen in the financial services sector.

That situation is not good for the future effective performance of a capitalist market economy, and it is certainly not conducive to a happy society. This is an important and pressing problem. My noble friend has obviously given this matter a great deal of thought, and has come up with two excellent suggestions to deal with it, although he himself said that no one solution—let alone a purely legislative solution—will solve the whole problem.

I deal in turn with the two proposals he has put forward, first in relation to employee representatives on the remuneration committee. Vinci, a multinational, is a French company, and we therefore had the benefit of two employee representatives on the main board. I have become a considerable supporter of that system. I made a proposal in the formal consultation that the Government launched a few months ago on corporate governance. Nothing much seems to have happened to it, unfortunately. I wrote to the Minister and spoke in this House, suggesting that we should incorporate the same provision in this country’s company law in future. When I was chairman of the Vinci remuneration committee, I explored the possibility of putting one of those two employee representatives on our board, on our remuneration committee. I discovered, however, and I think my noble friend may find this helpful, that the individual concerned had a certain personal reluctance to do that. I think he felt that he would spend all his time with his workmates defending any level of executive remuneration, which was bound to be much greater than that of his workmates, and that his life, job and role would be rather blighted as a result. So the right solution may be to introduce an element of compulsion. It is not a magical solution, but it can only be helpful.

My noble friend’s second proposal is even more important. He raises the issue of remuneration consultants. I do not think there has been anything like enough attention paid to the role of remuneration consultants. I have not seen any articles in the financial press or otherwise about the role of remuneration consultants. As far as I know, the matter has never been raised in this House and it is time that it was. Every major public company will have remuneration consultants reporting to the remuneration committee, and we had that in Vinci. However their influence was quite nefarious in many cases. The reason for appointing them was often simply to protect the remuneration committees or the boards from criticism. People often hire executive search consultants for similar reasons. It is not merely for the value that they add, although they do add a lot of value in certain cases. It also protects the boards against any accusation of cronyism or nepotism. In the same way, companies automatically take on remuneration consultants, which is a valuable business for them.

The only remuneration consultants I have ever come across are subsidiaries, either of executive recruitment firms or of accountancy partnerships or firms. They have almost a universal franchise now. Everybody feels they have to hire them. In practice the way they work is very dubious. They carry out for their clients a survey of the executive remuneration in comparable companies of a comparable size in a comparable sector, and then present it to the remuneration committee with a proposal for a level of increase for the senior executives for which the remuneration committee has a responsibility.

Let us say that the average increase is 10%, just to have easy figures to deal with, and they say, “We think 10% is appropriate”. However, remuneration consultants like to flatter their clients, in which case they add one or two points on top of that. The board, particularly the remuneration committee, may feel proud of their firm, and feel attached to their chief executive. They will want to encourage him and not humiliate him. So they will probably say, “Okay, we’ll give him 13%”. That will be good in relation to competition. They will be saying to the public that they think they have the best chief executive, the best finance director, and the best senior executives. That is fine. The decision is taken. Everybody feels protected and covered by the fact that they have had professional advice from professional remuneration consultants. The next week, the remuneration consultants go on to their next client, and they say “The latest figure is actually 13%, so you may want to start with that figure as your basis”.

I would not be talking about recruitment consultants in the House of Lords without having a lot of experience of the subject or having thought carefully about it. These remuneration consultants do amount to a kind of engine of inflation of remuneration of senior executives. The sooner we face up to that the better.

If we face up to it, what do we do about it? My noble friend has come up with the solution that the remuneration consultant should be responsible to the shareholders, rather than the board. Again, it very much depends on how that is interpreted, how it works in particular cases. There is no solution and no magic wand and I know my noble friend would be the first to say that. However, if we want to change the culture—I think we need to do so—this is a good and sensible way forward.

There has been no collusion at all between myself and my noble friend on this matter. I had no idea he was going to put down this amendment until I saw the Marshalled List today. However, I do think it has been particularly well-conceived and is particularly pertinent, whether or not it is accepted immediately by the noble Lord, Lord Sassoon. The noble Lord, Lord Sassoon, never seems to accept proposals put forward on any Bill that I have seen him taking through, although he is a very competent Minister, but he seems to be very embattled whenever anybody makes a suggestion for improvement. Whether the Government are prepared to accept that today or not, I do hope that my noble friend’s initiative will start a debate on this subject and cause a lot of thought to be put into this subject, and action to be taken on this matter, which seems to be very necessary.

[Baroness Noakes]

My Lords, I do not like to disappoint the noble Lord, Lord Davies, but this is not the first time that recruitment consultants have been debated in your Lordships’ House. I recall more than one occasion when we had a discussion of the role of recruitment consultants in the levels of pay within the financial sector and more generally, but before the noble Lord joined your Lordships’ House. It is a subject which has previously arisen and I am sure that if the noble Lord searches Hansard he will find earlier debates.

[Lord Davies of Stamford]

My Lords, I daresay I stand corrected. I am delighted to hear that I was wrong in that respect.

[Baroness Noakes]

More broadly, I think everybody accepts that executive pay has some problems attached to it. I do not wish to dismiss the amendments of the noble Lord, Lord Davies of Oldham, out of hand, although it will not surprise him to find that I do not support his amendments. I do not support them because they come close to interfering in the corporate governance model, which broadly serves the UK extremely well. The corporate governance model has boards which are responsible for making decisions, and these boards have committees of boards, including remuneration committees, which are responsible to those boards. To insert somebody who is not a board member outwith the context of having employee representatives on the board starts to change that dynamic. Similarly, if you have remuneration consultants who should be reporting independently to the remuneration committee being appointed by the shareholders, it is difficult to see what the relationship then is to the board and the board’s committees. There are a lot of problems in the solutions that have come up.

Remuneration is under huge scrutiny. There have been proposals from BIS in the last few years, and the regulatory ratchet has been increased with greater intensity. The involvement of the FSA, for example, in banking and other financial institution regulations, is not minor, and equally with regulators in other parts of the world. So we may have a problem which almost certainly will not be addressed by the amendments before us and which already has a lot of moving parts.

[Lord Davies of Stamford]

I am most grateful to the noble Baroness for giving way a second time. I wanted to rise to agree with her. She is absolutely right. You should never put on a remuneration committee someone who is not a member of the board. The remuneration committee must be a sub-committee of the board, and it was in the context of employee representatives being fully members of the board in every possible sense, that I put forward my suggestion.

[Baroness Noakes]

I am pleased to see that we are in agreement. Finally, I was concerned whether or not the noble Lord, Lord Davies of Oldham, thought that his amendment meant that all listed companies would be dealt with by the PRA and the FCA, because I do not think they have powers to deal with other than those bodies that are within the regulatory net, so it would only cover a relatively small proportion of his target.

