Consumer Insurance (Disclosure and Representations) Bill [HL]
Lord Eatwell Excerpts(13 years ago)
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Lord Eatwell
My Lords, I express my gratitude to the Minister and his team and to Mr David Hertzell of the Law Commission for their briefing on the Bill, which was very helpful indeed.
In debates on measures brought before Parliament, the claim is often made—and perhaps even sometimes believed—that the consequences will be wide-ranging. In the case of this Bill, it is likely that the claim will indeed be true—and perhaps not only in the United Kingdom. For the Bill proposes a fundamental change in the structure of the insurance contract from a requirement that the purchaser discloses everything that will be material to the insurer’s decision to insure to a requirement in Clause 2(2) that the purchaser,
“take reasonable care not to make a misrepresentation to the insurer”.
In effect, the purchaser must answer carefully the question posed by the insurer. That is a dramatic shift of responsibility. Even though it is claimed that the Bill essentially clarifies what is accepted practice under the FSA’s insurance regulation and the various provisions of the Financial Ombudsman’s scheme, it seems that the Bill goes further than mere clarification.
One of the fundamental principles of insurance is that which is referred to as “uberrimae fidei”, or “utmost good faith”. That principle is fundamental to insurance law throughout common-law jurisdictions. A quick internet search revealed exactly the same principle as cited in the UK also cited in India, Ireland, Australia and the United States. Yet the Bill makes it clear in Clause 2(5)(a) that,
“any rule of law to the effect that a consumer insurance contract is one of utmost good faith is modified to the extent required by the provisions of this Act”.
Given that this legislation makes such a fundamental change to the principle if not to the practice of consumer insurance, it would be helpful if the Minister would clarify a number of points. First, have I interpreted correctly the shift in the onus of good faith? Is it indeed the case that the Bill characterises the information on which an insurance contract is based as deriving from the responsibility of the insurer to ask the questions and from the requirement that the consumer answer the questions with “reasonable care”, as under Clause 3? Also, is it indeed the case that there is no onus on the consumer to provide information that is not asked for—that is, there is no requirement to answer questions that are not asked, however relevant the information may be to the insurer?
As a supplementary point, what is the position if the consumer thinks that unasked-for information might be relevant to the contract but, not being asked, either concludes that the insurer believes the information to be not relevant or believes that it is not his or her responsibility to supply the information? In other words, will Clause 3(1) result in the addition of catch-all questions to insurance contracts, such as, “Is there any other information that might be relevant?”, hence substantially negating the declared intention of this Bill? Would that question be “clear and specific”? Is such a question permissible?
As a further supplementary, what questions are not permissible? As the noble Lord will be aware, the European Union seems likely to rule questions associated with gender as being out of order in motor insurance. Is this likely to become a general rule? Are questions about race permissible when they are relevant, as in the health issues associated with, say, sickle cell anaemia?
Secondly, why is there no responsibility on the insurer not merely to be clear and specific in questioning but also to demonstrate the relevance of questions asked? If questions that are indeed relevant when embodied in the insurer’s statistical analysis do not appear relevant to the consumer and their relevance is not demonstrated, the consumer may be led into treating the exercise more casually than is appropriate. This may be particularly true in medical insurance, in which the relevance of important issues may be very obscure to the consumer.
As I understand it, Clause 4(1)(b) establishes appropriate materiality in legal terms, but to the lay man, and indeed to the consumer, that clause is completely obscure. I imagine that if I asked any non-lawyer in this Room to explain how that clause established materiality, they would be hard pressed to do so. Since this is consumer legislation, should not the wording be clear and specific and not as obscure as Clause 4(1)(b)? I believe that the clause needs to be rewritten.
Thirdly, given that the insurers are now no longer protected by the catch-all requirement that the consumer must provide everything that would be material to the insurer’s decision to insure, it might be expected that the questions asked in proposal forms would become far more wide-ranging and comprehensive than has previously been the case. The very complexity of questions required to cover every eventuality might well create problems in and of itself. Are there to be guidelines to insurance companies defining the character and range of questions to be asked? Will the ABI, for example, provide such guidelines?
Fourthly, it is a familiar problem in credit analysis that a consumer’s credit rating is inappropriate because information has been logged wrongly or analysis has been faulty, or for a number of other reasons. In these circumstances, consumers have access to their credit ratings and a right of appeal. Is a similar facility available to consumers of insurance products and, if it exists, will the availability of this facility and its importance be widely publicised subsequent to the passage of this Bill? Will the facility be available, or is it available on the internet? In this context, are consumers deemed to know to what they have access? I know that this is a common outcome of business law, but it would be entirely inappropriate in consumer law.
