Critical Benchmarks (References and Administrators’ Liability) Bill [HL]

Lord Eatwell Excerpts

2nd reading
Wednesday 13th October 2021 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, first, I declare an interest as a recent chairman of the Jersey Financial Services Commission and therefore a financial services regulator.

I begin by congratulating the noble Lord, Lord Altrincham, on his maiden speech and welcome him to the small club he sees around the Chamber of people who have an almost obsessive interest in the details of these financial matters. I hope he will continue to contribute to our proceedings on these matters. It is nice to grow the club a little.

I say to the Minister that I think that the very last sentence in the Bill has it wrong. It should say “This Act may be cited as the Critical Benchmarks (Inspired by Baroness Noakes) Act 2021.” I congratulate the noble Baroness, Lady Noakes, who brought forward these issues so strongly in the discussions in Committee on what is now the Financial Services Act 2021, on seeing that the important points that she made at that time have been noted and have been taken up to a considerable extent.

This is a Bill with but two substantial clauses, both of which are eminently sensible in the context of the complexities associated with Libor transition. But one of them, Clause 2, may well cause collateral damage. I will focus my remarks on Clause 2, but will first comment briefly on Clause 1. This is an entirely sensible clarification of the interpretation of references to a benchmark in a contract where the FCA seeks to replace Libor. The clause provides legal certainty in a variety of circumstances and is thus to be welcomed. Let us now turn to Clause 2.

The Libor story has, from the outset, been a story of the professional creation of risk. First, there was the scandalous gaming of Libor, which created market risks, which have been widely debated; now, there is the replacement of Libor, which itself creates risks because new benchmarks are untried, their relationship to events and financial markets is as yet untested, and the insertion of new benchmarks into existing contracts will be problematic and will typically result in revaluation of those contracts, resulting in gains for some and losses for others. Then there is the issue of timing, raising by the noble Lord, Lord Sharkey. Further, in those cases in which it is impossible to replace Libor, the imposition of a synthetic Libor will potentially result in asset revaluation, again precipitating gains and losses. This replacement issue was referred to by the noble Baroness, Lady Kramer, who asked about the mechanism for how synthetic Libor is to be created and questioned the cliff edge. These are all risks which have been created by the replacement of Libor.

It is not just a question of the creation of risk; it is also a story of the transfer of risk from professionals who create it to others. And not just to fellow professionals who may lose out in traded positions but to firms of all sizes—small, medium and large—to municipalities and to ordinary people, typically via their pension funds or mortgage contracts. This transfer of risk is a serious market inefficiency; the risk is imposed on someone who had nothing to do with its creation. Losses are suffered because of the actions of others.

That is why, as a financial services regulator for many years, I am allergic to the awarding of legal immunity to those who create the risk. The existence of legal immunity not only allows the risk creator to escape scot-free but creates a moral hazard, because the creator of risk suffers none of the adverse consequences that stem from his or her actions. Because of that, there is an obvious incentive to create even greater risks. Equally abhorrent, the legal immunity provided leaves no possibility of redress for those who have suffered losses because of where the risk has ended up. Legal immunity is, therefore, in the words of 1066 and All That, “a Bad Thing”, to be introduced only in extremis. Indeed, this case is in extremis, but it has other aspects that I wish to refer to.

Clause 2 of the Bill creates a legal immunity. It would grant the administrator of a critical benchmark immunity in circumstances where the administrator acts in accordance with requirements imposed by the FCA. The situations in which this is anticipated to happen are quite abnormal, because they arise from the peculiar circumstances created by the demise of Libor and the complexities involved.

As we have heard, legal immunity is provided in circumstances in which, in a very limited number of cases—the so-called tough legacy contracts—it is not practicable to replace Libor as the contract benchmark and the FCA has decided to require the administrator of the benchmark to use or change the benchmark in a specific way, particularly using synthetic Libor. In other words, immunity is provided to eliminate the possibility that the administrator of the benchmark might be subject to legal action as a result of complying with statutory requirements imposed upon it by the FCA.

By the way, in parenthesis I should add that I think it entirely correct that the Bill does not extend the safe harbour to acts taken by an administrator on his or her own discretion.

So far so good: we would not expect someone to suffer claims for damages for doing what their regulator has instructed them to do. But other people are suffering losses as a result—perhaps small firms, perhaps pension funds, perhaps individual non-professional investors. What about them? Who should be liable? The noble Lord, Lord Agnew, referred to these people collectively as bringing forward “unmerited and vexatious claims”. How does he know they are unmerited and vexatious at this stage?

So, who is going to be liable? Since action has been dictated by the FCA, should the FCA be liable? Of course not, because as a regulator it already has legal immunity with respect to regulatory action, and that makes sense. The regulator is required to meet its statutory responsibilities, and it would be surely unreasonable for it to be subject to legal claims for doing what, by statute, it is required to do, so that would seem to be the end of the matter—hard luck on those who suffer losses. But I suggest that there are aspects of this case that make it rather different.

The transition from Libor, and the introduction of synthetic Libor, arise from the behaviour of those miscreants who, in 2012, were discovered to have gamed Libor. Those who may be suffering losses are doing so because of the ramifications of those illegal acts. Unfortunately, there is no prospect of redress from the miscreants, but the core issue remains: surely, it is unreasonable and unfair, in solving our problems, to shift risk on to retail customers. Why should they suffer loss as a result of the need to fix the system to prevent the repetition of illegal acts? I put it to the Minister that this is the sort of legislation that gives the financial services industry a bad name: it is always the retail customers who take the losses, not the professionals. How does he propose that those who suffer losses should be compensated—or is he happy to leave them to their fate?

I have worked as a financial services regulator for nearly 30 years. I thought myself unshockable, but I was shocked, as was the noble Baroness, Lady Kramer, by the revelations around the gaming of Libor. As the noble Lord, Lord Altrincham, said, Libor was the bedrock of the UK financial system. The noble Lord, Lord Moylan, referred to Libor as the meat and drink of financial services. I think all speakers recognised that serious injury was done to the reputation of UK financial services by those actions. This Bill is part of the effort to repair that injury. However, this cannot be done, it seems to me, when the Bill imposes unrecoverable losses on retail investors. I really feel that it is incumbent on the Minister to tell the House this evening how the Government intend, while offering legal immunity to the administrator, to offset this collateral damage.

Health and Social Care Levy Bill

Lord Eatwell Excerpts

2nd reading & Order of Commitment discharged & 3rd reading
Monday 11th October 2021 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, I am grateful to the Minister for his brief introduction to the Bill.

The key promise of what he has described as the permanent new role for the Government, as expressed in the Bill and accompanying documentation, can be described as the introduction of the health and social care levy, which will mean that, between 2019 and 2025, the NHS England budget can increase by 3.9% per year in real terms. That is slightly above the long-run average of 3.6% in UK health spending. However, it is well above the 1.2% per year seen in the Conservative austerity years from 2010 to 2019, in which the share of GDP spent on the NHS fell year after year, leaving the NHS severely weakened when the pandemic struck. However, even this new higher rate of investment in the NHS will be well below the average of 6% per year seen under the Governments of Tony Blair and Gordon Brown.

It is useful to start from the fact that the Bill consists of three semi-independent strands woven together. First, there is the introduction of a new hypothecated tax: the health and social care levy. Secondly, there is the predominant alignment of the base on which the new tax is charged with the present tax base of national insurance contributions. I say “predominant” because the levy is also to be funded by the extension of NICs to those over 65 and by the dividend tax promised in the Budget later this month. Therefore the tax base is potentially malleable: it need not be NICs and it is not entirely NICs even at the beginning. Thirdly, there is the transitional arrangement of raising overall taxation in 2022-23 via the one-year increase in NICs—the transitional year.

To assess the true impact of the Bill it will be helpful to deal with these three strands of the Bill in order, beginning with the first strand: the new hypothecated tax. It is well known that hypothecation is a dirty word in the Treasury. National insurance contributions, for example, are not allocated uniquely to national insurance, and the road tax is not used for the upkeep of roads. Yet here we have a substantial increase in taxation that is, we are assured, pre-allocated to health and social care. Given the historic experience with other fictional hypothecation, it is reasonable to ask: for how long will this last? It is noticeable that Clause 4 allows the Treasury to use the levy to make different provision for different purposes, not necessarily the purpose described by the noble Lord. The only conclusion can be that this is a grudging and perhaps temporary hypothecation—a temporary uplift in NHS spending sufficient to buy political time as NHS waiting lists reach all-time highs. Can the Minister make it crystal clear: is this hypothecation here to stay or is it a temporary political expedient?

Once introduced, taxes tend to rise, so does the Minister expect an expanded role for this new hypothecated funding of health and social care? Or does the Minister agree with the assessment of the Institute for Fiscal Studies that

“In the short run, the additional revenues may be spent on boosting spending on health and social care. In the longer-run, the hypothecation is an illusion”?


If for now we accept the Government’s commitment to hypothecation, what is the rationale for the second strand: basing the levy predominantly on the NICs base rather than any other tax base? It is, after all, obvious that this will solely impact individuals whose income is mainly made up of earnings or profits, as opposed to other forms of income such as property income, pension income or savings.

When the Minister replies, will he explain why the levy does not cover income from buy-to-let properties? Why does the levy target the 17% of pensioners who work, while allowing wealthy pensioners receiving income from other sources to escape scot free? And why does the levy fall on low-paid workers?

Given the evident unfairness, I find the Government’s attempts to justify the distributional impact of the levy in the document entitled Illustrative Analysis of the Impact of “Building Back Better: Our Plan for Health and Social Care” a disturbing insight into Tory instincts where the NHS is concerned.

It is customary for the Treasury to accompany fiscal changes with an analysis of the distributional consequences of those changes: the impact on the poorest 10%, the next poorest 10%, and each decile up to the wealthiest 10%. Here, for the first time, the Treasury presents the impact of the levy on individual social groups together with what it believes will be the consequential spending on healthcare from which that social group would benefit. In other words, payment of the levy by a given group and the provision of healthcare to that group are linked. It is but a short step from this approach to the idea that payment for healthcare and receipt of healthcare should be linked—a negation of the fundamental character of our NHS, in which funding and the delivery of care have never, before this document, been linked. I hope that when the Minister sums up, he will disown the document.

