Financial Services (Banking Reform) Bill
Lord Deighton Excerpts(10 years, 5 months ago)
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The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, it is a great pleasure for me to resume our debates on the Bill. We do not believe that there is any need to recommit it. These are radical and important reforms—ring-fencing, bail-in, depositor preference, a new senior person’s regime and new criminal sanctions. The Government wish to put them in action, move forward and leave the period of deliberation behind. We wish to end the uncertainty for the economy, consumers and taxpayers that prolonged reviewing can bring. Where the reforms can be improved to increase their effectiveness, the Government have been prepared to listen, and you will see that we have responded. However, where the Government do not believe the proposals are backed by evidence, or are unreasonable, we have respectfully disagreed and set out our reasons. This is the approach that we have taken to all the amendments.
Specifically on Amendment 1, from the noble Lord, Lord Barnett, the ICB recommended that only retail deposits—that is, the deposits of individuals and small businesses—should be ring-fenced. This amendment would require all deposits to be ring-fenced. The ICB recommended that large organisations and wealthy individuals should be able—though, importantly, not obliged—to deposit with non-ring-fenced banks. This was because these depositors are sufficiently financially sophisticated to tolerate an interruption in access to a single bank, for example because they have multiple banking relationships. These sophisticated depositors therefore do not need the protection that is being mandated inside the ring-fence provides. They may choose to deposit in a ring-fenced bank if they wish, of course. It also provides a little bit more competition. It gives wealthy individuals and businesses the opportunity to shop around.
Large corporates and financial institutions also use complex financial products which ring-fenced banks will rightly be prohibited from selling. To obtain these products, such as complex derivatives, large companies or financial institutions will need to go to a non-ring-fenced bank. Given this, it is reasonable that these customers should be permitted also to deposit with non-ring-fenced banks, as the ICB recommended. The Government accepted the ICB’s recommendation. Therefore the Bill allows the Treasury to specify by order that a non-ring-fenced bank can accept deposits in certain circumstances.
The deposits of individuals—other than very wealthy and sophisticated ones—and small businesses will have to be within the ring-fence. There is no compulsion for large organisations or wealthy individuals to deposit outside the ring-fence, only the option for them to do so if they so choose. This option is provided for in secondary legislation. The Government published a draft of the relevant order for consultation in July this year. It is appropriate that detailed provisions such as this should be made in secondary rather than primary legislation to allow the legislation to keep pace with future developments in the market and to keep it fit for purpose. This approach was endorsed by the PCBS in its first report.
It is also important to highlight that under the Bill the Treasury does not have unlimited power to determine which deposits do not have to be ring-fenced. The Treasury may only allow deposits outside the ring-fence if it is convinced that doing so does not undermine the ring-fence and that the depositors concerned do not need the protection of the ring-fence. This is therefore a constrained power that is needed to implement the recommendations of the ICB. I therefore urge the noble Lord to withdraw his amendment.
Lord Barnett
My Lords, I do not think that the Minister has dealt with the central arguments about separation; he dealt mainly with something quite different and did not reply to my questions. Whether or not he has the information to hand, perhaps he could think about whether the staff of the FSA received millions of pounds in compensation for redundancy before they were reappointed to the FCA. Can he at least tell us that?
Lord Deighton
The central question of full separation is in Amendment 2, which we will address next, and we can go on to discuss it. With respect to the FSA redundancy arrangements, I would be delighted to write to the noble Lord with that information when I have it at my fingertips.
Lord Flight (Con)
My Lords, can I ask the Minister for a little clarity on ring-fencing in terms of what is in this pot and what is in the other pot? The point he has made is that the ring-fenced pot will essentially be individual family deposits while commercial deposits would be outside the ring-fence; but what about the other side of the balance sheet in the sense of which part of the loan portfolio is to be in the ring-fence and which part is to be outside it? My previous understanding was that the ring-fence was going to be all deposit-taking and all lending. My reservations, if you like, with regard to the Glass-Steagall solution are that history has shown it is lending and not investment banking that has always caused banks trouble. This time round it was CDO lending and the unwise lending by HBOS and RBS that actually caused the banks trouble. The idea of separating absolutely banking and investment banking as a great protection for the deposits of ordinary citizens is entirely false in terms of economic history.
Lord Deighton
The clarification is that the ring-fence effectively operates on the liabilities side, so we are dealing with core deposits. Just to correct the point and make it clear, the most sophisticated investors can be either inside or outside the ring-fence, and they have the choice. However, the asset side of the bank’s balance sheet is unconstrained in the rules.
Lord Barnett
My Lords, I will withdraw Amendment 1 and then move Amendment 2, although I spoke to it generally in my first speech and I do not wish to detain the House for too much longer. But as the noble Lord, Lord Lawson, said at the time, these are two totally different cultures and it is going to be virtually impossible to put the two together—those were his words. I therefore suggest to the Minister that Glass-Steagall, which worked for 60 years in the United States, could be made effective here if we had stronger regulations to make sure that those banking lobbyists could not succeed in stopping the separation. That was the major point that I made, and will continue to make. That is also where I would like to leave it so that the Minister can reply to Amendment 2. I beg leave to withdraw the amendment.
Lord Deighton
My Lords, this Bill legislates for ring-fencing. That is the Government’s policy, not Glass-Steagall-style full separation. The Government support ring-fencing, but not as a compromise option or a lukewarm version of separation, and not as a watered-down policy. Rather, the Government have adopted the ring-fence after careful consideration of the recommendations of the Independent Commission on Banking. As noble Lords will recall, the ICB was established in June 2010. It deliberated for 15 months before making its recommendations in September 2011. As part of its deliberations, the ICB considered full separation as an alternative to ring-fencing, but it rejected that alternative and instead recommended ring-fencing. The Government have accepted the ICB’s recommendation, and the commission set out its rationale for rejecting full separation in its final report.
Let me remind the House of the ICB’s line of reasoning. The ICB argued that an effective, robust ring-fence would deliver the same benefits to financial stability as full separation, on the model of Glass-Steagall. A robust ring-fence will insulate vital retail banking services from shocks to global financial markets—for example, reducing the risk that British high-street banks will be brought down by swings in the prices of complex securities. Let us recall, too, that retail banking has its risks and that market discipline demands that badly run banks must be allowed to fail. If a retail bank fails, a robust ring-fence will enable the authorities to manage that failure in a controlled way, with essential services kept running with the core deposits we were talking about, but without any injection of taxpayers’ money. So, a strong ring-fence will minimise the chance that a future Government will ever be forced to bail out a failing bank. The moral hazard that encouraged excessive risk-taking before the recent crisis would be removed.
The ICB argued that a robust ring-fence would deliver the same benefits as full separation, and would avoid some of full separation’s main disadvantages. In particular, a ring-fenced bank that found itself in financial difficulties could be supported by other group members, such as a healthy sister investment bank. Full separation would not allow this. Essentially the ring-fence is a valve; it does not let any of the bad stuff get into the ring-fence but allows support to come in if it needs it.
Under ring-fencing, a banking group could offer a one-stop-shop service to customers, especially business customers, so there is a strong marketing advantage to the group. Deposits or simple loans could be arranged with the group’s ring-fenced bank, while more complex products are supplied by the group’s investment bank. Full separation would not allow this. Finally, the ICB estimated that by denying banks the legitimate benefits of diversification, full separation would impose higher costs—costs that would likely be passed on to banks’ customers and to lending.
In summary, ring-fencing will bring the same benefits as full separation, but with fewer disadvantages. A rational, sober evaluation of the two thus brought the ICB to identify ring-fencing as the superior policy. I would like to use this opportunity to put paid to some myths around ring-fencing versus full separation. First, some claim that full separation is simpler to legislate for, and there is no complexity. Any separation of banks’ business will inevitably involve detailed rules to specify where the line, whether it is a ring-fence or a complete separation, is to be drawn, and prescribe which activities must take place either side of that line. As banks’ business is complex and involves a wide range of different products and services, so drawing that line will inevitably be complex. But a line will have to be drawn and someone will have to decide what is in each separated type of bank. It is the same problem for ring-fencing and full separation.
Secondly, either form of separation will, unless vigilantly maintained, be vulnerable to erosion or bank lobbying. There are plenty of examples of that through history. I do not, therefore, accept that full separation is either more simple or more robust than ring-fencing. As I have already said, the ICB conducted an exhaustive and detailed investigation of the case for different types of structural reform before coming to its recommendation in favour of ring-fencing. That recommendation commanded a wide consensus—including regulators, industry and the Opposition. Let me quote the shadow Chancellor speaking in the Commons when the Government first responded to the ICB in December 2011. He said that,
“we, too, support the commission’s radical reforms on ring-fencing”.—[Official Report, Commons, 19/12/11; col. 1074.]
Of course, no matter what the weight of evidence, there will always be some who disagree with the consensus. But to those who advocate full separation as an alternative, we need to ask: what is the evidence that supports this alternative policy? Throughout this process so far, the Government have openly invited others to give their views and present new evidence. We consulted widely, and submitted this Bill to pre-legislative scrutiny by the PCBS to seek its input. I do not think that the PCBS produced hard evidence in favour of full separation. It presented nothing that compared the two proposals, although it elicited some strong expressions of scepticism on whether it would work. Those are valid. It is certainly a new way of doing things.
Lord Flight
My Lords, can I ask the Minister whether I am right in thinking that the PRA would be the main regulator of the balance sheets of the two entities under ring-fencing, and not the FCA, which is about protecting customers? Secondly, if there were a Glass-Steagall separation, is the job not exactly the same, in that you would need to look carefully at a separate investment bank and a separate banking bank to make sure that one did not have things in it which ought to be in the other? I would have thought that the job of regulating would be exactly the same as under a ring-fenced structure.
Lord Deighton
I agree with my noble friend’s explanation of the roles and responsibilities of the respective regulators in each case.
Lord Hamilton of Epsom (Con)
My Lords, I support my noble friend Lord Lawson’s amendment as well. Like him and the noble Baroness, Lady Cohen, I have always been a believer in Glass-Steagall, and in the complete separation of investment banks from clearing banks as the only way in which you can guarantee that there will be no contamination.
My noble friend the Minister described the ring-fencing as robust. I do not know how he can speak with such confidence about the robustness of the ring-fencing. I do know that many people in the City today are, as we speak, working on ways to get round the ring-fence and to make sure that money held in clearing banks can be used in investment banks. The problem is that there is an enormous financial incentive to get round this ring-fence. If that incentive remains when you do not have separation, it is only a matter of time before the clever people employed in the City will find a way round it.
I agree with my noble friend Lord Phillips. Much has been made of the cost of separation, but there is also the cost of ring-fencing. There are a one-off cost and a continuing cost. It would be regrettable if we did not support my noble friend Lord Lawson’s amendment and I intend to do so.
Lord Deighton
My Lords, before I turn to the substance of these amendments, I would like briefly to pause and reflect on the process that has brought us to this point. Throughout the course of this Bill the Government have consistently tried to adopt the most constructive approach possible, welcoming contributions from all sides to help us get this right. I am particularly grateful for the constructive comments to that effect from my noble friend Lord Lawson and the most reverend Primate. I thank them for those.
Our ambition has just been to get this right. Even before the Bill was introduced to Parliament, we asked the PCBS to conduct pre-legislative scrutiny. We considered seriously its recommendations both on the draft Bill and on banking conduct and standards more generally. Almost a third of the Bill before us today was either added or heavily amended in response to its recommendations. We have also showed ourselves to be open to considering ideas proposed by the Opposition, both in the Commons and in this House. Where we have been convinced by the points made, we have been willing to amend the Bill to reflect that. I think that the sentiment of the House has demonstrated that. That includes changes to the process of scrutiny of the ring-fencing proposals, introducing the single bank separation power, putting the so-called Haldane principles in the Bill and clarifying the regulator’s objectives.
Lord Eatwell
My Lords, I am very grateful to the Minister for that expert summary of a complex set of amendments. However, I hope that I may ask him one question before he sits down. He referred to our Amendment 12, which would shorten the period before a review takes place, and said that he was very sympathetic and receptive to that point. Will he therefore accept Amendment 12?
Lord Deighton
I think the right thing for us to do is to discuss it together with our colleagues from the PCBS. The noble Lord is, of course, entitled to take the amendment to a vote, but I have not yet had the chance to discuss it with PCBS colleagues. The Government have an open mind on the relevant period, so I would prefer a fuller discussion.
Lord Eatwell
Does the Minister mean that he is content to return to this issue at Third Reading?
Lord Eatwell
Thank you very much.
This is a complicated set of interrelated amendments. I congratulate the Government on their Amendments 11 and 16 in which they have moved towards the commission’s position in proposing an independent review. By the way, I did not find any evidence that new Section 142J had been deleted, which was the previous requirement that the PRA conducted the review. Is there supposed to be a PRA review and an independent review? Surely that is not the case. It is not an important point but we should not leave both of them on the statute book. As I say, I did not detect that new Section 142J had been deleted.
We have a coherent package with the nested structure of the ring-fence, the electrification applied to individual groups and the electrification applied to the whole structure of banking—the so-called complete separation. That seems to me a coherent, rational structure which is supported by the review. Therefore, there will be the opportunity to take into account the detailed scrutiny by the ICB and the commission and consider which stage of this nested structure should be accepted. It seems to me that that coherence provides certainty as regards the way forward—not uncertainty, as the noble Lord, Lord Hodgson, suggested—because the review will not throw everything up in the air and lead to more years of parliamentary debate. We have been doing this for three years already, leaving the industry in a state of uncertainty. We should not throw it up in the air again but create a clear, rational structure that has been carefully put together by the ICB and the commission to provide for the review and separation.
The ordering of amendments before us makes our consideration a little awkward because we first have to consider my amendment on separation, Amendment 3 —which is identical to the commission’s amendment, Amendment 6—and then talk about the review. However, in the light of the care and consideration that the commission has given, I am content to fully support the commission’s position on the triumvirate of ring-fencing, group separation and full separation. I therefore wish to test the opinion of the House on Amendment 3.
Lord Deighton
Lord Deighton
My Lords, these amendments make a number of minor and technical amendments to the Bill. Amendments 7 and 8 amend new Section 142W, which gives the Treasury the power to require that ring-fenced banks make arrangements to ensure that they cannot become liable for the pension liabilities of any non-ring-fenced entity, and that they minimise such potential liabilities if they cannot entirely prevent them arising. In the process of making these arrangements, the pension scheme trustees may wish to transfer assets or liabilities between schemes. These amendments clarify that the Treasury can make regulations enabling trustees or managers to transfer to another pension scheme all the pension liabilities arising in connection with persons’ service before the date on which ring-fencing comes into effect, together with all the scheme’s assets and not just part of those liabilities and assets.
The Government’s intention is to give banks and trustees flexibility in how they carry out any segregation or separation of pension schemes. If trustees judge that transferring all such liabilities or assets is in the best interests of scheme members, the legislation should not prevent that. The trustees have a duty to act in the best interests of scheme members throughout any restructuring that takes place to comply with ring-fencing. As an added safeguard, we are taking the power under the Bill to require the banks by regulation to do all they can to get clearance from the pensions regulator for their scheme restructuring.
Amendment 9 is a minor and technical amendment which clarifies the definition of a qualifying parent undertaking for the purposes of Part 9B of FiSMA, which deals with ring-fencing. A qualifying parent undertaking is defined in proposed new Section 142L(4), and this amendment ensures that this definition will apply wherever the term is used in Part 9B.
Amendment 173 is a minor and technical amendment which clarifies that the definition of regulator in Section 3A does not apply for the purposes of Sections 410A and 410B, which deal with the Treasury’s power to impose fees on the financial services industry to cover the costs of UK participation in certain international organisations. The amendment ensures that the definition of regulator that applies to these sections includes the Bank of England, rather than the definition given in Section 3A of FiSMA, which is limited to the FCA and the PRA.
Lord Deighton
Lord Deighton
Lord Deighton
My Lords, this amendment removes Clause 5 from the Bill. It will leave the regulators, the PRA and the FCA to decide among themselves which one of them designates board members of ring-fenced banks as senior managers and which directors should be designated. Clause 5 requires that the PRA on its own designates all directors of a ring-fenced bank as senior managers under the new senior managers regime. This clause was introduced originally before the senior managers regime was proposed. It now needs to be updated to reflect those changes.
The PRA is considering how to implement the PCBS’s recommendation of focusing the new senior managers regime to strengthen individual responsibility for actions of the firm. The PRA wants to develop the new regime in a way that improves its ability to bring enforcement action against individuals when things go wrong. To achieve this, the PRA thinks that it may be best to limit the number of board members it designates as senior managers, to narrow the scope of accountability. Those directors designated senior managers by the PRA will need to comply with conduct standards that will further the PRA’s safety and soundness objective.
Clause 5 would force the PRA to designate all board members of ring-fenced banks as senior managers. It prejudges the outcome of the regulators’ policy development and could result in the application of the senior managers regime to ring-fenced banks being less focused than for the rest of the sector. A focused regime should improve the ability of the PRA to take enforcement action against individual directors by making clearer which senior managers are responsible for different aspects of the firm’s business. The Government therefore agree with the PRA that Clause 5 should be removed.
Some directors not designated as senior managers by the PRA may be more appropriately designated by the FCA. The precise calibration should be left to the regulators, who will consult on this next year. The removal of the clause also brings the application of the senior managers regime to ring-fenced banks into line with how it will be applied outside the ring-fence. Outside the ring-fence the PRA or the FCA can designate directors as senior managers.
Moving on, the minor and technical amendments to Schedule 2 will help to ensure that the bail-in provisions can be used effectively and as intended. Following the introduction of these provisions in Committee, we have discussed them with various stakeholders and experts. These amendments are the result of those discussions.
First, we have specified that special bail-in provision can be made to release guarantees which are not provided directly by the bank, but by other companies in the banking group, in consequence of the application of the powers to make special bail-in provision in relation to the liabilities of the bank under resolution. This ensures that guarantee arrangements can be adjusted in line with any write-down or cancellation of a liability of a bank covered by that guarantee.
Secondly, the amendments will give the Bank of England the ability to make an agreement with the director or directors of a bank with regard to the preparation of the business reorganisation plan. The existing drafting already allows such an agreement between the Bank of England and the bail-in administrator when appointed to prepare the plan. This is simply an extension of the arrangement to cover the case in which a director is appointed to perform that task.
