Economic Crime (Transparency and Enforcement) Bill

Lord Eatwell Excerpts

Committee stage
Monday 14th March 2022 Lords Chamber

[Lord Clement-Jones (LD)]

My Lords, I rise to speak to Amendment 17. I am delighted that it has also been signed by the noble Lord, Lord Agnew. This would extend the definition of a registerable beneficial owner of an overseas entity to include anyone who is the beneficial owner of land or property held by the entity.

Why does this matter? Let me give an example. Mr X wants to buy a house in London and sets up an overseas company to own the land. In this scenario, he meets the conditions for being a beneficial owner of a company; the Bill works as intended. However, assume our Mr X rather likes his anonymity, so he approaches a Panama law firm which, after a payment, buys the house for him using its general nominee company which holds legal title to many such properties all beneficially owned by different people. The nominee company issues a declaration to Mr X that it is holding the land as his nominee and that he is the beneficial owner of the property.

In this scenario, the nominee company is the overseas entity owning the property and its beneficial owner is the law firm which set it up. Depending on its ownership structure, the partners at the law firm may or may not appear on the register. However, that is not the point. They may be the beneficial owners of the nominee company but are not the beneficial owners of any of the properties owned by the company. Mr X and the other beneficial owners of the properties held by the nominee company do not tick any of the boxes for being a beneficial owner of that company. The declaration issued by the nominee company is private, so in this scenario they remain anonymous.

Is this what the Government intend? Opening the Second Reading debate last week, the Minister, the noble Baroness, Lady Williams of Trafford, said that the Bill would

“require anonymous foreign owners of UK property to reveal their real identity, ensuring that they can no longer hide behind secretive chains of shell companies.”—[Official Report, 9/3/22; col. 1484.]

That suggests that this is not what the Government intended, and this is where Amendment 17 comes in. By extending the definition of a beneficial owner of an overseas entity holding UK property to include anyone who is the beneficial owner of land or property held by the entity, we would be giving this Bill the scope the Government appear to intend for it.

Responding to last week’s debate in the other House, the Minister there said that if nominee companies were “directed by someone else”—the beneficial owner of the land—then the person doing the directing would be “caught by condition 4” in the definition of a beneficial owner: significant influence or control. But that would only be the case if a separate nominee company is set up for the particular beneficial owner. If a general nominee company is used and this acts for hundreds of different clients, then it is difficult to see that any one of them exercises significant influence or control over the nominee company. That is why Amendment 17 is needed.

[Lord Eatwell (Lab)]

My Lords, I support the theme of what the noble Lord, Lord Clement-Jones, just said, which is the general weakness of the definition of beneficial ownership in this Bill. It is very striking that in other jurisdictions within the British Isles that hold registers of beneficial ownership and have done for some years, the beneficial owner is always defined as an individual and never as a firm or a trust. An individual who ultimately owns or controls the entity must be identified. The Bill as currently constructed has significant weaknesses, which will prevent the identification of individual beneficial owners in the way that the Government apparently intend but have not as yet achieved.

[Lord Vaux of Harrowden (CB)]

My Lords, we find ourselves in an unusual position. Normally, this House is trying to knock the edges off overzealous legislation and limit the powers the Government have a tendency to give themselves. In this Bill, we are trying to achieve the exact opposite: to strengthen the powers and close the loopholes so that the powers are as effective as possible.

We are trying to move quickly because of the awful situation in Ukraine. As the Minister said at the outset, the overseas entity register is not an emergency measure—although it will be useful in this situation. In normal times, it would be subject to much more detailed scrutiny, and we would not normally debate such wide groups as we are today. At Second Reading, I asked the Minister to confirm that the follow-up economic crime Bill would be sufficiently wide in scope to allow the matters we are covering now to be considered further, if necessary, as part of that Bill. While the Minister nodded vigorously at the time, he did not give that confirmation in his response. The House clearly accepts the need to move fast, and matters which would normally be voted on will not be pushed to a vote. I hope that the Government will reciprocate that flexibility. Speaking for myself, it would be much easier to accept the flaws and gaps in this Bill, if it were clear that there will be the opportunity to give the more detailed scrutiny which these important issues deserve in due course. Will the Minister please provide that confirmation today?

We all welcome the additional clauses that the Government are proposing on trusts, one of the more common methods to obscure ultimate ownership. Of course, trusts can be—and, as the Minister said, they usually are—perfectly legitimate. However, they can be misused. As such, I commend the Government for introducing these new clauses. That said, and in addition to the points made by the noble Lord, Lord Clement-Jones, there is still one area where an important gap remains: the classic way of camouflaging the identity of the ultimate beneficial owner is by the use of discretionary trusts. These will often have a stated beneficiary, such as a charity, but, because they are discretionary, the benefit can be passed to others who are not identified. That might be under a formal agreement, but it is often something less formal or traceable. In such situations, it can be difficult to ascertain who the real beneficiary is. The identity of “the settlor or guarantor” is one clue— government Amendment 15 rightly requires those to be identified.