I turn to the third strand: the impact of the increase in NICs and the dividend tax from their introduction in April next year. The policy paper published by HMRC on 9 September sketches—the appropriate word for something that is very limited—the various impacts that the Government have considered. For example, HMRC refers to the impact on households:

“There may be an impact on family formation, stability or breakdown as individuals, who are currently just about managing financially, will see their disposable income reduce.”


This is not the Opposition speaking, it is HMRC. On business, the Government tell us:

“This measure is expected to have a significant impact on over 1.6 million employers who will be required to introduce this change.”


On the economy as a whole, HMRC says:

“The measure is anticipated to have a significant macroeconomic impact, with consequences including but not limited to for earnings, inflation and company profits. Behavioural effects are likely to be large, and these will include decisions around whether to incorporate or not, and business decisions around wage bills and recruitment.”


That is all rather serious stuff. Will the Minister tell us what steps are being taken to offset the impact on those who HMRC says are just about managing financially and who will see their disposable income reduced? Is he content to serve in a Government who wilfully introduce extra taxation that they acknowledge will hit those who are just about managing while at the same time cutting universal credit? Is he proud to be doing this to those who are suffering in-work poverty?

What of the impact on those 1.6 million employers—many of whom, as HMRC says, may well be reassessing business decisions on wage bills and recruitment? Will the Minister tell us exactly what the Government anticipate will be the scale of the impact on recruitment? Does he agree with the assessment of the Federation of Small Businesses that the levy will result in 50,000 fewer jobs being created? Does he agree with the Institute of Directors, a well-known left-wing organisation, which argues that:

“This is an extraordinary time to be adding additional burden to business and the cost of employing staff”?


Where are we to find the Government’s assessment of the impact of these measures on earnings, inflation and company profits? We have been offered none. However, the Institute for Fiscal Studies has again commented that:

“Following a rise in income tax of £8 billion and in corporation tax of £17 billion in the March Budget… the Chancellor has announced a further tax rise of £14 billion… which if delivered will raise the tax burden in the UK to the highest-ever sustained level.”


When the economy is struggling to recover from the pandemic, when the furlough scheme has ended, when business support has ended, leaving small and medium-sized companies with debt-laden balance sheets, when output is barely back to pre-pandemic levels and is hampered by serious supply chain problems and fuel shortages, the Government raise the tax burden to the highest-ever sustained level. Does the Minister consider that in this critical recovery period, the introduction of a levy that will have “significant macroeconomic impact” is quite such a good idea?

Finally, we come to the most important question of all: will it work? A fundamental issue must be the division of revenues between the NHS and the social care providers. As has been made clear, spending will be heavily weighted towards the NHS in the first three years, and then perhaps there will be some crumbs for social care. How can the Minister really pretend that this is the plan that the Prime Minister promised two years ago? To quote the Institute for Fiscal Studies once again:

“While the precise path for spending—and hence for the availability and quality of care—is unclear, it is clear that the extra funding will not be sufficient to reverse the cuts in the numbers receiving care seen during the 2010s”—


the great austerity period.

“Thus, while more people will become entitled to financial support as a result of the reforms planned”,


as the Minister told us,

“many people with care needs not considered severe enough will continue to miss out.”

In fact, the focus of what has been announced is almost entirely on changing who pays for care rather than directly addressing the growing problem that too few people are getting the care they need in the first place.

In his introduction to Build Back Better: Our Plan for Health and Social Care, the Prime Minister writes:

“We will bring the health and the social care systems more closely together”.


Over the weekend, there have been suggestions in the press that the Government are planning to create a national care service, integrated in some way with the NHS. If this is so, will the Minister tell the House what will be the role of the levy? Will it be raised further for what will be an expensive operation? Will hypothecation be extended?

I am afraid that the Bill is a typical example of ill-thought-through legislation, rushed through Parliament to spare the Prime Minister political embarrassment. If this was a plan ready more than two years ago, why the need for fast-track legislation? The explanation given by the Government is, I am afraid, disingenuous:

“The legislation is required to be in place for the 2022-23 tax year, which starts on 6 April 2022. The increase in National Insurance rates for that year will require changes to be made to the systems of employers and HMRC … it is important for both those employers and HMRC to have as much time as possible to implement the changes.”


All this amounts to saying that, even though the Government have announced the policy, with great fanfare, uncertainty about whether it will be put into effect persists, halting action until the relevant legislation is passed. In other words, a Government with a majority of 80 in the House of Commons are uncertain whether they can pass a money Bill. Pull the other one.

The rush was clearly designed to limit the time for proper scrutiny of the Bill and its many implications—scrutiny that your Lordships’ House can provide this afternoon. With that proper scrutiny, it will be evident that the provisions in the Bill are ill-thought-through and unfair, and will have potentially serious macroeconomic consequences.

[The Deputy Speaker (Lord Haskel) (Lab)]

My Lords, the noble Baroness, Lady Brinton, is taking part remotely. I invite the noble Baroness to speak.

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[Lord Agnew of Oulton (Con)]

I respectfully disagree with the noble Baroness on that. Your Lordships are having a much more detailed debate on health reform very shortly, so I am sure that will be teased out in those discussions.

The noble Lord, Lord Lipsey, asked about the White Paper. As I said, we certainly hope to see that out in the next few weeks.

The noble Lord, Lord Desai, asked about the taxation of carried interest and private equity firms, but I suspect he was being slightly disingenuous as he knows we are not extending this to capital gains tax, only to dividends. No doubt there is a separate debate to be had on that, but at the moment it is a capital gain.

The essence of this debate is the fairness of the way the tax is being structured—

[Lord Eatwell (Lab)]

It is fortunate that the Minister just brought up once again the issue of fairness and the discussion of it in the House. At the beginning of his speech, he referred to the proportion of the total raised from—I think he said—the top 14% of payers. This is a completely bogus statistic and has nothing to do with fairness. Let me give him an example. Let us suppose that someone earns £1 million and there is a 10% levy. They pay £100,000 on the levy and have £900,000 left. Then let us suppose that someone earns £10,000 a year—they would still be caught by this levy, by the way—and, to keep the numbers easy, that they still pay 10%. Their income has gone down from £10,000 to £9,000 and, as Marcus Rashford has said, they are choosing whether to eat or to stay warm. To understand fairness is to understand the impact on individuals of the measures taken. Using these absolutely bogus numbers, which are not at all representative of fairness, simply distorts and degrades the debate.

[Lord Agnew of Oulton (Con)]

I take on board the noble Lord’s points, but the reality is that the highest-paid in this country are paying the largest contribution to this tax and indeed PAYE itself. I accept entirely what he says about the impact being disproportionately greater on poorer people, but that is why we have designed the structure to protect as many people as possible. As I mentioned in my opening comments, some 6 million people will not be subject to this at all, and we have kept 40% of smaller businesses out of it. Those on higher earnings will pay a lot more, and that is an important principle, but I absolutely accept the point he made.

I am grateful for the opportunity to explain the Bill and address the issues that have arisen today, and I now commend the Bill to the House.

Net-zero Emissions Target

Lord Eatwell Excerpts

Monday 11th October 2021 Lords Chamber

[Lord Agnew of Oulton (Con)]

My Lords, I cannot speak to the detail of the Budget in a few weeks’ time, but we have a strong message, which we have been consistent with over the last few years. We have made clear, for example, the recently announced emissions trading scheme, which provides a clear road map for heavy users of carbon. We are about to introduce the plastic packaging tax, which again is clear, for industry to get behind. We will continue to send those messages, but I think they are pretty clear. Indeed, we are seeing dramatic change by business. For example, coming up to COP 26, three huge companies have made very strong commitments: GSK, Hitachi and Microsoft have all committed to get to net zero in the next few years.

[Lord Eatwell (Lab)]

My Lords, in the development of environmental fiscal policy, do the Government accept the fundamental principle that the polluter pays?

[Lord Agnew of Oulton (Con)]

My Lords, ultimately, that has to be the direction of travel for us, but we cannot get there overnight. To implement that sort of stringent regime now would dramatically increase costs, which would then come back to consumers in other ways.

Financial Services Bill

Lord Eatwell Excerpts

Report stage
Wednesday 14th April 2021 Lords Chamber

[Baroness Kramer (LD)]

My Lords, we do not oppose this amendment, particularly as we have the safeguard of the GDPR in place. However, I want to make one comment. One of our major frustrations with the regulator is how slow it has been to pick up on issues—how much information seems to have come its way that there is wrongdoing, yet all its actions seem to be delayed. We went through example after example of that in Grand Committee, Blackmore and London Capital being just two of the latest examples, and I think I have even missed two more scandals that have occurred in the last couple of weeks. I hope there are some other ways in which we can put pressure on the regulator to act and to do so in a more timely manner, and that it will not see this extension as an opportunity to relax and allow more time to pass before it begins to take action when it is needed.

[Lord Eatwell (Lab)]

My Lords, this seems to be an entirely sensible modification of an overly restrictive time limit on prosecutions for market abuse, and the Minister has certainly made a strong case.

I have one question associated with the Government’s note that accompanied the amendment. The Government stated that they had not found any clear rationale for the five-year limit applying in EU law and could see no reason for maintaining it in UK law. They said they understood that it had also been raised as an issue by EU regulators and they were considering a change to their law. Given that the EU is also considering a change, why have the UK Government not co-ordinated the change in our law with theirs? Is it not the Government’s “go it alone” approach that has been so damaging in the quest for equivalence? Could the Minister outline how the Government’s current stance on this change fits with the Memoranda of Understanding on trade in financial services with the EU?

[Baroness Penn (Con)]

My Lords, I thank noble Lords for their remarks in support of the amendment. As I have said, I recognise that the amendment has been tabled at a late stage of the Bill and that it would have been preferable to have included it earlier. However, as it seems the House agrees it is important that the FCA is able to effectively pursue its investigations into potentially criminal conduct, it is right that we make this minor change to ensure that it can continue to effectively identify, investigate and prosecute complex cases of market abuse. I reassure the noble Baroness, Lady Kramer, that this will not be seen as an opportunity by the FCA to take its foot off the pedal in such cases, but where it is undertaking this work it is essential that it is able to continue if the case spans a period of longer than five years.

To the question asked by the noble Lord, Lord Eatwell, the Government are committed to co-operation with the EU but it is now responsible for its own law and is aware of this issue and we are responsible for ours. As I set out in my opening remarks, without action now in this Bill the time limit would come to bite in July this year, and there is therefore an urgency with which we need to act. While we will continue to co-operate with the EU, it is right that we take this opportunity to address what we view as an unnecessary restriction on the retention of data.