Thirdly, we have clarified that where any person is acting under the direction of the Treasury for purposes related to state aid, that person is granted immunity from liability in damages save in relation to action in bad faith or in breach of the European Convention on Human Rights. There is a minor linguistic change to subsection (3) of new Section 48D to be inserted into the Banking Act.
Finally, the exercise of any of the stabilisation powers under Part 1 of the Banking Act 2009 to reduce a bank’s debt may lead to taxable loan relationship profits that would hinder its rescue. Consequently we will bring in measures in the next Finance Bill, with retrospective effect to this date, to relieve any such taxable profits that arise. I beg to move.
Lord Deighton
“Independent review of operation of legislation relating to ring-fencing
(1) The Treasury must, before the end of the initial period, appoint a panel of at least 5 persons (“the review panel”) to carry out a review of the operation of the legislation relating to ring-fencing.
(2) “The legislation relating to ring-fencing” means—
(a) Part 9B of FSMA 2000 (as inserted by section 4);(b) orders and regulations made by the Treasury under that Part;(c) ring-fencing rules, as defined by section 142H(3) of FSMA 2000, made by the FCA or the PRA;(d) section 192JA of FSMA 2000 (as inserted by section 116);(e) rules made by the FCA or the PRA under that section.(3) The initial period is the period of 4 years beginning with the first day on which section 142G of FSMA 2000 is fully in force.
(4) The members of the review panel must be persons—
(a) who appear to the Treasury to be independent of the PRA, the FCA, the Bank of England and the Treasury, and(b) who do not appear to the Treasury to have any financial or other interests that could reasonably be regarded as affecting their suitability to serve as members of the review panel.(5) In appointing the members of the review panel, the Treasury—
(a) must have regard to the need to ensure that the review panel (considered as a whole) has the necessary experience to undertake the review, and(b) must ensure that at least one of the members is a person appearing to the Treasury to have substantial experience in central banking or banking regulation at a senior level.(6) Before appointing the members of the review panel, the Treasury must consult the chairman of the Treasury Committee of the House of Commons.
(7) The reference in subsection (6) to the Treasury Committee of the House of Commons—
(a) if the name of that Committee is changed, is a reference to that Committee by its new name, and (b) if the functions of that Committee (or substantially corresponding functions) become functions of a different Committee of the House of Commons, is to be treated as a reference to the Committee by which the functions are exercisable;and any question arising under paragraph (a) or (b) is to be determined by the Speaker of the House of Commons.(8) The Treasury must appoint one of the members of the review panel to be the chair of the panel.
(9) The review panel must, within a reasonable time after the end of the initial period, make a written report to the Treasury—
(a) setting out the results of the review, and(b) making such recommendations (if any) as the panel considers appropriate.(10) The Treasury must—
(a) lay a copy of the report before Parliament, and(b) publish the report in such manner as they think fit.(11) Any expenses reasonably incurred in the conduct of the review are to be paid by the Treasury out of money provided by Parliament.”
Lord Deighton
“Right to obtain documents and information
(1) A review panel appointed under section (Independent review of operation of legislation relating to ring-fencing)—
(a) has a right of access at any reasonable time to all such documents as the panel may reasonably require for the purposes of the review, and(b) may require any person holding or accountable for any such document to provide such information and explanation are reasonably necessary for that purpose.(2) An obligation imposed on a person as a result of the exercise of the powers conferred by subsection (1) is enforceable by injunction or, in Scotland, by an order for specific performance under section 45 of the Court of Session Act 1988.”
Lord Deighton
“(1A) “Special bail-in provision”, in relation to a bank, also includes any associated provision (see subsection (1B)) that the Bank of England may think it appropriate to make in consequence of any provision under subsection (1) that—
(a) is made in the same resolution instrument, or(b) has been made in another resolution instrument in respect of the bank.(1B) “Associated provision” means provision cancelling or modifying a contract under which a banking group company has a liability.”
Lord Deighton
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Lord Deighton
Lord Newby
Lord Newby
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Lord Newby
Lord Newby
My Lords, we now move to a group of government amendments which pertain to the scope of the offence relating to a decision that results in bank failure. This offence was introduced through amendments to the Bill in response to a recommendation by the PCBS. As tabled in advance of the debates in Committee, and building on the FiSMA definition of “bank”, the offence would have applied to retail banks and building societies. This meant that all deposit takers except credit unions were covered.
As discussed in earlier debates on the scope of the senior managers regime, the Committee debate on 15 October has prompted the Government to reconsider this position. In the light of the persuasive arguments put forward in that debate, we are amending these clauses so that the offence may be committed not only by senior managers of a bank, but by senior managers of relevant authorised persons. “Relevant authorised person” is defined by government Amendment 106 to include banks and those investment firms that are regulated by the PRA as well as the FCA. These are known as systemic investment firms, because their large size means they have a significant impact on the wider financial sector. Smaller investment firms will continue not to be covered by the offence. This is because, like credit unions, they do not represent a significant risk to taxpayer funds, or to financial stability, and their failure is very unlikely to lead to serious harm to customers.
The Government shared this definition with the members of the former PCBS and are hopeful that the scope now captures those firms that the PCBS had in mind. I hope that these amendments fully meet the House’s concerns on the matter.
The other amendments in this group make consequential amendments to Clauses 27 to 28 which are necessary to give effect to this change, and improve the drafting of the existing provisions. There was also some debate in Committee over whether the cross-heading as tabled properly represented the offence. In the light of this, I have asked the House printers to amend the heading so it now reads, “Offence relating to a decision causing a financial institution to fail”. I trust that this addresses the concerns raised. I beg to move.
Lord Lawson of Blaby
I make one point of clarification on what my noble friend said. I apologise for my cold. It is absolutely necessary that the definition of “bank” should be extended in the way that the noble Lord has said. I am very pleased with that. He gave us a reason that these investment banks, or these investment institutions, might be a potential liability for the taxpayer. I hope he will withdraw that. It is very important that there is no taxpayer liability there. The reason we wanted it expanded is that we were concerned about banking standards, which was what this commission was all about: banking standards and culture. That is why it is necessary that there should be this regime for these banks, not because there might be a taxpayer risk or bailout.
Financial Services (Banking Reform) Bill
Lord Deighton Excerpts(10 years, 5 months ago)
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Lord Deighton
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Lord Deighton
“(2) “Financial institution” means a UK institution which—
(a) meets condition A or B, and(b) is not an insurer or a credit union.(2A) Condition A is that it has permission under Part 4A of FSMA 2000 to carry on the regulated activity of accepting deposits.
(2B) Condition B is that—
(a) it is for the purposes of FSMA 2000 an investment firm (see section 424A of that Act),(b) it has permission under Part 4A of that Act to carry on the regulated activity of dealing in investments as principal, and(c) when carried on by it, that activity is a PRA-regulated activity.”
Lord Deighton
Financial Services (Banking Reform) Bill
Lord Deighton Excerpts(10 years, 6 months ago)
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The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, these two amendments concern the role of auditing in banks. Many excellent points have been made about the historical challenges and weaknesses and to some of the problems they have created. However, not all of these have specifically addressed the amendments themselves.
Amendment 92 seeks to strengthen quality engagement between auditors and supervisors. We agree we want to accomplish that and the noble Lord, Lord Eatwell, made the same point. The question is about the most effective way to ensure it is consistently brought about and the difference between us is about how we accomplish that. It may appear attractive to require greater engagement in statute as a guard against complacency in the future, but the clause risks weakening the auditor dialogue and perpetuating the tick-box approach that was found wanting in the last financial crisis. That was one of the most important lessons about regulation we learnt from that crisis. The FSA was widely criticised for measuring adherence to its rules—like how many times you met the auditor—but not coming to an informed judgment about the risks in individual companies and the wider market. That is where the focus of our regulation needs to be.
I may have been in the private sector too long, but solving a major problem by legislating for a number of meetings has never been the best way to get quality outcomes to serious problems. The FSA was criticised, beforehand, for not engaging enough with the auditors of the banks they supervised. The then statutory requirement for regulators to meet with auditors at least once per year simply became another process and the wider purpose of the meetings was not properly developed. The whole point of the Financial Services Act 2012 was to make sure such failing was addressed and that the regulators follow a judgment-led approach to supervision. This means that all enforcement activities must enhance the regulators’ understanding of the business and the wider market to better enable them to detect risks before problems become serious.
FSMA now includes a new Section 339A—which deals with the powers to which my noble friend referred—requiring the PRA to have arrangements for sharing information and opinions with auditors of PRA-authorised persons, and to publish a code of practice setting out the way in which it will comply with this obligation. This code of practice, which we have talked about, sets out the principles governing the relationship between the regulators and bank auditors. The code has been laid before Parliament, so provision has already been made, both in and under FSMA, for a regular dialogue between the regulator and the auditor. These requirements mark a change in focus away from process—stipulating the number of meetings—to actual outcomes: getting them to do the job properly. This requires regulators to consider serious engagement with auditors and subjects their stated approach to scrutiny so we can see if they are complying with the code of conduct: it does not just fall away. This process is not only more rigorous in the short term, but gives the opportunity for parliamentary scrutiny when the codes of practice are laid before Parliament and provides a check on potential complacency in the future.
My noble friend Lord Lawson referred to the need to make sure the dialogue was at least quarterly: the PRA code says that it should be. Most noble Lords will not be familiar with the details of the code of practice, but for the major firms—the ones that are perceived to represent the greatest risk to the stability of the financial system—at least three or four meetings per year are encouraged. This is a risk-based approach and the meetings are: at least one routine bilateral meeting between the lead audit partner and the supervisor; one routine trilateral meeting between the lead audit partner, supervisor and the chair of the firm’s audit committee; and one bilateral meeting between the lead audit partner and supervisor in the lead-up to and during the annual audit of accounts.
Conversely, the amendment’s legal requirement for more regulator meetings with auditors would just follow in the footsteps of the tick-box policy from before the crisis. I am really talking about the smaller, much lower-risk firms, where the guidance is, generally speaking, for at least one meeting a year. Having two meetings a year would simply increase the workload of regulators and take them away from exercising judgment and away from prioritising the most concerning engagements. They would simply be setting up meetings, irrespective of individual circumstances, just because they needed to fulfil a rigid requirement. In our view, such rigidity would weaken engagement and impair the regulators’ ability to adapt their approach as circumstances change.
Because of all that, the Government remain unconvinced of the need to define the frequency of this dialogue in statute, as the PRA code already specifies this and invites scrutiny. My noble friend Lady Noakes put it very well when she spoke about how the world has moved on and how this now operates.
In relation to the second amendment, the Government have been clear that the crisis highlighted deficiencies in accounting standards and the fact that there was room for improvement. We all agree with that, and that is what we said in our response to the final banking standards report. The regulators must have the information they need to do the job of safeguarding financial stability, and in some instances that may require disclosure of financial information on a basis different from that used by other audited bodies. In response to the noble Lord, Lord Hollick, the PRA will have access to management accounts, for example.
In response to the banking standards report, the Government asked the PRA, working with other authorities and the FPC, to undertake a broad-based review of this subject. That review will take account of the nature and scope of information required to create a separate set of accounts, the costs and benefits of the initiative, and international requirements. From 2014, the new Capital Requirements Directive IV will require banks to disclose supplementary information which goes beyond the international financial reporting standards. Therefore, it is not yet clear whether we need an additional, separate set of accounts in the light of the extensive prudential and other regulatory reporting requirements that are being imposed through the CRD IV framework.
However, I can assure noble Lords that, whatever the outcome of this review, the powers that have been given to the regulators under the Financial Services and Markets Act, as amended in 2012—this, again, goes back to my noble friend asking about the existing powers—are already sufficient to permit the regulators to do everything that this amendment gives them the power to do. Their current powers would permit the regulators to make rules requiring banks to prepare additional accounts, to the extent that this is permissible under EU law, to specify the principles that should govern the preparation of such information and to make it public. To the extent that the amendment merely gives the regulators the powers they already have and does not require anything else of them, it is unnecessary. I therefore ask the noble Lord to withdraw the amendment.
Lord Lawson of Blaby
My Lords, I have listened to what the Minister has said. On the second of his two points, I think that he is very close to the position that I and other noble Lords who have spoken are in concerning the IFRS accounts and their defects. He is very much closer than he is on the first one, and he is very close to what I was trying to say. He said that the Government are going to see whether they can get an improvement. He referred to CRD IV, which goes some of the way but is not entirely satisfactory. The only way that we will get accounts in a form that is satisfactory for the regulators and the supervisory requirements is if they ask for that. He is absolutely right that they can do that now. In practice, they could have done it before the 2008 crash, but they did not. That is the problem. Those of us who support the amendments are saying: once bitten, twice shy. It could have been done before; it can be done now. But it was not done before. Therefore there should be a statutory duty, which would make it more likely that it will be done. How can that be objectionable?
On the first issue the principle is the same: once bitten, twice shy. The idea that this is simply a bit of box-ticking is an insult to the intelligence of this House. As we say in the amendment, the meetings should take place more than once a year—and they will be nothing to do with box-ticking. They will be meetings of the kind that the supervisor and the regulator find most useful. Those people will use their discretion; there is no box to be ticked at all. That idea is—if I may say so, with great respect to my noble friend the Minister—a total absurdity.
It is perfectly true that under the code of practice and so on, such meetings could take place anyway. But that was also the case before: not only could such meetings have taken place, but the Banking Act 1987, which was then in force—that part was not repealed— encouraged them to do so. However, although meetings did take place to begin with, towards the end they did not happen. That is why it makes sense to make it a statutory duty for those meetings to happen. They will not take the form of box-ticking; they will take the form that the regulators and the supervisors find most useful. We leave that to their discretion, but we do not wish to leave to their discretion—this is, in effect, the Government’s position—whether the meetings take place at all. We may wish to discuss this further, but for the present I beg leave to withdraw the amendment.
Lord Brennan (Lab)
My Lords, Mr Andrew Tyrie, the chairman of the Parliamentary Commission on Banking Standards, described leverage ratio as,
“the single most important tool to deliver a safer and more secure banking system”.
In their reply last July, the Government accepted this importance. Indeed at paragraph 5.50, they plainly stated that in the future the FPC should determine the ratio, provided that it was not allowed to fall below the international standards reflected in Basel III. However, at paragraph 5.51, that commitment having been repeated, it is then said that it is,
“subject to a review in 2017”.
The question therefore arises, if the Government are committed in principle to the FPC determining the ratio, what in this review in 2017 might affect that principle? Questions of amount or the approach to ratio in the light of Basel III go to the process rather than the principle of who determines the ratio. I presume that over the next four years, the Treasury will determine the leverage ratio and will place such requirements about it as it thinks fit on the banking industry.
At page 68 of the response, the Minister will recall that under the heading “leverage ratio”, it is stated that the Treasury is presently reviewing with the FPC the balance between backstop and frontstop considerations. The intention is to publish the results before the end of the year. Given the six weeks or so of parliamentary time that we have left until Christmas and assuming that Report is, for example, in December, will the Minister undertake to ensure that that review is published before Report? It will affect the debate, should it recur on Report, on the question of who makes the decision. The key point, however, is: why 2017, if the principle is accepted now?
Lord Deighton
My Lords, I welcome the engagement of noble Lords on this critical issue of the leverage ratio and the FPC’s toolkit. Everybody agrees the importance of making sure that our financial institutions are appropriately capitalised. There is no dispute about that and the lessons we should have learnt from the financial crisis. The real question—and again my noble friend Lady Noakes hit the nail on the head—is about the journey we take to get there, how it integrates with what is going on in global standards, and what powers the FPC and the regulators already have to ensure that we are in the right place in the mean time. I think that also comes back to the points made by the noble Lord, Lord Brennan.
I shall try to give some context, particularly for those who are not so familiar with all the aspects. With each of these amendments, I ask myself what the point of substance is between the amendment and the Government’s position and whether I can reconcile the two with the existing actions we are taking. In this case I have been able to comfort myself that adequate protections are absolutely in place, given the objectives of this amendment.
The FPC has two main sets of powers at its disposal. The first is a power to make recommendations. This includes recommendations to both the PRA and the FCA. They can be made on a “comply or explain” basis. The second set of powers, which we are talking about here, is to give directions to regulators to adjust specific macroprudential tools. Amendment 93 proposes that the Government give the FPC direction powers to implement a minimum leverage ratio in the UK. Before explaining why the amendment is not necessary or desirable, let me explain the international and domestic context, beginning with the international.
In order to address recognised problems with the system of risk-weighted capital requirements—which we have all talked about and acknowledged—the Basel III accord recommends a complementary binding minimum leverage ratio. Again, we have all agreed that the right way ahead is for the two to work together, so there is no dispute about that. That standard comes into force in 2018, following a final calibration of the leverage ratio in the first half of 2017 so that we get it right. Separately, at the European level the European Banking Authority will undertake a review of the leverage ratio with a view to the European Commission introducing legislation in 2017. The Government agree, and have consistently argued, that banks must be subject to the binding minimum leverage ratio requirement, which supplements the risk-weighted capital requirements as set out by the Basel III accord. Therefore the Government fully anticipate the development of internationally agreed minimum standards of leverage.
The Government take the view—and we believe that the regulators agree—that the optimal approach to creating a lasting binding minimum standard is to work towards international agreement and its implementation through legislation. As Mark Carney wrote in the Financial Times on 9 September:
“Yielding to calls for unilateral action to protect domestic systems would risk fragmenting the global system, slowing global growth and job creation”.
Once that minimum is agreed domestically, the Government propose—and this directly addresses the point made by the noble Lord, Lord Eatwell—to furnish the FPC with a specific macroprudential tool to vary the leverage ratio, through time, obviously subject to it not falling below the minimum.
However, the question raised by the amendment is: what powers do the regulators have to take action on leverage between now and 2018 in advance of the introduction of that internationally agreed binding minimum requirement through European legislation? Let me reassure noble Lords that the regulators already have extensive powers to address the issues raised by this amendment. The FPC has broad powers to make recommendations to the regulators, on a “comply or explain” basis, including on leverage. The PRA has all the powers necessary—which we have talked about—under Section 55M of the Financial Services and Markets Act 2000 to require individual firms to take specified actions, including on leverage. Under Section 137G of FiSMA it may make rules in pursuance of its general functions, including rules on leverage ratios.
The killer fact, if I may call it that, is that on 20 June—interestingly, one day after the publication of the PCBS report containing this recommendation—the PRA announced that it would require eight major UK banks to meet a tougher leverage ratio than that prospectively required by Basel III. They have already done that. That action followed a March 2013 recommendation from the interim FPC to the PRA to consider applying higher capital requirements to any major UK bank or building society with concentrated exposures to vulnerable assets, or where banks were highly leveraged relating to trading activities. Put simply, the regulators already have the powers to do what the noble Lord appears to be suggesting in advance of international agreement.