Fifthly, how are all these matters to be played out in the process of renewal of an insurance contract referred to in Clause 2(3)? What if the request “to confirm or amend”, based on the original questions asked, does not in fact cover relevant changed circumstances? Is the consumer required to volunteer such information and how, under the terms of the Bill, is he or she to determine what is relevant? Would the insurer be allowed to ask the catch-all question, “Provide all other information that might be relevant at this stage”? If so, once again the Bill is otiose. It is particularly unclear in Clause 2(3), which therefore requires redrafting. It says that an insurance contract renewal is in fact a new contract. Renewal is not a concept known to insurance law. Should not the clause be redrafted to make that clear? What estimate has the Treasury made of the increase in the cost of insurance consequent on this legislation?
Before ending, I shall turn to the questions raised by paragraph (a) of Clause l, which seeks to define “consumer”, and by Clause 6, which is on warranties and representations. It may be—I have been unable to find out—that the concept of the consumer is defined in other relevant legislation, but as drafted in this Bill the definition is unreasonably vague. For example, taking out insurance against debilitating illness is typically motivated by the economic well-being of the sufferer and could not be said to be unrelated to the individual’s trade, business or profession. That would be especially the case if the physical or mental capacity that is insured is a necessary component of the performance of the profession. For example, for a ballet dancer, the body is the tool of his or her profession; it is the instrument of his or her art. Would any general health insurance taken out by a ballet dancer be insurance contracted by a consumer or not? Another, less exotic, example of the ambiguity of this definition of a consumer comes to mind. If I insure my BlackBerry, am I a consumer or not? The expression “wholly or mainly” is far too vague for me to know and, by the way, is unknown to insurance law.
On a related point, why was the legislation not extended to cover small businesses or even the micro-businesses to which the noble Lord, Lord Sassoon, referred, which at present suffer the same disadvantage as consumers? Indeed, the boundary between a consumer and a small business is often very vague—take my BlackBerry example. The clause requires further attention. It is not satisfactory as it stands.
On the question of insurance warrants, Clause 6(2) makes a valuable amendment to the law on misrepresentation, but this does not eliminate the generally destructive power of a warrant related to a condition of insurance. Given the drafting of Clause 3, which refers to “reasonable care”, and the remedies outlined in Schedule 1, would it not be appropriate to eliminate the role of warrants entirely from consumer insurance?
This is an important Bill, which is designed to pursue a worthy purpose. It is entirely supported by this side. However, it is not clear that the present drafting is sufficient to bear the weight of the major philosophical and practical change that is embedded within it. We will have the opportunity to pursue these matters at a later stage. In the mean time, answers to the questions that I have posed will greatly facilitate preparation of any necessary amendments.
I nearly forgot: as far as the Committee stage is concerned, I understand that under the rules governing Law Commission Bills it is possible to take evidence in Committee. Given that and given the defects in the drafting of the Bill as presently tabled, are the Government intending to call expert witnesses in Committee?
Lord Sassoon
My Lords, I start my response to what has been a helpful discussion by thanking the noble Lords who have taken the trouble to contribute this afternoon. The points have been wide-ranging and constructive. I am grateful to the noble Lord, Lord Eatwell, for his faith that I can respond so quickly to the huge number of very detailed points that he raised in his constructive intervention. He may forgive me in advance if I do not manage to cover all the details. Of course, I will write to the noble Lord and copy that to others who have taken part in the debate this afternoon.
Lord Eatwell
My Lords, I entirely understand the noble Lord’s position and am quite happy to receive written answers to my questions.
Lord Sassoon
I am grateful for that, because some of this has been a touch technical and some rather fundamental. I will talk about the process in a moment, as my noble friend Lord Higgins asked about the procedure for Law Commission Bills. The fact that it is a Law Commission Bill and has, as my noble friend pointed out, been the subject of a big report subsequently consulted on by the commission means that we can be fairly confident that all the fundamentals of the law have been considered in great detail. Otherwise, this Bill would not be going through this procedure. This is the first Bill to go through the Law Commission procedure since the procedure was made permanent last year. I am pleased that, as my noble friend Lord Higgins recognised, this innovation has allowed for parliamentary time to be found for this legislation, which would clearly otherwise have been difficult.