--- Later in debate ---

I very much look forward to the Minister’s comments. The letter from the Economic Secretary included a “must have regard to”—a useful phrase. Regard must be had to parliamentary responses to consultations. We can argue about whether the consultation process is sufficient or adequate, but that phrase is only in a letter; it is not in the Bill. I wonder why the Government are not willing to put some of the commitments that they are willing to describe either on the Floor of the House or in letters, into a form that could go on the face of a Bill, and so give this House confidence that the direction of travel is a direction that we can live with.

[Lord Eatwell (Lab)]

My Lords, I would like to begin by acknowledging the considerable efforts that have been made by the noble Earl, Lord Howe, to provide greater insight and information in the form of letters from the CEOs of the FCA and PRA, and to encourage the Economic Secretary to the Treasury to provide his letter today, all of which have enhanced and coloured this debate. These letters have been quoted by many speakers. I am most grateful to the noble Earl for his strenuous efforts and commitment to making this legislation useful.

In Committee, we had some valuable debates on parliamentary scrutiny and the activities of the financial services regulators that dealt with the important point that those activities are now entirely repatriated from the European Union. It is clear, as Sam Woods, the CEO of PRA, states in his letter to the noble Earl, Lord Howe, that

“it would seem natural to us that, if some rulemaking responsibilities previously conducted at EU level move to us, Parliament might choose to evolve the way it scrutinises that activity.”

Mr Woods is entirely correct, as the debate this evening has demonstrated.

The role the European Parliament has in the development of financial regulation reflects the EU’s preference for embedding high levels of technical detail in EU primary law. It has been made clear by the Treasury, notably in the consultation document on the regulatory framework review, that the approach to be developed in the UK is to be quite different. It is to be a principles-based approach, in which

“the setting of regulatory standards is delegated to expert, independent regulators that work within an overall policy framework set by Government and Parliament.”

However, it is also evident from that consultation document that in respect of parliamentary scrutiny, there has been an important—shall I say—oversight or error. As was made clear in that document, the FCA and the model of regulation introduced by that legislation continue to sit at the centre of the UK’s regulatory framework. However, it is FiSMA that sits at the centre. FiSMA is the model of regulation that was introduced, but it was produced in 2000, when the UK was a long-standing member of the European Union and UK politicians participated in the scrutiny of financial regulation at EU level. The noble Baroness, Lady Kramer, has emphasised this point.

The Treasury has failed to take into account the need for a different domestic approach to democratic scrutiny now we have left the European Union. Simply reproducing the structures that have worked for the past 20 years, as is done in chapter 3 of the consultation document, is just not good enough. This was the key issue debated on Second Reading and in Committee.

Powers returned from Brussels need to be redistributed between Parliament and the regulators. The nature of that redistribution is at the heart of our discussion. In the regulatory model adopted by the UK, an increase in the powers of the independent regulators is inevitable and necessary, as I agree they are best placed to take on the many technical functions previously handled at the EU level. But the inescapable conclusion is that this increase in regulators’ powers will need to be accompanied by new checks and balances. The role of Parliament in this new setting is what is at issue in these amendments.

--- Later in debate ---

[Baroness Kramer (LD)]

My Lords, given the hour I shall also be very brief, but I have to say I rather like the amendments in this group. I like Amendment 24, as amended by Amendment 25—I do not care if it is a separate chapter. But it is quite dangerous to get tangled into issues around competitiveness without making sure there is a lens on consumer protection at the same time. Many small businesses fall into the consumer category in reality, certainly the micro end of small businesses.

What I like about this amendment is: what you measure, you manage. We are so constantly focused on change, new regulation and new rules, without ever going back and looking at the consequences of what we have done and trying to identify what worked, what did not and where the gaps are. It seems that this proposal goes absolutely in the right direction.

There is something interesting in Amendment 37 because one of the big questions that has never been answered is: how does our financial services industry impact on the real economy, in contrast to something much more circular within the financial services economy? I do not think that one is good and the other bad but they are very significant questions, particularly in a country where we have such a dominant investment banking culture, which does not necessarily provide a wide range of relevant services to a great deal of our economic base—particularly our small business base. There is a very interesting question wrapped up in all of that. The approach of saying “We need to look at this in a serious and consistent way, perhaps regularly” strikes me as important when feeding the strategy which then informs the way in which the regulator, the Treasury and the Government behave.

[Lord Eatwell (Lab)]

My Lords, Amendments 24 and 25 develop the notion of an information system—the information that will be provided by the FCA, PRA and the Government to feed into an assessment of the performance and impact of the financial services sector and the regulators. Amendment 37 goes much wider, as one might have gathered from its presentation, seeking to make, or ask for, a general economic assessment of the role of financial services generally within the UK, particularly the impact of the various regulators and the Treasury.

One of the themes particularly around the discussion of Amendment 37 was that this is not done. There are shelves of academic books that do this, and there are libraries of this material, but what has not happened is that it has not been brought together and assessed in a decision-making environment on a regular basis. The problem with Amendment 37 is that it asks the FCA and the PRA to—to use a phrase that has become popular today—mark their own homework. They are not really the right people to assess themselves; there are plenty of research institutes around this country that do a first-class job of assessing exactly these issues. However, we have not brought them together very well. What is so valuable about Amendments 24 and 25 is that they are targeted on that bringing together—bringing information into what I have called the “New Scrutiny”.

I would be interested to hear the Minister reflect, when he sums up, on the information role that is represented by the amendment of the noble Baroness, Lady Neville-Rolfe, and the role that that sort of information system will play in our regulatory future.

[Earl Howe (Con)]

My Lords, Amendments 24, 25 and 37 return to an issue that I know is of keen interest to many in this House. They seek to introduce requirements to publish reports on the impact of financial services regulation and to undertake assessments of the impact of the financial services sector on the UK more broadly.

The noble Baroness, Lady Bennett of Manor Castle, many not feel able to assent to what I am about to say, but, as we consider this topic, we should remind ourselves of the vital role that the financial services sector plays in our economy, employing more than 1 million people nationwide. It is also a critical source of tax revenue, which has proved especially important during these difficult times. We can argue about how we should calculate the precise amount of such revenue, but, by any measure, it is very substantial. We also should not forget the role that the sector plays in enhancing the nation’s standing abroad. The UK exported over £50 billion-worth of financial and insurance activities in 2019, a trade surplus of £41 billion.

Amendment 24 would require the Government to publish a report on the “impact of measures” taken by the FCA, PRA and the Government to regulate this most important financial services sector. In particular, it seeks understanding of the impact of measures on small businesses, innovation and competitiveness. Amendment 25 would add “consumer protection” to the list of things that the Government would be required to report on.

Lest there be any doubt, the Government are wholly committed to ensuring that the financial services sector supports competition, innovation and competitiveness. I hope that this is evidenced by the last set of remit letters issued to the FCA and the PRA by the Chancellor, which requested that the regulators have regard to these three priorities when advancing their objectives and discharging their duties.

In respect of reporting, the FCA and the PRA both have a statutory objective to promote effective competition. What does that involve? It involves promoting a financial services framework that supports new firms to enter the market and grow, promotes innovation and allows successful, innovative firms to grow and thrive. Those, surely, are the key aims for the sector when we talk about effective competition.

I remind my noble friend Lady Neville-Rolfe that both regulators are obliged to prepare annual reports that analyse the extent to which their objectives, including this competition objective, have been advanced that year. Those reports are in turn laid before Parliament for scrutiny. Moreover, I should say to her that, under the Financial Services and Markets Act, the FCA and the PRA are required to publish cost-benefit analyses when proposing new rules. The regulatory initiatives grid, a relatively recent innovation, sets out the regulatory pipeline that allows the financial services industry and other interested parties to understand and plan for the timings of initiatives that may have a significant operational impact. The grid is published at least twice a year, so Parliament has a forward look at upcoming proposals in a material and transparent way.

Turning to my noble friend Lady Neville-Rolfe’s point about small firms, in my letter to her of 2 March, I set out the Government’s actions to support smaller innovative firms to grow to their full potential, including through the FCA’s regulatory sandbox and our support for the fintech sector. The amendment would therefore duplicate reporting obligations and arrangements that already exist.

I should also note the new accountability frameworks that the Bill puts in place for prudential measures. These require the FCA and PRA to have regard to UK competitiveness, among other things, when making rules to implement Basel or the investment firms prudential regime. Furthermore, the regulators will then be required to report on how having regard to competitiveness has affected their proposed rules.

On consumer protection, which is the subject of the amendment, let me first reassure noble Lords that the protection of consumers is at the heart of our existing regulatory framework. The FCA has an operational objective to secure an appropriate degree of protection for consumers and is required under the Financial Services and Markets Act 2000 to consult a consumer panel on the impact of its work. The panel ensures that consumers play an integral role in the regulator’s rule-making and policy development.

The FCA has repeatedly demonstrated its commitment to consumer protection. One of the key areas of focus in the FCA’s Business Plan 2020/21 is,

“ensuring…that the most vulnerable are protected”.

The FCA has also recently published guidance on how firms can treat vulnerable customers fairly. As consumer protection is one of the FCA’s statutory objectives, as set out in FSMA 2000, the FCA must already report on how consumer protection has been advanced in its annual report, as outlined earlier. Therefore, as with a previous amendment, the amendment would duplicate reporting that already exists. As regards the PRA, it is important to remember that it already has an important role in protecting consumers indirectly by promoting the safety and soundness of PRA-authorised firms. This means that consumers are protected from the significant distress and suffering caused by disorderly bank failures.

I now turn to Amendment 37, which would require regular reports on the impact of the financial services sector on a range of topics, including economic development and regional inequality. I have already set out some examples of the overwhelmingly positive impact that the sector has on jobs, productivity and tax revenues across the whole UK.

Budget Statement

Lord Eatwell Excerpts

Friday 12th March 2021 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, in these very uncertain times, it is inevitable that some of the Budget measures will prove an unexpected success and some an unexpected failure. So, instead of dealing with detail, I will focus on the inspiration and what the Budget tells us about the Chancellor’s thinking—his economic philosophy, if you like.

Fortunately, that philosophy is summed up in the Budget speech:

“The only reason we have been able to respond as boldly as we have to covid is because 10 years of Conservative Governments painstakingly rebuilt our fiscal resilience.”—[Official Report, Commons, 3/3/21; col. 255.]