Lord Eatwell
I am intrigued by that argument. The noble Lord started off with a powerful argument for the necessity of a leverage ratio that is allied with risk-weighted assets and other measures. He is now saying that we do not need it because it is all there already. Why, then, are we even bothering to think about introducing it in 2017 or 2018? As he said, we have all the powers already. He is absolutely contradicting himself in a single speech. Will he also address the fact that the Bank of England’s response today to the banking commission’s final report states that the FPC will publish its assessment of the appropriate level of the leverage ratio by the end of this year? When the FPC publishes that assessment, what will the regulators and the Treasury do about it?
Lord Deighton
There was nothing contradictory in what I said, but I will clarify it. For the longer term, we absolutely agree that we need an internationally consistent standard that will work with a minimum leverage ratio. In the mean time, before we are able to employ that in a way that is consistent with how those rules work out, we have the powers individually to make sure that leverage ratios exist which protect the system. I do not think that there is anything contradictory about that. It simply shows that in the short term we have the capacity to protect the financial system, and that is exactly what the regulators have done. There is nothing contradictory in that at all. The regulators have the powers to do what they need to do and will continue to have those powers after international agreement has been reached, at which point we will integrate them through the power that we will give the FPC to set the varying leverage ratio through time.
Lord Deighton
I apologise to the noble Lord. I was so excited about the first question that I forgot about the second one. It is consistent with what I have already said that the FPC intends to address this recommendation in that timescale, but a full assessment will depend on the definition of leverage agreed internationally, so it all rather depends. In terms of who is going to implement it, as I said, the regulators already have the power to do so. In June this year, they changed the ratios on our key eight institutions to protect them in the mean time, so they have these powers and they have exercised them. I think that is a killer fact.
Lord Lawson of Blaby
My Lords, in some ways this has been a rather puzzling debate. I warmly endorse what the noble Lord, Lord Eatwell, said. This is one of the most important—if not the most important—issue that we have to discuss in the course of this extremely long Bill. For that reason alone, I think it likely that we will wish to come back to it at Report. Meanwhile, I am encouraged to some extent by what my noble friend the Minister said. However, he seemed to be saying at least two completely different things, if not three. One was that we would have to have the leverage ratio—we are all in agreement that we have to have a leverage ratio—that was internationally agreed. Then he said that we would also have discretion, with the FPC, to decide the leverage ratio, and therefore that there was no need for the amendment because the provision was already there.
First, I am not convinced that it is already there. I shall read very carefully what the Minister said. When my right honourable friend the Chancellor responded to the recommendation of the Parliamentary Commission on Banking Standards, he said nothing of the sort. Nor did he say whether he disagreed with it. He said the first part of what my noble friend said: namely, that we have to accept the international standard.
There are only two major global financial centres: New York and London. It is important that we do what is right for our financial centre—and the United States takes the same view. We should not rely on international agreements. Too often it is the lowest common dominator that is agreed. The United States is going its own way, particularly with large banks. It realises that it is a major global financial centre and that New York is so important to the American economy that they have to get it right.
In the United Kingdom, the banking and financial sector is even more important to the British economy. In relative terms, it is five times as important to our economy as the American banking and financial sector is to theirs. Therefore, it is all the more important, if we are to have a strong and successful financial centre and a strong and successful economy in this country, to do what is right.
It is quite clear that that means that we should have a leverage ratio that may be the same as what is agreed internationally—if it is agreed internationally—but may well be a more prudent one. It certainly would not be a less prudent one, but it may be in the interests of the City of London and the British economy that it should be more prudent.
The amendment states that the decision should be taken by the Financial Policy Committee of the Bank of England. In a sense, my noble friend agreed with that when he said that the duty was already there and that we had given it to the committee. If that is so, it is good news. However, I suspect that it is not entirely the case. Therefore, it is very likely—in fact, more than likely—that we will come back to this very important issue on Report. In the mean time, I beg leave to withdraw the amendment.
Lord Turnbull
I reassure the noble Lord, Lord Higgins, that it is certainly not intended, while this activity might remain within a banking group, that it should be done, under the plan, by a ring-fenced bank. One of the reasons why we took the view that we should wait and see is that the dividing line between a proprietary trade and a trade on behalf of a customer is not straightforward, which is why it is very difficult in the US. For example, if I lend the noble Lord money he may seek some kind of hedge which I would provide. That might mean that my position as the bank is no longer what I really want it to be. As a bank, I would look around to see what my colleagues have done during the course of the day, and we would then add up all the positions that we have taken. We may well find that that position is not where we really want to be, so on the following day the bank goes out and undertakes a trade which gets it back to the degree of hedged position that it wants. Was that a proprietary trade or was it a trade that was a consequence of serving a customer? That is why this is actually very difficult and why we are wise to wait and see whether workable definitions could be found of what constitutes real proprietary trading and of what constitutes trading in response to a customer. This measured amendment enables us to do precisely that.
Lord Deighton
My Lords, the ICB considered in detail the case for a ban on proprietary trading in the UK, but decided in favour of ring-fencing. The PCBS heard evidence from a wide range of sources that prop trading does not appear to play a large role in the UK at the moment—as my noble friend Lord Lawson pointed out—nor did it play a significant role in the financial crisis. The noble Lord, Lord Turnbull, has already addressed the question of my noble friend Lord Higgins, but it should of course be noted that the ring-fenced banks will be banned from proprietary trading as well as from market-making and other forms of trading activity that would expose them to risks from global financial markets. Therefore, from a prudential perspective, much of the risk posed by prop trading can be addressed by a suitably robust ring-fence which is, of course, the thrust of our legislation. This was the point made by the PRA in response to questions from the PCBS.
It is also worth noting that the evidence heard by the PCBS also suggests that prop trading is not necessarily the sole avenue for the cultural contamination of banks. For example, the PCBS highlighted in its excellent report the serious failings in culture and standards at HBOS, a bank which did not engage in any prop trading at all. Indeed, it is perfectly possible to run an integrated securities business with full integrity in a way that manages any potential conflicts of interest quite satisfactorily, so they do not necessarily follow. It is far from clear, therefore, that prop trading is the real problem facing the UK financial system, or that structural solutions address cultural problems. In light of that, and of observations about the practical difficulties of a ban on prop trading, as it is being attempted in the US through the Volcker rule, the PCBS did not recommend a ban on prop trading.
It is not wholly clear what further evidence would support a different conclusion to that reached by the PCBS in its own assessment, so it is unclear what a further review into proprietary trading within such a short period of the PCBS’s own report would add. Still less is there a need for such a review to be followed immediately by an independent review of the same question. Of course, we have no issue with reviews as a matter of principle: we are just not sure that, in this case, legislating for one in advance really does much for us.
As the findings of the PCBS do not suggest that prop trading presents a serious prudential risk at this time, I do not think we need to legislate for the regulator to carry out a further review. The absolutely valid point made by my noble friend Lord Lawson was that this could change in the future. That is what we are trying to address. Should that happen, the PRA has made it clear that it already has the powers it needs to bear down on prop trading where it endangers the safety and soundness of a firm or where the risk incurred is not consistent with the publicly stated risk appetite of a bank.
Moreover, monitoring and reviewing all risks to a bank constitutes an essential part of the PRA’s work. The PRA’s approach is to insist that firms adopt and follow a risk appetite that is consistent with the PRA’s statutory objective to promote the safety and soundness of firms that it regulates. This will include regular monitoring and review of all risks, not limited just to those associated with prop trading. Therefore, to require the PRA by legislation to undertake such a review seems unnecessary. Should we legislate for a review of how reference rates are set, for example? Should we legislate for a review of mis-selling practices? Why, therefore, should we do it for prop trading? It is not apparent to me what problem a review would solve. While I think that reviews can play a useful role, in this case we are not sure that it is justified in advance.
We need to give the regulator the space to allocate its resources in a way that is appropriate and proportionate when considering all the different risks to the UK financial system, not only focusing on one particular risk. Our more widely framed reporting requirements allow for this. For all of these reasons, I do not think that a review on the particular issue of prop trading is necessary. The regulators are already subject to extensive reporting requirements. I expect the PRA to make the Treasury, and Parliament, aware of any emerging risks it identifies, whether through prop trading or anything else. The deputy governor for financial stability has already written to the chair of the Treasury Committee, offering to discuss arrangements for reporting. I therefore ask the noble Lord to withdraw his amendment.
Lord Higgins
My Lords, the Minister says that we do not want to have the regulator wasting resources. However, if we ban an activity, it would not waste resources. I am also not absolutely clear—I thought I was—that we are going to say that proprietary trading by a ring-fenced bank is absolutely banned. If that is so, ought we not to make it absolutely clear in the Bill?
On the point made by the noble Lord, Lord Turnbull, we have to distinguish between proprietary trading and other activities such as hedging as there may be a case for the bank operating on behalf of its clients by hedging for a foreign exchange risk or whatever. However, that is not at all the same as what is normally meant, certainly by Paul Volcker, whereby banks use a client’s money to take on particularly risky investments which have nothing to do with the client.
Lord Deighton
I was trying to be clear but I shall reinforce my comments. I think this issue was covered on the first day in Committee when we dealt with the details of ring-fencing. It is clear that proprietary trading for ring-fenced banks is not allowed; it is an excluded activity, as defined. As my noble friend implies, there are some exceptions to that which are predominantly related to a bank’s own hedging activities to deal with its own surplus liquidity. My noble friend’s phrasing was accurate and the issue is included in the Bill.
Lord Lawson of Blaby
My Lords, I think that there has been a slight misunderstanding. My noble friend the Minister said that we have gone down the ring-fencing route instead. That is a different matter altogether. The idea of ring-fencing is to put a sharp barrier between the commercial banking operations of a universal bank—the lending to individuals and to small businesses and, indeed, medium-sized businesses—and the investment banking activities. There should be a line between them. There is also the great question, which we debated earlier, as to whether there should be a total separation. This is about whether a universal bank—I agree with my noble friend that it would not be done in the ring-fenced part—should be permitted to engage in proprietary trading at all.
It is all very well to say that there may be cultural contamination as a result of proprietary trading but that, as there are other forms of cultural contamination as well, we should not bother about this one. I do not buy that. If we can significantly reduce the amount of cultural contamination by making proprietary trading by banks illegal, that is a plus. There may still be other problems with the banking culture, but at least we would have solved an important part of it.
My noble friend the Minister also seemed to say that there was no need to review this issue. There is a need to review it for the very reason that the noble Lord, Lord Turnbull, pointed out. The overwhelming weight of evidence received by the commission in conducting its inquiry was that it would be a very good idea for banks not to engage in proprietary trading for some of the reasons that I and other noble Lords have given in this short debate. However, as the noble Lord, Lord Turnbull, identified, the problem was how precisely you define proprietary trading and distinguish between it and market-making and some of the other activities referred to.
I have known Paul Volcker for 30 years. He is a very wise old bird. I am not suggesting that my noble friend the Minister is not wise, but of all the people I have known in the financial sector Paul Volcker is among the wisest, if not the wisest. If he thinks that this measure is desirable and workable, that carries a great deal of weight with me. He said that if a chief executive of a bank did not know whether or not he was engaging in proprietary trading he ought to be fired. At one level that is a perfectly good answer. Nevertheless, there is a complicated issue of definition. That is why we have said that we should see how things develop over the next three years and see whether there is a workable system in the United States or whether those who say that it is completely impossible to have a satisfactory definition because it will not work are right. We will find that out and then we will take action accordingly.
It is nice to hear mention of the notion that the PRA can bear down on proprietary trading as it implies an acceptance that there is, or could be, a problem. However, that is not the same thing as saying very clearly that no bank should be doing this, even if it is not a ring-fenced bank. At present, the Bill does not go far enough in that regard. This is something to which we will almost certainly wish to return on Report. I beg leave to withdraw the amendment.
Financial Services (Banking Reform) Bill
Lord Deighton Excerpts(10 years, 6 months ago)
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Lord Turnbull (CB)
My Lords, there was a similar organisation set up in my time, the Shareholder Executive. The Shareholder Executive is a body attached to BIS, as it is now called, and it creates a centre of expertise for the management of shareholders. What it does not do is claim to be the decision-maker. It is all very well to have the expertise—we need the expertise—but there is a pretence that decisions relating to RBS and LBG are being taken by UKFI as opposed to being taken by the Treasury on the advice of UKFI. It is a pretence that when it suits you, you can decide, and when it suits you, you can hand it on to someone else.
At the moment, with the change of leadership in RBS—the noble Baroness, Lady Noakes, may not want to comment on this—we do not know whether that was a decision of the RBS board, UKFI or the Treasury. It ought to be clear who took that decision. You can have an advisory body—in this case, almost an executive body—but not one that claims to be the decision-maker, which is the pretence of the UKFI situation.
The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, the intention of the amendment is to transfer into HM Treasury the function of managing the Government’s shareholdings, in particular in RBS and Lloyds. As my noble friend Lord Lawson has pointed out, the Chancellor of the Exchequer, in his Mansion House speech in June, has already made it clear that he rejects this particular PCBS recommendation.
As has been pointed out in a number comments already, UKFI was not a creature set up by this Government; it was set up by the previous Government when they made the initial capital injections into RBS, Lloyds, Northern Rock and Bradford and Bingley, with the idea of being able to manage these investments on an arm’s-length commercial basis. So that was the genesis.
This group works closely with the management of RBS and Lloyds to assure itself of their approach to the strategy and to hold management to account for their performance. RBS and Lloyds are led by their management and board in the interests of all shareholders, including the taxpayer. So, while it may be possible to imagine different arrangements to fulfil these objectives—you can make the arguments and the pros and cons of the different ways of doing it—the current ones work well, as my noble friend Lord Garel-Jones has said, and it would not make sense to change them at this stage. So, just as my noble friend Lord Lawson said it is a simple amendment, there is a simple reason to reject it—it does not make any practical sense. UKFI is working fine and the time and effort it would take to pull it back into the Treasury and to reorient all that work there would distract our efforts on the important work that is currently going on.
My noble friend Lord Lawson referred to the review at RBS in particular, which we are two-thirds of the way through, and the bad bank/good bank option. I am afraid I am going to disappoint my noble friend. I am not going to tell him what the result is but it will be ready this autumn and we will announce the outcome and the rationale behind it. The matter is being pursued with great urgency and the last thing we want to do at the moment is to destabilise the arrangements for conducting that important analysis, which is really the most important thing.
I reiterate that UKFI is staffed by some very good top people. I have worked with them and I have seen the work that they do. Frankly, we have been able to recruit top-class people to do this work on our behalf. I can assure the Committee that the Government continue to value the role that they play. It was demonstrated again, as my noble friend pointed out, by the role they played in advising the Chancellor on the successful divestment of 15.5% of the Government’s shareholding in Lloyds at 75p per share. They will carry on looking at the full range of options for RBS and managing the timing of the subsequent tranches of the sale of Lloyds back into private ownership.
I am grateful to the PCBS and the noble Lord for raising these issues, but the Government consider that UKFI has a vital role to play which it is performing well. I therefore cannot support the amendment and I urge the noble Lord to withdraw it.
Lord Lawson of Blaby
My noble friend will not be surprised to hear that I am wholly unconvinced by his reply; nevertheless I shall please him by withdrawing the amendment.
Lord Brennan
My Lords, perhaps I may take up the points raised by the noble Baroness, Lady Noakes. Paragraph (a) of the proposed new clause refers to a “fiduciary duty” by the ring-fenced body. In practical terms that means a duty exercised by, ultimately, the board of directors. The body acts through it. The practical consequences of such a duty, which does not involve enforceability by the regulators, are twofold. First, if the board of a bank breaches its fiduciary duty to customers in this way, it is perfectly reasonable for the shareholders to refuse to indemnify it in respect of any claims made by customers on the basis that it has breached a statutory duty, which could not conceivably be said to have been acting in the shareholders’ interests. That is the first practical consequence. It is a deterrent. Secondly, although I have not checked this yet, I suspect that in the field of commercial insurance you would not be able to get D&O insurance for protection in respect of a fiduciary duty until you have satisfied the insurability test of having acted reasonably and in accordance with commonly accepted standards of probity and good behaviour in the commercial sector. Therefore, the point is answered, I suspect, by practical consequences.
Lord Deighton
My Lords, this amendment is an opportunity to revisit the imposition of fiduciary duties or duties of care on financial services firms. The other place debated the same amendment at the Committee and Report stages of this Bill. Of course, no one in this House is going to disagree with the proposition that customers need a better deal from their banks, whether we call it treating customers fairly, having better standards or putting customers first. The Government have been keen, for example, to see more competition between banks as another way of addressing this concern. We all want to see better standards in the banking industry and a return to the days when the customer relationship mattered and the customer came first. We want the leadership of banks to appreciate that it is also in their long-term interests in building successful banking businesses. The Government’s amendments so far, which implement the recommendations of the PCBS, will be an important step in the round in that respect.
However, I note that the commission did not itself recommend the introduction of either a fiduciary duty or a duty of care. To cut to the chase, the Government do not consider that the introduction of either a fiduciary duty or a duty of care in legislation would help to drive up these standards within ring-fenced banks. First, banks are already subject to a wide range of legal duties. Most obviously, they are subject to contractual obligations to their customers. Any banking relationship or transaction is subject to a contract between the bank and the customer. Of course, a bank is subject to obligations under FiSMA and the regulator’s rules. Further, the Government’s amendment on banking standards rules means that in future senior managers and ordinary employees will also be subject to conduct rules. Therefore, it is not clear that imposing a fiduciary obligation on a bank would add any value. The fiduciary obligation is the kind of obligation that a director owes to a company, or a trustee owes to a beneficiary under a trust. It is an appropriate obligation when one person is acting on behalf of another or dealing with another’s property on their behalf. However, deposits with a bank are not property held on trust, so a fiduciary obligation would have no place in the contractual relationship between a bank and its customer.
Similarly, it is not clear what a duty of care—
Lord Phillips of Sudbury
I hesitate to interrupt my noble friend at this time of night, but there is an important issue in relation to what he said that needs clarification. He said a couple of times that the relationship between a bank and its customer is a contractual one, and therefore that that was sort of QED. The problem is that until not long ago all banks, in the small print of their contracts, which they knew full well that customers would not read, put material which, had the customers read it, would have led them to not agree the contract. In that situation, the contract said such and such, but the purport was wholly antithetical to the real interests of the customer. How does my noble friend deal with that situation, if he is rejecting the fiduciary concept?