Financial Services Bill

Lord Davies of Stamford Excerpts

Wednesday 18th July 2012 Lords Chamber

[Baroness Kramer]

I think that this is an issue that I will hand off to the Minister.

[Lord Davies of Stamford]

My Lords, I want to intervene briefly on two amendments. One is that moved by my noble friend, Amendment 104ZB. I congratulate her on it and draw particular attention to paragraph (c), which is enormously important. Paragraphs (a) and (b) stand by themselves and no one will want to argue with them, but I particularly congratulate my noble friend on paragraph (c), which deals with the need to ensure that all those involved in managing money or advising retail investors should keep abreast with changes in financial markets, which, as we all know, have been great in the past 10 or 20 years, and in financial products.

The range of financial products available is enormously confusing. Inevitably, it totally confused retail investors. It is enormously important that IFAs are kept abreast of developments so that they can give good advice to their clients. Among the complex and dangerous instruments that have emerged have been all sorts of derivatives used both for hedging purposes—thereby reducing risk if they are used intelligently and properly—and speculatively and extremely dangerously. That can be an acceptable product for a very sophisticated investor to use as a way to leverage his or her risk if he or she is determined to do that.

Just as it is so important to ensure that doctors are kept abreast of changes in medical science, which in a career of, say, 40 years, can revolutionise the subject, it is enormously important that that should happen in financial services. An “annual validation of competence” would be an excellent discipline that will itself create a market. Professional organisations, business schools and others will arrange regular courses for people in the financial services industry who are affected by the clause and need to keep up to speed. I hope that those courses will involve some test or examination at the end, so that it will be possible to use that as validation. That will greatly reassure the public. I congratulate my noble friend on proposing this extremely intelligent contribution to the Bill.

I also congratulate the noble Baroness, Lady Kramer, first, on being selected for the very important committee. Even those of us who thought—and still think—that a judicial inquiry is the right approach give our very best wishes to those who have taken on the important task of carrying out the parliamentary inquiry. The credibility of Parliament is at stake here, as is that of our financial services industry, so it is enormously important that people of the highest intellectual calibre and integrity have been selected. I know that the noble Baroness falls under both those categories, as does my noble friend Lord McFall, who is sitting behind me, and I also delighted that he has been nominated for the committee. That is very reassuring to us all.

--- Later in debate ---

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I hope that the Committee will agree that it is probably better, given the number of members of the committee here, if I stick to matters relevant to this group of amendments rather than wandering off into the long grass from where I might never come back. All three amendments in this group relate to concerns that have arisen in connection with the recent LIBOR scandal, and in that context I am sure that the Committee would like to thank not only my noble friend Lady Kramer and the noble Lord, Lord McFall of Alcluith, but my noble friend Lord Lawson of Blaby, the noble Lord, Lord Turnbull, and the right reverend Prelate the Bishop of Durham for kindly agreeing to join the parliamentary committee on banking standards, which goes to the heart of the concerns raised in the amendments.

I turn to the issue of professional standards. Amendment 104ZB seeks to place requirements on the FCA to impose a training regime. The object of the regime is to specify minimum standards of competence and integrity, and it will include continuous professional development and a code of conduct. Amendment 110ZB seeks to extend the non-exhaustive definition of the integrity of the UK financial system by adding a reference to the professional standards of those working in financial services.

As a former chairman of the IFS School of Finance—what was previously called the Institute of Bankers—I believe as firmly as anyone that professional education has to be a cornerstone of standards in the banking industry. Personally, I wish that more banks would insist on more of their employees going through structured professional education, not just at the start of their careers but right through them. In answer to the point made by the noble Lord, Lord Davies of Stamford, there are indeed providers of these courses of great distinction, including the IFS School of Finance, and many bankers go through them. However, we would all like to see many more going through them and on a continuous basis.

Having said that, particularly in the light of the LIBOR scandal, we must ensure that our regulators have the right powers to set and enforce high standards of behaviour in the financial services industry. That is why we have invited Parliament to set up an inquiry into standards in that industry. While I share many of the concerns of the noble Baroness, Lady Hayter, that does not mean that I can support these amendments, which I consider unnecessary and to be coming forward at the wrong time. Neither amendment gives the FCA powers to impose standards of integrity and competence that it does not already have. The FCA’s integrity objective contains an indicative and non-exhaustive list of matters that are relevant to the UK financial system operating with integrity. The conduct of those working in financial services is already covered by the objective, even if it is not listed here. The list contains a number of matters relevant to the LIBOR example, including the soundness of the system and the orderly operation of markets. These can be ensured only if standards of professionalism are maintained by those in the industry.

[Lord Davies of Stamford]

The Minister agrees with me that it is highly desirable that there should be regular courses for people working in the financial markets, so that those advising the less sophisticated can be kept up to date. Yet I cannot understand why he resists the suggestion that that should be a statutory, mandatory requirement—that, as my noble friend’s amendment lays down, such people should be forced on an annual basis to have their qualifications validated. What is his reason for resisting that?

[Lord Sassoon]

If the noble Lord, Lord Davies, would permit me to complete the argument, I have explained that the FCA has an integrity objective, under which standards of professionalism need to be maintained by those in the industry. Within the overall integrity objective the FCA already has a mandate and powers to deal with these issues. It will specifically have powers to impose standards, including training and qualification, on individuals. Training, qualifications and minimum standards will be of considerable importance to the issue of re-establishing a proper banking culture. They are matters which will be relevant to the regulators’ consideration of applications by persons wishing to become approved to carry out significant influence functions, but it is a big step from that to the FCA mandating a training regime across all areas of financial services.

The forthcoming reviews, including that of the parliamentary Joint Committee, will show whether my analysis is right, or whether the committee believes that the FCA needs additional powers. To answer at least one of the challenges from the noble Lord, Lord Barnett, I refer back to the existence of the committee; this is going to be central to what it is looking at. I see one member of the committee nodding assent, but I think it is obvious.

--- Later in debate ---

[Lord Sassoon]

I am not suggesting for one moment that there should be a laissez-faire attitude. I am merely pointing out that a very different set of parameters has to be used by the FSA, and will have to be used by the FCA, when dealing with different parts of the financial services market. To those who argued earlier that we should not lose caveat emptor, I point out that in professional-to-professional markets, of course there has to be a high degree of integrity. Recently we saw exactly what appears to have been going on in what are fundamentally professional markets. However, that is very different from the duty of care owed in the case that we are talking about, which is of selling products to vulnerable, disabled consumers. Wholly different considerations apply from those that apply in professional markets. I point that out because the noble Lord, Lord McFall of Alcluith, got into this broader question, and as background to the question that we need to come on to, which is whether it is appropriate to include amendments to highlight important issues about disability, ability and vulnerability that address consumer product markets.