Note that he said: “The only reason”. For the Chancellor, the prime objective of government policy must be fiscal resilience—the heartbeat of austerity. There was no mention of the impact of those 10 years on public services desperately understaffed as the pandemic hit, no mention of the lack of 35,000 nurses in the NHS—indeed, no mention of the NHS at all—and no mention of the fact that we entered the pandemic with a little over six intensive care unit beds per 100,000 population, compared with double that number in France and Italy and five times that number in Germany.

For the Chancellor, fiscal resilience is paramount and the unique determinant of economic success. Hence the grandstanding on future tax rises in the Budget. For the future is to be dominated not solely by higher taxation but by cuts in government spending on top of the cuts already announced in the autumn. These are deemed necessary to pay off the debt. Overall, it is deflation in excess of £30 billion a year—year after year. How well founded is the Chancellor’s assertion that austerity is

“The only reason we have been able to respond”?


As is evident from the OBR report, the increase in government spending to counter the pandemic was funded almost entirely by the Bank of England. Does anyone really believe that the Bank would have refused to fund the increase?

Is the Chancellor right to suggest that fiscal resilience should be his principal objective, or is his obsession distorting the Government’s entire approach to economic policy? Let us be clear: the prime objective of government economic policy should be the management of demand for the nation’s real resources, labour and productive capacity. The Government should set fiscal policy to ensure the very best use of resources today and development of resources for the future. If this involves more debt, then that is the best economic decision; if it involves more taxation, then that is the best decision. The role of taxation is not to pay off the debt but to be part of a balanced programme of fiscal and monetary policy to stimulate the real output needed for the achievement of the Government’s goals: health, education, defence of the realm, decent living standards, tackling climate change and so on.

Of course, the mixture of taxation, spending and debt decrease or increase may have other consequences that must be taken into account. For example, the OBR demonstrates that quantitative easing has lowered the maturity of UK debt, making it more interest rate-sensitive. That is serious. There may be other effects in the money markets. For example, holders of government bonds may come to believe that current policy will increase inflation. It does not matter whether the belief is true or false; if the result is that they sell off bonds, interest rates will tend to rise. Given his important responsibility of managing expectations, there is market danger in the Chancellor’s suggestion that fiscal resilience should be the paramount goal.

If, instead, we view the Budget through the lens of a programme of monetary and fiscal policy that secures the highest real output, some key consequences emerge. In a speech last week, the Governor of the Bank of England defined the ideal post-pandemic economic policy: the cost of the Covid shock

“has to be managed, and it will be easier to do that with a higher trend rate of growth, boosted by stronger investment.”

Have the Government provided a plan for stronger investment? The approach in the Budget is best characterised as, “There’s a problem, so throw money at it and hope it works. There’s a lack of investment, so throw money at super deduction for two years.” The result is spelled out by the OBR: long-term investment will not be increased, just shifted around. There will be a two-year boost to take advantage of the subsidy, then a decline. For companies to invest, they do not need super deductions; they need the prospect of growing demand for their products. What does this Budget offer them? Miserable rates of demand growth: 1.5% in 2023, 1.6% in 2024 and 1.7% in 2025—no long-term strategy for investment.

Similarly, there is a housing crisis. Let us throw money at it in the form of stamp duty holidays and a mortgage guarantee. The result? Sharply rising house prices and a few more houses. Has the Chancellor not noticed that house prices have risen by 8.5% in the midst of the worst recession of modern times? There is no long-term strategy for housing.

So, where is the plan for investment? Well, there is what I can only describe as a PR brochure, Build Back Better: Our Plan for Growth, published by the Treasury. It is full of wonderful, glossy photographs and a lucky dip of proposals on infrastructure, skills, innovation and the environment, but the photos fail to disguise the fact that there is no unifying framework, a complete absence of any plan for implementation or monitoring, no institutional oversight and no evidence of consultation —nothing to encourage the commitment of private investment, and no strategic thinking for an investment decade. How could there be when fiscal resilience and spending cuts have to come first?

The pandemic has imposed a massive cost on the British economy, the real cost of lost output, lost jobs, furloughed idleness and collapsed businesses, the highest death rate in the G7 and the biggest fall in production. But there is an economic opportunity. New thinking can define a break from the policies of the past 10 miserable years. Just as, after the war, Britain built a better society, we can build a new economy and a new society now, but only if monetary and fiscal policy are the servants of a building programme; not if, as for the Chancellor, the real economy is to be squeezed in the service of outdated fiscal orthodoxy.

Financial Services Bill

Lord Eatwell Excerpts

Committee stage & Lords Hansard
Wednesday 3rd March 2021 Grand Committee

Moved by

[Lord Eatwell]

49: After Clause 30, insert the following new Clause—
“Review of penalties for insider dealing and financial services offences
(1) Within six months of the day on which this Act is passed, the Treasury must commission a review of penalties for insider dealing and financial services offences (“market abuse”).(2) The review under subsection (1) must include statistics relating to—(a) the perceived level of market abuse,(b) the number of arrests for market abuse, and(c) the number of successful convictions for market abusein each of the last five financial years.(3) The review under subsection (1) must also contain a summary of steps being taken by Her Majesty’s Government to ensure market abuse offences are identified and punished. (4) Within one month of the review under subsection (1) being completed, the Treasury must—(a) lay the document before both Houses of Parliament, and(b) make a statement responding to the review, including a declaration of whether and how the Treasury will act to—(i) increase the resources available to those charged with investigating market abuse,(ii) modernise and reform the United Kingdom’s suspicious activity reporting regime, and(iii) ensure greater consistency in the intensity of supervision across different parts of the financial services sector.(5) After the requirements under subsection (4) have been met, the Treasury may by regulations enact such reforms of market abuse provisions that are identified in the review.(6) Regulations under this section are subject to the affirmative procedure.”Member’s explanatory statement
This probing amendment seeks to understand what steps the Government is taking to improve identification and punishment of market abuse. It asks for the Treasury to outline proposals for enacting recommendations from a 2018 evaluation by the Financial Action Task Force, the global money laundering and terrorist financing watchdog.

[Lord Eatwell (Lab)]

My Lords, we now come to the section of the Bill that introduces measures to deter financial crime, whether insider dealing or money laundering. None of us in this Grand Committee can be content with this country’s attempts to limit financial crime. Headlines that cry that London is the “money laundering capital of the world” may embody journalistic exaggeration, but, sadly, they are not that exaggerated.

I will first speak to Amendment 50 in my name and then turn to Amendment 49 in the names of the noble Lord, Lord Tunnicliffe, and myself. I admit that Amendment 50 is constructed in a rather peculiar way, and I am grateful to the clerks for that ingenuity and for allowing me to make what I believe to be an important point concerning money laundering legislation.

The measures in Clause 31, to which Amendment 50 refers, derive from the EU fifth money laundering directive and the UK response to the examination of UK anti-money laundering measures by the Financial Action Task Force. An important outcome of the FATF examination was Her Majesty’s Government at last announcing measures to deal with the scandal of Companies House.

One of the political puzzles of the past 10 years is that Conservative Prime Ministers have regularly referred to the register maintained by Companies House as a gold standard, a beacon of openness and an example to the rest of the world. In fact, the manner in which the register is constructed is the key element in those headlines that describe London as the money laundering capital of the world.

The scandal derives from the fact that Companies House does not verify the beneficial ownership of companies registered there. Companies House is a library in which any shameful book can be deposited. There are so many shameful books that have been deposited, and that is a matter of record. Just to take a couple of the more colourful examples, the Mafia managed to set up one UK firm with a director named as Ottavio Il Ladro di Galline—Ottavio the chicken thief. His occupation was listed in Companies House as truffatore—fraudster. Another company had an address that translated as “Street of the 40 Thieves”. At the moment, the Companies House register includes almost 4.5 million UK businesses, but it operates in much the same way as it did 150 years ago. That means that criminals have been able to set up seemingly legitimate shell companies without even the most basic identity checks.

Consider the case of Mr Kevin Brewer. A few years ago, he launched a campaign to expose how easy it is to fake British company records. He decided in 2013 to register government Ministers, including Vince Cable—the then Business Secretary—and the noble Baroness, Lady Neville-Rolfe, as the directors and shareholders of fictitious companies. The idea was to prove how anyone could form a company in the UK in any name or address that they wished. He used an online service offered by—you guessed it—Companies House. He then owned up. As a result, he was prosecuted by Companies House and fined £12,000. The Government issued a triumphant press release, which is still available on the government website, headlined:

“UK’s ‘first ever’ successful prosecution for false company information”.

It is the only prosecution in 150 years.

A study published by Transparency International in November reported that British shell companies were implicated in nearly £80 billion of money laundering scandals. On top of that, the anti-corruption group Global Witness reported in 2019 that more than 336,000 companies did not disclose their beneficial owner. It also found that more than 2,000 company owners were actually disqualified directors—people who had previously failed to meet their legal responsibilities and were banned from directorships in the future. A further study by, among others, my colleague, Professor Sharman of Cambridge University, found that it was impossible to establish a shell company in the Cayman Islands, the Bahamas or Jersey but it was easy to do it in London.

It should be clear that an open register, as we have in the UK, is no protection against financial crooks. Protection is provided only by verification and regular reverification of beneficial ownership by skilled forensic accountants. At last, in September of last year, under continuing pressure from the Financial Action Task Force, the Government published a document entitled Corporate Transparency and Register Reform. The Minister, the noble Lord, Lord Callanan, wrote in his foreword to the document that Companies House procedures, or lack of them, resulted in,

“Shell companies … set up for no other purpose than to launder the proceeds of crime – committed both here and overseas.”

The noble Lord, Lord Callanan, recommended verification of company data. However, the document contained an ominous sentence:

“This document sets out the actions the Government intends to take in response, subject to funding being agreed”.


Amendment 50 would simply require the Government to keep Parliament up to date with what is happening. After all, this is the biggest money laundering scandal to which the UK has been subject. When will this country acquire an honest register? How much funding has been agreed? Is it enough? When will the entire Companies House register—the whole register—be fully verified? I hope that the Minister will be able to tell the Grand Committee that initial funding has already been agreed, that future funding will be forthcoming and, to ensure that the momentum is sustained, that the Government will be happy to accept this amendment and report regularly to Parliament on the progress towards a fully verified register of beneficial ownership. The Government owe that to everyone who has been betrayed by the lax approach to money laundering.