Lord Deighton
It is clear that the essential contractual relationship still exists, regardless of the fine print. It is not clear what a duty of care would add to the existing contractual obligations or regulatory requirements to which the ring-fenced body is subject. The primary duty of a ring-fenced bank is to repay its borrowings, such as deposits, when they fall due, in accordance with the terms of its contracts. If a ring-fenced bank does that and complies with its regulatory obligations, such as those relating to ring-fencing or leverage, it is hard to see what a duty of care would do to make it care more for its customers, inside or outside the financial services industry.
Therefore, the Government firmly believe that it would be better to impose specific and focused requirements, and standards of business, on banks, than to rely on high-level, generic concepts such as a duty of care. Banks can comply more easily with specific requirements. Customers and regulators can more effectively hold to account the banks, and, if appropriate, their senior managers, when they do not comply. Moreover, if our ultimate objective is to improve the deal that customers get from their banks, one of the most effective and direct ways to achieve this is surely by enhancing competition. Banks must be spurred to treat their customers better by the threat of the customers voting with their feet. Through the introduction of the measures in this Bill, including the changes to the regulator’s objectives and powers, and the new payments regulator, we believe that a better deal can be achieved.
Imposing a duty of care or a fiduciary duty would not give banks or their senior managers a clear understanding of what conduct is expected of them. It would not provide a viable and effective means of holding banks to account, and it would not benefit consumers. Therefore, I hope that the noble Lord will agree to withdraw the amendment.
Lord McFall of Alcluith
On the duty of care, at the present moment if an individual opens a bank account, they get 170 pages of dense text to look through. No one is going to look through that. If a duty of care were imposed, does the Minister not think that banks would look at that again and perhaps fillet a lot of the information, so that the information that went to the customer would be readily understood?
Lord Deighton
I certainly agree with the noble Lord’s observation that sometimes the way in which business is done clearly is not in the interests of the customer. However, the Government do not believe that the duty of care is the right way to address those kinds of problems.
Lord Deighton
Noble Lords will know that the Chancellor has already set out at the Mansion House the next stage of the Government’s plan to take the banking system from rescue to recovery. For Lloyds, the Chancellor has taken the first steps to return Lloyds to the private sector and will continue to consider options for further share sales. Value for money for the taxpayer will be the overriding consideration for disposals. There is no pre-fixed timescale for share sales and, given the size of the taxpayer’s stake in Lloyds, the disposal process is likely to involve further multiple stages over time.
For RBS, however, share sales are still some way off. We discussed this earlier when we debated my noble friend Lord Lawson’s amendment. The Treasury is currently examining the case for creating a bad bank for RBS risky assets. As discussed, this review is still ongoing and will be published later in the autumn. Setting out public options for structural change may be advisable in some cases, as the Chancellor’s announcement of the RBS bad bank review makes clear. However, the Government will need to judge in each case whether to do so, given the risk of generating uncertainty and speculation about likely outcomes.
Similarly, selling large numbers of shares in the market is a very commercially sensitive matter: for example, in the case of Lloyds. Any communications from government in advance of placing shares could be destabilising and affect the price that the Government get for the shares. Publication of a report as outlined in the proposed amendment could undermine the Government’s ability to sell shares quickly in favourable market conditions. This could significantly reduce value for money for the taxpayer in that case.
The Government firmly agree that all the topics set out in the amendment need to be carefully considered by any Government in making their decisions relating to the sale of banking assets. UKFI, which we talked about earlier, was established with a very clear emphasis on value for money in executing its core mandate of devising means of exiting the Government’s shareholdings in the banks. In doing so, it is required to pay due regard to the maintenance of financial stability and act in a way that promotes competition.
The amendment seeks to improve accountability. Many mechanisms already provide accountability. On value for money, the Government are scrutinised against the general principles set out in the Green Book. UKFI is also accountable to Parliament through the Chancellor of the Exchequer, and has a mandate to secure value for money for the taxpayer. Moreover, the Treasury and UKFI are accountable directly, through the accounting officer mechanism, to the National Audit Office and to the Public Accounts Committee. Indeed, UKFI published a report, following the sale of Northern Rock, setting out the rationale for returning the bank to the private sector at that time. The National Audit Office completed a review of the sales process and published a lengthy report on it, which was considered at a session of the Public Accounts Committee.
The sale of Northern Rock demonstrated the Government’s commitment to transparency on the sale of their banking assets and the ability for bodies such as the National Audit Office and Parliament to scrutinise the decisions of government on these matters. Finally, the Government are accountable for their decision to Parliament, including through the Treasury Select Committee and in public debate. Overall, it is not clear what value would be added by this mandatory reporting requirement and it might well be detrimental to the objectives it aims to deliver, particularly to value for money. I hope that the noble Lord will therefore agree to withdraw the amendment.
Lord Turnbull (CB)
The first half of a paragraph in the PCBS report asked for a report on the good bank/bad bank option by September: it is going to be a bit late but we are told it is coming soon. The next two or three sentences were on the same subject as the amendment: looking at a wider range of options. Is the Minister telling the House that the Government will fulfil the first half of this PCBS recommendation but not the second half?
Lord Deighton
The Government will announce the conclusions of the good bank/bad bank review and the rationale for why that is the option being pursued. We will be addressing the second half of the undertaking in describing the rationale.
Lord Turnbull
The Government have got to good bank status with RBS. Are they not proposing to do any further analysis on what might happen to the good bank bit that remains?
Lord Deighton
The first thing we have to determine is what we are proposing to do with the good bank/bad bank. Does the split make sense and on what basis does it work? We will subsequently look at what we do with the separate parts.
Lord Eatwell
My Lords, that was not a very satisfactory answer. First, market sensitivity is an extraordinary red herring. Whoever wrote that bit should not be allowed to write any bits again. This is not about market sensitivity: it is about the overall structure of the banking sector and any issues of market sensitivity would, of course, be kept carefully out. Anybody would do that, so it is a really silly argument.
Turning to the good bank/bad bank story, value for money with respect to the disposal of assets is obviously an important component, but so is the future of the banking industry and its performance in relation to the UK economy as a whole, especially its support of the real economy in the provision of financial services. That aspect does not seem to have been considered. After all, the good bank/bad bank story is essentially a defensive move. It is dealing with a bank which is hampered—or potentially hampered; we will see what the report says—by its current mixture of assets and liabilities, particularly non-performing assets. The good bank/bad bank split is a defensive measure; a device for ensuring that you have an operation in the good bank which we hope can start increasing lending, as the noble Lord, Lord Lawson, said, particularly to the SME sector.
However, Amendment 103 is asking for something different, which the Minister did not actually address. It is asking for some thought about what the structure of the banking industry should look like in future. Are we simply going to repair what we have in the best way we can or do we want something really different? Could progress towards that “something different” be made in the sale of state-owned assets? It seems to me that that was what the noble Lord, Lord Turnbull, was talking about when he referred to the second element of the banking commission’s recommendations. Clearly, this recommendation has not been taken on board by the Government. Perhaps it has simply been overlooked; they might look at it now and think more seriously about it. I am sure that we will be returning to this issue later. In the mean time, I beg leave to withdraw the amendment.
Financial Services (Banking Reform) Bill
Lord Deighton Excerpts(10 years, 7 months ago)
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Lord Deighton
“(1A) The Treasury may by regulations require a ring-fenced body to make arrangements for any one or more of the following purposes—
(a) ensuring that, except in prescribed cases, the ring-fenced body cannot become liable to meet, or contribute to the meeting of, pension liabilities which arise in connection with persons’ service on or after a date specified in the regulations (“the specified date”) in any employment, other than service in an employment in respect of which the employer is a ring-fenced body;(b) ensuring that, except in prescribed cases, the default of a person other than another ring-fenced body would not result in the ring-fenced body becoming liable to meet, or contribute to the meeting of, pension liabilities arising in connection with persons’ service in any employment before the specified date;(c) to the extent that it is not possible to ensure the result mentioned in paragraph (a) or (b), minimising any potential liability falling within paragraph (a) or (b).(1B) The regulations may make provision enabling the trustees or managers of a relevant pension scheme in respect of which the employer or one of the employers is a ring-fenced body—
(a) to transfer to another relevant pension scheme part of the pension liabilities arising in connection with persons’ service before the specified date together with part of the assets of the scheme, or(b) to divide the scheme into two or more sections in relation to which prescribed conditions are met.(1C) The regulations may make provision—
(a) enabling a ring-fenced body to apply to the court in a case where the ring-fenced body has been unable to reach agreement with another person (“P”) about the making of arrangements with P on commercial terms for one or more of the purposes in subsection (1A), and(b) enabling the court on such an application to order P to enter into arrangements with the ring-fenced body for those purposes on such terms as the court considers fair and reasonable in the circumstances.(1D) The regulations must provide that any terms specified by the court by virtue of provision made under subsection (1C)—
(a) must be terms which, in the court’s opinion, represent terms on which the arrangements might be entered into if they were being entered into for commercial reasons between willing parties dealing at arm’s length, and(b) may involve the payment of any sum by instalments.(1E) The regulations may make other provision—
(a) about the making by a ring-fenced body of arrangements for one or more of the purposes in subsection (1A);(b) about any transfer or division falling within subsection (1B).”
The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, I turn to Amendments 24 to 37. A central principle of ring-fencing is that ring-fenced banks must be independent from the rest of their groups, so that the failure of another member of the group cannot spread to—and bring down—the ring-fenced bank. Under existing pensions law, if a ring-fenced bank continues to share a pension scheme with other parts of its group then, if another group member were to fail, the entire liability for the scheme could fall on the ring-fenced bank as the “last man standing”. If this liability were sufficiently large, it could then threaten the viability of an otherwise healthy ring-fenced bank. Allowing ring-fenced banks to remain liable for a group pension scheme would thus leave open a potential avenue of contagion from the group to the ring-fenced bank.
It is for this reason that the ICB recommended that ring-fenced banks’ liabilities to group pension schemes should be removed or mitigated. Proposed new Section 142W, as currently set out, therefore gives the Treasury the power to require that ring-fenced banks make arrangements to ensure that they cannot become liable for the pension liabilities of any non-ring-fenced entity, or that they minimise such potential liabilities if they cannot entirely prevent them arising. This could involve segregating an existing pension scheme into discrete sections, or splitting it into two separate schemes. Restructuring would largely be executed through the existing means allowed for under pensions legislation.
The amendments to the powers as currently set out do not change the overarching policy objective. They simply ensure that the powers are wide enough to make sure that that objective is met in all scenarios. Under the existing drafting, the Bill allows the Treasury to make regulations requiring ring-fenced banks to make arrangements in relation to potential statutory liabilities they have to multi-employer schemes.
These amendments expand the scope of the power, allowing the Treasury to make regulations requiring that a ring-fenced bank ensure that it cannot become liable for the pension liabilities of non-ring-fenced banks, or at least minimise its potential liabilities to them, whether the liabilities are statutory—such as those which arise under the employer debt legislation—or non-statutory, such as can arise under contractual arrangements such as guarantees. The amendments also allow the Treasury to make regulations including provisions to help the banks to achieve the required separation of pension schemes, such as enabling the trustees to split the scheme or transfer assets and liabilities to a new scheme; and providing that a ring-fenced bank can make an application to the court if it is unable to reach agreement with a third party about the terms on which it should be released from a contractual arrangement or guarantee giving rise to potential pension liabilities.
In addition, the amendments enable the Treasury to make regulations requiring banks to do all they can to obtain clearance from the Pensions Regulator for any restructuring undertaken to comply with ring-fencing, to ensure that pension scheme members are adequately protected. This strengthens the existing provision in the Bill which only allows the Treasury regulations to require that a bank apply for clearance.
Finally, the amendments introduce a power, allowing the Treasury regulations to modify, exclude or apply legislation—including primary legislation—for the purposes of achieving the required separation of pension liabilities. Pension arrangements are inherently long-term in nature, and the Government must be able to respond flexibly to unforeseen developments as banks restructure their pension schemes if they are to ensure that the economic independence of ring-fenced banks is preserved. Regulations made under this power, like all regulations made under proposed new Section 142W, will be subject to the draft affirmative resolution procedure, and can be made only for the specific purposes outlined above. These amendments therefore ensure that proposed new Section 142W is effective in making the ring-fence robust.
Lord Eatwell (Lab)
My Lords, I am grateful to the noble Lord for introducing this set of amendments about pension schemes. The argument for the amendments raises two significant questions. We are talking here about transitional arrangements: about moving from a group pension scheme to what might in future be deemed to be necessarily separate schemes for the ring-fenced and non-ring-fenced components of a group. There must therefore be other transitional arrangements as well—for example, property leases which are relevant to a group. Are they, too, to be separated and decomposed? What are we going to do about all those group liabilities similar to pension liabilities during the period between the implementation of legislation for ring-fencing and the conclusion when ring-fencing has been in place for some time? Over that period, there have to be transitional arrangements. Clearly, pensions are a very special case because the people will presumably stay where they are, but there must be other elements of liabilities which are also rather difficult to untangle. My first question is therefore: what is the Government’s thinking about such transitional problems?
The second question, which is much more specific to pensions and immediately arises, is whether the separation will be to the detriment of members of the pension scheme. This is precisely an area in which scale can become enormously important in a pension scheme, especially with respect to diversifying risk. The sheer scale of a pension scheme can be a component of the commercial success of that scheme. If the scheme is to be broken up, will it be to the significant detriment of the pensioners? There must surely be some consideration of whether it is to be their detriment and, if so, of what measures are to be taken to remove that detriment.
Lord Deighton
On the noble Lord’s question about transitional arrangements, the structure with respect to group liabilities will generally be to ensure that liabilities that are particularly relevant to the newly structured organisations that fall out of the ring-fencing arrangements are consistent with the businesses that they are in, so that an operating unit is created which has liabilities which match the business that it is running. If there was a lease at the group level and the ring-fenced bank was the organisation leasing the building, you would expect there to be an inter-company arrangement which would pass the cost down to that level. That is the principle and I think that most banks operate on that basis anyway because one is trying to put the costs and revenues where the business is. There is a provision under Part 7 of FiSMA which allows for transfer of business schemes if one is moving other businesses, but that is a separate point.
On the question of banks and trustees, it is for the banks to work out the practicalities. The legislation defines the objectives to make sure that the ring-fenced bank is protected and that the trustees and pension arrangements are protected in each case, which is why the provisions here ensure that the regulator is contacted in each case. Essentially, the cost of making this work, so that the pensioners are, at a minimum, indifferent to the outcome, will sit with the bank. That is the principle behind this. There may be some costs involved for the banks to leave the pensioners no worse than indifferent, and those costs are an intrinsic part of this separation and the advantages that it brings us.
Lord Higgins
Will my noble friend perhaps consider between now and Report whether there is not a strong case for the two schemes to be quite separate? There may well be a conflict of interest between the pensioners of one part of the bank and those of the other part; for example, on whether it should be a final salary scheme or a defined contribution scheme and so on. Will he consider whether one should not leave it to the banks but determine that they shall be separate pension schemes?
Lord Deighton
We will certainly review the question in that light. The principle behind this is that they would be separate pension schemes. They may be very similar schemes which are separated, but the notion here is that the ring-fenced bank would have one scheme and the rest of the group would be under different arrangements, the key objective being that the ring-fenced bank would not have an exposure to the pension liabilities that arise elsewhere in the group. That is the key principle here.
Lord Deighton
Lord Deighton
Lord Deighton
Amendments 39 to 41 bring Clause 5 into line with the new senior managers regime recommended by the PCBS. The intention behind Clause 5 is to make sure that directors of ring-fenced banks always have regulatory approval to perform their functions. The clause was introduced before the PCBS made its recommendations about the new senior managers regime. It required directors of ring-fenced banks to be approved persons when they carried out designated significant influence functions, in the terminology of the old regime. The Bill now introduces the senior managers regime, in which the concept of a significant influence function has been replaced. A technical amendment to the clause is therefore necessary to require that the regulator, which can be the PRA or the FCA, always has to designate directors of ring-fenced banks as senior managers, which removes the references to the old terminology.
Lord Deighton
Lord Deighton
“( ) the extent to which ring-fenced bodies are carrying on the regulated activity of dealing in investments as principal (whether in the United Kingdom or elsewhere) in circumstances where as a result of an order under section 142D(2) that activity is not an excluded activity,( ) the extent to which ring-fenced bodies are carrying on activities that would be excluded activities by virtue of an order under section 142D(4) but for an exemption or exclusion made by such an order,( ) the extent to which ring-fenced bodies are doing things that they would be prohibited from doing by an order under section 142E but for an exemption made by such an order,”
Financial Services (Banking Reform) Bill
Lord Deighton Excerpts(10 years, 7 months ago)
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Viscount Trenchard (Con)
My Lords, with the leave of the Committee, I, too, would like to participate in these proceedings although, like my noble friend, I was prevented from participating in the Second Reading debate. I strongly support the amendment put forward by my noble friend for the reasons that he has explained very well. I do not think that I can improve on his excellent explanation, but your Lordships should consider that governance would not be improved if there is a situation where the holding company has a completely different membership from the boards of the ring-fenced subsidiaries, and that applies most strongly in the case where the excluded activities comprise only a small part of the activities of the group as a whole. But even in the case where a relatively greater amount of excluded activities are carried out within the group, if the board of the holding company with responsibility to shareholders comprises completely different people from the board of the principal operating subsidiaries, does that provide for effective governance? I therefore would like to hear from the Minister something more about what “to a specified extent” means in new Section 142H(5)(d).
The Commercial Secretary to the Treasury (Lord Deighton) (Con)
My Lords, I will consider both Amendments 1 and 2, and I will talk first about Amendment 1, which has been proposed by my noble friend Lord Blackwell. I have much sympathy with the intention behind this amendment and I hope that I can provide some of the comfort that my noble friend seeks. Independent governance is of course key to the integrity of the ring fence to ensure that ring-fenced banks do not simply operate in the interests of their group’s investment bank, in this example, or indeed other parts of the bank, but it is important that any governance requirements are proportionate to the threat to the ring-fence. Where a ring-fenced bank makes up the great majority of a group’s business and the investment bank is therefore small, so the risk of the ring-fenced bank being dominated by the interests of the investment bank is also small.