[Lord Davies of Stamford]

I hope that the Minister will think again about this before Report, because he has got it profoundly wrong. There is a duty of care for all clients. Of course, it has different consequences according to the nature of the client and according to their sophistication, capital resources and ability to absorb risk. When Goldman Sachs placed collateralised debt obligations—securitised packages of mortgage loans—with professional clients, they knew that the products were junk, and internal e-mails referred to them as such. They were breaching a duty of care; there is no doubt at all about that. The courts will be looking at this in connection with LIBOR and are very likely to decide that if it were the case that even professional clients were working on the basis of a falsified LIBOR rate, there was a breach of fiduciary responsibility and duty of care. Duty of care is an enormously important term of art. The Minister, this afternoon, is trying to weaken and dilute it. That is an extremely dangerous line to go down.

Financial Services Bill

Lord Davies of Stamford Excerpts

Tuesday 10th July 2012 Lords Chamber

[Lord Davies of Stamford]

My Lords, I have considered carefully over the last 24 hours whether I should say what I am now about to say to the House, but I have decided that it is right to. My noble friend’s amendment, which I support in principle, says in proposed new Section 9WA(2)(a):

“The membership of the Panel will be … the Deputy Governor for Financial Stability”.

In light of his answers yesterday to the Treasury Select Committee, it is completely wrong that the present deputy governor for financial stability should be given these responsibilities on this financial advisory panel, or any other responsibilities for financial stability. In the course of the performance yesterday, during which I assume that his answers were entirely honest and frank, he effectively made a plea of guilty to incompetence and complacency at a quite heroic level. He admitted having chaired a meeting at which several people said that there had been discrepancies between the LIBOR rate and the rate at which banks had been paying for deposits on the interbank market. In his defence yesterday, he said he thought that some of those discrepancies might have been due to transactions intermediated through brokers, but he did not ask what the position was. He did not pursue it. He did not make an attempt to discover what the real facts were. That was astonishingly negligent, to put it mildly.

The other incident, the conversation that he had with Mr Diamond of Barclays, which has been so much in the public mind in the last week or so, also casts a strange light on his actions in carrying out his responsibilities in the Bank of England. He said that he was under great pressure at the time and that there was a great financial crisis, so much so that he was not able to make a note of even very important telephone conversations. I assume that the conversation was not a casual one, but that it was deliberate and designed to achieve a particular purpose. The only purpose that it could have achieved, and the only effect that it could have had, would have been to have persuaded or encouraged Barclays to understate the cost that it was paying for deposits on the interbank market. Clearly, Barclays could not do anything about the actual cost that it was paying. It would have been taking on deposits at as low an interest rate as possible. There have been some strange things going on. I have little confidence in the personality of the present deputy governor of the Bank responsible for financial stability.

There is a defence of his actions which noble Lords might have seen in yesterday’s Financial Times. It was the first letter in the paper, with the heading going something like “Tucker and Barclays saved the British financial system”. The argument was that it was correct in difficult circumstances, when banks were being squeezed on the interbank market or the interbank market was drying up, to give a false impression of what was going on by recording and publishing false LIBOR statistics. I do not accept that defence. First, it is not a defence that either Mr Diamond or Mr Tucker is making. Secondly, even if it were their defence it would be wrong. It is important that no financial stability organisation or anyone concerned with financial stability should be tempted to believe that by falsifying statistics in a difficult situation that is contributing to a solution. That risks undermining not merely the credibility of the index that you are falsifying, but every announcement and index. If the Bank of England was prepared to collude with a clearing bank to falsify the LIBOR statistics, the markets would immediately assume that collusion might take place if it was convenient in other circumstances, and that perhaps regulators and banks would collude to understate their provisions. As soon as that rumour or suggestion got about, there really would be a crisis.

That is a road down which no one should go. I do not accept that defence of Mr Tucker’s actions. It is not of course the defence that he has been making. He has no defence because he has confessed to an extraordinary act of negligence. Had he not undertaken it, had he not let that meeting go past—and yesterday there were suggestions that at the time he had other evidence that the LIBOR market was not as straight and transparent as it ought to have been—the crisis that we have experienced recently would not have occurred. I am sorry to have to make these harsh comments about a man whom I have not met and whom I had not heard until I listened to his evidence yesterday. However, in present circumstances, it seemed to me important that if one felt sufficiently strongly about such a matter one should raise it in the House.

[Lord Myners]

My Lords, I take note of my noble friend’s comments, but I feel compelled to say a few words in response. Without drawing the ire of the Minister, I can link it back to the subject of the amendment.

I worked with Mr Tucker, the deputy governor, during the banking crisis. We should wait for the outcome of the Treasury Select Committee’s report and the Joint Committee report. It is wrong to say that if the manipulation of the LIBOR-setting process had not occurred we would not have had the global financial crisis. It was undoubtedly bad and reprehensible, in the words of Mr Diamond, but it did not itself cause the crisis. Listening to Mr Tucker yesterday and reflecting back on the extraordinary circumstances of October 2007, I sympathised with him. The banking system was on the verge of complete collapse. It is still not fully appreciated how close we came to the edge of the cliff. In those circumstances, when one seemed constantly to be in meetings and constantly to be on the telephone, not taking notes of meetings is pretty forgivable. I was delighted that Mr Tucker was able to settle the issues arising from Mr Diamond’s file note about the senior Whitehall figures. I look forward to the Chancellor of the Exchequer responding to the clarity that Mr Tucker has brought there.

Reflecting on my noble friend’s amendment, I ask whether we are creating positions in the Bank of England and in the architecture which are simply beyond the talents of any one person to fulfil? Mr Tucker is one of the outstanding candidates to be the next governor. He is not the only one, but it is not a long list and it has got decidedly shorter in the past seven days. Two people previously spoken about as candidates, Mr Varley and the noble Lord, Lord Green, have probably dropped off in the past few days, so it is not a strong list.

Looking then at the FPC and its oversight, where are we going to find the people with the necessary talents to do this job? We are on the horns of a dilemma. On the one hand, you want knowledgeable people—people who do not have to be taken through everything step by step, but come to the issues with a good and clear knowledge and the ability to spot where the critical questions lie. On the other hand, you do not want to start these committees with people who in some way are conflicted by their current employment, their past employment, their pension arrangements and so forth.

I do not have a view about whether the shadow FPC is doing a good job. I think one or two of its members appear to be. Mr Robert Jenkins, in particular, appears to be an independent spirit who is not in any way caught up in the groupthink and consensus that I associate with much of the heart of the Bank. The simple fact is that most members of the FPC have a career background in investment banking. They have a career background in the very activity which was associated with the global financial crisis. I think we have a problem here. How do we get the right people into the right committees and the right courts and the offices of governor and deputy governor? No architecture makes sense if we are creating it on the presumption that we can find people of integrity, raw talent and understanding to fill the jobs when that is not a realistic assumption. I think the heart of the matter raised by my noble friend in his amendment is: how can we be satisfied that the people sitting on the FPC are appropriately competent and are managing conflicts of interests, as they probably will always have conflicts as a prerequisite for qualification to sit on these various committees?