On what happens next, the important thing is that this is not in any sense a fast-track procedure, because the Bill will follow the usual parliamentary process but for two exceptions. First, the substantive Second Reading debate is held in Committee—that is what we are doing this afternoon—rather than on the Floor of the House. Secondly, the Committee stage will be, as the noble Lord, Lord Eatwell, said, taken by a Special Public Bill Committee, which is indeed empowered to take evidence from witnesses as well as to conduct the usual clause-by-clause examination of the Bill. I have no present intention to suggest from the Government’s side that we should call witnesses, but that is allowed for in the procedures. For the benefit of my noble friend, I draw the Committee’s attention to paragraph 8.44 of the Companion to Standing Orders, which says:
“The House agreed in 2008, on a trial basis, that second reading debates on certain Law Commission bills should be held in the Moses Room … The Committee debates the bill, and reports to the House that it has considered the bill. The second reading motion is then normally taken without debate in the House, though it remains possible, in the event of opposition, for amendments to be tabled or a vote to take place on the motion. Law Commission bills are normally committed to a special public bill committee”.
I hope that that is as clear as it can be. I do not know whether that allows for speakers lists, gaps and things this afternoon, but I am grateful that my noble friend got to his feet and contributed to the discussions in his usual lively way.
As I said in opening, we believe that this Bill is necessary in order for the law to catch up with best practice. It will also ensure that the legal duty of consumers is reasonable and clear. In answer to the questions asked by the noble Lord, Lord Eatwell, in this area, I am not sure whether it is right to look on it in the context of shifting the onus of good faith. It is clear that it is up to the insurer to ask the questions and to the consumer to answer them, with the potential consequences of misrepresentation in the way that I outlined in opening. The effect of this is to shift the burden between the insurer and the consumer in the consumer’s favour as against the law as it stands in the 1906 Act. That is entirely appropriate.
It is worth reiterating in this context—I think that this is the point on which my noble friend Lady Kramer asked for confirmation—that any information that the consumer misrepresented or failed to disclose must be proven to have been relevant to the content and/or the price of a policy before the insurer is entitled to a remedy. There is a shift in the legal position, but it is a shift towards a position that is in line with industry best practice and the standards that are currently imposed by the Financial Ombudsman Service.
I am particularly grateful to my noble friend Lady Kramer for drawing attention to a shocking but classic case of the sort that this Bill is intended to obviate and to ensure does not happen in future. The case that she put forward was interesting because it was a question not of unreasonable loss to the consumer—as I understand it, after a two-and-a-half-year struggle, the FOS found in favour of the insurer—but, as was explained to us, of the very real distress and the time and effort that had to go into getting to the right answer. That should be eliminated in similar situations as a result of this legislation.
As I said in opening, the industry will benefit, as we anticipate a reduction in the costs of handing complaints internally and with the ombudsman. In that context, I can confirm to my noble friend Lady Noakes that we will be mindful of the burdens of implementation on the industry. She rightly and helpfully pointed out the various other initiatives that will bite on training, information and standards of scripts, whether in relation to the retail distribution review or simplified advice. Her points are well taken.
My noble friend Lord Higgins referred to paragraph 10.30 of the Law Commission’s report, which discusses the pros and cons of giving legal effect to industry guidance. My noble friend quoted from paragraph 10.30, but the report discusses the issue at some length in paragraphs 10.32 to 10.43. The Law Commission decided not to include such a provision for the reasons set out in paragraph 10.38, principally because the role of guidance is different from that of legislation. I think that the discussion is extensive in the Law Commission’s report.
Lord Sassoon
Good. I, too, am grateful that we have nailed that one.
On the other questions raised by the noble Lord, Lord Eatwell, there is first this difficult issue about permissible questions and specifically questions of gender and race. They are made particularly difficult by the recent judgment of the court in relation to motor insurance. This issue is dealt with elsewhere and not in the Bill, which is solely focused on the transmission of information in the context of underwriting risk. It is not part of the scope of the Bill to discuss questions of discrimination or equalities legislation—nor should it be.