The Independent Commission on Banking recommended that where the vast majority of a group’s assets were in the ring-fenced bank, requirements for independent governance should be relaxed. The Government accepted that recommendation, and in our June 2012 White Paper we supported,
“flexibility in governance arrangements where a ring-fenced bank represents the overwhelming majority of a group’s business”.
Under the Bill, the precise details of ring-fenced bank governance arrangements, along with other ring-fencing rules, are for the regulator to determine. The Bill sets the objectives that rules must achieve; the regulator then decides what exact structures or restrictions are needed to achieve those objectives. This is appropriate because of the highly technical nature of the issue, and in order to allow requirements to keep pace with developments in a fast-moving market. Rule-making will, of course, require the regulator to exercise its judgment, and proportionality will be central to how it does so. In particular, the regulator will be obliged to consider the costs and benefits of any rules it proposes to make, including ring-fencing rules.
In the case of ring-fencing and governance rules, the Bill also specifically gives the regulator flexibility to consider the proportionality of different requirements. The Bill requires the regulator to ensure “as far as reasonably practicable” that a ring-fenced bank is able to take decisions independently of the rest of its group.
The formulation “as far as reasonably practicable” specifically anticipates circumstances in which certain governance requirements might be impractical or have costs that are disproportionate to their benefits. The case where a ring-fenced bank constitutes the overwhelming majority of a group’s business may be one such circumstance. I hope the noble Lord can therefore feel reassured that the intention of his amendment is already reflected in the Bill. I therefore call upon the noble Lord to withdraw his amendment.
Government Amendment 2 corrects a minor and technical point in connection with new Section 142H, which imposes an obligation on the appropriate regulator to make certain rules requiring that a ring-fenced bank be independent of other members of its group. The clause as currently drafted defines the appropriate regulator only in relation to ring-fenced bodies. However, as new Section 142H also imposes an obligation on the appropriate regulator to make rules applying to authorised persons who are members of a ring-fenced body’s group, but are not themselves ring-fenced bodies, the appropriate regulator needs to be defined in relation to all authorised persons, not just ring-fenced bodies. This is corrected by this amendment, and I commend it to the House.
Lord Eatwell (Lab)
My Lords, I wonder whether, in his assessment of the amendment of the noble Lord, Lord Blackwell, the Minister might take into account the fact that it was exactly this sort of procedure that led to the steady erosion of Glass-Steagall over the years. There was a tendency continuously to say, “Well, if we have a particular subsidiary, then perhaps we don’t need to have the separation in this smaller subsidiary”. These steady erosions built up over the years, until by the early part of this century, before its repeal, the effectiveness of Glass-Steagall had been completely eroded. Perhaps the Government should take that into account. There is also the point that, if the investment banking services required by a ring-fenced bank are relatively small, they could, of course, always be purchased from another provider.
Finally, the Minister mentioned that the precise definition of the rules of extent and so on will be defined by the regulators and in secondary legislation. I wonder whether it would be appropriate at this moment to take into account the latest report of the Delegated Powers and Regulatory Reform Committee, which has expressed considerable concern about the scrutiny of secondary legislation that will follow from new Sections 142A, 142B and so forth as we are discussing in this particular context. Are the Government likely to accept the enhanced scrutiny proposed by that committee with respect to these particular sections?
Lord Blackwell
I am grateful for my noble friend’s comments on Amendment 1 and for his explanation that the flexibility allowed for in this Bill will be flexibility that the regulator will be expected to interpret. I note the comments of the noble Lord, Lord Eatwell, but clearly the regulator’s role will be to ensure that creep does not occur on the way and that the protection of the ring-fenced bank is the requirement as set out in this legislation. Therefore, with those assurances from my noble friend, I am pleased to withdraw the amendment.
Lord Deighton
With respect to the specific question, we have not had the chance to review the delegated powers yet, but of course we will in formulating where we go from here.
Lord Deighton
“(a) in relation to a PRA-authorised person, the PRA,(b) in relation to any other authorised person, the FCA.”
Lord Desai (Lab)
My Lords, I apologise for not speaking at Second Reading; I was out of the country. I support the amendment tabled by my noble friend Lord Eatwell. As many noble Lords said, ring-fencing will be a new experience. However, given what happened in the banking industry, and the damage it caused, we have to start the process with extreme care and great suspicion. Given time, I know that the banks will innovate ways of avoiding ring-fencing; that is the nature of the market in innovation. Therefore, before anything further happens, we ought to have early scrutiny of ring-fencing arrangements, as proposed by my noble friend. Later, if we wish, we may do the next review after four or five years, but the initial reviews must be done as early as possible and as toughly as possible, because if we are kind to the banking sector and it does the same thing again, the public will never forgive us.
Lord Deighton
My Lords, there have been a number of comments on the length and complexity of the Bill. I am not here to apologise for the Bill, but I know that my officials in the Treasury have worked extraordinarily hard to try to make sense of it and to deliver comprehensive briefs as quickly as the timetable allowed. Therefore, I hope that noble Lords will bear with us as we work our way through this complex process.
At the heart of this group of amendments is the question of the nature of the review and what it is trying to accomplish. The critical point that I want to clarify is that under the Bill the PRA will review the workings of the ring-fence: how well the rules achieve the ring-fence’s objectives and how far the banks are complying. The PRA is not being asked to judge whether the ring-fence is the right policy.
As the Chancellor emphasised in his evidence to the PCBS, the Government have no objection in principle to independent reviews. Indeed, as the House knows well, the ring-fence has its origins in the recommendations of an independent review: that of the Independent Commission on Banking. As I stated, the Bill provides for regular reviews of the operation of the ring-fence. Clause 6 provides for the PRA’s annual report to Parliament to cover the extent of banks’ compliance with the ring-fence—a provision that Amendment 42 will strengthen, as I will discuss in a moment.
Subsection (3) of new Section 142J requires the PRA to carry out a review of ring-fencing rules every five years to assess how well the rules are framed in order to achieve the objectives set for the PRA in the legislation. Should the PRA identify areas where the rules need to be changed, it will have the power—indeed, the responsibility—to do so. Regular reviews of how the mechanics of the ring-fence are working are legitimate and necessary, so it is right that the Bill already provides for them.
On Amendment 42, in response to arguments made in the Commons, we are strengthening the requirement of the PRA to report each year on banks’ compliance with the ring-fence. Amendment 42 requires the PRA to report annually to Parliament on how ring-fenced bodies have used any exemptions to excluded activities or prohibitions. As noble Lords will know, the Bill allows the Government to create exemptions from the exclusion or prohibition of certain activities, as long as the exemptions are not likely to threaten the continuous provision of core services—that is, retail deposit-taking. These exemptions are necessary to allow ring-fenced banks to enter into derivative contracts to manage their own risks. The Government also intend to use this power to permit ring-fenced banks to sell simple derivatives to their customers, subject to safeguards to ensure that this does not expose ring-fenced banks to excessive risks or undermine their resolvability.
It is right that any such exemptions should be closely monitored. We have therefore agreed with the suggestion from the Opposition, who in the other place advocated that the regulator should report on the sale of simple derivatives by ring-fenced banks. However, our amendment goes further, requiring the PRA to report on ring-fenced banks’ use of all exemptions created now or in the future. These will include exposures of ring-fenced banks to financial institutions incurred for the purposes of risk management, providing payment services or trade finance services, as well as the sale of simple derivatives. This amendment will ensure that Parliament has sufficient information to make an informed judgment about whether the ring-fence fulfils its objectives and the exemptions remain fit for purpose.
On the other amendments, it is far less clear to us that we should legislate for repeated reviews of the whole policy. Amendment 3 would effectively reconvene the ICB in perpetuity to ask afresh every few years whether we should continue with the ring-fence at all. I have two main objections to this. First, one of the original aims of establishing the ICB was to secure consensus and certainty over the future of the banking industry in this country. The Chancellor has memorably described how, before this Government took office, he heard four different proposals from the then Prime Minister, Chancellor, Governor of the Bank of England and chairman of the regulator. The ICB process brought together all these voices and others to produce recommendations, including for ring-fencing, that commanded wide consensus support. That consensus gave the industry certainty over the future regulatory framework, which is so important to enable businesses to plan and invest. Reopening that consensus every five years, or indeed even earlier, would undermine that certainty.
If I have learnt one thing in my relatively short period in the Treasury as Commercial Secretary, it is that the one consistent request I get from businesses in every industry is, “Please provide us with a stable and certain framework so that we can plan and invest so as to sustain this recovery”. As I have implied here, shortening the gap between reviews—as Amendments 4 and 5 would do—would add further to the uncertainty. I also question whether it would even be possible for a review to judge after only two years whether ring-fencing was working. Given the scale of the changes involved, any verdict arrived at before ring-fencing has had more time to bed down would surely be premature.
My second objection is to this amendment’s prescription that the terms of reference for these repeated reviews must include considering the case for full separation. This seems rather like requiring that reviews continue until they come up with the right answer. I do not believe that that is appropriate. Given this, I also see no case for delaying the commencement of the Government’s provisions for a firm-specific power of separation until after a review, as Amendment 116 would require.
I turn now to the proposal in Amendments 10 and 14. So that noble Lords are clear, this is quite a different issue. It is for an external review to form part of the procedure for the firm-specific power to require separation. It is the electrification power. As noble Lords will know, the Government have accepted the case for a firm-specific separation power, and we will shortly debate the government amendments designed to make the separation of power already in the Bill more credible and effective. That is what I promised when we first discussed this Bill. However, the Government do not understand the possible justification for an external review to form part of this power. The PCBS proposed this as a safeguard for banks against arbitrary or unreasonable actions by the regulator, but the right of appeal to the tribunal already protects against this possibility. The tribunal, of course, is independent, so an additional safeguard is unnecessary.
Further, an external review could also serve to undermine the electrification process. The PCBS argued powerfully that regulators should not be subject to self-serving lobbying by banks. An external review could easily become an opportunity for banks to lobby during the electrification process to seek to persuade the reviewer that the regulator was acting unreasonably or treating them unfairly. Any bank required to restructure will have a right of appeal at the end of the process, so why give it another opportunity to challenge the regulator? I am also concerned that, even if the bank’s lobbying efforts did not succeed in blocking a requirement to restructure, they could serve to delay it and slow down the process for the regulator to require separation. This seems contrary to the objective, shared by both the PCBS and the Government, of making the electrification process less lengthy and cumbersome. For these reasons, I cannot agree to these proposals, and I call on the noble Lord to withdraw them.
Lord Deighton
Lord Deighton
My Lords, Amendments 6 and 81 insert two new sections into the Financial Services and Markets Act 2000 and make a consequential amendment to new Section 142J. The first new section, new Section 192JA, gives the PRA a power to make rules over the parent companies of ring-fenced entities. Ring-fencing will require banking groups to make large structural changes to ensure the independence of the ring-fenced bank from other entities in its group. The PRA may need to make rules to ensure that the groups in which ring-fenced banks sit are structured and governed appropriately. Rules over parent companies may be needed to ensure that this is the case.
It is important that the regulator has the ability and flexibility to tackle parent companies. They can influence subsidiaries in a number of important ways—through their attitude to risk management throughout the group, for example. This obviously has implications for the incentives faced by a ring-fenced bank. This amendment, therefore, further enables the regulator to strengthen the ring-fence.
I also expect the PRA to use this power to require groups containing ring-fenced banks to adopt a so-called “sibling structure”. This means that a non-ring-fenced bank cannot own a ring-fenced bank and vice versa. Both the ring-fenced and the non-ring-fenced bank will sit directly underneath the holding company. In this way, the PRA will be able to supervise banking groups more effectively, by having a clear divide between the ring-fenced and non-ring-fenced parts of a group. As development of the ring-fencing policy has progressed, the PRA has identified additional supervision benefits to a “sibling” arrangement such as this. I also understand that the Bank of England is encouraging banking groups to issue loss-absorbing debt from the holding company level, which is likely to lower the marginal cost to banking groups from adopting the sibling structure.
New Section 192JB will give the PRA and the FCA, as appropriate depending on the nature of the firm, the power to impose rules on qualifying parent undertakings to require them to make arrangements which would facilitate the exercise of resolution powers in relation to the parent or any of its subsidiaries.
Lord Higgins
Can my noble friend explain precisely what is meant by “resolution powers”?
Lord Deighton
The resolution powers all relate to the Bank of England’s powers essentially to step in in advance of a bank’s insolvency so that it can change, for example, the creditor arrangements.
The PRA and FCA already have powers to require regulated entities to take actions that would facilitate the resolution of a firm in the event of its failure. This may include requiring it to raise additional capital, issue debt to the market or make structural changes to enable the firm to be resolved.
However, banks may be organised in a number of ways. Many have a structure whereby the bank is owned by a financial holding company, which may not be regulated. Banks may also be part of corporate groups which contain non-corporate banking entities. In these cases, the existing powers may be insufficient to deliver some of the changes that the regulator feels are necessary to make a bank resolvable. This is because the regulated entity may not have the level of control required to make the change. This may be the case where, for example, capital and debt are issued out of the parent undertaking before being downstreamed to a bank. It may also be operational in nature; for example, where a service company which is not owned by the bank but sits in another part of the group provides critical services in the bank.
The amendment will address these cases and ensure that the PRA and the FCA have the necessary powers to make banks resolvable for all types of corporate structure. It amends new Section 142J to ensure that any reviews by the PRA of “ring-fencing rules” under that section must also cover rules made under the power given in new Section 192JA in relation to parent undertakings of ring-fenced bodies.
Lord Eatwell
My Lords, I have enormous sympathy with the amendments and the struggle that the Treasury is having in having effectively to provide rules for parent undertakings in relation to the maintenance of the ring-fence. In many ways, the amendments go at least some of the way to achieving that. However, I should like to ask a question which I asked at Second Reading and which was not answered then. The Minister referred to capital and debt being raised at the level of the parent company and then downstreamed into the ring-fenced entity. If it can be downstreamed, can it not be upstreamed? If that were so, the ring-fence would not exist.
Lord Deighton
It is a valve which goes only one way; it cannot be upstreamed—otherwise the noble Lord is right that the ring-fence would not work.
Lord Higgins
My Lords, the clause as I understand it seems to be absolutely essential if the powers involved are to be able to ensure that there is a separation between one part of the bank and the other, in which case it is rather extraordinary that the amendment has suddenly appeared at this stage.
If I understand the clause correctly, it has both national and international implications. My noble friend, in response to my inquiry, referred to the Bank of England, but the clause also apparently refers to any similar powers exercisable by the authority outside the United Kingdom. That gives me cause for concern. It would be very useful if all the actions taken in this country, in the European Union and in the United States worked on the same basis. However, as I understand it, that will not be so. The line will be drawn in rather different places in the United States compared with the European Union and in the European Union compared with the United States or this country. How precisely are the FCA and the PRA to set about ensuring that they can separate the two parts of the bank effectively? I am not clear from the amendment how they will do that.
Lord Deighton
The simple way to look at the amendments is that they are to ensure that both regulators have the flexibility to address every aspect of the group structure to ensure that the ring-fence works. That is why we are trying to give as much flexibility as possible to address even the non-regulated entities within the group.
Lord Eatwell
My Lords, the noble Lord, Lord Higgins, has raised a very important matter with respect to authorities outside the UK. The proposals under Glass-Steagall and under Liikanen are different from the ring-fence—the divisions appear in different places. In those circumstances, “similar powers” seems to be a very weak description, because they are similar but not the same. With respect to resolution powers, which are crucial in the relationship between the parent body and the ring-fenced entity, that seems to create a degree of uncertainty. Can the Minister clarify exactly what that applies to? Presumably, it applies to the home-host division in regulatory responsibility and therefore subsidiaries of UK institutions in other jurisdictions will be regulated by the home regulator. If the home regulator has different rules with respect to the divisions, it seems to me that there will be a degree of confusion as to what is actually being enforced.
I am grateful for the Minister’s clear answer about the valve that goes one way on the raising of debt and capital. I return to my previous question. Let us suppose that we have a group in which the liability structure of the ring-fenced entity is essentially provided from the parent through the one-way valve and then the parent simply stops providing. In those circumstances, the security and stability of the ring-fenced institution would surely be threatened. The ring-fence would not be working simply because the steady flow of financial support for the ring-fenced institution had been cut off.
Lord Deighton
I shall try to go through those points one by one. Just to be clear with respect to the foreign banks, the power we were talking about relates to the Bank of England’s rule-making power over parent companies. It allows the Bank of England to support a resolution being carried out by a foreign regulator where the bank is in a different country. It just allows the support of that resolution going on elsewhere so that we have the kind of international co-operation which is necessary for these resolutions. On the point about Liikanen and the convergence in how we are looking at this around the world, the general view of the officials who are working on the European legislation is that we are sufficiently in tune with where that is heading for these arrangements to work effectively.
I was not sure that I entirely followed the risk that the noble Lord, Lord Eatwell, was pointing out. However, risk-fenced banks can of course have equity provided by their parent and, once it is given, it need not be repaid, so the flow can still keep going into the ring-fenced bank.
Lord Deighton
That is part of the resolution process that needs to be sorted out but there is nothing to stop it continuing to go in.
Lord Deighton
(1A) The preliminary notice must—
(a) state that it is a preliminary notice,(b) state that the regulator proposes to exercise the group restructuring powers,(c) state the action which the regulator proposes to take in the exercise of those powers,(d) be in writing, and(e) give reasons for the proposed action (which must include the regulator’s reasons for being satisfied as to the matters mentioned in section 142K(1))”
Lord Deighton
My Lords, these amendments streamline the procedure for the group restructuring powers—the so-called electrification powers. In another place, following the recommendations of the PCBS, the Government introduced amendments adding new Sections 142K to 142V. These sections give the regulator the power to require a banking group to restructure if the regulator believes this necessary to ensure the objectives of the ring-fence. As the PCBS recommended, the regulator will have the power to require the group to divest completely either its ring-fenced bank or its non-ring-fenced bank, or transfer specific business units out of the group. These extensive powers may be exercised if the regulator believes that the group’s ring-fenced bank is insufficiently independent or if the group’s conduct is such as to threaten the regulator’s ability to meet its statutory objectives. The amendments made in the Commons thus provide for the power to require the separation of an individual banking group that the PCBS recommended.
However, some concerns were expressed both in the other place and in this House that the procedure for the regulator to exercise its group restructuring powers was too complicated and drawn out. It was argued that the number of steps involved and the length of time required from start to finish created a process that was so cumbersome as to be difficult for the regulator to use in practice, and that this risked undermining the group restructuring powers as a deterrent against attempts by banks to subvert or game the ring-fence.