I now turn to Amendment 49, which takes a wider perspective, seeking a thorough review of Her Majesty’s Government’s efforts to limit insider trading and market abuse, so providing a firm foundation for the measures outlined in Clauses 29 and 30 of the Bill. The rationale for such a review can be stated in brief as this: what is the point of Clause 30; what is the point of increasing the penalties if there are almost no convictions? Hundreds are prosecuted every year for fiddling a few quid from social security; you can count the annual number of prosecutions for crimes in high finance on the fingers of one hand. Consider this comment, published in the Financial Times on 3 November 2019:

“The FCA has previously been accused of taking a light touch approach to white collar crime. A freedom of information request showed the regulator prosecuted just eight cases of insider dealing, securing 12 convictions, between 2013 and 2018.”


There were 12 convictions in five years.

It is not as if there is no financial crime about. Consider this further story, published in the Financial Times on 10 September last year:

“Britain’s financial regulator”—


the FCA—

“is still working on a high volume of investigations into potential wrongdoing by firms and individuals, but delivering a relatively low proportion of clear outcomes at an increasing cost, according to new data.”

The Financial Times continues:

“the Financial Conduct Authority’s annual report provided details of its enforcement actions in the year to March 31 2020, and showed 185 cases were concluded in that period, leaving another 646 ongoing. In the previous year, 189 cases had been closed, leaving 647 open. However, despite this persistently high caseload, only 15 investigations resulted in financial penalties being handed down in the latest 2019-20 period — down on the 16 cases that led to fines in the two previous years.”

So what is going wrong? An important clue is to be found in the section of the 2018 report of the Financial Action Task Force dealing with the substance of UK measures to deal with money laundering and the financing of terrorism. The report states that, with respect to the UK Financial Intelligence Unit, which is the financial division of the National Crime Agency:

“The UK has pursued a deliberate policy decision to limit the role of the UKFIU in undertaking operational and strategic analysis. The UKFIU suffers from a lack of available resources (human and IT) and analytical capability which is a serious concern considering similar issues were raised over a decade ago in the UK’s previous FATF mutual evaluation. The limited role of the UKFIU calls into question the quality of financial intelligence available to investigators.”


Is it not the case that the surest way to deter criminal behaviour is to increase the likelihood that the criminal will be caught? I ask again: what is the point of increasing sentences while, at the same time, reducing the capacity to catch the criminals? When the Minister replies to this debate, will she explain why:

“The UK has pursued a deliberate … decision to limit the role of the UKFIU in undertaking operational and strategic analysis”?


Surely now is the time for a thorough investigation into the Government’s persistent failure to prosecute crime in our financial services industry. Accepting Amendment 49 will be a start. I beg to move.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I happily acknowledge that point. The point I was trying to make is that even with that slightly broader definition of the use of financial services, a “failure to prevent” offence for broader economic crime is one that people would want to apply in a broader context. I appreciate that the scope of the Bill defines how amendments may be written, and that takes me back to one of the reasons that my noble and learned friend Lord Garnier predicted I might give for resisting this amendment: that this is not the right Bill for it.

[Lord Eatwell (Lab)]

My Lords, this debate has evidenced considerable concern from all sides of the Grand Committee at the level of financial crime and the apparent inability to tackle it in this country in a consistent manner. I am afraid that the Minister’s reply did not provide any reassurance. Indeed, there seemed to be an enormous amount of long grass in evidence into which various reviews and considerations were being kicked.

Before commenting on the Minister’s reply to my amendment, I shall comment on the amendment by the noble Lord, Lord Holmes, on KYC. I entirely sympathise with his point about a modernised means of identification, but I am afraid he will come up against what seems to be a most peculiar British national aversion to any comprehensive means of identification. Therefore in KYC we rely on documents such as utility bills that were never designed for this purpose. The debate over a vaccine passport is running into the same national aversion. However, I wish him well because he is on the right track in what he is attempting to do.

I was also enormously impressed by the amendments in the name of and the speech made by the noble and learned Lord, Lord Garnier. I cannot understand why the notion of failure to prevent, which he described so clearly that even a non-lawyer such as myself could understand it, can apply to bribery and tax evasion but not to other financial crimes. The Minister did not really address that lacuna in her reply.

Turning to my two amendments, first, the UK’s approach to measures against financial crime is underresourced, scatter-gun and generally ill directed. The evidence is clear in the extraordinarily low number of prosecutions. I therefore feel that there is an urgent need for a major reconsideration of this matter. I hope that the review referred to by the Minister, to be conducted by Her Majesty’s Treasury and the FCA, will produce something concrete and effective—for a change, I must say.

On beneficial ownership, I was amused by the point made by the Minister that, because of the peculiar structure of my amendment, I was somehow letting the private sector off the hook. That was not my intention, of course; it was about the necessity of getting the argument in the Bill. However, I was really disappointed to hear her repeat the discredited support for Britain’s so-called wonderful public beneficial ownership open register. This public register is inaccurate, misleading and shelters criminals, and I am surprised that she is so enthusiastic in her support for it. I hope that the committee that scrutinises financial matters, which we discussed earlier in this Committee, will be able to keep an eye on developments in the prosecution of financial crime and the provision of a proper, verified beneficial ownership register. I hope that it will push these matters forward and not let them disappear into further reviews.

In the meantime, I beg leave to withdraw Amendment 49.

Amendment 49 withdrawn.

Spending Review 2020

Lord Eatwell Excerpts

Thursday 3rd December 2020 Grand Committee

[Lord Eatwell (Lab) [V]]

My Lords, the spending review was a revelation. It revealed how the Chancellor will shape policy over the coming years. The first revelation is found in the Chancellor’s statement that

“our economic emergency has only just begun.”

Mr Sunak spells out the emergency: debt is

“clearly unsustainable over the medium term.”—[Official Report, Commons, 25/11/20; cols. 827-28.]

It is clear that Mr Sunak regards government borrowing, necessary as it may be in the face of the pandemic, as a burden on future generations. This is economic nonsense, and the foundation of the austerity that has done so much damage to Britain.

Of course borrowing will need to be repaid—but to whom? Taxes are raised from British citizens to repay the debt owed to other British citizens. What borrowing and the repayment are all about is the distribution of income: funds being transferred from one group of citizens to another group. Mr Sunak has made clear who he expects the funds to come from. The first in line to pay off the borrowing are the public sector workers whose pay has been frozen.

However, in so far as the Government borrows from foreigners, the borrowing can create a future burden. When funds are repaid, spending power is transferred abroad. That is why the OBR estimate of the increased foreign borrowing associated with Brexit is so worrying. Here lies the second revelation. In his review of the coming economic emergency, Mr Sunak fails to mention Brexit at all. For Mr Sunak, Brexit is the love that dare not speak its name. Yet the OBR makes it clear that the scarring from leaving the European Union with a deal is worse than the long-term scarring by the pandemic. If we leave without a deal, the scarring will be twice as bad. Yet from Mr Sunak, not a word about a policy that will add more to government borrowing in the medium term than will the pandemic. Has there ever been a more irresponsible Chancellor of the Exchequer?

Covid-19: Economy

Lord Eatwell Excerpts

Thursday 4th June 2020 Lords Chamber

Moved by

[Lord Eatwell]

That the Virtual Proceedings do consider (1) the economic lessons learned from the COVID-19 pandemic, and (2) the measures necessary to repair the United Kingdom economy.

The Motion was considered in a Virtual Proceeding via video call.

--- Later in debate ---

[Lord Eatwell (Lab)]

My Lords, to repair the UK economy, we must learn the lessons of the past dreadful months. The new normal cannot be the same as the old normal. We are today enduring the second major economic crisis in 12 years. The global financial crisis of 2008-9 saw UK income fall by 5% in one year, and the government deficit rise by £110 billion. In due course unemployment rose to 8%. This year the Bank of England expects GDP to fall by 14% in one year and the government deficit to rise by £250 billion. Unemployment will soar to 10% or more as the furlough scheme winds down; that is about 3.5 million people unemployed.

In 2008-9, thanks in no small part to the efforts of my noble friend Lord Darling, the financial system was stabilised, the decline in GDP was arrested and by the first half of 2010 the UK economy was growing at an annual rate of a little under 3%. We won the war; but we lost the peace. The coalition Government’s austerity budget of June 2010 killed the recovery stone dead.

The past 10 years have been the worst decade for the economy since the war. Productivity stagnated, real household income barely grew at all, inequality rose inexorably, local government and social services were starved of resources, and persistent underinvestment meant that the NHS had to take on the pandemic in a seriously weakened state. Now we are fighting a battle against Covid-19. Talk of a trade-off between beating the virus and boosting economic recovery is seriously mistaken. Without an effective lockdown or an effective “test and trace” system, the economy will not recover. With ineffective measures and many new cases every day, most people will stay at home. The idea of cash-strapped workers being forced back to work in unhealthy conditions is abhorrent. You cannot restart the economy without having the virus under control.

How, then, do we assess the cost of this disaster? The cost is not the £250 billion increase in the budget deficit. That is the financial consequence of government policy; it is not the economic cost to the British people. The real cost of the shutdown is the loss in real GDP, right now and in the medium-term future. It is the loss of the output of goods and services resulting from people being forced to stay at home, retail and hospitality being forced to close, airlines and factories falling idle, the collapse of companies that are vital parts of the supply chain, and so on.

A fall in output of 14% means that, on average, the income of every man, woman and child will go down by 14%. That is a cut of more than £4,500 in the disposable income of the average family this year. We all know that the cut will not be spread evenly, on average. Unless something is done, even greater costs will be borne by those who, through no fault of their own, have lost their jobs or lost their businesses—everyone whose source of income has disappeared. In these circumstances spending by the Government to sustain demand, support employment and enable firms to survive is not a cost to society at all. If the increase in the national debt reduces the loss of real GDP, that is an economic and social gain. It is not a cost; it is a benefit.

Of course, the Government’s financial measures will not be costless if they in turn have a reverse effect that leads to a reduction in GDP. Given the increase in national debt, the “deficit hawks” will demand a new austerity to pay for it all. They should be ignored. The deficit will fall steadily as production levels are restored. The debt-to-GDP ratio will likewise fall over the years ahead. Further austerity will just add to the terrible cost of the pandemic. Of greater concern is the likelihood of negative feedback from the financial services industry, enforcing bankruptcy, especially on small and medium-sized firms, and further depressing output.