The Minister kindly wrote to me yesterday afternoon—I apologise for spoiling his weekend. He said that HMRC already has access to information about beneficiaries through new data-sharing gateways and existing exchange of notes mechanisms. However, this is true only for UK resident taxpayers and for situations where money actually flows. It does not cover all jurisdictions, so the gap remains. Many of the ultimate property owners are not UK residents, and value can pass in different ways—for example, the simple right to use the property rent-free would not be picked-up by HMRC.

One other way of trying to see through such discretionary trusts is to identify who has benefited in the past, including those who have had the use of the underlying property at less than market rent. It would be relatively easy to add a subsection to the Government’s Amendment 15 to cover that, and it would not be difficult information for innocent parties to provide. Is this something which the Government could consider, even if it is in later regulation?

As a general theme, we should not be allowing overseas entities to register unless they are fully transparent. To be honest, the Government’s apparent reluctance to accept clauses which would improve that transparency is somewhat concerning. On that theme, I also wholeheartedly support Amendment 17. It seems rather pointless to have information on the overseas entity, if that still fails to show us who owns the property. I urge the Minister to look at that seriously.

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Finally, the noble Lord, Lord Sikka, has tried to add a number of information requirements, all of which are sensible. I hope that the Minister will actively consider those under the powers to regulate in Clause 4.

[Lord Eatwell (Lab)]

My Lords, I will make a couple of observations on the amendments put forward by my noble friends Lord Sikka and Lady Chapman, and the noble Lords, Lord Fox and Lord Agnew. These observations are based on my experience as chairman of the Jersey Financial Services Commission. The Bill as drafted is significantly weaker than the requirements for registration in Jersey. For example, on the point made by my noble friend Lord Sikka, under the Control of Borrowing (Jersey) Order, any interest can be required to be registered without one of these numerical levels.

Secondly, with respect to the amendment proposed by my noble friend Lady Chapman and others, in Jersey, the requirement is that a change of beneficial ownership be registered within 21 days. This 12-month period is really foolish. It provides an open door to misbehaviour.

I support my noble friends Lord Sikka and Lady Chapman and friends in the amendments they have put forward. We should be able to achieve at least the level of seriousness achieved in Jersey.

[Lord Cromwell (CB)]

My Lords, there is clearly a great deal we can learn from Jersey and I am very happy to follow the noble Lord, Lord Eatwell.

I will speak to Amendment 24, to which I have added my name, and will also make a couple of comments on Amendment 53—there may be a slight sense of déjà vu, as my noble friend Lord Vaux has done the same.

In relation to Amendment 24, on page 3 of his very helpful all-Peers letter of 11 March, the Minister explains that Companies House would not know if a legal entity registered abroad was compliant with the 14-day rule. Likewise, this would not be visible to a third party, whereas that third party could be confident that, if an annual date had passed, the register would be up to date.

I am not convinced that that is so clear-cut or indeed helpful. This approach means that, for up to 12 months, an entity could keep hidden its change in ownership structure. Only at that point would it be in breach if it had not disclosed the change—or possibly multiple changes. Assuming—which may be a bold assumption given some of the entities—that the entity indeed complied with a 12-month date to reveal changes, this would still leave the third party in the dark for up to 12 months and the entity under no obligation to register the changes and having that as a defence. In short, it is possible for entities to game the system by carefully timing their changes. Twelve months, or even one month, can be a long time in business.

This also makes it possible for an entity to waste the time and resources of the acquirer and the regulatory and enforcement agencies if, for example, it becomes subject to sanctions based on its ownership but can claim, at a time to suit itself, that the affected owner or owners actually no longer own it. A 14-day limit greatly tightens the ability of both the registrar and any third party to see, at least in the case of compliant entities, any registered changes in as close to real time as is practicable.

Where entities are not compliant and fail to declare changes in this timely way, should this emerge in due course, it should give the third-party acquirer grounds for withdrawal and the authorities grounds for pursuit. This does leave an obligation on the registrar to ensure that entries are kept up to date, but that is a technological and resourcing issue perhaps better addressed in other amendments. For these reasons, I added my name to Amendment 24 and support it. I urge the Minister to rethink the 14-day requirement.