On the definition of consumers and micro-businesses, we discussed informally last week what would happen with respect to the insurance of the foot of a ballet dancer or a footballer. Maybe we could call this the “David Beckham’s foot” question. The Explanatory Notes on Clause 1 define a consumer as,
“an ‘individual’ who is acting wholly or mainly for non-business purposes. Thus the consumer must be a natural person, rather than a legal person (such as a company or corporation). The definition expressly provides for mixed use contracts”—
for example, the insurance for a personal car that is sometimes used for business travel to be defined as a consumer insurance contract. It means that the Bill will not apply to individuals purchasing insurance that is mainly for purposes related to their trade, business or profession, which would clearly be the case in some of the examples that have been discussed.
Lastly, on the cost of insurance, HM Treasury has not made an estimate of the impact of the Bill on insurance premiums. However, we have estimated that the net impact will be savings for the industry—that is, when we take account of the initial training costs and the savings as a result of fewer FOS complaints among other factors. On the basis that the industry should have net savings from this Bill being enacted, there is absolutely no reason to believe that there should be any additional cost passed on to consumers. In relation to the overall cost of insurance, these are relatively small marginal costs but ones that would impact favourably—that is, downwards—on insurance costs.
Lord Eatwell
I should perhaps explain the point about cost. Given that the catch-all clause from the Marine Insurance Act 1906 is removed, necessarily the range of risks to which the insurance company is exposed will be greater. Given that, it is likely that the premium charge will be greater. That was the point that I was making.
Lord Sassoon
My Lords, I do not believe that the range of risk will be any greater. Under this Bill, the range of risk to which the insurers are exposed will be brought in line with the current industry best practice and the standards to which insurers are held under FSA rules and by the FOS. There is no extension of the range of liabilities; there is merely—this is an important “merely”—an alignment, a clarification and an important legal codification of where the duties lie at the point at which the insurance contract is taken out. There is also clarification of the remedies—the remedies that are already applied by the FOS—should a misrepresentation occur. So, yes, the position under the law will change from that of the 1906 Act, but in substance the Bill will put insurers in a position that they are already in under current practice. Therefore, I would not accept that there is a greater range of liabilities and costs to which the insurer is liable; if anything, as I have said, there will be a modest saving because of the clarity that the new architecture will bring.
I have gone on at some length in response to the important questions that have been raised. I will sweep up anything else that I have not had the chance to cover and get back to noble Lords in good time ahead of the Special Public Bill Committee. I hope that I have, nevertheless, responded to as many points as I can this afternoon. I look forward to further discussion in the Special Public Bill Committee in due course.
Banks: Cheques
Lord Eatwell Excerpts(13 years ago)
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Lord Sassoon
My Lords, we are straying a bit from the rather important and focused question of cheques and the Payments Council, which those other forms of payment extend rather beyond. The critical thing is that no decisions are to be taken precipitately. As I have said a couple of times, the banks recognise what they have to do. This issue will remain a matter of considerable public focus, not least because the Treasury Committee in another place recently announced that it is reopening its own inquiry into the future of cheques. The issue will remain very much in the public eye and the pressure will be on the banks and the Payments Council to come up with a solution that works for the whole country.
Lord Eatwell
My Lords, the Minister said just now that it was the Government’s view that cheques should not be phased out until suitable new arrangements have been made. Can he tell us what criteria the Government will use to judge the suitability of any arrangements? If those criteria are not met, will the Government require that cheque payments be maintained?
Lord Sassoon
To those noble Lords who were listening to some of my previous answers, forgive me for repeating myself: the criteria which the Payments Council itself put forward and which the previous Government welcomed back in December 2009—I echo that welcome—were that the new system had to be generally available, generally acceptable to its users and widely adopted. There also has to be, in the view of the Government, a paper-based system. Those are the criteria that have been set and we are making sure that the Payments Council sticks to them.
EU: Financial and Monetary Co-ordination
Lord Eatwell Excerpts(13 years ago)
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Noble Lords
Public Expenditure: Reserve
Lord Eatwell Excerpts(13 years, 1 month ago)
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Lord Sassoon
Yes, indeed. As ever, my noble friend Lord Newby gets it absolutely right. Fiscal discipline is absolutely the watchword of this Government. I should say that the Armed Forces will get all the expenditure that they need in relation to net additional costs of military operations in Libya and elsewhere, but that is the exception to the rule.
Lord Eatwell
My Lords, before answering my question, perhaps the noble Lord could tell the noble Lord, Lord Newby, what impact the threatened downgrading by Standard & Poor has had on the funding of US debt. I am sure that I could help the noble Lord by telling him that its impact was nil. Will the noble Lord tell us what criteria the Treasury uses to judge whether events merit using the reserve and, given those criteria, would an increase in unemployment of 100,000 or 250,000 fall within the rules?