Our financial sector places the highest premium on liquidity—on the ability to get its money back easily. Banking logic will be to foreclose on non-performing loans, forcing viable companies out of business. The measures that have been put in place by the Government to protect industry are a temporary band-aid. The loan schemes are loading up company balance sheets with debt. It is estimated that around half of them will default, deepening the recession. There is no path to recovery that is paved with bankruptcies.

As and when the economy does begin to recover, the Government will be faced with significant fiscal management challenges. It will need to relearn forgotten skills in managing tax-and-spend to secure the largest possible output and the flow of resources to where they are needed most. Carefully sustained demand pressure is needed to provide a profitable platform for reconstruction and recovery, and to leave space for the Bank of England to concentrate on the maintenance of financial stability. We must abandon the pretence that minimal interest rates and quantitative easing stimulate output. Instead, they wreck pension schemes, push up house prices and stimulate the Stock Exchange.

What have we learned about our economy and society in the past four months? We have learned that our NHS is not funded in a sustainable manner so that it can protect us. We have learned that our social care system is neglected, fragmented and underfunded. We have learned that the unemployment and benefits system is unable to safeguard livelihoods when incomes collapse unexpectedly, particularly for those in the gig economy or the self-employed. We have learned that malignant inequality is manifest not only in income, housing, and opportunity, but in death from the virus. We have learned that our system of government and politics fails to produce the co-operation needed to prepare us for the next crisis.

We have also learned the damaging consequences of current economic policies. Governments have steadily removed the regulations and norms that provide protection when the lifeblood of our society is threatened, whether that lifeblood is biological, environmental or economic. In the pursuit of short-term efficiency, we have created a world more easily prone to shocks, but with fewer buffers to cushion those shocks. Pandemics are today not just biological; they are economic and environmental too. In sum, we have learned that our economy and our society are not resilient. Resilience will require a new form of political economy.

Every company manager worth their salt has a disaster recovery plan prepared for his or her firm, but only the state can protect us against the consequences of systemic disasters. We learned that in the 2008 financial crisis, and we are learning it all over again today. We must begin by building resilient social services —notably, but not exclusively, the NHS and social care. That includes restoring the local public health system that has been disabled by the 60% cuts to local authority budgets in the past decade. The Government’s emergency grants cannot re-magic that sort of capacity overnight. No wonder it is proving so difficult to implement an effective test and trace system. Resilient social services will require well-trained, well-paid essential workers. Can the Minister explain why, when Britain was hit by the virus, the NHS was short of 50,000 nurses?

Ensuring a resilient labour force will require short-term and medium-term action. A recent report from the London School of Economics reveals that what it calls the “Covid generation” was already suffering falling real wages, fewer opportunities, and stagnant or declining living standards. Now that the crisis has drastically worsened economic and education inequality, young people are even less likely to climb the income ladder and less likely to fulfil their potential, regardless of their background. Are the Government prepared to introduce a job guarantee scheme for those facing long-term unemployment and catch-up tutoring for disadvantaged youngsters? The Bank of England is the backstop for the financial sector. Will the Minister tell us what will now be the employment backstop for Britain’s youth?

Rebuilding our economy will require a resilient financial system, by which I mean not just stable financial markets but a financial system that does its proper job in funding and supporting industry—supporting the production of the goods and services on which our standard of living depends.

All noble Lords will be painfully aware that the Government’s management of the pandemic compares very poorly with that of Germany. In Germany there have been around 7,500 deaths; in Britain there have been 50,000-plus. The economic comparisons are also disheartening. Similar amounts of government funds were provided in Britain and Germany to support small and medium-sized firms. In Germany the funds flowed readily; in Britain they did not. The reason was the superior German pipeline. The banking system there is accustomed to investing in industry, aided by public institutions. In the UK, the banking system proved once again that it is not up to the job.

What will the Government do to ensure that small and medium-sized industry can invest and grow, confident in the availability of the sustained, resilient financial support it needs? Does the Minister agree that what is needed at all levels of industry is not more debt but more equity? What principles would guide the Government to provide the equity support that British industry, large and small, desperately needs?

Of course, Britain is not alone in facing new economic challenges; the global health emergency is also a global economic emergency. Achieving a resilient Britain demands a resilient international trading system, but world trade is forecast to contract by 34% this year. The pandemic has exposed severe weaknesses in global production and trade, just as the crisis of 2008 exposed severe weaknesses in global financial markets. Countries are turning in on themselves. Facing a hostile United States, the WTO is falling apart, with its director-general resigning a year ahead of time. After the 2008 crisis, a massive international effort, led by Gordon Brown, put in place a regulatory system capable of stabilising international financial markets. How do the Government plan to rebuild Britain’s trading relationships in a more resilient manner?

Finally, we all must recognise that a resilient economy must be a sustainable economy. Just as the pandemic, serious though it is, is but a warning of other potential biological disasters to come, the floods of winter, the heatwaves of summer, the melting of the ice caps and the fires in Australia are but the warnings of environmental disasters to come. We are woefully unprepared. The pandemic is an alarm call—a warning that we must build a more resilient economy. That will not be easy to do or to sustain. Resilience will cost money, and the pressures of competitive markets and short-run economic efficiency will erode our commitment to prepare for the shocks that will occur, at some unknown date in the future.

We must forge a durable public and political consensus behind resilience, otherwise short-term economic priorities and electoral cycles will soon get in the way. As the emergency fades in the memory, the stocks of PPE will again be slowly whittled down, the NHS squeezed again, social care returned to being a national disgrace, local public health officials starved of resource and experts ignored, and inequality will be on the rise. This must not happen again. We must win the war, and this time we must win the peace.

--- Later in debate ---

[Lord Eatwell]

My Lords, I am grateful to all noble Lords who have contributed to this debate. There were so many interesting, albeit short, interventions. I have one major comment, but first, I express concern at the Minister’s use, three times, of the phrase “sustainable public finances”. That sounds very comfortable, but it is the weasel word for austerity. Whenever anyone hears that phrase, the alarm bells should ring.

My general comment is that what many noble Lords looked for was vision—a vision of a resilient economy. In the public sector, that is easy to define. It means building up what the noble Viscount, Lord Chandos, called “redundancies”, meaning the excess capacity to respond to emergencies such as the one that we are suffering at the moment. However, in the private sector, it means a regulatory framework which ensures that private firms sustain the level of capacity which will enable them to respond effectively to major crises. In the financial sector, stress tests are required, and those stress tests test redundancies; they test the capacity to respond to major shocks. We need a wider view of resilience and redundancy—in that specific use of the word—to ensure that in our economic future, we can deal with the major biological, environmental and occasionally economic shocks that will inevitably come.

I thank the Minister for his summing up and look forward to hearing his response to my questions. Thank you.

Motion agreed.

Bank of England and Financial Services Bill [HL]

Lord Eatwell Excerpts

Tuesday 15th December 2015 Lords Chamber

Moved by

[Lord Eatwell]

2: Clause 3, line 3, at beginning insert “At the request of the Treasury Select Committee of the House of Commons, or”

[Lord Eatwell (Non-Afl)]

My Lords, this amendment seeks to provide the Treasury Select Committee of another place with the ability to stimulate the oversight function of the Court of the Bank of England. It may be helpful to provide some context for this proposal. The measures in the Bill, in so far as they refer to the Bank of England, return the regulatory scope and powers of the Bank to roughly the same position that they were in in 1997. From 1997 onwards there was, first, the transfer of many, though not all, of the Bank’s regulatory powers to the FSA, then the abolition of the FSA and the transfer of prudential regulation to the PRA, and now the subsidiary status of the PRA is to be abolished and its activities fully reincorporated within the Bank, so we have come full circle. After major institutional reforms, we are back where we started, with all the powers of prudential regulation being exercised by the Bank. Conduct of business regulation, amalgamated in the FSA from various sources, now resides with the FCA, but it should be noted that few of these powers were originally exercised by the Bank of England.

It is worth recalling that the Bank of England that we began with, prior to the creation of the FSA, was not a successful regulator. The Bank failed in the case of the Johnson Matthey bank and over BCCI, and so glaring was its failure with respect to Barings that the then Board of Banking Supervision commented acerbically that the Bank of England should try to understand the institutions that it purports to regulate. Regulation was taken away from the Bank because it had failed as a regulator. Then, of course, the new tripartite regulatory structuring of the FSA, the Bank and the Treasury failed dramatically in the financial crisis of 2007-08, so the FSA was abolished. At least the PRA can hold its head up and declare that its position as an independent subsidiary is being abolished in this merry-go-round not because it has failed but because of a desire to restore the unitary power of the Bank of England. It is neater that way.

What this tale of circular institutional reform should teach us is that there is no specific institutional structure that can guarantee to deliver regulatory competence. The all-powerful Bank that we are now recreating has proved in the past to be a regulatory failure, while the tripartite structure of the FSA, the Bank and the Treasury failed even more spectacularly. Given that institutional reform will not be a panacea, there is a powerful case for thorough parliamentary scrutiny to at least attempt to identify the failings when they occur, as we can be sure that they will. Moreover, I remind noble Lords of the words of the Treasury Select Committee of another place with regard to the original proposal that a supervisory board be established at the Bank. The committee said:

“The Bank is a democratically accountable institution, and it is inevitable that Parliament will wish to express views and, on occasion, concerns about its decisions. Our recommendation that the new Supervisory Board have the authority to conduct retrospective reviews of the … prudential performance of the Bank, should, if operated successfully, provide the tools for proper scrutiny”.

In Committee I asked the Minister if he agreed with the proposition that the Bank should be a democratically accountable institution. He failed to reply. I will happily give way now if he wishes to comment. Apparently he does not.

Therefore, the Treasury Select Committee argued, correctly, that proper parliamentary scrutiny depends on internal reviews of the Bank, not just on the external inquiries of parliamentary committees. Internal review provides Parliament with the “tools for proper scrutiny”. The reason is obvious. The court that as a consequence of the Bill will be invested with the oversight function has full information about the operations and policies of the Bank—a level of information that even the most assiduous Treasury Select Committee could never have. Indeed, the court has information which is not, and sometimes should not be, in the public domain.

My amendment would allow the Treasury Select Committee of another place to request that the court exercise its oversight function. Note, as the Minister said, that the court is not compelled to comply. The wording of the noble Lord’s amendment, to which my amendment refers, states that the non-executive members of the court “may”—not must—“arrange for a review”.