--- Later in debate ---

[Lord Liddle]

Britain’s position is given a special status given that we are the financial centre of the European single market. The governors of the central banks who make up that body are alive to London’s concerns at all times. It is very important that we play a major role there. It is therefore crucial that we keep these issues under review. I do not think that the way in which the Government have handled the proposals for a banking union is in the UK national interest. It is a bit rich to say, “It is none of our business because this is to do with the eurozone”, but then to complain that the creation of this thing might mean that there was an inbuilt majority against Britain on all financial regulatory decision-making. It is rather contradictory.

The position we have to adopt is that although we are not in the eurozone and will not be in the eurozone, we have to sustain the single financial market. That involves us having the closest possible relationship with the relevant European bodies and keeping abreast, in terms of our own arrangements, with developments there. For those reasons, I strongly support my noble friend’s amendment.

[Lord Davies of Stamford]

I also strongly support my noble friend’s amendment, which was very well conceived and—if I may say so—very persuasively moved. I also agree very much with my noble friend Lord Liddle in the way that he approaches this problem. I think that there are four major issues on which the House needs to ponder carefully. The first is the emerging mismatch between the evolving structures in financial regulation on both sides of the channel. Something has already been said about that so I will not go into it any further.

The second issue is subjective, but I fear that it is very difficult to deny. It is our declining influence in matters of financial regulation and supervision around the world. Many of us can remember a time when the British were regarded as great experts in these things. We obviously were brilliant because we had such a successful financial services industry. Therefore, when we said something about financial regulation, supervision or the right way of creating a framework for a thriving financial services industry, whether it was said in Washington, New York, Brussels or Frankfurt, it was listened to with great attention. We naturally had a very strong influence. I am sorry to say that a combination of the Euroscepticism of this new coalition Government and our recent failings in financial regulation and supervision—one thinks of the failings of the FSA in matters of RBS and so forth, and now the terrible and very upsetting scandal of LIBOR fixing, which I will not go into any further—inevitably will, and is, undermining the influence that we used to have. That is a very worrying situation.

There is, thirdly, the competitive issue, which we will come on to in later amendments. It is quite clear that as the framework for financial regulation diverges between this country and the continent, there is always a danger of competitive advantages changing, and possibly not in our favour. One of the obvious examples of which people are well aware is the possibility of lower capital-adequacy ratios on the continent. Presumably, particularly in the light of the crisis that we have all been through, they will always be set at a fairly sensible prudential level. However, there may be significant differences—for example, in retail deposit insurance schemes—which would lead people to want to hold their accounts on the continent rather than here. All kinds of things could emerge from regulatory and supervisory initiatives that would change the competitive balance. We need to be very alert to that.

Finally, the jury is out on whether or not it is in the national interest for us to be part of the emerging European banking union. I can see a great many theoretical reasons why it might be very strongly in our interest to join, but I do not have the slightest hope of persuading colleagues in the House today of that. Indeed, I am happy to wait and see, but we need to keep the matter under review. The regular review which my noble friend proposes in this amendment is exactly the kind of procedure and discipline that we want.

All British institutions involved should be aware that they are being reviewed in this matter; that their collaboration and effective participation in European structures is being watched; that they are expected to use their influence as effectively as they can on our behalf; and that they should be very conscious of the role they are playing. All that is very important and we need to monitor the results. We need, a few years after it comes, to be able to look back over the record as revealed by these reviews and otherwise—quite pragmatically and open-mindedly, without dogmatism or emotionalism—and to take a rational decision on the best way of achieving the national interest going forward.

[Baroness Cohen of Pimlico]

I support the amendment proposed by my noble friend Lady Hayter. Not only are we poorly mapped on to the new European financial regulators, but we are poorly represented in relation to our weight in financial services in Europe. We are under-represented, in fact. We are where we are, but this is one of the areas on which, in a year’s time, it would be useful to have a review and to see how best we might change or adjust our position, either by adjusting our own institutions, or by hoping to make greater progress in Europe. However, financial services are key to this country. Immense amounts of regulation being debated in Europe at the moment, and we are not quite in the best position to be doing all this. I very much welcome the idea of a review in a year.

Governor of the Bank of England

Lord Davies of Stamford Excerpts

Tuesday 10th July 2012 Lords Chamber

[Lord Sassoon]

My Lords, I am not going to be drawn into a discussion of particular candidates, but the Bishops’ Bench is making some very notable contributions to the deliberations on the Financial Services Bill.

[Lord Davies of Stamford]

My Lords, Mervyn King has been a very distinguished governor and has made a major contribution to the science and art of inflation targeting, which is internationally recognised. Is it not desirable that in choosing his successor we choose someone not only of absolute integrity with great familiarity of the financial markets, and not just in the British amateur tradition, but someone who is a genuine monetary economist, is internationally respected in the field, and can hold his or her head high and deal on equal terms with Mario Draghi and Ben Bernanke, who are certainly in that category?

[Lord Sassoon]

My Lords, I am sure that whoever is selected and whoever is recommended by the Chancellor and the Prime Minister to the Queen, whose appointment it is, will be of the very highest quality.

Royal Bank of Scotland: LIBOR

Lord Davies of Stamford Excerpts

Wednesday 4th July 2012 Lords Chamber

[Lord Sassoon]

My Lords, on the RBS/NatWest/Ulster Bank IT failure, RBS has assured customers that nobody will be left out of pocket as a result of the problems. There is a Question down for tomorrow—number 4—from the noble Lord, Lord McAvoy, that touches on Ulster Bank, so I am sure we will return to that tomorrow.

On the instructions to RBS and the monitoring of them, the Government manage their shareholdings in RBS at arm’s length through UK Financial Investments and the governance arrangements are set out in the framework document and the investment mandate between UKFI and the Treasury. It is all there transparently on the website. I believe that those arrangements continue to be appropriate for the arm’s-length management. As it happens, UKFI published its annual report only this week. It sets out a very full account of the issues that it has been engaged in with RBS and with Lloyds Bank. I believe that all the appropriate channels are there and that there is a high degree of transparency. I can reassure the noble Lord on that.

[Lord Davies of Stamford]

My Lords—

[Lord Flight]

My Lords, will the Minister advise the House how many banks from how many countries provide regular LIBOR information in order to produce the average LIBOR rate?

[Lord Morris of Aberavon]

My Lords—

[Lord Davies of Stamford]

My Lords, at the heart of the LIBOR scandal we now have a classic conflict of evidence—

[Lord Morris of Aberavon]

Will the Minister confirm that the legal provisions for the offences—

[Lord Davies of Stamford]

I have already given way once. Tucker is saying one thing and Diamond is saying another, so one or other of them must be lying. On the outcome—

[The Chancellor of the Duchy of Lancaster (Lord Strathclyde)]

When two noble Lords are trying to speak at the same time one really ought to give way to the other. They are both from the Labour Party so perhaps they ought to decide among themselves.