The Government took these concerns very seriously. As noble Lords will recall, I committed at Second Reading to bringing forward amendments to simplify and streamline the process for exercising the group restructuring powers. These amendments do exactly that. Amendments 7, 9, 11 and 12 replace the requirements for three preliminary notices with just one so that if the regulator is considering exercising its powers it need notify the target group only once, stating its reasons for considering requiring restructuring and the action it is proposing to take.
Amendment 8 removes the requirement for the Treasury to consent to a preliminary notice. Previously, Treasury consent was required for each of the original three preliminary notices. Under this amendment, the regulator need give the Treasury only a copy of a preliminary notice. Treasury consent will be required only later in the process for the issue of a warning notice.
Amendment 15 clarifies that any notice of a decision by the regulator not to exercise its powers must be given in writing. Amendment 16 provides that a copy of such a notice be given to the Treasury.
Amendment 17 shortens the warning notice period from 12 to 18 months to three to six months. This period is intended to give a bank about which the regulator has concerns, and to which it has issued a preliminary notice, an opportunity to address the problems identified by the regulator of its own accord. The Government still believe that it is right to give a bank the chance to tackle any problems, but agree that the period originally provided for was too long.
Amendments 13, 18 to 20 and 38 are consequential on the other amendments being made to these sections. Amendments 21 and 22 remove the requirement that the regulator must allow at least five years for any restructuring or divestment to be completed. Now it will be up to the regulator to set whatever deadline it considers appropriate.
These changes will bring the procedure for using the group restructuring powers into line with that proposed by the PCBS. One point on which we continue to differ from the PCBS is the inclusion in the procedure for requiring the restructuring of an external review, which Amendments 10, 14 and 116 would have inserted, and which we have already debated.
As for the total time involved to require the separation of a group, following the Government’s amendments, the minimum total time will be slightly shorter under the Government’s provisions than under the PCBS’s. Under the Government’s amendments, the minimum time from the regulator’s first notice of its intention to require restructuring to the actual imposition of a requirement to separate will be approximately four months, compared to approximately five months under the PCBS’s amendment. These amendments will therefore make the group restructuring powers—the “electrification” powers—an effective reinforcement to the ring-fence.
Some will argue that the Government should have gone further and should also legislate for the option of full separation across the entire UK banking industry. The Government do not agree with this suggestion. To provide for a targeted deterrent against members of an individual banking group that seeks to game or evade the ring-fence is a sensible reinforcement for the ring-fence. To legislate for industry-wide separation, however, would not be a sanction; it would be to abandon that policy. The logic of requiring all banks to separate would have to be that the ring-fence had failed to achieve its objectives of delivering greater financial stability while preserving the legitimate economic benefits of universal banking. It could in no way be described as a deterrent.
Lord Lawson of Blaby
My noble friend has talked about the great advantages of universal banking that need to be preserved. Will he explain to the House what these unique advantages are?
Lord Deighton
The first point that I would make in response is that it was the position of the ICB, which did an enormous amount of work on this, that the ring-fence was not in any sense a compromise but was in fact superior to full separation because of some of the synergies available in the universal bank. The essence of the argument is that the other parts of the bank that may not get into financial trouble actually provide benefits of diversification and scale that can protect the ring-fenced entity from any of the problems that they may have. It is essentially the diversification and scale advantages that universal banking may bring.
I have some sympathy with my noble friend’s underlying suggestion; in much of the discussion so far we have talked about how ingenious bankers are but, given what they have done to their organisations and the industry over the past five years, you have to question exactly how ingenious they are on a consistent basis.
To come back to the point, others are of course perfectly entitled to the view that the ring-fence will fail—we have heard that point of view from many Members here—and a future Government would be entirely within their rights to propose an alternative policy to ring-fencing. However, the only proper way to legislate would be for the Government to conduct research and analysis to match the calibre of the Vickers commission in support of full separation. I note that the PCBS produced no such evidence. Let it build a consensus around its conclusions, and let it come to Parliament with new legislation to be subjected to the full scrutiny and debate that such a step would require.
Lord Eatwell
My Lords, I echo the words of the noble Lord, Lord Turnbull. I think this is a significant improvement on the procedures that were previously outlined. I have a number of exploratory questions about this procedure. First, the regulator essentially seems to be judge and jury in this respect. It was the role of the old Regulatory Decisions Committee and, I believe, the ambition of the commission with respect to its development of the Regulatory Decisions Committee to ensure that there was an independent step in any major regulatory enforcement. The main reason why that was introduced into FiSMA was because it was felt that otherwise it would contravene human rights legislation. Are the Government confident that this procedure does not contravene such legislation?
Secondly, with respect to the publication of notices, in the very thorough and welcome briefing that the Minister’s staff provided on these amendments, the Government argued that they would not accept the commission’s proposal that the existence of a preliminary notice or of various stages be publicised. Instead, it was felt that these matters should be kept “secret” until such time as any impact on Stock Exchange listing rules demanded publication that the group was being subjected to such a procedure. It seems to me that this is a slightly dangerous structure. It is a traditional structure of central banks. It has always been strongly opposed by securities regulators which believe much more in transparency in this respect. This lack of transparency is likely to produce rumour and false information in the marketplace. Consequently, if we are going to have this procedure—which I think is well thought out, apart from the one issue that I raised, on which I would like to have assurances—we should make it a transparent procedure because rumours and false information are really damaging to markets. Transparency is always to be preferred, even if that transparency may be extremely uncomfortable for the firm being subjected to this process.
Lord Deighton
On the question of the breach of human rights, we are confident. The RDC still exists, and under this procedure we still have the independent Upper Tribunal. We have looked into that.
On the publication of the initial warning, we are all trying to accomplish the same thing, and it is quite finely balanced as to which way you go. I point out, for the benefit of noble Lords, that of course the regulator has the discretion to publish the initial notice but is not obliged to do so. Therefore, in those circumstances in which it is in the interest of the market to do that, it would do so. One of the principal reasons why we are reluctant to do that is because if you have gone public with the initial warning it may make you reluctant to issue the initial warning and to begin a process because of the consequences of that being out in the public domain. This is a tricky area where the arguments are relatively well balanced. We came out with this option for the regulator to disclose it, which we thought was, on balance, the right thing to do. I beg to move.
Lord Deighton
“(2) The appropriate regulator must give a copy of the preliminary notice to the Treasury.”
Lord Deighton
Lord Deighton
Lord Deighton
My Lords, we have already discussed many of these issues as it has been extremely difficult to avoid talking about full separation when discussing the other amendments. However, I pause to review the most reverend Primate’s reminder that the most important thing in these institutions is culture and that we can make as many rules as we like but if we do not force a cultural change bankers will find their way around the rules. Separating banks is absolutely not a recipe for ensuring a better culture. If you look, for example, at the experience at HBOS, which was a pure retail player, there was clearly a massive cultural problem there. Culture is quite independent of some of the structural issues that we are talking about.
I remind noble Lords that we are talking about whether or not there should be a reserve power for industry-wide separation. Inevitably, the discussion seems to be about ring-fencing versus full separation but that is not the debate we are having. It is difficult to avoid confusion around that issue. The high voltage or the extent of the electrification and the incentive to banks is extremely strong in terms of individual bank separation. I outlined in our amendment how quickly and effectively that can be deployed. A bank needs no further incentive than to know that it will be completely restructured if it seeks to game the system. The notion that banks will watch each other is not how the industry operates.
As regards the point made by my noble friend Lord Higgins, the ring-fence rules are internationally consistent and have been designed to make sure that they are compatible with EU and US law, although the way each country deals with the issue structurally is different. I remind noble Lords that we are legislating to ring-fence retail from investment banking. That is what the Independent Commission on Banking recommended. The Government oppose this amendment as a matter of substance and process. The complete separation of retail and investment banking which this amendment would provide is not a sanction or deterrent but a different policy. It would not support or reinforce the ring-fence; it would abandon it in favour of an alternative. We can see this in the terms of the review that the noble Lord proposes which might trigger full separation. That review must decide how far the provisions in the Bill—that is, the ring-fencing regime itself—deliver the policy objective so that even if no bank gamed the ring-fence full separation could be triggered.
Having established this as an alternative policy, let me set out two simple reasons why we do not support the amendment. First, if a future Government did decide to switch to a new policy, it could not be appropriate for that change to be effected simply by commencing a reserve provision. That would entail no more than a single order with a single brief debate in each House of Parliament. There would be no detailed scrutiny, no opportunity to consider amendments and no chance for Parliament to assure itself that the circumstances justified the new policy. There would be no development of an extensive evidence base, no cost-benefit analysis and no opportunity to build an extensive domestic and now European consensus. This proposal may therefore be at odds with the desire expressed in both Houses to enhance the process of scrutiny.
Lord Eatwell
The point that the Minister seems not to have taken on board is that the arguments for review and this power have to be seen as a coherent package. The point is that there would be that review; there would be a continuous independent review providing exactly the information that he says is necessary.
Lord Deighton
Yes, there would be a review, but not a proper parliamentary process. The argument I am making is that this is such a switch from ring-fencing to full separation that it should benefit from that full process. While I obviously bow to the experience of my noble friend Lord Lawson, these things, if the circumstances dictate, can be done extremely rapidly, where the circumstances demand that kind of urgent move.
I think it is instructive to compare the process of developing the ring-fencing policy to that of this proposal for full separation. The ICB went through an extensive process of deliberation and analysis, carefully collected data, prepared a full cost and benefit analysis and compared that to full separation. It found that a robust ring-fence will insulate essential retail banking services from shocks originating elsewhere in the financial system. It will enhance the authorities’ ability to manage the failure of a ring-fenced bank, or its wider corporate group, in an orderly way. It will, therefore, deliver the financial stability benefits of separation. Ring-fencing will also preserve some of the benefits of universal banking. I made the argument of diversification and scale, not simply diversity. Customers will be able to access the full range of services from a single group: that is a marketing advantage as well. The frictional costs to the economy of ring-fencing are therefore lower than those of full separation. That is, of course, the reason we did not go for full separation. Further, in the event that the ring-fenced bank runs into trouble while the rest of the group is doing well, other group members can support it. That, of course, would not be possible under complete separation.
On a comparison of the costs and benefits, the ICB chose ring-fencing as the superior policy. The PCBS did not provide any new evidence to contradict this position. In this respect, the noble Lord’s proposal for an independent review of ring-fencing is an admission that the evidence base for full separation does not yet exist. The amendment asks us to put a policy into law and then establishes an independent review process in the hope that it might justify it. For us, this is lawmaking done backwards.
That brings me to the Government’s second and perhaps more powerful reason for rejecting this amendment. Let us imagine that a future Government decided that not ring-fencing, or full separation, but a third policy was appropriate. Imagine, for example, that it decided that a Volcker rule was the right policy, or a shift to full-reserve banking. In either case, a review that was limited to deciding whether to enact a reserve provision for separating ring-fenced banks from their groups would be no use at all, and the power would need to be repealed, along with much of the rest of the Bill. Coming back to Parliament would be the only way to give a future Government wanting to change policy the full range of options.
Therefore, on grounds of both substance and of proper legislative process, the Government continue to oppose a reserve provision for a move to full separation and I therefore urge the noble Lord to withdraw his amendment.
Lord Turnbull
I think the Minister has erected a straw man here. The straw man is that there is a quite lightweight review, possibly of the kind that he is recommending, rather than the kind others are recommending, and then there is a day in the Commons and a day in the Lords and, bingo, this huge change takes place. What the commission envisages is a resurrection of the ICB. It is not a coincidence that the number five was chosen, as that was the number that worked on the ICB. The ICB went through all the steps that he claimed, of looking at the options, the cost benefits and so on, and evidence was taken in various Select Committees. Therefore, there would be an enormous amount of public discussion, inside and outside Parliament, before this was enacted. That seems to me to be the process and I cannot see what is wrong with it.
The other point is that the Minister downplays the incentive effect. If you have one bank which has no incentive to test the system and is very happy with its niche in the market and it sees another bank pushing very hard at the limits, what is its incentive? Does it simply turn a blind eye? Under this arrangement it has an incentive to support suggestions that the other bank should be reined in, otherwise it then brings big change on the sector as a whole. So it produces, it seems to me, the right incentive set for all the players in the banking sector.
The Minister has heard a lot of quite strong opinions on this. As I said at the start, the prior condition of all this is a proper review arrangement. If that is in place, this is, in the opinion of many, a sensible power to have. It can be enacted, but if the view is that some alternative to separation is better, there is no problem; the Government can go down a different channel. If they want to extend separation, they have the power to do so. As with the first reserve power, further discussions need to take place. I think the divisions here are more fundamental, but, equally, I think the strength of opinion is also more fundamental. None the less, I beg leave to withdraw the amendment.
Financial Services (Banking Reform) Bill
Lord Deighton Excerpts(10 years, 9 months ago)
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The Commercial Secretary to the Treasury (Lord Deighton)
My Lords, the Bill is a central part of the Government’s response to the financial crisis of 2007-09. Noble Lords will recall the terrible events of those years. Britain saw the first bank run in over a century. Depositors in Northern Rock queued in the streets to take their money out. The biggest bank in the world, the Royal Bank of Scotland, teetered on the brink. RBS and HBOS had to be bailed out and the Government had to inject £65 billion of taxpayers’ money to save the banking system from collapse.
Huge though this direct cost to the taxpayer was, the full costs of the crisis were still greater. Gross domestic product fell, peak to trough, by 7.2% as the supply of credit dried up and tight credit continues to be a problem for many businesses and families. This is why the Government have had to intervene to support credit supply through measures such as Funding for Lending, Help to Buy and the Business Finance Partnership. These will help to address the consequences of the crisis. To tackle its causes and to prevent a repeat, the Government are taking forward a programme of reform built on three pillars.
The first pillar is reform of financial regulation. This was achieved through the Financial Services Act 2012, which received Royal Assent last December and came into force this spring. The second pillar is structural reform of the banking industry. That is the focus of the measures in the Bill before us today. The third pillar is reform of banking standards and culture. The Parliamentary Commission on Banking Standards—the PCBS; I am afraid there will be quite a few abbreviations today—last month made important recommendations in this area. The Government have accepted the PCBS’s principal recommendations and where those require primary legislation they will be incorporated into this Bill through government amendments at Committee stage.
Let me first turn to the measures already in the Bill. The bulk of these implement key recommendations of the Independent Commission on Banking, or ICB, chaired by Sir John Vickers. As noble Lords will know, the Vickers commission was established in 2010 to consider both structural and non-structural reforms to the banking sector. It reported in September 2011 and recommended, first, the ring-fencing of retail from investment banking. The ICB also proposed measures to improve banks’ ability to absorb losses and to ensure that losses can be made to fall on banks’ creditors and not the taxpayer if a bank fails. These measures included higher capital requirements for ring-fenced banks, a bail-in power and preference in insolvency for bank depositors over other creditors. The Government accepted virtually all the ICB’s recommendations.
This Bill will implement the ring-fence as recommended by the ICB. It defines core activities—that is, taking deposits—which must be inside the ring-fence, and it defines excluded activities—that is, trading in investments as principal—which must be outside the ring-fence. As the ICB recommended, activities that are neither core nor excluded may be either in or out. The Bill makes safeguarding the continuity of services connected to deposit-taking a part of the Prudential Regulation Authority’s general objective. It requires the PRA to make rules to ensure the independence of ring-fenced banks from their wider corporate groups. In response to the recommendations of the PCBS, we have amended the Bill in the Commons to electrify the ring-fence. I will come on to the details of that shortly.
The Bill also makes deposits protected by the Financial Services Compensation Scheme preferential debts in the event of insolvency. This will increase the FSCS’s expected recovery in the event that a bank fails and the FSCS has to pay out, reducing the risk of contagion and protecting the taxpayer. The ICB also recommended that if a bank fails the authorities should have the power to bail-in creditors, imposing losses on them rather than letting those losses fall on the taxpayer. The forthcoming EU bank recovery and resolution directive should deliver a bail-in tool at European level and a requirement for national authorities to ensure that their banks have in issue a minimum amount of credibly bail-inable liabilities, necessary to ensure bail-in is effective and credible. This Bill gives the Treasury power to set the framework within which the PRA imposes requirements on banks to have in issue minimum amounts of bail-inable debt.
In addition to the ICB’s recommendations, the Bill also reforms the governance of the Financial Services Compensation Scheme manager to ensure proper oversight and accountability for its use of public funds. It extends to subsidiaries of the Bank of England exemptions from Companies Act accounting requirements given to the Bank itself where the Bank considers that necessary for reasons of financial stability. It also allows for the costs of the Treasury’s participation in international organisations dealing with financial stability to be recovered from the industry.
Before reaching this House, the Bill already received very substantial scrutiny. The Government published the Bill in draft last October for pre-legislative scrutiny by the PCBS, which of course included several Members of this House. In light of the PCBS’s report on the draft Bill, the Government made a number of changes both before the Bill was introduced to Parliament and while it was before the House of Commons. In the Commons, the Bill was scrutinised line by line over the course of eight Committee sittings and had two days of debate on Report. For a Bill of just 35 pages, that was intensive, detailed scrutiny.
Throughout this process the Government have consistently adopted a constructive approach. We have welcomed suggestions from all quarters on how the Bill might be improved. Where we found those suggestions valuable, we have amended the Bill accordingly. For example, in pre-legislative scrutiny the PCBS argued that the regulator’s objective for ring-fencing could be made clearer. We accepted this suggestion and amended the Bill before its introduction and again on Report in the Commons. The PCBS also called for specific requirements for ring-fenced bank independence to be put in the Bill. We agreed and amended the Bill in a way that the PCBS acknowledged arguably went even further than it had suggested. The PCBS proposed that the PRA be required to report on ring-fenced banks’ sale of derivatives to clients. We will amend the Bill to this effect while it is before this House.
On the procedures for exercising delegated powers, the Government not only accepted recommendations made by the House of Lords Delegated Powers Committee, but also accepted a further amendment tabled by the Opposition in Committee in the Commons.
Perhaps most significantly, as I alluded to earlier, in response to the recommendation of the PCBS, the Government amended the Bill in the Commons to provide for a power for the full separation of an individual banking group. This is what the PCBS termed “electrifying” the ring-fence. The power we have added to the Bill will substantially reinforce the ring-fence. It will allow the regulator to require a banking group to separate completely its retail from its wholesale banking operations. This power can be exercised if the regulator believes that a ring-fenced bank is insufficiently independent of the rest of its group, or that the group’s conduct might in some other way threaten the regulator’s ability to safeguard the continuity of core retail banking services. As the PCBS recommended, given the momentous consequences for a banking group of a requirement to separate, the regulator can only use this power with the consent of the Treasury.