Let us suppose that the Treasury Select Committee’s request stimulates a review. What happens then? First, as the noble Lord’s amendment requires, a report or reports will be made to the court. To discover what happens next we turn to Sections 3C, 3D and 3E of the Bank of England Act 1998, as amended. There we find that the Bank must give the Treasury a copy of the report and that the report must be published, unless the court of directors decides that publication is not in the public interest. Finally, in exercising its oversight function the court must monitor the response of the Bank—including the court itself—to any recommendations made in a report.

I have detailed the path that any report stimulated by a Treasury Select Committee request might take in order to reassure the House that safeguards are already built into the structure of the legislation before us that will ensure that information which it is not in the public interest to publish at a particular time will indeed not be published. Yet even without publication, a request by the Treasury Select Committee may well stimulate an important investigation that results in valuable internal reform at the Bank.

The government amendment makes a valuable addition to the powers of the non-executive members of the court in the exercise of their oversight function. However, the procedure envisaged by the government amendment is such that investigations can be stimulated only by insiders—not what might be considered proper democratic accountability. My amendment will at least provide a pathway along which proper democratic accountability may be exercised: not will be, but may be. The Treasury Select Committee will be able to request that the court institute a review. That is just a small increase in democratic accountability but one that may well avert future regulatory failings. I beg to move.

[Lord Turnbull (CB)]

My Lords, I am somewhat puzzled by the amendment, because it seems to be a power which the Treasury Select Committee already has and already exercises. I will give noble Lords three examples. It called for a report from the Bank into Northern Rock, another one into RBS, and then—with some delay, appearing only three days ago—finally into HBOS. Therefore the Treasury Select Committee, led by the people who lead it now, does not need this power. It is perfectly capable of forcing the Bank to undertake a review and to reveal the contents to that committee.

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[Lord Bridges of Headley]

I begin by thanking the noble Lord, Lord Davies, for his kind words. Let me reciprocate by saying that it has been a pleasure having discussions with him, and with the noble Baroness, Lady Kramer. I hope that this constructive spirit is retained all afternoon.

The noble Lord, Lord Myners, made a good point: why are we bothering and why do we need to do this? The point that the noble Lord, Lord Davies, made answered that in large part: it is because there was concern. But specifically, the court’s powers of delegation are limited by paragraph 11 of Schedule 1, and it may not delegate duties and powers that are expressly imposed on the court in legislation unless it has express permission to do so.

This has been a good debate, and I return briefly to the points made by the noble Lord, Lord Eatwell. He asserted that we have gone back to 1997. I would dispute that that is the case. The Government have given the Bank the tools and powers that it needs to deliver its financial stability mandate. In particular, the Bank is now the statutory resolution authority with primary operational responsibility for financial crisis management. On top of that, we have created the FPC as a statutory committee of the Bank with the responsibility for monitoring and mitigating systemic risks for financial stability.

As to why prudential regulations should reside with the Bank, one of the key weaknesses of the tripartite system was a failure of co-ordination between those responsible for overseeing the financial system. We do not want to return to that. As the Chancellor said during the passage of the 2012 Financial Services Act, the Bank of England is the natural home for the microprudential, macroprudential and monetary policy functions because the interconnections are so great between these three critical functions. Having the PRA as part of the Bank also reduces underlap that could be harmful in the event of a crisis.

I turn to the issue of democratic accountability of the Bank. Since 2012, a number of measures have been introduced that have significantly enhanced the transparency of the Bank, and I will briefly recount some of these. For example, the court is now required to publish minutes of every meeting within six weeks. It has also voluntarily published historical records of court minutes, including those during the financial crisis, and, through this, Parliament and the public now have greater insight into the governance of the Bank and the key decisions made. Similarly, the Bank has introduced measures to enhance the transparency of the Monetary Policy Committee following the recommendations of the Warsh review. Clearly, therefore, the Bank is a more transparent institution than it was in 2012. However, there obviously remains room for further improvements. This Bill builds on those reforms through changes to the Bank’s governance, to its policy committees and to its accountability. However, as I argued previously—and as the noble Lord, Lord Turnbull, has argued—this amendment is not necessary.

[Lord Eatwell]

My Lords, I am impressed by the extensive lack of support for this amendment throughout the House. I say in response to what the Minister has said that, of course, the powers have developed and lessons have been learnt since the financial crisis, but I was referring to the recentralisation of powers rather than some of the extra powers that have resulted from the lessons learnt.

The main argument made against my amendment was that the power exists already. If the power exists already, the amendment does no harm—I have not heard anyone express the view that it does. However, the key reason for the need for my amendment was expressed clearly by the noble Lord, Lord Myners, who asked why conditions requiring members of a board to act were in the Bill at all. They are in the Bill because the action has not been present in the past. It is because of this lack of action that Parliament has lost a degree of confidence in relying just on the actions of the court and has decided that, to ensure appropriate transparency and efficiency in the operations of the court, it may be required to do certain things. That is why the Government have put into the Bill measures instructing the court to behave in particular way and why my amendment is there—because the court has not always responded to the requests of the Treasury Select Committee. It has not, for example, responded to repeated requests to publish a detailed review of its own actions during the financial crisis. My amendment, small in terms of changing circumstances though it might be, would have assisted the development of the democratic accountability of the Bank. However, in the circumstances, given the widespread lack of support around the House, I beg leave to withdraw the amendment.

Amendment 2 (to Amendment 1) withdrawn.

Bank of England and Financial Services Bill [HL]

Lord Eatwell Excerpts

Monday 9th November 2015 Lords Chamber

Moved by

[Lord Eatwell]

1: Before Clause 1, insert the following new Clause—
“The Bank: definition
(1) For the purpose of this Act, “the Bank” has the same meaning as in section 41 of the Bank of England Act 1998 (general interpretation).
(2) In section 41 of the Bank of England Act 1998—
(a) For “In this Act” substitute “For the purposes of this Act”; and(b) After “England;” insert “for the purpose of this Act, powers delegated to “the Bank” may be exercised by, or be limited to, any or all of—(i) the staff of the Bank of England,(ii) The court of directors,(iii) The committees of the court of directors, (iv) The Governor,(v) the Deputy Governors,(vi) the executive staff; and”.”

[Lord Eatwell (Non-Afl)]

My Lords, as was evident in the speeches around the House at Second Reading, there is a feeling in this House that the Bill is a serious retrograde step from the measures taken in 2012 and 2013 following the financial crisis to strengthen the accountability and oversight of the Bank of England. The purpose of my Amendment 1 is to exemplify the argument that I made at Second Reading that the Bill renders the governance structure of the Bank of England opaque and not fit for purpose. Many measures in the Bill that we will come to discuss later on this afternoon serve the cause of making the governance structure opaque. One device for achieving this obscurantist outcome is to use the term “the Bank” in an active sense; that is, where an entity labelled “the Bank” is to act, notably to make policy or policy decisions, without ever defining who might be responsible for those actions since, as my amendment seeks to make clear, “the Bank” could refer to anyone involved in the institution: the governor, deputy governors, various committees, or even the doorkeepers in their pink coats.

I read carefully through the Bank of England Act 1998—the version as amended by subsequent legislation, which the Bill seeks to amend further. In all clauses within that Act that provide the power to make policy, the active entity is clearly identified. So in Section 9A the financial stability strategy must be determined by the court. In Section 9C, the Financial Policy Committee has clearly defined functions and powers. In Section 13 the formulation of monetary policy is clearly defined as the role of the Monetary Policy Committee.

There are a few instances in the existing Act where the vague term “the Bank” is used in an active sense. However, as far as I can tell, in all such instances it is clear from the context which entity within the organisation might perform the relevant function. For example, Section 9Y of the Bank of England Act provides “the Bank” with powers to enable the pursuit of the financial policy objective. These powers are to seek information to enable the Financial Policy Committee to do its job. Clearly, the active entity would be the Financial Policy Committee asking for information. Section 18 of the Bank of England Act requires “the Bank” to produce reports on the activities and objectives of the Monetary Policy Committee. The active entity would presumably be the MPC, although I admit that in this case it is not entirely clear.

Generally, up until now the vague term “the Bank” is used within the Bank of England Act, where the context is such that the active entity can be identified and consequently, and crucially, can be held to account. If this Bill were to be enacted as currently drafted, that would no longer be the case. In new paragraph 13B(2) introduced under Clause 8(6) of the Bill, the Bank is given the power to revise and replace the code of practice to which members of the Monetary Policy Committee must comply. Can the Minister tell us exactly who “the Bank” is in this context? Who can revise and replace the code of practice with which members of the Monetary Policy Committee must comply?

The most extraordinary example of deliberate obfuscation is to be found in Clause 5, where we find amendments to the Bank of England Act that would make “the Bank” responsible for the determination of strategy with respect to the financial policy objective. Indeed, Clause 5(2) amends Section 9A of the Act with the extraordinary statement that “the Bank” must consult the Financial Policy Committee about that strategy. Will the Minister tell us precisely who is doing that consulting?

I remind the Minister that the financial policy objective and the role of the FPC arose out of the experience of the financial crisis, when it was evident that the Bank of England’s attention to questions of financial stability was woefully inadequate, yet now this vital piece of policy-making is to be handed over to—we know not whom. The Treasury has connived in this obscurantism. In its impact assessment of the Bill, it states with respect to Clause 5:

“Making the Bank responsible for setting the strategy”,

within the Bank,

“will ensure that Court is responsible for the running of the Bank and that the Bank’s policy committees are responsible for making policy”.

Really? How does it know? It is not in the Bill. Nothing in the Bill identifies the division of responsibilities with respect to the financial stability objective in the terms set out in the impact assessment. I remind the Minister of the words of the Treasury Select Committee in another place:

“The Bank is a democratically accountable institution and it is inevitable that Parliament will wish to express views and, on occasion, concerns about its decisions”.

Does the Minister agree with that view? If he does, will he tell us how it will be possible for Parliament to hold the Bank to account when the Bill sets out to obscure where within the institution responsibility for the exercise of vital powers may actually lie?

My amendment—which is, if you like, a probing amendment—is intended to expose what is being done in the Bill. The amendment makes it clear that the term “the Bank”, when used in the active sense, is an empty, amorphous expression and hence is designed to obscure. If the Minister disagrees with my definition of “the Bank”, perhaps he would be good enough to provide his own definition. I beg to move.

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[Lord Eatwell]

Why has the court’s responsibility been taken out of the Bill and replaced with “the Bank”? The Bill originally said that the court should consult the FPC, but now it says that the Bank must do so. The noble Lord is saying that that means the court, so what is the point of this amendment?

