Criminal Finances Bill

Debate between Lord Davies of Stamford and Lord Hodgson of Astley Abbotts

Committee: 1st sitting (Hansard): House of Lords
Tuesday 28th March 2017 Lords Chamber

[Lord Hodgson of Astley Abbotts (Con)]

My Lords, this is a modest amendment that is grouped with around 58 other amendments which deal with unexplained wealth orders, a new form of legislation in this country. Those 58 other amendments have been proposed by a bevy of talent, including several by my noble friend on the Front Bench, so after a few introductory remarks I propose to focus on the narrow issue which is the subject of my particular amendment. Before doing so, I should remind the Committee of my interests as declared in the register. I understand that it is now no longer approved procedure just to make a general reference and that we are supposed to be more specific. I should also remind the Committee that, while I am no longer an authorised person under financial services legislation, I remain the chairman of two companies that provide services to the financial industry.

At Second Reading I said that I strongly support the direction of travel of this Bill. I am well aware of the impact and the deleterious effect of the worm of corruption on society as a whole. However, I pointed out then and I point out now, as we begin Committee, that new regulation is by no means always the answer. Better use of existing regulation may well be equally effective, as encouraging and rewarding better behaviour to create the right climate may be. We need sticks but we also need carrots. The most important carrot is that people believe that what they are being asked to do is proportionate, fair and worth while, and that the information they are being asked to provide will be used and used effectively.

That should not be taken as my being in any way lukewarm about what we are discussing in the Bill and its purpose, but I shall want to be reassured now and as we go through Committee on three things: that the new powers being sought are required and required in the form it is proposed they should take; that those powers will be used, will be used effectively and will not sit on the shelf; and that they are likely to have a proper impact on the reduction of financial criminal activity.

With those introductory remarks, I turn to my amendment. As I said, this first part of the Bill is concerned with the introduction of an entirely new power for the authorities to obtain a court order to investigate what is called in the Bill “unexplained wealth”. I am no lawyer, but that seems a fairly broadly drafted phrase capable of quite a varying range of interpretations. I accept, however, that such broad phrasing may be necessary to cover the many forms that criminal financial activity may take, but equally, when I read that the provision will involve a reversal of the burden of proof—that is, under an unexplained wealth order I will have to explain why I should have this wealth, rather than the authorities explain why I should not—I wonder whether the right balance has been struck in the drafting.

In particular, in the group of amendments that we shall discuss, government Amendment 8 in the name of my noble friend on the Front Bench proposes to reduce the amount above which an unexplained wealth order may be sought from £100,000 to £50,000. If the Committee was minded to accept this amendment, quite small sums and probably quite legally unsophisticated individuals may be swept up in the new regime. It could be argued that such people need and deserve a higher level of judicial protection. With my amendment I seek to redress and improve the balance by imposing an additional duty on the court in the case of unexplained wealth orders. Clause 1 requires the court, under new Section 362A(1) merely to be,

“satisfied that each of the requirements for the making of the order is fulfilled”.

My amendment would raise the evidential bar a little by requiring the court not merely to be “satisfied”, but to be satisfied “beyond reasonable doubt” by inserting those three words in line 13 of page 1.

In summary, I argue that, if the authorities want the burden of proof reversed, the citizen is entitled to a high degree of protection from the court against possibly vexatious activities by regulators. My noble friend on the Front Bench may argue that government Amendment 6 would achieve the same purpose. Again, I am no lawyer, but the Government’s phrase,

“there is reasonable cause to believe”,

seems a good deal weaker than my phrase in Amendment 1, “beyond reasonable doubt”. I will await reaction from other Members of the Committee who have more legal experience than me as to whether my fears are justified or groundless. My noble friend may also argue that I should have tabled a similar amendment to deal with Scottish unexplained wealth orders under Clause 4. She would be absolutely right but my response is that, for today at least, this is a probing amendment to enable a broad discussion on the point to take place.

Other noble Lords will no doubt wish to discuss the practicalities of how the UWOs will work and whether the target category of politically exposed persons will be able to be dealt with effectively because of personal and functional immunity—we have had quite a lot of briefing on these matters. My amendment is about trying to achieve the right balance.

Before I sit down, I want to ask my noble friend one last question. It is about legal privilege and client confidentiality under the new unexplained wealth order legislation. As I understand it—again, I say that I am no lawyer—legal privilege does not exclude a legal adviser from the provisions of the suspicious activity, or SAR, regime. If a legal adviser becomes aware as a result of discussions or communications with his or her client that activities that would be capable of being caught by the SAR regime are occurring, they are obliged to report them and to do so without informing their client—indeed, informing their client would be an offence. Can my noble friend in due course make clear what the position is on a legal adviser whose client becomes the subject of a UWO? Is the construction of legal privilege changed in any way? I do not think that unexplained wealth orders or the suspicious activity regime will necessarily walk hand in hand. I beg to move.