I shall now make a few comments on Amendment 53. In paragraph 4 on page 2 of the same letter, in relation to the purpose of the Bill, the Minister acknowledges that there will be those who seek to exploit opportunities to avoid it—he also referred to this earlier today. I raised at Second Reading the issue that there are enablers whose approach to reporting suspicions is light-touch or simply to turn a blind eye. I also advocated the idea put forward very eloquently by my noble friend Lord Vaux a few moments ago of having a named senior official on the hook. Simply saying that existing regulations cover this is to deny the evidence that there are entities and enablers in the area addressed by this Bill that have been skirting round existing regulations too easily by claiming ignorance or that suspicion was only mild. I think this may be more specifically reflected in the reference in paragraph 5 on page 5 of the Minister’s letter of 11 March, which says in relation to verification of information that:

“We expect that this will include a role for professionals regulated in the UK by the Money Laundering Regulations.”


This amendment, by including suspicion rather than certain knowledge, covers the loophole by which enablers can claim not to have had certain knowledge even if they should have had reasonable suspicion. This makes it considerably more difficult for enablers and others to look the other way and strengthens the hand of those seeking to hold them better to account. I support this amendment.

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[Lord Callanan (Con)]

First, I thank all noble Lords who have contributed to this debate. Before I address the amendments tabled, I reiterate the point I made earlier. This will be almost the first register of its kind in the world. We should accept that we are leading on this. I completely accept that we may not have everything perfect, but we will learn as we go—just as we did, in the example I cited, when we implemented the people with significant control requirements for domestic companies. We had to learn and iterate that, and now many other countries have followed our lead. That is a good thing. I re-emphasise that we will be perfectly willing to revisit these measures if it transpires that we have not got everything quite right.

[Lord Eatwell (Lab)]

Just thinking off the top of my head, I can think of four registers of this ilk which exist already.

[Lord Callanan (Con)]

I would be happy to debate with the noble Lord. When I queried this, my information was that Germany potentially has something similar, but nobody else. I am happy to exchange letters with him about numbers, but that is not the information I have.

Before I move on, perhaps I may correct something I said on the first grouping—which will teach me to pluck numbers from memory rather than consulting my notes. The correct figure is that there are 30,000 overseas entities registered in the UK owning approximately 95,000 properties. I think I may have said that the other way round. I slightly disagree with the noble Lord, Lord Sikka. The vast majority of those are perfectly legitimate entities. We are an open trading environment and welcome investment from all over the world. International companies owning headquarters in the UK do so perfectly legitimately. The vast majority of these entities are legitimate. A small minority are not, and they are the ones we seek to catch in this register, but we must be fair to the vast majority which are perfectly legal, above board and just seeking to use the UK to do business, which we encourage.

Let me also pick up the points made by the noble Baroness, Lady Jones. Although I am grateful that she is supporting the government amendments—I will write that down for posterity, because I am not sure it will happen again—we did not just pluck the dates of 1999 for England and Wales and 2014 for Scotland out of thin air. We did not just sit there and think what date we would make it retrospective to. Those were the dates of incorporation when that was required by the Land Registry, so it is appropriate to go back to them. Northern Ireland has never required this, so it is impossible to retrospectively apply the provisions there. I hope she will accept that we did not just make these dates up; they are put in place for a reason.

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[Lord Callanan (Con)]

No, I do not disagree with that. It is, of course, perfectly possible—

[Lord Eatwell (Lab)]

My Lords, on the same point, would it not be helpful for a third party to know who it is actually dealing with? Under the Minister’s proposal for 12 months, it could rely on the register and find out that it is dealing with someone it had not expected at all.

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Moved by

[Lord Eatwell]

42: Clause 16, page 10, line 24, at end insert—
“(A1) All information delivered to the registrar for the purposes of sections 4(1)(c), 7(1)(d) and 9(1)(e) must be verified by the registrar.”Member’s explanatory statement
This amendment places a statutory responsibility on the Registrar to secure the verification of the relevant information in the register.

[Lord Eatwell (Lab)]

My Lords, I explained at Second Reading that lack of data verification at Companies House has been a fundamental factor in enabling—indeed, encouraging—the flow of dirty money to London. Lack of data verification has played a major part in securing London’s position as the money laundering capital of the world. As I argued last week:

“Companies House is a library in which any shameful book can be deposited”—[Official Report, 9/3/22; col. 1496.]


and accepted without fear of exposure or retribution. Indeed, just earlier this afternoon, the noble Lord, Lord Callanan, described Companies House procedures as “dumb”.

This afternoon, we have been debating amendments to the Bill that will define more accurately and more widely the sort of information that will, as a result of the Bill, be required to be offered to the registrar. However, nothing we have discussed so far will guarantee that the information is accurate. If it is not accurate, it is useless or indeed worse than useless.

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[Lord Callanan (Con)]

I first thank the noble Lord, Lord Eatwell, for tabling Amendment 42 and for his thoughtful contribution at Second Reading on the same subject. He is, of course, absolutely right: I agree wholeheartedly that ensuring the public can be confident that the data on the register is reliable is of the utmost importance. That is why, as has been referred to, the Bill already provides for the making of regulations to create a robust and effective verification mechanism.