As noble Lords will know, when this power was debated in the Commons, questions were raised about the process for exercising it set out in the Government’s amendment. Some argued that the procedure was too complicated or lengthy. The Government have listened to these arguments. We accept that the process for requiring a group to separate could usefully be streamlined. We will therefore bring forward amendments to that effect while the Bill is before this House. And we will listen to the contributions of noble Lords to ensure that the process in the Bill meets the objectives that the PCBS set out, and which the Government share.
The Government remain unpersuaded, however, that a reserve provision for full separation across the entire industry would be appropriate. A firm-specific reserve power will reinforce the ring-fence by deterring banks from seeking to undermine or weaken it. However, to move to industry-wide separation would be to abandon the ring-fence altogether, in favour of an alternative structural reform. Let us be clear: this would not be a sanction, it would be a different policy. That alternative policy was considered in detail by the ICB, which rejected it. As noble Lords will know, the ICB concluded that full separation similar to Glass-Steagall would entail very significant additional costs, for doubtful—or even negative—additional benefits to ring-fencing. The Government have accepted the ICB’s recommendation and are therefore implementing the ring-fence through this Bill.
Like the ICB, the Government believe that the ring-fence will succeed. A future Government would, of course, be within their rights to come to a different conclusion, and to shift to an alternative policy. But if they did, the only proper and democratic way to implement that new policy would be to return to Parliament with new primary legislation which could be properly debated and scrutinised. The proposal made by the PCBS would potentially lead to full separation with no more than a short debate in Parliament and a vote. This would stand in extreme contrast to the extensive consultation and scrutiny that the current policy has gone through.
We have also recently heard proposals from the PCBS on the issue of the leverage ratio. The PCBS has suggested that control over the leverage ratio should be taken out of political hands and given to the regulator. The Government strongly support the principle of a binding minimum leverage ratio, as agreed in the Basel III accord. We believe that it is entirely appropriate for minimum standards to be set in statute. This applies to all the minimum requirements in Basel III, which we continue to push to have implemented through EU legislation.
This does not mean that there is no role for the regulator. Judgment-based regulation means the regulator having the ability to impose additional requirements if it feels that these are necessary to achieve its statutory objectives. Only last month, the PRA required a number of banks to meet higher leverage standards sooner than the Basel III deadline. The PRA thus demonstrated that it already has the power to impose higher requirements on leverage. So beyond minimum requirements set in statute in line with international standards, day-to-day control over the leverage ratio lies in the hands of the PRA.
Structural reform of the banking industry is the second pillar of the Government’s reform programme. The third pillar is reform of banking standards and culture. As noble Lords well know, the Government have welcomed the recent report of the PCBS, one main theme of which was to strengthen individual accountability in financial services. The PCBS argued that the existing approved persons regime has failed in this, and that new measures are needed to replace it. The PCBS also called for criminal sanctions for reckless misconduct in the management of a bank.
The Government have accepted these recommendations. While the Bill is before this House, we will therefore bring forward amendments to introduce a new senior persons regime. We will reverse the burden of proof for senior persons so that they will be accountable for any breaches of regulatory requirements in their areas of responsibility, unless they can prove that they took all reasonable steps to prevent them. We will also amend the Bill to give regulators the power to make rules governing the conduct of anyone employed in financial services, and to extend the time limit for enforcement action from three to six years.
Lord Forsyth of Drumlean
I am most grateful to my noble friend. Perhaps I should declare an interest as a regulated person. This new criminal offence of reckless misconduct is to apply—according to the excellent report which was produced—only to the senior management of banks. Can the Minister explain why, if someone is responsible for major systemic difficulties arising from the collapse of a bank, this new criminal offence should be limited only to the management of the bank and not apply to regulators or Treasury officials?
Lord Deighton
I thank my noble friend for that interesting observation. The purpose of the Bill is to look at the management of the financial institutions themselves rather than the system. I would welcome that discussion later, in Committee, if my noble friend would like to take it further.
As a further deterrent against misconduct, the Government will table amendments to make reckless misconduct in the management of a bank a criminal offence. Those found guilty will face the possibility of prison sentences. Together, these measures represent an historic overhaul of the system for holding bankers to account for their actions. However, rules and sanctions alone will not guarantee good conduct. The PCBS argued that effective competition between banks is essential to ensuring high standards of behaviour, and the Government agree. We will therefore amend the Bill to give the PRA a secondary competition objective. This will give the PRA a greater role in championing competition in the banking market, to the benefit of consumers.
One key barrier to competition in banking, and in particular to new entrants and smaller firms looking to challenge the big high street banks, is the big banks’ control of payments systems. The Government will therefore introduce amendments establishing utility-style regulation of payments systems. To ensure the safety and stability of payments services, we will also bring forward amendments to provide for a special administration regime for payment and settlement systems. This will require critical payment and settlement services to be continued even in insolvency, until the firm recovers or alternative provision is available.
While the Bill is before this House, the Government will also make some technical amendments to provisions on the pension liabilities of ring-fenced banks and introduce amendments to modernise the rules for building societies, helping to create a level playing field between building societies and banks while preserving the distinct nature of the building society sector.
In the other place, the Government set out our intention to use this Bill to require the Bank of England to produce a resolution strategy for each major UK bank—that is, a plan for how the authorities propose to respond in the event that that bank failed. We still believe that resolution plans are necessary, but given that the European Council of Ministers and the European Parliament have recently published proposals for the EU recovery and resolution directive that include similar provisions, it may be more appropriate for this requirement to be imposed through transposition of the directive than through the Bill. The Government will continue to review this issue in the light of European developments while the Bill is before this House, with a view to bringing forward amendments if necessary.
We can all agree that this is legislation of the highest importance. It is essential that we address the causes of the terrible banking crisis of five years ago, whose consequences remain with us today. The Bill is a vital step towards ensuring that this crisis is never repeated. Its current provisions represent a once in a generation reform of the structure of British banking, while forthcoming amendments will revamp the accountability regime for bankers’ conduct and standards. I look forward to constructive engagement with all sides of this House over the months ahead. To support noble Lords’ consideration of the Bill, last week the Government published drafts of the principal secondary legislation exercising delegated powers under the Bill, and I will ensure that my officials are available to noble Lords to discuss any details of the Bill. I am pleased to present the Bill for the consideration of noble Lords. I beg to move.
Economy: Infrastructure
Lord Deighton Excerpts(10 years, 9 months ago)
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Lord Dobbs
To ask Her Majesty’s Government what plans they have for improving infrastructure to enable businesses and employment to grow.
The Commercial Secretary to the Treasury (Lord Deighton)
My Lords, the Government laid out their infrastructure plans at the spending review in their document Investing in Britain’s Future, committing to fund publicly specific projects worth over £100 billion and facilitating private investment by both extending the UK guarantees scheme and providing policy certainty, for example to energy businesses and investors through the early publication of renewable strike prices.
Lord Dobbs
I thank my noble friend. On this exceptionally happy day, could we perhaps spend a moment looking on the bright side? It might be too early to spot green shoots but there are certainly a number of blue shoots around. Growth is accelerating, exports are rising and unemployment is falling. Confidence among consumers and business is growing. However, many challenges still lie ahead. Does my noble friend agree that small businesses are consistently at the sharp end of economic revival? How do he and his colleague intend to ensure that the huge and very welcome infrastructure programme that he has announced gives a fair share to Britain’s small businesses?
Lord Deighton
I thank my noble friend for those observations about the signs of good news that are beginning to be seen in the economy. Based on my discussions with small businesses, they are most concerned about access to finance, improved broadband and better roads. The Government are addressing all of those through the Funding for Lending scheme to get cheaper financing and through the business bank to get about £1 billion of capital committed in non-bank funding. We are rolling out broadband as fast as possible both privately and through government intervention and we have committed a record amount not only to building new roads but to improving and repairing existing roads so that small businesses can get around. As for the participation of small businesses themselves in these large infrastructure projects, those businesses operate down the supply chain, and giving them a long-term warning that these projects are coming is extremely helpful. By way of example, I think that about 58% of the businesses which benefit from Crossrail spend would be classified as small and medium-sized.
Lord Barnett
The noble Lord will know that I strongly welcome the news of the amounts being spent. However, as he has now taken direct responsibility in this area, can he answer the vital question of how much will be spent in the next two years?
Lord Deighton
The actual expenditure on infrastructure is difficult to predict because, of course, the predominant portion of infrastructure is financed by the private sector. That is why we focused on developing our energy policy, so that we can trigger investments with offshore wind, with nuclear and with various gas developments. We have laid out our expenditure plans and the proportion of investment that is capital investment is laid out in the spending round for this year and for future years. We have shifted, I believe, £9.3 billion from current spending to capital spending during the time of this Government. We have put an extra £18 billion into capital investment in Budget 2013. As a result of those changes, public investment as a share of GDP will be higher on average between 2010-11 and 2020-21 than it was under the previous Government. We are trying to shift it into the more productive areas. Transport investment in 2013-14 will be higher than at any point under the previous Government despite the fact that we were in something of a boom time there, and it will rise every year until 2020.
Lord Forsyth of Drumlean
My Lords, can my noble friend tell the House how much less would be spent on infrastructure and capital projects if the plans of Alistair Darling and the previous Labour Government had been implemented?
Lord Deighton
Again we are dealing with a hypothetical question because in 2010 our plans for capital investment were broadly similar. Since then, because of our ability to focus on government efficiencies and the delivery of other programmes more cheaply, we have been able to transfer, first, the £10 billion to which I referred into capital spending within our fiscal envelope and, then, a further £18 billion through 2020-21. These capital expenditure investments are very focused on the most productive areas—economic infrastructure—but they are also all fully costed and within a fiscal envelope that is affordable.
Lord Harrison
My Lords, given the palpable failure of the regional growth fund, can the Minister report on the Government’s proper ambition to try to switch access to finance for small businesses from the current 80% secured from their banks in the United Kingdom to the 80% secured from the capital markets which applies in the United States of America?
Lord Deighton
I share the noble Lord’s observation that the current performance of the banks in supporting small and medium-sized businesses needs support. That is why we introduced Funding for Lending and amended it to make it more effective in cheapening banks’ funding for those areas. It is also why we have the business bank in place. I agree that some of the schemes need time to bed in, and they need to be activated faster and more effectively, because this is a critical part of our plan to get the economy growing again.
The Earl of Listowel
My Lords, can the Minister say what part high-quality, affordable childcare will play in freeing up the workforce for small and medium-sized enterprises, particularly for women entering the workplace?
Lord Deighton
I thank the noble Earl for drawing attention to the importance of flexibility in the workforce, the way that it relates to our policies in the area of welfare and its reform and the support that we are giving to get valuable members of the workforce back into being productive members of this economy.
Baroness Sharples
Can my noble friend say whether ministries are paying all their small business suppliers on time?
Lord Deighton
This goes back to the noble Lord’s earlier point about being creative about finding every possible way to get finance into smaller businesses. The noble Baroness is right: getting everybody to pay on time, including the ministries, is a critical part of that, and we have a programme in place to ensure that we perform in the same way as we are encouraging the rest of business to.
Finance Bill
Lord Deighton Excerpts(10 years, 10 months ago)
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The Commercial Secretary to the Treasury (Lord Deighton)
As noble Lords are aware, this Government came to power in the midst of an economic crisis and inherited the largest deficit in our peacetime history. Since then, the Government have taken resolute action to deal with our debts and get the economy moving again. The Finance Bill before us represents the latest stage in those plans by legislating for measures to deal with the deficit, to encourage economic growth and support businesses of all sizes and to create a fairer and more efficient tax system.
I turn first to growth and competitiveness. The Government have set out our ambition to have the most competitive tax system in the G20. We have already made significant progress towards that goal. In 2013, the main rate of corporation tax will be 23%, far lower than the uncompetitive 28% rate that we inherited. However, we want to do more to relieve the tax burden on business. Clauses 4 and 6 will reduce the main rate of corporation tax to 21% from April 2014, and to 20% from April 2015—the joint lowest rate in the G20, and lower than any comparable EU member state.
It was also announced in Budget 2013 that once the main rate has fallen to 20%, it will be unified with the small profits rate to create a single headline rate of corporation tax—simplifying the system. These changes have been widely welcomed by business groups such as the Confederation of British Industry and the British Chambers of Commerce, but competitiveness is not only about the corporation tax rate. The Government are also supporting the innovative sectors that will drive future economic growth.
Clause 7 and Schedule 1 increase the annual investment allowance from £25,000 to £250,000 for two years from April 2013. That will provide additional, time-limited support for businesses investing in plant and machinery, and will particularly benefit small and medium-sized firms. Clause 34 introduces a new, more generous above-the-line tax credit for large companies’ R&D expenditure, providing more visible and more certain relief to those companies engaged in ground-breaking research in the UK. Clause 35 introduces new tax reliefs to support the UK’s creative economy, including animation and high-end TV. Those will be among the most effective reliefs available anywhere in the world. As John Cridland, Director-General of the CBI, said:
“Providing further support for our world-beating creative industries … and increasing the rate of the above the line R&D tax credit will … have a material impact on some of the most important sectors of the UK economy”.
Creating a competitive tax system goes hand in hand with making sure that companies and individuals pay the taxes they owe. That is why this Finance Bill includes significant new measures to tackle tax avoidance by the small minority of individuals and businesses who are not willing to pay their fair share. I know that this is an area in which noble Lords have shown great interest.
Clauses 203 to 212 and Schedule 41 establish the UK’s first general anti-abuse rule, or GAAR. That is a major new development in UK tax law, and will provide HMRC with an important new tool to tackle abusive tax avoidance. It sends a clear message to those who create and promote abusive tax avoidance schemes that their activities will not be tolerated.
We are also strengthening the disclosure of tax-avoidance schemes—or DOTAS—regime. DOTAS has already been highly successful, with more than 2,000 tax avoidance schemes being disclosed to HMRC since its introduction in 2004. This Finance Bill will further improve the information that promoters of tax-avoidance schemes have to provide about the use of their schemes, making DOTAS an even more effective tool.
The Government will also continue to introduce anti-avoidance rules to address specific types of avoidance in areas of the tax system. This Finance Bill includes legislation to close 15 loopholes which have been used to avoid tax.
Taken together, those measures will raise tax revenues by almost £2 billion up to 2017-18, as well as protecting future revenues. Noble Lords will also be aware that the Government have been at the forefront of international efforts to strengthen tax standards and tackle avoidance by multinational companies. The OECD will present its action plan for tackling base erosion and profit shifting to the G20 in July.
Tackling tax avoidance is an important part of delivering a tax system that is fair. There is, however, more to fairness than tackling avoidance. This Government recognise the financial pressures that many families are currently experiencing and are determined that hard-working families should be able to keep more of the money they earn. That is why this Government have set an ambition for the personal allowance to increase to £10,000 by the end of this Parliament—an ambition which will in fact be reached one year early, in April 2014. Clause 2 takes an important step towards that ambition, by setting the value of the personal allowance at £9,440 from April this year. This is the largest ever cash increase in the personal allowance, and represents a tax cut for 24 million people. It will save a typical basic-rate taxpayer £267 a year.
This Finance Bill also takes action to ensure that the wealthiest members of society make a fair contribution. It introduces a new annual charge on enveloped dwellings to ensure that owners of high-value properties cannot avoid paying their fair share of tax by placing their property in a corporate envelope.
The Bill legislates for a new cap on certain unlimited tax reliefs from this April to curtail excessive use of these reliefs by high-income individuals who want to reduce their tax bills. The cap will be set at £50,000 or 25% of a person's income, whichever is the greater, ensuring that these reliefs cannot be exploited unfairly.
The Bill reduces the pensions tax relief lifetime and annual allowances to £1,250,000 and £40,000 respectively. This will limit the amount of relief available to the top 2% of pension savers and curb the growing cost of pensions tax relief, which has doubled in the decade since 2001.
By rewarding work and ensuring that reliefs are properly targeted, this is a Finance Bill that delivers a fairer tax system. The Government are committed to greater consultation on tax policy changes. Most of the measures in the Bill were announced at Budget 2012 and have been subject to extensive consultation. We published more than 400 pages of draft legislation for comment in December, and received more than 400 responses. This consultation has ensured better legislation with fewer changes required. I take this opportunity to thank the noble Lord, Lord MacGregor, and noble Lords on the Economic Affairs Committee for their detailed examination of the draft Finance Bill and the thoughtful and constructive comments in the report before us today.
To conclude, the Bill sets out measures to improve our competitiveness, tackle tax avoidance, and help hard-working families and businesses. It builds on the progress that the Government have already made to deal with the enormous debts we inherited and get the economy moving again. The underlying damage to our economy has turned out to be greater, and the road to recovery longer, than anyone had thought. We are, however, on the right path. I commend the Bill to the House.
Lord Deighton
My Lords, I thank all noble Lords for their excellent and insightful contributions. I will do my best to respond to them. Let me take first the attack of the noble Lord, Lord Davies, on current government policy. When I entered the Treasury I found myself confronted with the financial state which this Government inherited from the previous Government. I find it quite difficult to know where to begin in comparing and contrasting a government strategy which left this nation financially on its knees with the steady and consistent plan which this Government have put in place to recover the situation.
This Government have succeeded in reducing the deficit by a third, and have the confidence of international markets. This Government have put in place a growth strategy in terms of reducing taxes, and making sure that this is an economy in which investors want to invest and companies want to grow. This is the basis for sustained improvement in the decade to come. I agree that issues on infrastructure need addressing. This is because over generations—I think that this really applies to many previous Governments—we have not put in place the long-term approach to sorting out the economic infrastructure that was needed. This Government deserve credit for actually taking the right long-term steps to sort that out, which I hope will put in place a regime that will work very effectively for many years ahead.
Let me get to the specifics of this particular debate and the Finance Bill. The Bill reflects the Government’s continuing commitment to making tax policy in a transparent manner through improved consultation. Many measures in the Bill have been subject to extensive consultation and scrutiny. I take great comfort from the comments at large that the consultation process has been extraordinarily effective. My noble friends Lord MacGregor and Lord Wakeham made the point that we gave the Committee the ability to look at the draft and at the changes we put in place. I think that that is progress all round, which we should enjoy. That robust approach to making tax policy ensures that we can effectively legislate to restore the economy to growth and address the enormous deficit that was inherited. This Finance Bill is part of our plan to put the country on the right path through supporting enterprise, helping families and ensuring that everybody pays their fair share of tax. Part of this plan includes the biggest ever cash increase in the income tax personal allowance, as my noble friend Lady Kramer noted. In her view, that was the most important part of the Bill.