[Lord Davies of Stamford (Lab)]

My Lords, the noble Lord has said that his amendment is merely probing. Clearly, the purpose of a probing amendment is above all directed at trying to influence the Government, but the other purpose is to see whether anyone else in the Committee rather agrees with the line of it, which may also be useful information for Ministers when they are taking final decisions on what the shape of the Bill should be.

The noble Lord made a very good case. We all know that legislation of this kind is essentially a matter of balance. On the one hand, we are imposing on people constraints and breaches of privacy and liberty. We are also imposing on them costs, because it is likely that to be able to respond to orders such as these they will have to pay accountants to do work. As the noble Lord said, we may be talking about amounts of wealth that are a substantial portion of the portfolio of the individual citizen being investigated. To respond to the investigation, the individual may need to spend significant amounts of money on accountancy or other professional advice. We should be very careful and aware of the costs of doing such things. We should also be aware that there is always a temptation for an authority, if it has a power, to use it and say, “There’s no downside. Let’s just put in a request to the High Court to have one of these investigations”. The noble Lord is therefore right to emphasise the need to protect the citizen to make it absolutely clear that an authority before making such a request, or a court before acceding to it, must be really convinced that there is a case for doing something quite exceptional—the state asking an individual to declare his or her private affairs. I therefore agree with the sense of the noble Lord’s amendment and I hope the Government take it seriously.

European Union Committee: 2012-13 (EUC Report)

Debate between Lord Davies of Stamford and Lord Hodgson of Astley Abbotts

Tuesday 30th July 2013 Lords Chamber

[Lord Hodgson of Astley Abbotts]

My Lords, it is a great privilege to follow the noble Lord, Lord Kerr of Kinlochard. A lifetime at the diplomatic coalface has given him analysis and perspective that I cannot hope to match, and I listened with great interest to his suggestions.

I am just an ordinary member, now of Sub-Committee E and previously of Sub-Committee F. This has given me the opportunity to study in detail four very different chairmen: my noble friends Lord Jopling and Lord Bowness, the noble Baroness, Lady Corston, and, previously, the noble Lord, Lord Hannay. Each has been extremely effective and has been able to corral their potentially recalcitrant flocks with humour and good sense. It has been a pleasure to serve under them all. The other group to whom I add my thanks are the clerks, who do such terrific preparatory work and manage to turn the meanderings of the committees into a coherent whole. In my view, the country and the House owe a great debt of gratitude to both these groups.

As a member of Sub-Committee E, I served on the joint Select Committee considering the opt-out decision but I am not proposing to cover that issue now. The House has debated it at length and I agree with the noble Lords, Lord Judd and Lord Hannay, that the delivery of the Government’s response was unacceptably late. However, we have had a good chew of that and candidly, if I am honest, I am suffering a bit from opt-out or opt-in fatigue, at least for the time being. We will no doubt return to that issue in the autumn.

Instead, I will focus first on another of Sub-Committee E’s reports: that on The Fight against Fraud on the EU’s Finances. The evidence that the sub-committee received indicated that the official figure of fraud—which, as we have been told, was £404 million—was a woeful underestimate and that the real figure could be as much as 12 times higher: around £5 billion.

We also received evidence that OLAF, the European agency charged with fighting fraud, did not always receive the full-hearted national co-operation that it deserved. In these circumstances, the Government’s participation in our inquiry, or perhaps I should say their non-participation, is disappointing. Further, the Government’s response to the sub-committee’s report, received only recently, did not seek to rebut the sub-committee’s suggestion that EU fraud could be as high as £5 billion, merely recording, as the noble Baroness, Lady Corston, said, that it was not a figure that they recognised. This smacks of a good deal of complacency. Fraud is theft—theft from the taxpayer, whose interests every Government in the EU ought to be protecting. Moreover, fraud, if not investigated and prosecuted with vigour, has an unhappy habit of spreading. I hope for a more vigorous approach by the Government on this topic in future.

[Lord Davies of Stamford]

I am grateful to the noble Lord for giving way. Does he agree that, given the importance of fraud—I think that the whole House will be with him on everything that he said on that—it might have been a good idea if the Government had decided to join in with the initiative of setting up a European prosecutor’s office with a specific remit of pursuing fraud cases in the EU?

[Lord Hodgson of Astley Abbotts]

As always, the noble Lord, Lord Davies, has a seductive tone to his voice, but of course that is a completely different issue. We are trying to ensure that OLAF, which is the European fraud investigative committee, operates effectively. That is what we need to concentrate on first rather than, as my noble friend Lord Howell has said, superimposing yet another body that will be out of touch with the reality on the ground.