Clause 16 sets out that:

“The Secretary of State must by regulations make provision requiring the verification of information”,


which must be in place before an overseas entity can undertake certain actions. These actions include applying for registration to, or removal from, the register. Clause 16 sets out that these regulations can include provisions about

“the information that must be verified … the person by whom the information must be verified … requiring a statement, evidence or other information to be delivered to the registrar for the purposes”

of registration, updating of information and removal from the register.

This amendment seeks to add a statutory responsibility on the registrar to ensure the verification of any information provided to the registrar in accordance with the regulations made under Clause 16. The amendment would place responsibility for ensuring that information is verified on to the registrar, which means that the registrar would have to be satisfied that the information provided at the application stage is verified. We believe that such an addition would be nugatory to the already robust verification process that will be set out in regulations attached to this Bill once it has passed through Parliament.

The regulations that will be made under Clause 16 include the ability to specify the types of statements and evidence that the registrar can require in order to be satisfied that the information submitted to the register is appropriately verified. We expect that UK professionals regulated under the money laundering regulations will have a role to play in the verification process. We are, of course, aware of concerns raised in this House about enablers who might seek to undermine our systems. The verification process that will be set out in regulations will ensure that, whatever process is used, it cannot be undermined by enablers of unlawful activity. To support this, as was referred to by the noble Lord, Lord Coaker, we have also put forward an amendment that would ensure that, where anyone submits information that is false or misleading without reasonable excuse, they can be held to account for that.

I would also direct noble Lords’ attention to the amendment tabled by the Government in the other place, which committed to bringing regulations made under Clause 16 into force before any applications for registration may be made under Section 4(1). Therefore, creating a specific statutory requirement for the registrar to secure verification, as the amendment proposes, is in my opinion not necessary. The verification mechanism already contained in the Bill will ensure that those engaging with the regime have confidence in the information held on the register. I therefore hope that the noble Lord will feel able to withdraw his amendment.

[Lord Eatwell (Lab)]

My Lords, I always think that the government defence of “not necessary” is the weakest we ever hear in this House. My amendment calls for a clear statutory requirement for verification. Just think of the contrary, which the noble Lord is supporting: that there will not be final statutory verification, and that information will be provided by professionals, enablers. He says that we can ensure that this will not “undermine the process”. If he believes that, he will believe anything. How can he ensure that it will not undermine the process, unless there is a means of checking that it is not undermining the process?

We are dealing with very sophisticated crooks with the best legal advice that money can buy and the Minister is leaving the Bill naked, with the key protection lacking that is necessary to sustain confidence in financial markets in this country. This is a sad day for the probity of those markets. Having said that, regrettably, I beg leave to withdraw the amendment.

Amendment 42 withdrawn.

Economic Crime (Transparency and Enforcement) Bill

Lord Eatwell Excerpts

2nd reading
Wednesday 9th March 2022 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, a considered assessment of this Bill requires some reflection as to why measures to thwart economic crime have failed so dismally up to now. At the centre of the Bill stands the registrar, embodied in Companies House. It is Companies House that is the prime source of the failings that have made London the money-laundering capital of the world. One of the political pantomimes of the last 10 years has been the spectacle of Conservative Prime Ministers referring regularly to the register maintained by Companies House as a gold standard, a beacon of openness, an example to the rest of the world. In reality, the manner in which the register is constructed has been and remains the key element in the inability of this country to stem the inflow of dirty money and the total failure to slow the growth of economic crime.

As has been known for years, the scandal derives from the fact that Companies House does not verify the beneficial ownership of the companies registered. Companies House is a library in which any shameful book can be deposited, as the noble and learned Lord, Lord Garnier, has just argued. That so many shameful books have been deposited is a matter of record. By the way, Companies House has led one prosecution in 150 years. That was of a person who deliberately registered a false company in the name of government Ministers to show how hopeless Companies House was at verifying the data. It then prosecuted this man when he owned up to what he had done.

Today, the Companies House register includes about 4.5 million UK businesses, but it operates in much the same way as it did 150 years ago, meaning that criminals have been able to set up seemingly legitimate shell companies without even the most basic identity checks. A study by Professor Jason Sharman of Cambridge University found that it was impossible to establish a shell company in the Cayman Islands, the Bahamas or Jersey, but easy to do it in London. A further study by Transparency International, in November 2020, reported that British shell companies were implicated in nearly £80 billion worth of money-laundering scandals. On top of that, the anti-corruption group Global Witness reported in 2019 that more than 336,000 companies on the register did not disclose their beneficial owner. It also found that just over 2,000 company owners were actually directors who had been disqualified, yet they were accepted by Companies House. It is this same organisation that we now ask to do more: to manage the new register of beneficial ownership of real property envisaged in the Bill.