--- Later in debate ---

[Lord Sassoon]

My Lords, it is not a question of trading how many days one inquiry or another will sit. I could read out the long list of judicial inquiries that have taken two, three, four, five or 10 years and more. We believe that a parliamentary inquiry can do its work effectively by Christmas. These matters will be debated in another place tomorrow.

[Lord Davies of Stamford]

My Lords—

[Lord Elystan-Morgan]

My Lords, going back to the Question asked by my noble friend Lord Empey, can the Minister tell the House, without going into specifics, what was the first point in time at which the Government gained any information about the possibility of the rigging of LIBOR?

Financial Services Bill

Lord Davies of Stamford Excerpts

Tuesday 3rd July 2012 Lords Chamber

[Baroness Noakes]

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

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

[Lord Davies of Stamford]

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

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

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

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

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

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

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

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

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

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

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

[Lord Hodgson of Astley Abbotts]

The noble Lord, Lord Davies of Stamford, has given us a pseudo-economic lecture. I have to tell him that the lesson that will be drawn by future business schools will not be about the economic policy of this Government but about the economic policy of his Government, which led this country to the edge of ruin. That is the case that will be taught in business schools: how not to do it. It was his Government, of which he proudly said he was a part, that led us to the pass that we are now in.

Turning now from the general to the specific, the noble Lord, Lord Eatwell, in his introduction, described—

[Lord Davies of Stamford]

I realised when the noble Lord said that I had given a pseudo-economic lecture that he was going to disagree with me. He appears to have ignored the point that I made, to which I should like him to respond. Although in retrospect it is true that the previous Government might have taken moves other than those they did on financial regulation and supervision—I regret that we did not but this is very easy with hindsight—at the time, the party that he was and is a member of was urging us to deregulate. It said that we were constraining the competitiveness of the City of London with excess regulations. I have no doubt that he would have been one of the first on his feet to object and protest had we increased capital ratios, supervision and the examination of the quality of the assets in banks in this country.

[Lord Hodgson of Astley Abbotts]

I am very glad that the noble Lord appreciates that the previous Government got it wrong. The reality is that it was the macroperformance of the Government, which they now seek to blame on sub-prime lending in the United States, that left the country without adequate protection, not having taken adequate financial decisions in time. That is what a Government are supposed to do. It is the prime responsibility of the Government to make sure that the economic security of the country is maintained.

Going back to Amendment 34, in the name of the noble Lord, Lord Eatwell, he used, if I may say—in no patronising way—the attractive phrase, “leaning into the wind”, when he introduced it. Amendment 34 is stated in fairly general terms. It refers to,

“having regard to the Government’s growth, employment and other economic objectives”.

The noble Lord raised the issue of tension between that and the other objectives. Amendment 35A “leans into the wind” rather better than the noble Lord’s amendment. It refers to,

“contributing to the achievement by the Bank of the Financial Stability Objective, and … subject to that, supporting the economic policy of Her Majesty’s Government”.

That is a much more precise way of approaching this than the rather more general way that the noble Lord explained in his amendment. I am comfortable with Amendment 35A. It is more specific and purposive than Amendment 34 and does not contain the coercive elements of Amendment 35, tabled by the noble Baroness, Lady Kramer, with whom I agree on many other things but with whom I do not agree on this occasion.

--- Later in debate ---

[Lord Sassoon]

My Lords, the Government have always been clear that the Financial Policy Committee, as the body responsible for ensuring the stability and safety of the financial sector as a whole, must have financial stability as its primary focus. That is our starting point. However, we have been equally clear that the FPC must balance the pursuit of its primary objective for financial stability with the wider impact of its actions.

In our February 2011 consultation document the Government spoke of the need to,

“build the balance between financial stability and sustainable economic growth”,

into the FPC’s objectives. In addition, my right honourable friend the Chancellor made clear, when giving evidence to the Treasury Select Committee almost exactly a year ago, that we do not seek “the stability of the graveyard”. Our first shot at achieving this symmetry within the FPC’s framework was the creation of an economic growth “brake” for the FPC. The provision set out in subsection (4) of new Section 9C prevents the FPC from taking action that would significantly adversely affect the ability of the financial sector to contribute to medium- or long-term economic growth in all cases, regardless of the strength of the financial stability rationale. That is a very strong backstop provision.

However, the Government have listened to calls, both in another place and in our Second Reading debate in this House, for the FPC to be given a positive duty to support economic growth. In response to those calls, government Amendment 35A amends the Bill to give the FPC a secondary objective to support,

“the economic policy of Her Majesty’s Government, including its objectives for growth and employment”.

As many noble Lords are aware, this wording is identical to that used in the MPC’s secondary objective.

The noble Lord, Lord Eatwell, has used similar wording in his Amendment 34, but in the form of “having regard” rather than a secondary objective. I believe that in this case a secondary objective is more appropriate—more purposive, in the words of my noble friend Lord Hodgson of Astley Abbots—than “having regard”. We mean to be purposive here. The Government’s intention is to require the FPC to seek proactively to support economic growth. For this, you need an objective, not simply “having regard”.

Some noble Lords have questioned how such an objective bites in the context of the MPC. I am very glad that the noble Lord, Lord Barnett, is at last starting to get answers to his questions from the noble Lord, Lord O’Donnell, who is much more expert in these things than I am, and long may he continue to keep the noble Lord, Lord Barnett, supplied with explanations. In my inadequate way, I shall attempt to give one or two examples; first, of how the new secondary objective will impact on the FPC’s decision-making. I do not want to get sidetracked too much on the MPC but I will make one or two remarks to suggest that similar wording has impacted on the MPC as well. It is most important to think about the FPC, because that is what we are talking about here.

Let us imagine that the FPC takes action, such as imposing additional capital requirements, during the upturn of the cycle, when systemic risks are building up and financial stability concerns are heightened. If the situation changes—for example, the expansion subsides and the financial stability risks reduce—the secondary objective for economic growth will incentivise the FPC to remove those additional capital requirements in order to free up money for lending to the real economy. This effect will work in tandem with the new requirement for the Bank to review previous actions, which we will discuss in due course.

[Lord Davies of Stamford]

My Lords, will the noble Lord recognise that what he has just described as being the result of his amendment is precisely what the Government are not doing in the present circumstances? The economy is not reviving and the Government have not reconsidered their policy of imposing additional capital requirements on banks.

[Lord Sassoon]

My Lords, first, I was talking about different economic conditions, and, secondly, I would have thought that the point made by the noble Lord, Lord Davies of Stamford, would endorse why it would be extremely helpful to have such a secondary objective on the FPC.