However, we also take firm action against those who do not pay their fair share of tax. There has been quite a detailed discussion of GAAR in this evening’s debate. Given the amount of consultation that has gone on around it and the debate that we have had, I am not sure that there is much more I can add. Insightful comments on it were made by my noble friends Lady Wheatcroft and Lady Kramer and the noble Lord, Lord Bilimoria. GAAR is part of an overall approach and works together with specific tax rules. It does not attempt to address the broader question of the tax behaviour of big multinational companies, which I think we all agree and understand needs to be dealt with through international collaboration. I am proud to be part of a Government who are leading on that issue. We will hear later this week the OECD’s proposals to the G20 to move forward on these issues following up on the ball that we rolled into play at the recent G8 meeting, so that is well under way.
On when we should review GAAR, we rejected the two-year suggestion. On whether five is the right number, the Government reserve the right to keep all taxes under review. I agree with the general sentiment that the way this works needs to be bedded into the system and therefore needs particularly careful management. Overall, I think that the Government’s approach of driving down taxes generally to make this economy more productive, and avoiding the Winston Churchill problem of the man in the bucket, is the right one. Combining that with our rigorous approach to the collection of taxes that are due is exactly the right balance for this age. I wish that our predecessors had got to grips with those two important issues much earlier so that we did not have to deal with them right from basics now.
I also agree with the general sentiment expressed by the noble Baroness, Lady Wheatcroft, and the noble Lord, Lord Bilimoria, that, in an ideal world, we would drive more simplification into the tax system. It is an easy concept to embrace but a difficult one to put into practice given everything that we are trying to accomplish. There is an Office of Tax Simplification whose mandate it is to cause some of these things to happen.
On whether we have done quite the right thing on tax reliefs, the Government are committed to supporting growth and we take action to support business tax relief in an effective way, but it cannot be without limit. We promote business investment through targeted tax relief schemes—some examples of those are the Enterprise Investment Scheme, the Seed Enterprise Investment Scheme and the venture capital trusts—and, as I have said previously, we are driving down the overall level of taxation. The balanced package leaves companies of all sizes in a very attractive tax environment which should be good for the growth of the economy.
In response to the question asked by my noble friend Lord Bates about tax relief for married couples, I can confirm that my right honourable friend the Prime Minister made a commitment to recognising marriage in the tax system. We intend to announce our plans shortly and it will be at the earliest opportunity. My noble friend was absolutely right to quote my right honourable friend the Chancellor, who said in an interview a few days ago that,
“the Government is committed to introducing it and I think you can expect to see it in the Autumn Statement”.
I hope that that is a strong enough commitment. It sounds pretty good to me.
As noble Lords are well aware, this Government inherited enormous debts. It was essential that we addressed that and got the economy moving. We have taken difficult decisions and resolute action to tackle the challenging legacy that we inherited. The Finance Bill 2013 is part of the Government’s plan to put this country back on the right path, through supporting enterprise, helping families and ensuring that everyone pays their fair share of tax. I commend the Bill to the House. I beg to move.
Government Spending Review 2013
Lord Deighton Excerpts(10 years, 10 months ago)
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Lord Deighton
To move that the Grand Committee takes note of the 2013 spending review.
The Commercial Secretary to the Treasury (Lord Deighton)
My Lords, last week’s spending round was a further step in the Government’s programme of returning the public finances to a sustainable position. Spending reductions are being achieved by transforming public service delivery, driving through efficiency savings and controlling welfare spending.
Through three years of reform and savings, the Government’s actions have brought the deficit down by a third; we are set to borrow £108 billion this year, £49 billion less than at the peak. We have kept interest rates at record lows, which is good news for mortgage borrowers as well as, of course, making a major contribution to keeping the Government’s own costs down. We have helped a record number of people into work. From the initial savings plan of £80 billion, we are right on target, having already delivered £53 billion of it. It has been well managed from the beginning.
We have to keep going. This spending round looked at taking £11.5 billion of savings out of departments. At the same time, we continue to meet our pledge to protect certain areas, the so-called ring-fence: the health service, the schools system and our overseas development budget. Because of the tough decisions that we have taken to be able to make economies elsewhere, we have been able to invest in education and accelerate school reform, so the Department for Education’s overall budget will increase to £53 billion and school spending will be protected in real terms. We have increased the health budget from £99 billion when we came into office to £110 billion in 2015-16. Capital spending in health will rise to £4.7 billion. We are proud to be able to fulfil our commitment to spend 0.7% of our national income on development. I do not think of those ring-fences as some sort of constraint on our ability to save but as reflecting our priorities and protecting what we have been able to accomplish in those critical areas.
We are reforming public services to get more for every £1 we spend of taxpayers’ money. Yesterday, I was at a Civil Service programme for staff members called, I think, “Be Exceptional”. The whole point was to clarify for everybody that this is a continuing and constant programme of reform and is now the way we do business: determining how we can deliver things differently and more efficiently. It is not something that you do as a one-off to meet a specific target but a continuing requirement for our Civil Service to be able to deliver and perform in a more effective way, utilising fewer resources.
As part of that, we are driving out costs, renegotiating contracts and reducing the size of government. We have cut spending on things like marketing and consultants. We are focused hard on what technology can do for us, and are consolidating procurement and negotiating hard on behalf of the taxpayer. We must also reform pay in the public sector by keeping pay awards under control and limiting public sector pay rises to an average of up to 1% for 2015-16. In the spending round, we announced that we are ending the automatic progression pay in the Civil Service by 2015-16.
We have already saved £5 billion, and this spending round found another £5 billion of efficiency savings; that is of course nearly half the total of £11.5 billion at which we were aiming. To give noble Lords a sense of where that is coming from, just under £2 billion comes from the departmental administration budgets in the year in question. That means that since 2010 there has been an overall reduction of around 40% in the cost of running Whitehall departments. That tells you on the one hand that it has been a very thorough exercise. On the other hand, it might tell you something about how efficiently we were positioned at the start.
We have reduced by £1.5 billion the Government’s projects portfolio, scaling back some projects and stopping other non-priority ones. That is just a question of being much more rigorous about prioritising, which you always have to do when budgets are tight. I talked about the Government being a much more effective procurer by centralising procurement using our immense bargaining power. We expect to squeeze a further £1 billion out of that. One example highlighted in the spending round is that we are bringing together health and social care to manage more efficiently the delivery of services to the home and over time provide a better service as well; it should help the NHS save something like £1 billion.
In 2010, the Government set out welfare savings worth about £18 billion a year. Last week, my right honourable friend the Chancellor of the Exchequer announced further welfare reforms. We have put in place new measures to support people to get them into work. It is all about keeping welfare spending under control and affordable. The changes involve making sure there is up-front work search and that all claimants prepare for work and search for jobs right from the start of their claim, and introducing weekly rather than fortnightly visits to jobcentres for half of all jobseekers. It is all about getting people back into work in the most efficient and effective way.
That is at the specific level. At the general level the Chancellor also introduced a new welfare cap. The theory behind this is to try to control the very significant overall costs of the benefits Bill. We have capped the benefits of individuals. This now is an approach to try to cap the system as a whole to keep our entire budget within what we can control. That cap will apply to what is effectively more than £100 billion of welfare spending and is another move to make sure that we are managing our budget in a consistent, rigorous and professional way and that welfare remains affordable.
The other half of the spending round statement was in Investing in Britain’s Future, which in effect lays out our plan for infrastructure. It demonstrates that right up to 2020-21 we will invest in infrastructure. It does a number of things. It gives a long-term spending commitment, which is the right horizon to provide for those kinds of long-term projects. We have been plagued by “stop, go, stop, go” historically. This gives certainty to an industry that needs that long-term investment in the right way. It also demonstrates that we are prioritising infrastructure and shows which infrastructure projects we are funnelling the money towards. That is what is done here.
Infrastructure is at the heart of our economic strategy. It is a key supporting foundation for what my right honourable friends the Prime Minister and the Chancellor always refer to as the global race. We need infrastructure in this country that can support industries that expected to be competitive on the global stage. This investment is critical because we have underinvested for generations now and we need to modernise our infrastructure and bring it up to date. We are talking here about transport, energy, communications systems and flood protection. The document also refers to our social infrastructure, both housing and schools. We are getting the right long-term approach to that. I do not think that there is any political contention about whether this is a good thing or not; it is all about how well and how effectively we do it. We will, I am sure, have a discussion about how well and effectively we are doing it and who had the good ideas first, but fundamentally it is really important that this country gets behind its infrastructure programme and delivers it as efficiently as possible. It is now all about delivery and making this programme happen.
To make a programme happen you need three things: a really good plan, the money and the capability to implement it. We are building on the original national infrastructure plan that was produced with the Autumn Statement in 2010. It is to be updated towards the end of this year and we will refresh the so-called construction and infrastructure pipeline, which is where we show the list of projects to industry so that it knows what we are doing and can make preparations to support it. Investing in Britain’s Future is in effect a supporting strategy document that lays out in each of the sectors what we are doing, why we are doing it, and what we think it takes to make this country competitive. To me, that is why what we have done in this spending review is potentially transformational. We are taking the right long-term strategic approach that thinks about the issues in the correct way.
The money is the next step in any plan. I have already referred to how parts of the infrastructure which the Government fund from taxpayer resources will be handled, and of course the majority of the focus in this document is on our roads and our rail system. I will not go through the numbers or the detail of the particular projects because they are all laid out in the document, but the road investment is more significant than anything we have seen since we put the major national structure of roads in place in the 1970s. The rail investment, which has already begun with Network Rail, marks a period of greater investment than anything since the Victorian times, and of course we have also put a comprehensive budget in place for HS2. Similarly, we have put long-term budgets in place for science, infrastructure and affordable housing, and to ensure that we finish off our digital communications programme so that we have very fast broadband coverage in the maximum number of locations as soon as possible. We are working closely with the private sector to accomplish that.
My final point concerns our own capability, which is an exercise that I have been very much involved in myself: making sure that the Government know how to be a good client when they are building infrastructure. We have reviewed the four major departments with infrastructure responsibility, which of course are the Department for Transport, the Department for Energy and Climate Change, Broadband Delivery UK, which sits within DCMS, and the Environment Agency, which sits within the Department for Environment, Food and Rural Affairs. We have looked at the commercial resources that they need to deliver the project portfolio in front of them, and we will work with them to supplement their own resources to make sure that they have people in place. Structurally, from an organisational point of view, the presumption is that we will manage these projects within organisations that are dedicated to project delivery. We will get them done urgently, with focus and for great value. An example would be that we are going to corporatise the Highways Agency so that it has the flexibility it needs to hire the staff it needs to do the job and has flexibility with its funding so that it can get on and be the most effective deliverer of roads that it can be.
Lord Davies of Oldham
Food banks are developing in almost every constituency in Britain because the so-called supply-driven factor has been occasioned by the demand of real necessity at present. It is a vastly different situation from that which obtained a decade or even five years ago.
I would ask the Minister to take on board the very important points that have been made by his noble friends today in supporting the coalition. Will he also, at some point in his remarks, address the question of morality? Why is it, for example, that his supporters are concerned to promote a bedroom tax that ensures that there is a desperate issue for impoverished people as to whether they will be forced to move but that when a mansion tax is proposed by the Liberal Party, there are all sorts of anxieties that people who are reasonably well off might be obliged to move and about what an affront to fairness that would represent? The mansion tax would be aimed at properties of very considerable value and at people who know they well might come under attack rather than the very large numbers of people who, under the bedroom tax, are being forced to move from their homes, the schools which their children attend and even the localities in which they have lived for very many years. I hope the Minister will address some of those points.
Lord Deighton
My Lords, first, I thank all noble Lords for their insights, ideas and challenge. It has been a most fascinating exchange and I congratulate the noble Lord, Lord Davies, on holding up the Opposition’s end there. I will address his question about morality straightaway. To me, this is a very simple issue: unless we are able to create a state that can actually afford to sustain itself, those who are most vulnerable will be the most exposed victims of the fall-out from that kind of financial crash. We have to get our ability to afford a welfare state in the right state so that we can sustain it. That is the way that we protect the vulnerable in the long run.
The Chancellor was back with another spending round because we had not defined the spending plans for 2015-16. We took the opportunity to lay out the investment programme through to 2021 because, as I explained in my earlier remarks, we think that it is the right way to provide an environment in which people can plan investment correctly. On the general question of whether anything is really being done about growth for the future, the point is precisely to begin to deliver a programme from which future Governments will benefit. They can quibble over who was responsible for the earlier decisions. These kinds of investments have very long lead times and our planning is trying to break the link between the political and economic cycles. There was some misunderstanding there, in that I do not think anybody was trying to claim more; we were just trying to claim that there is a long-term plan. Public sector gross investment in this decade, 2010 through to 2020, is slightly higher on average than in the previous decade, if you smooth out the peaks and the troughs and take the average.
In terms of delivery today, the noble Lord, Lord Davies, is correct that projects from 2021 and onwards, or in five years’ time, have an impact later. However, the projects we are undertaking now are having an impact. Crossrail is being delivered now—the money in the spending round is for the feasibility study for Crossrail 2. Crossrail will be open in 2018-19 and we are spending something like £15 billion on it. It is the biggest urban infrastructure project in Europe and is going on now, right under our feet. That a very good example of delivery. Similarly, we have upgraded 150 stations, completed more than 30 road projects, opened more than 80 new free schools, delivered more than 84,000 affordable homes and done an enormous amount in rolling out 4G mobile services. There is a significant amount of delivery going on now and we are trying to plan for future delivery. We are trying to accelerate it and make it better value all the way through. I accept the point of my noble friend Lady Noakes that it is not necessarily a good thing just because it is an infrastructure project. We have to evaluate them all, which is what we did in the plan through to 2020. We re-evaluated them all on a zero-budget basis and approved the ones that we thought were most powerful.
My noble friends Lady Kramer and Lord Northbrook both asked about the welfare cap. It will apply to welfare, of course, but does not apply to state pensions. As my noble friend Lady Kramer implied, it will work off the OBR forecast. If the spending is forecast to breach the cap, the Government will have to explain what action has been taken. We will put a buffer in place to ensure that any policy actions are not triggered by small changes. That is how that one works. For the information of the noble Lord, Lord Northbrook, the areas being capped are all in social security: housing benefit, disability benefits, pensioner benefits and tax credits.
The noble Baroness, Lady Kramer, also asked whether we would be focusing on the quick wins in infrastructure and leaving the longer-term strategic projects because they have a longer lead time. It is the portfolio that works; I addressed this earlier. Lots of delivery is going on at the moment and we are trying to put a consistent long-term plan in place. We will, of course, look at local funding of infrastructure projects, of which TIF is one example. Another example is the single local growth fund. The European funds we are allocated will be put into the single pot and be part of that as we devolve responsibility.
I was delighted that the discussion got around to our international competitiveness—I thank the noble Lord, Lord Risby, for giving us the detailed example of what is going on with Algeria. I have spent a lot of my own time dealing with inward investment. This country has a tremendous advantage. Overseas investors really want to invest here. They trust us. They believe in our rule of law. There are many things they like about the opportunities we create here. We are working very hard to exploit this to the country’s fullest advantage. On export promotion we are continuing to fund UKTI. It is in the process of transforming our approach to trade and its support to a very focused business approach.
We had a very powerful discussion about our fiscal position and whether we are moving quickly enough to address what I accept are still very high levels of borrowing. It is absolutely critical that people understand that the deficit each year is extra borrowing—it is adding to the stock of borrowing. I do not think that that is generally perceived or understood more widely. The implications of understanding that properly should focus attention on addressing the deficit as fast as possible.
In defence of the pace at which the Government are addressing the deficit, we are still focused on reaching a balance by 2017-18. We are on that path. There is a plan in place. I am very open to challenges about the paradigm shift, as my noble friend Lady Noakes suggested, that we could be more radical in some of the ways we deliver public services and in some of the ways we have structured the Civil Service. That is a challenge we should set for the next tranche of cost improvement. Without that it becomes very difficult to continue—again, in my noble friend’s words—to “salami-slice”.
My noble friend Lord Shipley asked about whole-place budgets. Community budget pilots have demonstrated that it is possible to do much more by joining up local authorities; I do not think there is any question about that. That is why we talked about the £3.8 billion social care budget that we have set aside. We have also set up a £200 million pot to accelerate joint working among local authorities. Whether we can release the borrowing cap on HRAs is another matter. If we were to do that it would add another £7 billion to public sector borrowing every year. Most of the schemes which creatively try to allow more borrowing at the local level are captured and increase public sector borrowing. That is always the constraint that we are trying to manage.
My noble friend Lord Northbrook asked for a response on public pension cuts. My noble friend Lord Newby and I will certainly get back to him on that.
The noble Lord, Lord Empey, asked why UK pension funds are not investing in UK infrastructure. He is correct to say that that industry is highly fragmented compared to its counterparts overseas. That is why we have worked with the industry to consolidate funds into a pension infrastructure platform of £1 billion. Ten funds have come together so that they can gain economies of scale, develop the expertise to assess those credits and provide us with the scale to begin to get them into that business in the same way that, for example, the Canadians have so effectively prosecuted over the past few years.
I could not agree more with the noble Lord, Lord Haskins, that we need to rationalise the number of funding streams going into skills training. That is why we have set up the single local growth fund so that we can begin to provide that kind of rationalisation.
The noble Lord, Lord Empey, asked about VAT and how it is applied to building. I will get back to him in writing on that.
I thank noble Lords for a very stimulating debate.
Lord Higgins
What is the assumption on interest rates in calculating debt interest payments?
Lord Deighton
I thank my noble friend Lord Higgins for reminding me of that question; I was intending to deal with it directly. There is a ready reckoner in the OBR. Our debt is fixed-rate, so the effect of interest rates going up increases over time as debt matures and as we borrow more. For example, if we had a 1% increase in gilts rates, by 2015-16 that would be costing us just over £4 billion more per annum in debt service costs. That gives a sense of the sensitivity. By 2017-18, it would more or less double to just over £8 billion.
Lord Deighton
That is the impact, but those are not the assumptions. We must consider the impacts, so the assumption is on a stable basis, but that is the sensitivity to change. That is how we measure it.