In assessing whether Companies House can actually do the job, it is important to dismiss the comfortable fantasy that an open register provides sufficient scrutiny to detect wrongdoing. Protection against even moderately sophisticated financial crooks is provided only by verification and regular reverification of beneficial ownership by skilled forensic accountants. This fact was acknowledged by the noble Lord, Lord Callanan, in his foreword to the September 2020 White Paper Corporate Transparency and Register Reform—note that this was a document published two years ago.

The section on verification is to be found in Clause 16. Clause 16(1) refers to verification of information before an application is made by the overseas entity—that is, before the registrar is even aware of the application. I am sure that noble Lords have noticed that the wording of Clauses 4(1)(c), 7(1)(d) and 9(1)(e) indicates that the task of verification is assigned to the overseas entity. The Government may take some comfort from that, but I assure them that I do not. Clause 16(2) refers to

“the person by whom the information must be verified”,

and

“evidence or other information to be delivered to the registrar”.

Again, this suggests verification by a person other than the registrar, Companies House, to which the information is to be delivered, all ready, tied up with a fancy ribbon and a label reading “Nothing to see here.”

Nowhere in the Bill can I find a statutory obligation for the registrar, Companies House, to verify the data submitted to it. The Institute for Government has noticed the same omission, saying that

“without strengthening the organisation—expanding its powers of inquiry and resources to investigate and remove false information, and requiring mandatory identity checks on those incorporating companies, on company directors and on those who ultimately control companies—the new register could have little impact.”

There is also a clear suspicion that the Government are not willing to provide the resources the job requires, as the noble and learned Lord, Lord Garnier, pointed out earlier. To quote the Institute for Government again:

“the provisions in the new bill will make little difference unless authorities are provided with additional resource to enforce them … the UK already has strong tools to target illicit funds but law enforcement agencies have struggled to make full use of them because of resourcing issues.”

In her introduction, the Minister informed the House that a new economic crime Bill, including reform of Companies House, will be brought forward in the next Session. This has been promised time and again by this Government: it is always in the next Session—and the next Session never comes. On verification, we must act now. Making the verification of data by the registrar a statutory requirement is essential if the Bill is to be a meaningful measure and not just another PR exercise. Without a statutory requirement for verification by the registrar, and without the resources to do the job, this House will be participating in a sham. We must ensure that this is not the case.

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[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)]

I start by thanking all noble Lords for their constructive engagement in advance of and during today’s debate, and for the support generally expressed for the swift passage of this Bill. The noble Baroness, Lady Jones, was right—she is occasionally—that this was a good debate with many insightful points. I would not go so far as to say that I enjoyed it but it was nevertheless a good debate. It has underlined the importance of taking action on the dirty money flowing through the UK, following Russia’s brutal and barbaric invasion of Ukraine. I totally agree with the noble Lord, Lord Coaker, that it is more important than ever to ensure that we have the powers we need to take swift action to tackle economic crime. In doing so, we should ensure that the UK remains the place for legitimate investment to flourish. I am confident that this legislation strikes the right balance.

I know that many noble Lords—the noble Lord, Lord Fox, in particular—have a strong interest in Companies House reform and limited partnership reform. So do I, as the Minister responsible for implementing these important policies. Let me assure the House that these measures will be included in a wider Bill in the coming months. They will come alongside new powers to make it easier to seize crypto assets from criminals and measures to provide businesses with more confidence to share information on suspected money laundering.

[Lord Eatwell (Lab)]

Will the Minister give way?

[Lord Callanan (Con)]

I may be about to address some of the noble Lord’s points about Companies House reform so let me finish this paragraph; if I do not address his points, I will come back to him, if that would be helpful.

I can say to the noble Lords, Lord Fox and Lord Coaker, and others that reform is already under way at Companies House. It has received £20 million for this financial year. A further £63 million was announced at the spending review. However, the full Economic Crime Bill will be very significant. I understand why noble Lords are questioning me about why it is not being included at this time; to be frank, it is purely a matter of drafting time. This will be the biggest change to our system of company registration in some 170 years—the biggest change to limited partnership law since 1907. Drafting has already begun and I can assure the House that we will bring it forward as soon as we possibly can in the next Session. I hope that what I have been able to say will provide some reassurance to the noble Lords, Lord Eatwell and Lord Coaker, the noble Baroness, Lady Jones, and the House as a whole.

[Lord Eatwell (Lab)]

Given the wide level of expertise evident in this debate, will the Minister commit to pre-legislative scrutiny of the new economic crime Bill? That would be the way both to exploit the talents available in this House and to ensure that the Bill, when it arrives on the Floor, will have a smooth passage.