[Lord Bridges of Headley]

My Lords, we will come to address that. Responsibility for these functions still rests with the court, and I think that is perfectly clear. I am happy to meet the noble Lord to address these points in more detail, and we will come to the FPC in due course. I hope I have begun to provide further clarity on the Bank’s governance, but I can see from the noble Lord’s face that I may not have done. Even so, I hope he will withdraw his amendment.

[Lord Eatwell]

My Lords, I am grateful to those noble Lords who have spoken, and in particular to my noble friend Lord Tunnicliffe for his exposition of yet further confusion in letters from the Bank of England, or from whoever, attempting to explain what the Bill is really about. I must say that I am sympathetic to the suspicion in the mind of the noble Lord, Lord Flight, that “the Bank” means “the governor”.

The noble Lord, Lord Bridges, has said that the answer is that the court is responsible for deciding what “the Bank” means, and the court may delegate those purposes how it might wish. This House spent many hours working carefully with the noble Lord, Lord Deighton, who I am delighted to see in his place, to define precisely the roles of different committees within the Bank of England and their responsibilities. It is very striking that in the crucial role of financial stability, this definition is lacking. For the Monetary Policy Committee the definition is clear and, in respect of other activities within the Bank, if one reads the Bank of England Act 1998, one can see that the responsible entity is clear. In respect of the vital role that arose from the financial crisis and the failures of the Bank of England during that crisis, however, there is to be no clarity or clear definition of role.

I think it will be necessary to amend the Bill to make the position clear, because if it is not amended, parliamentary scrutiny has less insight than it requires to perform the role of ensuring that the Bank is democratically accountable. At this time, I will say that unless the noble Lord amends the Bill appropriately on Report—he may be encouraged to do so—I will produce appropriate amendments myself. In the mean time, I beg leave to withdraw the amendment.

Amendment 1 withdrawn.

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[Baroness Noakes]

My Lords, I have absolutely no knowledge of how the Court of the Bank of England works and have not had that knowledge since 2000, when my tenure on the court ceased. At that time I think that we were a court of 16, of whom 13 were non-executives. I will not claim that we were a very effective board at that. All I am trying to say is that what the Government are proposing is perfectly sensible and in line with general corporate practices. It seems to be entirely defensible.

[Lord Eatwell]

My Lords, the Bill reeks of the feeling that non-executive directors are a nuisance. Everywhere, we find the role of the non-executive directors in the Bank being reduced. This simple numerical reduction is something like arguing about the number of angels who can dance on a pin. None the less, let us remember why legislation was brought to this House and argued for so forcibly by the noble Lord, Lord Deighton. It was because the Bank of England was seen to have significantly failed during the financial crisis: in particular, that the Bank of England had not had sufficient alternative voices or challenge within its decision-making process. That is what underlay the Financial Services Act of, let me remind the Committee, 2012—just three years ago. From its vesting date to today, that Act has been in force for about two and a half years. How, after that period, can it be decided that the experience of the Act and the structures put in place by it were misconceived? This seems to be simply an attempt for the Bank to return to business as usual, ex ante—before the financial crisis. If the size of the court is too large then that should be the subject of a careful review and the evidence should be presented to this House. That has not been done. Where is the evidence?

The noble Baroness, Lady Noakes, said that what the court does is of course not very much. I wonder whether she was listening to the noble Lord, Lord Bridges, just now when he said that the court is responsible for deciding delegation of powers within the Bank. That seems to me to be quite a lot. With respect, perhaps in the day of the noble Baroness the court did not do very much, but the 2012 Act was specifically designed to empower the court and to produce on it a variety of views and the potential for challenge. There is not much of an issue between seven and nine. The issue is: why is this being changed now? What was wrong in 2012 that is now to be righted and what evidence is there that the decisions which this House made in 2012 were misconceived?

[Lord McFall of Alcluith (Lab)]

My Lords, I would like to make a couple of points in support of the views of the noble Lord, Lord Sharkey. The noble Baroness, Lady Noakes, made the case that the court did not do very much; that was precisely the problem. It had the job of oversight and it is a matter of record that it did not do that job well. The feeling was therefore that the Bank was engaged in groupthink. It did not allow the doors of the Bank to be opened and for the outside world to understand what the Bank was doing. That closed community failed. Evidence to the Treasury Committee acknowledged that it had failed; the current governor acknowledged that it had failed in a speech at Mansion House a number of months ago, when he made three detailed points about the areas in which it failed.

This body has failed. It therefore needs to ensure that that groupthink and closed mentality is disposed of, but that cannot be disposed of by shrinking. It has to ensure that there is a wider community looking over the Bank. After all, society depends on the decisions that the Bank makes, and it is extremely important that society has confidence in the Bank. This is not just a matter for the Bank, the directors and the governor or how he feels; this is a matter of democratic accountability to Parliament and societal involvement. As the noble Lord said, two years after a change with no examination is an unacceptable way to go about business. Let us get the doors of the Bank open and ensure that we have a wider engagement and a wider debate. That will do both the Bank and society good.

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[Lord Eatwell]

I am intrigued by the Treasury Select Committee’s recommendation of eight. Can the Minister tell us what would have been the composition among those eight recommended persons?

[Lord Ashton of Hyde]

I fear I cannot. Can the noble Lord help us? The answer is, no, I cannot tell noble Lords that.

--- Later in debate ---

Furthermore, the very words “Independent Evaluation Office” suggest that the office has some power to conduct investigations into the Bank. Those of us who were privileged to attend the Treasury Select Committee scrutiny of the Bill heard the chairman, Andrew Tyrie, question Mr Carney on this matter. He confirmed that the IEO cannot independently decide to start an inquiry; instead, it gets its priorities from the court. This is central. In a difficult situation—which we have experienced within living memory—independence is central to the NEDs having the power to hold the executive to account. I hope that the Government can explain why they have decided to so significantly weaken the oversight role of the court’s NEDs.

[Lord Eatwell]

My Lords, I find this a somewhat naive and shocking part of this small Bill, in the sense that the clause under debate has two objectives. The first is to reduce the powers of the NEDs and the second is to reduce the powers of Parliament. Both of those goals I regard as reprehensible. As the noble Lord, Lord Tunnicliffe, set out, these issues were debated extensively in this Chamber with respect to the Financial Services Act 2012. We went through them in great detail and, in particular, we followed the advice of the Treasury Select Committee of another place.

It is obvious that this measure is designed to reduce the powers of the non-executives, but perhaps I may comment on the second point that I made about the powers of Parliament. That derives from the statement by the Treasury Select Committee of another place, which at that time was referring to a new supervisory board. That, in debate, was transformed into the oversight committee. The Select Committee said:

“Our recommendation that the new Supervisory Board have the authority to conduct retrospective reviews of the macro-prudential performance of the Bank should, if operating successfully, provide”,

Parliament,

“with the tools for proper scrutiny”.

Those “tools for proper scrutiny” are being removed in this clause. I think that Mr Carney’s explanation of the role of the Independent Evaluation Office, which can be summoned into action only by the oversight committee, is particularly revealing.

It has also been argued that, in some sense, the Bank now has two boards—the court and the oversight committee—and that this is causing confusion and reducing the effectiveness of the Bank. That is a very foolish argument. The notion that there should be an independent non-executive committee reviewing the activities of a main board is commonplace, particularly given that the reviews are specifically defined by legislation to be retrospective and not to question the contemporary acts of the court. That process is one that the best unitary boards have embodied in their codes of practice. I am amazed and, as I say, shocked that the Government are attempting to reduce the powers of non-executive directors in this way and, in particular, to reduce the powers of Parliament.

[Baroness Kramer]

My Lords, I will make just a few comments, if I may. I join my noble friend Lord Sharkey, and the noble Lords, Lord Tunnicliffe and Lord Eatwell, in their concern about the changes being proposed and the implications that would follow from them.

Will the Government confirm that, under the arrangements to reduce the number of non-executive directors to seven and increase the number of officials on the board to five, it would take co-operation from only one non-executive director with those officials to effectively prevent any investigation into any area of Bank activity? That is, I feel, a completely unacceptable balance that is being proposed today. The Government will have to come up with a very great justification for why the hurdle must be so low—four current officials—to prevent investigation of historical activity.

Clause 4 effectively falls if Clause 3 falls. Clause 4 makes the situation yet worse, because it contemplates not that the whole court will act as an oversight committee but that a sub-committee can be created in order to carry out that work, comprised of as few as two non-executive directors. For two non-executive directors to be considered sufficient for the important work of investigation, review and oversight of the Bank of England strikes me as completely extraordinary. It is also noticeable that the number two applies to the sub-committee responsible for the remuneration of officials at the Bank.

We are moving into a “two best friends” provision here, and I find it exceedingly disturbing. The Government will have to come up with some justification for why a sub-committee of two NEDs is sufficient to carry out a crucially important task that was absent during the many years in which the Bank of England essentially failed to meet the necessary standards to prevent a systemic crisis in finance in this country. I would like to hear their justification for the number two.

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[Lord Bridges of Headley]

As the noble Baroness rightly points out, obviously her maths is correct and there would be robust discussion. This comes back again to the quality of those who are on the court and their ability to persuade people that such a review is necessary.

That is all I wish to say on this matter.

[Lord Eatwell]

The noble Lord, having not been present at our discussions, sadly, three years ago, has not appreciated the loss of confidence in this House in the general accountability of the Bank of England.

Given the structure of the Bank of England and its role in national and international life, the position of the governor is extremely powerful, and quite rightly so. He needs to carry the gravitas and status of his or her office. However, in those circumstances, it is important that an Oversight Committee, charged with retrospective evaluation of the performance of the Bank with respect to its objectives, should not include the governor or the deputy governors. That is a crucial element of our thinking which underpinned the 2012 Act. In repeating that powers have now been simply transferred but still remain, the noble Lord has failed to take that aspect into account and has failed to reflect on the experience of the financial crisis of 2008 and the Bank of England’s performance during that crisis.

[Lord Bridges of Headley]

Once again the noble Lord makes a powerful intervention. I am sorry that I was not here for what were obviously those interesting debates and I heed what he has to say. I would simply repeat that I am more than happy to meet with him if he so wishes to discuss these points in more detail. Clearly the court would continue to be able to delegate and to meet as a sub-group of non-executives to look into matters as they see fit, but I believe that this Bill will put in place a more transparent, accountable, effective and recognisable board structure for the Bank, and I hope that I have been able to convince noble Lords that this clause should not stand part of the Bill.