Moving on, a second example of how such a secondary objective will operate is where the FPC is choosing between various different courses of action to address a systemic risk. Assuming that the actions under consideration are equally effective in addressing the risk to stability, the secondary objective will require the FPC to select the action that is more compatible with the Government’s economic objectives.

I agree with the noble Lord, Lord Eatwell, that it is the role of the FPC to lean against the wind.

--- Later in debate ---

[Lord Neill of Bladen]

My Lords, I should like to make a few observations about the amendment. We are at Committee stage of the Bill. While it is passing through your Lordships’ House there has been an enormous scandal about the fixing corruptly of the LIBOR rate by Barclays over, I understand, a period of years—a practice in which it is possible that other banks took part. They have thereby done enormous damage to the reputation of the City of London as a place where you can get honest dealing. The matters thus far brought to light show innate corruption, whereby it is seen as perfectly all right to rig the figures that you supply in order to fix the LIBOR rate and to bring in profit or reduce losses. That is a form of corruption.

One can go back to one’s early days with a bank. I banked with Barclays from the mid-1940s onwards. The notion of the bank then being involved in this type of activity was absolutely laughable. The banks have turned into merchant banks of the worst possible character, and that ethos is reflected in conduct that reveals a completely disgraceful picture.

The question is: what is the best way to have a wider inquiry into that matter? At the moment, it is a pity that what is called the Tyrie inquiry is being allowed to carry on on its own, without any thought as to whether or not the investigation of those facts would be central to any wider inquiry about the integrity of banks. However, how do you investigate integrity? The theory is that you are not allowed to look at other cases because Tyrie is dealing with the matter. In fact, it is the best possible evidence you can have of the way that bankers think today. You want to know all the details of that case and not exclude them from it, rather than ask a generalised question: how do we establish integrity or lack of it in the City?

I therefore assume that today we are having an exploratory discussion, that the amendment will be withdrawn, and that there will be time, at least by Report, to consider revised proposals of what might be done by way of investigation. The suggestions of noble Lord, Lord Carlile, are interesting and persuasive, but all this has just been pitched upon the House of Lords because of a curious financial scandal coming to light at this very time while we are in Committee. I hope that consideration will be given as to whether matters in relation to the banks and financial institutions could be better conducted after we have had time to think and the Government have had time to react to the amendment. I hope that some reasonable and rational delay will be introduced and that the amendment will be withdrawn.

[Lord Davies of Stamford]

My Lords, I am very glad indeed that we have an opportunity to discuss this extremely important matter. The news over the past few days has been dramatic and horrific, and the public would think that our parliamentary system was woefully inadequate if we did not take time not just to discuss this matter but to come rapidly to conclusions, which is why I profoundly disagree with the noble Lord, Lord Neill, that we should not take any decision today and that the amendment be withdrawn. I hope that my noble friend who spoke extremely powerfully on his amendment will press it in due time.

There seems to be prima facie evidence of widespread abuses, dishonesty and corruption—a good word that I take from the noble Lord, Lord Neill, with pleasure, because it is the right word—in our banking system. None of us would have supposed that that would arise here in the City of London. All of us have been excessively complacent about the standards of conduct which are applied in the City of London.

--- Later in debate ---

[Baroness Noakes]

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

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

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

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

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

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

[Lord Davies of Stamford]

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

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

[Lord Northbrook]

I support the very sensible amendment in the names of the noble Lord, Lord McFall, and my noble friend Lady Noakes. As the noble Lord, Lord McFall, stated, the MPC’s remit is to target inflation. Finding an indicator—or a set of indicators—for the FPC is difficult. There is merit in amending the Bill to ensure that a set of statistics is available to help external bodies, including the Treasury, to assess the performance of the FPC. The recommendation in the Treasury Committee’s report says:

“The selected range of indicators must be flexible and under constant challenge and review, not only by Parliament, Government and the Bank of England, but also by others such as financial industry practitioners, the media, academia and the public. The indicators should be published so that the performance in maintaining financial stability may be monitored and so that it can be held accountable for that performance. The FPC should report against these criteria at regular intervals”.

To the same extent, the Joint Committee said:

“The FPC should begin work towards developing indicators of financial stability in dialogue with the Treasury. They should be published and the FPC should report against them. The set of indicators should be flexible and subject to regular review”.

The recommendations of these two committees are very powerful and, as the noble Lord, Lord McFall, has already stated, the court was generally supportive but did not believe that they should be put in the Bill. I happen to disagree: I think it would be much clearer to have these in the Bill.

Euro Area Crisis: EUC Report

Lord Davies of Stamford Excerpts

Monday 21st May 2012 Lords Chamber

[Lord Marlesford]

My Lords, both the noble Lord, Lord Monks, and my noble friend Lord Maclennan have warned us against advising or criticising other countries in these matters. It always seems to me that one advantage of the privacy of your Lordships’ Chamber is that we can freely give advice to the Government without much danger of it leaking out.

As the only other member of Sub-Committee A speaking today, I congratulate my chairman, the noble Lord, Lord Harrison, on his lucid exposition of our findings. I also tell your Lordships that in the ever-changing kaleidoscope of events in the euro area that we faced during our inquiry, his skill as a chess master enabled him to guide us through and sometimes even interpret the irrational, usually contradictory and often ill conceived moves of the euro area.

I am neither a Eurosceptic nor a Europhile. If I presume to symbolise anything at all, I would try always to use a pragmatic approach and describe myself if anything as a Euro-challenger.

Never has it been clearer that the first commandment for a leader is to identify and then face reality. That applies in politics, economics and business; it applies especially to bankers and, above all, to central bankers. Do not let us forget that one of the main architects of our misery is that shrunken giant Alan Greenspan, with his failure as chairman of the Fed to face—and still less to act on—the reality that he had, in fact, identified in the three years that led up to the summer of 2007, when it became clear that everything would unravel.

The former name for economics was political economy, which underlines the crucial links between economics and politics. Even when the economic realities are revealed, political forces often conspire to frustrate the hope of solutions. I intend to devote my own brief comments to the situation in Greece and suggest a possible way forward for that country.

I should perhaps declare a rather remote interest in that my great-grandmother was Greek and her uncle was Capodistrias, who after he had represented the Russian tsar at the Congress of Vienna was, in 1827, persuaded to be president of Greece—and for his efforts was assassinated in 1831 within five years of taking office. It was ever thus.

It is perhaps relevant to remember that the British Foreign Office argued strongly against the liberation of Greece from the Turk on the grounds that it would undermine the Ottoman empire and thus destabilise the Balkans. The words of the noble Lord, Lord Monks, “I told you so”, may be echoed by diplomats of today. Of course, it was Lord Byron and his friends who ensured that the advice of the Foreign Office was not taken on that occasion.