[Lord Callanan (Con)]

Let me come back to the noble Lord on that. I certainly commit to full scrutiny of the Bill when it is ready, which I think the noble Baroness, Lady Chapman, also asked me about. It will not be emergency legislation; we expect it to have the full scrutiny of this House. I think that pre-legislative scrutiny would probably be a bit time-consuming; it is probably better just to bring the legislation forward, then it will get its full scrutiny. However, as I say, we are getting it drafted as quickly as possible. It is something like 150 pages of legislation so it will be substantial.

Russian Oil and Gas Imports

Lord Eatwell Excerpts

Monday 7th March 2022 Lords Chamber

[Lord Callanan (Con)]

We have already banned all Russian oil and gas tankers entering UK ports and we are looking to go further to ban cargoes from Russia as well.

[Lord Eatwell (Lab)]

My Lords, the market for oil and gas is global, and therefore the figure that the Minister has cited twice about our dependence being only 4% is entirely irrelevant to what happens to the price of energy in the UK. If there is a shortage of gas in Germany, the gas price goes up globally. The only answer to this is to reduce hydrocarbon use throughout Europe, and therefore reduce the market which the Russians are exploiting.

[Lord Callanan (Con)]

The noble Lord makes a sensible point. Of course it is an international market. It is usually operated by private companies, and any shortages in Russia will feed through into the UK. It will not affect the price, but it will affect our energy security, which is why I used the fact that only 4% of our gas is Russian. Most of our supply comes from our resources in the North Sea or from Norway. Security of supply is not affected, but the noble Lord is right about international pricing.

Industrial Strategy

Lord Eatwell Excerpts

Monday 8th January 2018 Lords Chamber

[Lord Eatwell (Non-Afl)]

My Lords, it is a great pleasure to follow the noble Lord, Lord Prior, particularly as I had set out to be critical of the White Paper. Having listened to him, I realise I must temper some of my criticisms.

Although the policy set out in the White Paper is a step in the right direction, the measures proposed are a pale imitation of the sort of programme of institutional reform that could produce a real industrial renaissance. One of the fundamental problems is the failure to recognise the sheer scale of the economic difficulties facing Britain. The White Paper begins with the statement:

“The UK is a fundamentally strong economy”.


That extraordinary statement confirms a myopia. It refers to an economy in which investment as a proportion of GDP is lower than in both the US and the European Union and is below the average of OECD countries. Corporate investment in fixed assets fell from 11% of GDP in 1997 to just 8% in 2014, which is below the rate of capital depreciation. In other words, the corporate capital stock is being eroded. As has been pointed out by many earlier speakers, research and development spending in the UK as a proportion of GDP is about half the level of that in the US or Germany. Productivity—a concept that has been referred to many times—is lower than in the US and all the major European economies; since the financial crisis a decade ago, productivity has barely grown at all.

Of even greater relevance is the long-run deterioration of the core competitiveness of the UK economy. Our share of world trade has halved in the past 40 years, while Germany’s has been stable. The result has been a continuous deterioration in the balance of payments, now a persistent deficit of 5% of GDP a year. In other words, about one-twentieth of our standard of living—our food, clothing, travel and shelter—is paid for by borrowing from foreigners. At the moment, Britain cannot pay its way and the idea that the country is on the verge of conquering new global markets is an ignorant fantasy. These long-term, baked-in trends have all worsened since the financial crisis and, in particular, since the 2010 imposition of austerity policies by the coalition of Conservatives and Liberal Democrats.

Indeed, a serious lacuna in the White Paper is the lack of a policy on demand to match its supply-side policies. The Government seem to have learned nothing from the enormous damage done to the British economy by austerity. If demand is not growing, it does not matter how big the tax incentives, how creative the government initiatives: no one is going to invest. If there is no demand for your product, why would you? Similarly, it does not matter how cheap money might be: there is no incentive to invest without the prospect of a growing market and a positive return. No wonder that these days, British businesses are accumulating and distributing cash, not spending on investment.

In essence, as the White Paper rightly suggests, there are three main tasks, and any policy proposals need to be judged against the template of how far they promise success in these tasks. First, Britain needs a competitive industrial base; this can be defined precisely as an industrial structure that delivers a positive balance of payments at high levels of income and employment. It is easy to have a positive balance of payments by impoverishing your own society sufficiently, but a positive balance of payments with high levels of income should be our goal. Secondly, it is absolutely right that to achieve this, Britain needs a significant increase in efficient investment in new technologies, capacity and people. Thirdly, Britain needs an economic policy framework that can be sustained over many years to turn around those 40 years of decline. This means that the programme must have strong political roots, involving, as it must, significant and sometimes disruptive change. There must be a broad social consensus behind the need for a programme of national economic renewal.

Instead of relying on the latest fashion in economic theory, we can turn to economic history for some insight into how this is done. In the mid-19th century, Germany, France and the United States faced the overwhelming industrial challenge of a dominant Britain. All three countries recognised explicitly their backwardness, and to compete, all three undertook fundamental institutional reforms focused on exactly the same goals I have referred to for Britain. Similarly, Japan and South Korea faced competitiveness problems after the war; once again, the reaction to backwardness was a major reform of institutions targeted on the three goals.