I shall focus the rest of my remarks on Chapter 10, the future look. I have written to the noble Lord, Lord Boswell, to give him some advance warning of what I wish to raise and what I would like the EU Committee to look at in future: the implications for this country of the continued free movement of labour within the EU—one of the pillars, as the noble Lord, Lord Hannay, firmly pointed out, on which the whole EU structure rests. However, I fear that the UK, uniquely, is already facing some strains from this free movement, strains that I fear will almost certainly become more severe and increase over the next 10 to 20 years.

A couple of figures may help to illustrate the point. England, not the United Kingdom, has now overtaken the Netherlands as Europe’s most densely populated country, with some 400 people per square kilometre. By comparison, France has 125 people per square kilometre, which is one-third or one-quarter as densely populated, and Germany has 260 per square kilometre—about two-thirds as populated. That is today, but over the next 15 years to 2027, if you believe the mid-projection by the Office for National Statistics, the UK’s population—here I am talking about the UK, not England—will increase by 7 million people, from 63 million today to 70 million then. What does this mean in comparable statistics? Last year, the UK’s population grew by just short of 1,100 people per day—a small village every week; a parliamentary constituency every three months or so. By contrast, Italy’s, France’s and Germany’s populations are falling, and on present projections the UK will overtake Germany to become the most populous country in Europe by the early 2030s.

Should we worry about this? Before answering that question, one needs to make it clear that race, colour and creed play no part in the debate. Indeed the social strains, if social strains there be, are likely to be felt most harshly in the minority communities. So should we worry? Physically, we can certainly fit the people in. Bangladesh has 1,400 people per square kilometre compared to England’s 400. However, it will be up to wiser minds than mine as to whether we wish to reproduce Bangladeshi living conditions in the UK.

Concerns revolve around two specific issues. First, there is the impact on our environment—the pressure on the green belt around our cities, the impact on our countryside, especially in the south-east, and so forth. These are important to me but are not the critical issues. For me, the critical issue is the potential crowding out of our native-born population—please note that I say, and I mean, “native-born”; that is not another word for white but, rather, means anyone and everyone who was born here—and the consequences of that crowding-out on our social structure. If the default option for British industry and commerce is to call for more immigration as opposed to upskilling our own population, we run the risk of creating a sullen, disconnected, unemployed and in due course no doubt unemployable underclass—an underclass that, in the minority communities, may well find extremist activities attractive. That is not good for us as a country or as taxpayers.

I shall give the House a practical example. I have a house on the Shropshire/Herefordshire border. As I speak here today, there are about 4,000 people from eastern Europe picking fruit. They are here legally, they behave well, they work hard and at the end of the season all, or at least most, of them will go home. However, there are unemployed locals in Herefordshire and south Shropshire. Talk to the fruit farmers and they will tell you that the locals will not work hard enough, are not reliable and turn up once and do not come again. Talk to the locals and they will tell you that they cannot get the farmers to recruit them because they prefer to recruit in bulk from eastern Europe in the hundreds. Where does the truth lie? I have no idea, but there is an issue here that at some point we have to address.

An argument often advanced for increasing immigration is the need to provide additional people to look after, and compensate for, our ageing population. This has extremely superficial attractions but it ignores the inexorable laws of ageing and compound interest. Today’s increased number of young people leads inevitably to tomorrow’s increased number of old people, who will in turn require still further increases of young people to compensate. Indeed, it has been calculated that if we wish to keep the same number of workers to pensioners as at present—it is about 3.5 to 1—we will already need an extra 27 million more workers by 2050: a 40% increase in our population.

To conclude, while free movement of labour within the EU is only part of the challenge, it is an important part and one which an EU committee will be uniquely well placed to address because it can do so in the non-partisan, equable, evidence-based way at which it excels and which this subject, above all, demands. I take a fairly hard-nosed approach to this country’s relationship with the EU but I do not doubt that at root it has been of great benefit to the United Kingdom. The 900,000 or so graves in France and Belgium are mute witnesses to that fact. However, outside the M25 in particular, the apparently inexorable rise in our population is causing concern. We need to reassure any concerned people that Parliament is aware of those concerns and prepared to investigate them fully, no matter how sensitive they may be.

Martin Wolf, the FT economics commentator, wrote:

“Society cannot function without a majority willing to play by the rules, without individuals demonstrating on a minute-by-minute basis their trustworthiness, reliability, courtesy and self-reliance”.

We need to ensure that we do not stretch these qualities to breaking point.

Financial Services Bill

Debate between Lord Davies of Stamford and Lord Hodgson of Astley Abbotts

Tuesday 3rd July 2012 Lords Chamber

[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.