Noble Lords will remember that it was Plato himself who argued against Athenian democracy of the fourth century BC on the grounds that demagogues could use it to prevent sound decisions. His analogy was a ship controlled by ignorant and quarrelsome sailors who refused to believe that there was any such skill as navigation and would write off a mere helmsman as a useless stargazer. His solution was, of course, the philosopher ruler. Whether either Mr Papademos or Mr Venizelos is up to such a role is not perhaps for me to judge. However, at paragraph 133 of our report we draw attention to the outburst of anger on the part of Greek politicians at the suggestion that there should be a budget overseer for that country. It seems to me that the danger now is that the second round of elections may again result in a preference for the rather destructive demagogues in the extreme right Golden Dawn and the hard-left factions forming the Syriza. There are rather frightening echoes in these economics and politics of how Hitler came to power 80 years ago.

It seems to me most unlikely that Greece can, or should be, bailed out yet again. I think, therefore, that it must leave the euro area, but I certainly hope that it remains inside the EU. Then what? There are two choices. The first is assumed, and that is the re-creation of the drachma as a new Greek currency. I believe that this would be a disaster for Greece. It would be a currency that no one would wish to lend or to borrow. The markets would ensure that it would be rapidly devalued and the Greek central bank would have to resort to the printing press.

[Lord Davies of Stamford]

I agree with the noble Lord’s analysis entirely up to now. However, does he agree with me that if the drachma collapsed, as it certainly would, everybody would want to borrow in it and have their liabilities in drachmas and their assets in euros, and that that would be part of the problem?

[Lord Marlesford]

My goodness, the noble Lord is certainly a speculator.

If Germany is prepared to pay not the cost of bailing out Greece but the cost of redeeming the Greek euro debt which already exists, we have to think of something better than going into a Mickey Mouse currency such as the drachma. The solution would be for Greece to leave the euro area but to continue to use the euro. There are plenty of examples from past economic crises, such as Latin America using the dollar and Yugoslavia using the deutschmark after Tito died. The whole point is that using the euro with a new central bank for Greece would impose a discipline on the central bank and on Greece. Like anyone else, it would be possible for it to use only the currency that it could afford. It would not have any relation or connection with the European Central Bank. It would be paddling its own canoe but it might well have to have some help from the IMF. However, it might well produce a remarkable resurgence. Indeed, a noble Lord talked about the possibility of financing certain projects with eurobonds. This might be very possible if people could see sound opportunities in Greece and they knew that the currency being used was a proper international currency. I think that that would be a real help.

Economy: Budget Statement

Lord Davies of Stamford Excerpts

Thursday 22nd March 2012 Lords Chamber

[Lord Davies of Stamford]

My Lords, I endorse the remarks of the noble Lord, Lord Higgins, about the extraordinary leaks of this Budget, which was more or less published verbatim before the Budget Statement. I do not need to repeat those remarks because everyone heard them, but I thoroughly agree with them. If the Minister would be so kind, would he tell the House clearly whether the leaks by the official referred to by the Financial Times and other papers were authorised by Ministers or, if not, whether the Treasury is undertaking an inquiry into them with a view to stopping such scandalous behaviour in future?

I was shocked, as I think was the whole country, by the extraordinary decision of this Government, when for the first time they had an opportunity to give away some tax breaks, to make the major priority those people earning over £150,000 a year and paying tax at 50 per cent. It is widely regarded as extraordinary, at a time when people on modest incomes and on working families tax credit are finding that that tax credit and people’s benefits are being reduced and people are being made redundant wholesale by the public sector—I think of so many sailors, soldiers and airmen whom I knew in the MoD and whom the Government are now making redundant—that the Government should want to give a present of roughly £40,000 to someone who is earning £1 million a year. That is quite obscene and extraordinarily insensitive.

It was almost as obnoxious that the Government should abolish the higher personal tax allowances for older people, which apply only to those whose total income is less than about £25,000—I cannot remember the exact cut-off figure. Surely they are some of the most deserving people in this country; they are retired and have incomes at a modest level that can have been accumulated only through quite brave and self-sacrificial efforts at saving during their careers or small occupational pensions, and now they are being denied their benefit. Again, that is an extraordinary decision, reflecting an extraordinary set of priorities and values.

The Government have got themselves into the most frightful mess about child benefit. They have introduced a taper, which admittedly is slightly better than the previous system where the benefit was simply removed at the point of earning a £40,000 income. Nevertheless, what they have done introduces serious anomalies. Between incomes of £50,000 and £60,000 there will be a high rate of withdrawal of child benefit. I do not know what that rate will be—perhaps the Government can tell me—but it will be a very high effective marginal tax rate. I remind the Government, as they appear to have forgotten, that marginal tax rates are essential in determining incentives to save, to work, to take risks, to start businesses, to work harder, to get promoted or whatever. It is most undesirable for the Government suddenly to introduce a high effective marginal tax rate for this category of earnings.

What is more, the measure leaves the distortion and the great unfairness that if two parents are both working, they can enjoy an income much greater than in the case of a single parent who is working and continue to have the full child benefit. That runs quite counter to all the rhetoric that we heard from the Government about supporting the family and so forth. Perhaps that rhetoric was nothing more than rather insincere PR, which I think is rather a sad position.

I am concerned about the consequence of putting a ceiling on all reliefs. I support the principle quite strongly but I am concerned about the impact on charities. I would be grateful if the Minister could make clear whether in some way this would limit people’s ability to offset their charitable giving against tax; it would be a very unfortunate development if that were the case. There is a complete distinction between individuals who give away their money—they no longer have it and therefore should not be taxed on it—and those taxpayers who invest their money in tax-efficient savings schemes such as SIPPs and EISs. They still continue to own those assets and have the benefit of them, so the position is completely different and in that case it is quite right to impose a ceiling. It is quite wrong to do so if it affects the income of charities and the propensity of people in this country to contribute to them.

On the detailed tax measures, I support in principle the introduction of a general anti-avoidance rule but with an important condition, and I would be greatly reassured if the Minister could assure me that that condition will be applied: that there will be a right for taxpayers to receive timely pre-transaction rulings from HMRC when it wishes to remove the uncertainty that will otherwise be created by this GAAR. The point is that, under present arrangements, if you want to know what your tax liability is, it is sufficient to read the taxes Acts and look at the jurisprudence, or pay someone else a large amount of money to do that for you. Then you know exactly where you stand. Under a general anti-avoidance rule, that will no longer be the case. You might be completely in line with the texts available, which might tell you quite correctly that a certain rate of tax should be applied, but it is then open to HMRC to challenge you and say that actually you should pay a vast increase on that, a penal rate, because the only or substantial reason that you have arranged your affairs in that way was to avoid tax.