What are the institutional lessons for Britain? First, we must own up to the fact that the economy as a whole is in seriously poor shape. This recognition is undoubtedly hampered by the important point, emphasised in the White Paper, that Britain does have some world-beating companies, but we do not have enough of them and focusing on these exceptions obscures the underlying problems. Secondly, we must recognise that little or no good will be done by new tax incentives and various investment initiatives if the country’s fundamental institutional structure is not up to the job of overcoming our competitive backwardness.

What institutional reforms would at least start to tackle the job? First, research by the Bank of England has shown that the UK’s capital markets are more short-termist than they used to be and more so than those of other countries. There has been an observable increase in the priority that investors give to short-term returns over long-term returns. The result is that over the past quarter of a century, the proportion of profit that UK companies have been distributing to shareholders, rather than reinvesting in their businesses, has been increasing. The interaction between British finance and British corporate governance is resulting in exactly the wrong sort of incentives.

In many ways, of course, the UK finance sector is a great success story. In terms of its size, exports, employment and profits, it is one of the most successful in the world. However, that international success has been bought at a price. The financial sector injects international instability and risk into the domestic economy, as was so evident in 2008. No wonder there is an emphasis on short-term liquidity, a ubiquitous desire for exit and an unwillingness to commit to the long term when that long term is regularly punctured by financial disorder. There were attempts to address these failings in the ring-fencing provisions of the Financial Services (Banking Reform) Act 2013—a pale imitation of the 1930s Glass-Steagall Act in the US. That was relevant to America, but the reforms in the UK failed to take into account the reality of the British economy. Once the real structure of British finance is taken into account, it becomes clear that the ring-fence is in the wrong place. It should be between domestic finance and international finance. The stability of comprehensive financial services for UK firms should be rigorously enforced, while our booming, if unstable, international financial sector should be encouraged to do what it does best: selling outstanding services to the rest of the world.

Secondly, a stable domestic financial system would provide the motivation for and the possibility of a reform of corporate law, including the regulation of mergers, to incentivise the long-term investment culture that Britain so desperately needs. The current corporate structure, with its emphasis on the primacy of the shareholder—an individual whose commitment to any one company is totally transient—has to go.

Thirdly, we need new ways of tackling the long tails of very poor companies that exist in just about every industrial sector. The White Paper refers to the creation of sector deals, but again these are a rather weak version of what should be done. What is needed is an industrial reorganisation corporation with real powers to tackle the long, unproductive tails of inefficient companies that blight our economy.

Fourthly, in addition to financial reform, corporate law reform and industrial reorganisation, the rescue of the British economy from its uncompetitive quagmire will require an entirely new approach to research and development. As the White Paper acknowledges, in Britain we are fortunate to have some of the finest research universities in the world, but the Government seem intent on ruining the sector with their ideological pursuit of the marketisation of higher education. In both Germany and the United States, publicly funded R&D underpins their superior innovative performance. As my former pupil, Mariana Mazzucato, has pointed out, every significant innovation that went into the iPhone was developed in the public sector. In Germany, where 58% of companies invest in academic research, publicly funded R&D—much of its content stimulated by the private sector—underpins the country’s remarkable competitiveness in manufacturing. Long-term public support is a crucial component of long-term R&D success.

Fifthly, we need a complete rethink of the ridiculous “Britain is up for sale” strategy that the Government falsely identify with being an open economy. How many times in recent years have we seen successful companies, many of them built on the foundations of public investment in education, research and skills, sold off to foreign interests as soon as they reach a decent scale? No other country pursues such a foolish and short-sighted policy—when will it stop? When will we have a policy on mergers and acquisitions based on the national interest?

Sixthly, these changes will not work unless the prospect of stable and growing demand provides a sustained incentive to invest: growing demand at home and growing demand from abroad. At home, government commitments to their own increased infrastructure spending must lead the way. Internationally, the fall in the pound provides an opportunity to recover lost markets, just as long as the competitive boost is not squandered on increased consumption. Monetary policy must ensure that the gains from the low value of sterling are sustained over the medium to long term.

Finally, as argued by the noble Lord, Lord Prior, any campaign of national economic renewal must be a truly national campaign that benefits all the people in all the regions of this country. Again, the White Paper puts a brave face on the issue of regional inequality, but it fails to address adequately the more important issue of personal inequality of income and opportunity. As noted already, successful national renewal, particularly in an era of remarkable technological innovation, will involve disruptive change. People whose lives are disrupted in this way should not be paying the price for the nation’s renewal, and they should not be living on handouts either. As part of the reconstruction programme, there must be a comprehensive and supportive programme of training and retraining for decent, well-paid jobs.