In many cases, there may be respectable reasons for a particular structure being adopted. The structure may happen to be tax efficient as well, but there may be other reasons, market reasons, strategic reasons or risk-management reasons—foreign exchange exposure management, for example—which lead you to adopt that course. Complete uncertainty is created as to whether those reasons will prevail and be accepted by HMRC. The disincentive to invest in this country which will be introduced if that uncertainty is allowed to exist will be much greater than the value of several points off corporation tax, desirable as that is in itself.

That uncertainty must be removed. The only way to remove it is to give people a guarantee that they can get a pre-transaction ruling from HMRC, that they can clear with HMRC a particular structure or arrangement in advance in a timely fashion. There should be a limit of 30 days within which HMRC must respond. I do not know whether the Government have in mind such a provision. If they do not, they should look at that urgently. If they do, I hope that they will reassure me that they are already working along those lines. It is not easy, because I am sure that HMRC will find all sorts of arguments why it cannot or should not be done: it does not want the risk or the responsibility; it is afraid of being taken to court; it does not have the people or the time; all the usual bureaucratic reasons. I am convinced that it will have to be forced to do that, but it is important that it is if the GAAR is to come into effect.

Finally, I make some remarks on the macroeconomic management of the Government. It seems to me that their fiscal policy has been far too tight. The fact that they have successively had to revise down their growth rates proves that. The excuse of the sovereign debt crisis in the eurozone is of no use, because that did not begin to affect the markets and confidence until last autumn. It is clear that they got their judgment wrong. It would have been much better to have continued on the general curve of reduction of public expenditure and the deficit which they inherited from the previous Labour Government.

That said, clearly the Monetary Policy Committee takes the same view and thought that it was necessary to do something by way of a monetary boost. Because, at the present rates of interest, it cannot use the traditional interest rate instrument, it has gone for the quantitative easing instrument. I have nothing against that in principle, but it raises two problems: a short-term and a longer-term problem. The short-term problem is that it is not very efficient. You need an awful lot of quantitative easing to get a given amount of credit creation—£200 billion or £300 billion each time. Part of the reason for that is that we are in a deleveraging recession or near recession in which there is not a great propensity on the part of households to take on more debt; they are trying to get rid of their existing debt. Part of the problem is the confidence in the economy at the present time, and part of the problem is that the Government are in contradiction with themselves, because they are trying to impose on banks the new Basel rules for high capital ratios, and that runs against the idea of the banks using that money to leverage a large amount of lending. That is the short-term problem.

Then there is the longer-term problem of what the Government do with all the instruments that they are buying—or the Bank of England, on their behalf, is buying. If they are cancelled, that represents a substantial increase in the money supply, which could be extremely dangerous once the output gap is reduced, narrowed. On the other hand, if the intention is to reverse the transaction, there will be great pressure on the markets, which will of course compete with the gilt issue and the need to renew the considerable amount of government debt in future. It will mean that interest rates are likely to be higher at that stage in the cycle than they otherwise would be, because of the need to reverse the transaction.

I agree with the noble Lord, Lord Higgins, on that. There has been nothing like enough discussion in this House or among the public about the monetary easing by means of quantitative easing. There is all too great a temptation to see this as a free lunch, a cost-free exercise with only benefits attached to it. I should be grateful if the Minister would address those problems in his summing up.

--- Later in debate ---

[Lord Sassoon]

That issue has been the subject of an Urgent Question in another place this afternoon, and the Government have explained their position in an answer there.

I have said that we will stick to our fiscal position. That means that there continue to be tough choices to be made. Some of those tough choices have been highlighted this afternoon. I start with my noble friend Lord Newby, who gave a fair and good analysis of the issues about pensioners and the fair deal that they are getting. However, because the noble Lords, Lord McFall, Lord Myners and Lord Davies of Oldham, and others raised the issue, let me underline it again. The Government are committed to supporting pensioners. The IFS confirmed today that that is indeed the case. Pensioners will get the largest ever rise in the basic state pension this April to £107.45 a week. The Government are protecting pension benefits, including winter fuel payments, free prescriptions and eye tests, free bus travel, free TV licences and, of course, the triple lock on the basic state pension is being introduced. The single-tier state pension will be introduced and has been estimated to be likely to be £140 in current terms. I refute the suggestions that pensioners have been poorly treated. We are all in this together.

My noble friends Lord Fink and Lord Sheikh have quite properly raised the issue of tax transparency. I agree with them on the importance of the new annual statements, which will show everyone who pays tax what they are paying and where the money will be spent across the different categories of expenditure. I am sure that will raise a healthy debate.

On tax reform, I am very confused about where the Opposition stand on the 50p tax rate. Are they really still saying that the Chancellor of the Exchequer should justify the continuation of a tax that is shown to produce next to no revenue for the country and which materially affects our global competitiveness? The noble Lord, Lord Eatwell, quotes approvingly the Institute of Directors, but the main part of the institute’s statement after the Budget called for the tax rate to be reduced to 40p. Is that what the noble Lord, Lord Eatwell, wants? The noble Lord, Lord Wood of Anfield, who is not in his place at the moment, questioned whether the Government had been fully transparent on this. The forestalling number that he was looking for is set out in bold type on page 51 of the Red Book, a complete contrast to what the previous Government did in not even recognising that there was a forestalling problem. The tax raised less than a third of the estimates that they put out. I believe that they are in no position to question the basis on which we have looked at the evidence in coming forward with a 45p rate.

[Lord Davies of Stamford]

How can a 50p tax rate possibly be devastating to our competiveness and at the same time raise no money? If people do not pay it, it will not have any effect on their behaviour.

[Lord Sassoon]

My Lords, the simple fact is that if you talk to businesses around the world about why they are not moving business into this country and are not moving high-earning individuals back to this country, you will find that it is simply because of the disincentive effect of the 50p tax rate. It is entirely consistent that there is a disincentive effect on business decisions, even though the net take is nothing. I listened to what the real businesspeople in this House—the noble Lord, Lord Bilimoria, and my noble friend Lord Fink—said about the damaging effect of high rates of tax. Their voices present the true position.

EU: Member States’ Budgets

Lord Davies of Stamford Excerpts

Tuesday 29th November 2011 Lords Chamber

[Lord Sassoon]

Yes, my Lords, I very much share my noble friend’s concerns.

[Lord Davies of Stamford]

My Lords, a few years ago was there not a proposal that the Commission be given a duty of auditing the national accounts of member states? That proposal was turned down at the time by the Council. Is it not the case that if it had not been turned down and had been accepted, we would have had an earlier insight into the problems of Greece, the Greeks would have been unable to falsify their accounts, and the grave problems we all now face might have been significantly reduced?

[Lord Sassoon]

My Lords, I very much doubt it. We are looking at the proposals for strengthening governance as they have been put on the table, and that is clearly what needs to be done. We should not rely on the auditors to sort out all our problems.