In summary, the state of the UK economy requires that all government policies should be directed towards the long-term recovery of British competitiveness. There should not be a revival of the tired old argument about the role of the market and of the state. Of course the state can be inefficient, but as we in this country know only too well, markets and the private sector can be massively inefficient too. A programme of national renewal is not about creating a socialist utopia or a libertarian capitalist utopia, but reconstructing our market economy to achieve national goals. This White Paper could be a small and significant step in the right direction, but it could also do significant damage if we end up thinking that it represents all that needs to be done.

Queen’s Speech

Lord Eatwell Excerpts

Monday 26th June 2017 Lords Chamber

[Lord Eatwell (Non-Afl)]

My Lords, there has been a lot of debate about the likely impact that leaving the European Union will have on the UK economy. To date, there have been two indisputable negative impacts. First, the fall in the pound as a consequence of the referendum vote has the direct effect of reducing real incomes. The second negative impact, indisputably, is the content of the gracious Speech. For the next two years at least, government energy and parliamentary time will be totally absorbed by the legislation needed to leave the EU. No time at all will be devoted to tackling the long-term trends in the UK economy, trends that herald very difficult times ahead for Britain, whatever may be the eventual deal reached in Brussels.

Consider the following. Investment in the UK as a proportion of GDP is lower than in both the United States and the EU. Corporate investment in fixed assets has fallen well below the rate of capital depreciation—in other words, the corporate capital stock is eroding. Research and development spending in the UK as a proportion of GDP is just a little over half the level that it is in the US or Germany. As a consequence of these, productivity in the UK, output per worker hour, is lower than in the US and all the major European economies, excepting Italy where it is about the same, and for the past decade productivity has not grown at all. It is hardly surprising that these trends have resulted in a seriously uncompetitive UK economy with a falling share of world trade and a persistent deterioration in the balance of payments. Britain is uncompetitive. The idea that we are in a fit state to conquer new global markets is an ignorant fantasy.

The competitiveness failure cannot be solved by the cheap-money policies of the Bank of England. It does not matter how cheap money might be; there is no incentive to invest unless there is prospect of a growing market and a positive return. No wonder companies today are accumulating and distributing cash, not spending on investment.

So what is there in this Brexit-dominated gracious Speech that might do something to reverse these miserable trends? Precious little. We are told that the Government will,

“work to attract investment in infrastructure to support economic growth”.

Note the careful wording—not a Government spending but a Government whistling in the wind in the hope of “attracting” investment. We are also told that the Government,

“will spread prosperity and opportunity across the country through a new, modern industrial strategy”.

But can we have any confidence in this strategy when over the next four years the Department for Transport’s infrastructure plans will see nearly £2,000 per person spent in London but just £280 per person in the north of England? There is not much spreading of prosperity there.

To become competitive again, Britain must become an investing economy. In policy terms we need nothing terribly original, just to learn from what has worked elsewhere. It is clear that low investment is related to the interaction of the UK’s financial markets and corporate behaviour. The Bank of England has shown that the UK’s capital markets are more short-termist than they used to be, and are more so than those of other countries. Investors give priority to short-term returns over long-term ones. In many ways the UK financial sector is a great success story; in terms of size, exports, employment and profits it is among the most successful in the world. But that international success has been bought at a price. The financial sector injects international instability and risk into the domestic economy. No wonder there is an emphasis on short-term liquidity, an unwillingness to commit to markets that are regularly punctuated by financial disorder.

Attempts to address these failings were made in the Financial Services (Banking Reform) Act 2013, which sought to erect a ring fence between, on the one hand, commercial banking for households and small and medium-sized firms and, on the other, banking for large companies, investment banking and more risky market activities. However, once the real structure of UK finance is taken into account, it is clear that the ring fence is in the wrong place; it should be between domestic finance and international finance. The stability of comprehensive financial services for UK firms should be rigorously enforced while our booming, if unstable, international financial centre should be encouraged to do what it does best: sell outstanding services to the rest of the world. A stable domestic financial system would provide the motivation for, and the possibility of, a reform of corporate governance, including the regulation of mergers and a revamped, publicly funded R&D strategy, and would incentivise the longer-term investment culture that Britain so desperately needs. Those changes, and the many others that are necessary to create a long-term competitiveness culture, will not work unless the prospect of stable and growing demand, at home and from abroad, provides a sustained incentive to invest. Internationally, the fall in the pound provides an opportunity to recover lost markets, just so long as the competitive boost is not squandered on increased consumption.

In sum, the state of the UK economy requires that all government policy should be directed towards the long-term recovery of British competitiveness. Instead, as is clear from the gracious Speech, all government policy is directed towards a complex divorce from the EU, a huge misdirection of time and effort that in itself will do lasting damage to the UK economy.