Lord Sassoon
My Lords, first, in relation to this discussion about borrowing costs, I am pleased to say that as of last week the UK’s 10-year borrowing costs, the benchmark for our gilts, hit practically the lowest that they have ever done, while the margin we pay in relation to the German bund has hit its best position since the general election. We absolutely must do these things to make sure that our interest rates remain low. As to how the reserve operates, I am happy to copy to the noble Lord the published rules that the Treasury uses. However, they are for consideration only in exceptional circumstances and would not be linked to the sorts of factors that he sets out.
Fraud: Staffing Levels
Lord Eatwell Excerpts(13 years, 1 month ago)
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Lord Sassoon
I am grateful to my noble friend for bringing up that specific issue. Of course the question of local coverage is important. I will do as he suggests and take that back to my ministerial colleagues and to the management of HMRC.
Lord Eatwell
My Lords, the Minister will be aware that many of the organisations involved here, especially the FSA, have suffered serious and debilitating rates of staff turnover in the past few months—in part explained by the uncertainties associated with the reorganisation of financial regulation and management. A major source of that uncertainty has been that the Government’s Bill to change the status of the FSA and associated organisations is at least four months late. When will the Government bring this legislation forward? Why did they not get on with it and end the uncertainty?
Lord Sassoon
My Lords, I suppose it is my fault for raising the FSA in my Answer, even though it is not a government agency and therefore, more than the other bodies we have been talking about, manages its own affairs. I would not for one moment, though, agree with the noble Lord’s assertion about the state of staffing at the FSA, which continues to do an important and extremely difficult job—albeit within a flawed regulatory structure. We have been through rounds of consultation. If we brought the legislation forward too quickly, I would be criticised about the lack of pre-legislative consultation and scrutiny. It is coming forward with due speed because, as the noble Lord recognises, this is a big mess that we have to clean up, we have to get it right this time, and we will do so.
EU: Financial Management
Lord Eatwell Excerpts(13 years, 2 months ago)
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Lord Sassoon
My Lords, I am very grateful to my noble friend for recognising the practical steps that the Government are taking to get round this issue. I very much respect his many years of involvement in European issues. We are working very practically. Only next week, my honourable friend the Economic Secretary is meeting the three Commissioners who have responsibilities for the budget and the audit of the budget. She plans to meet the Court of Auditors and she has met the one and only state Minister who is solely responsible for the management of EU funds. We are very much on the case in making sure that EU funds are handled in a much simpler and transparent way in the future so that control can be improved.
On the question about a debate, I shall take that suggestion on board. In another place, I believe they have a debate in committee which normally takes place in January or February before ECOFIN considers the annual discharge. We shall consider that suggestion.
Lord Eatwell
In his first answer to the noble Lord, Lord Campbell of Alloway, the Minister referred to the development of the process of financial regulation. As that term usually applies to regulation in the private sector, I was a little unfamiliar with its use in respect of the public sector. Can he explain what practical measures of financial regulation are relevant in this case?
Lord Sassoon
My Lords, I am not responsible for some of the curious terminology which the EU uses, but I believe that financial regulation is the term it uses in this context. The relevant issue about which the Government are concerned is reducing the administrative burden on how expenditure is handled, particularly at member state level. We are worried about some specific questions: the proposal, for example, that loans might be used by the Commission to purchase EU buildings, which is something that the Government oppose; and the question of introducing a concept of tolerable risk of error within the accounting framework, which we oppose. I said before but I will say again that we want to push for much greater transparency in how assigned revenue is used. A host of issues come under that heading, but I cannot be responsible for the terminology.
Economy: Government Policies
Lord Eatwell Excerpts(13 years, 3 months ago)
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Lord Eatwell
My Lords, this has been a fascinating debate, enhanced by excellent maiden speeches from the noble Lord, Lord Hussain, and the noble Baroness, Lady Stedman-Scott. Reflecting on what was said by the noble Lord, Lord Lawson, in his customarily elegant introductory speech and on the remarks of many noble Lords opposite, it occurred to me that the economic policies being pursued by the Government may be characterised as good—good politics, that is.
Two elements of the Government’s stance bear the mark of good politics. First, it is always a good idea to have a scapegoat. We have today heard numerous references to the so-called “economic mess” inherited by the Government and to the “record deficit”. With a good scapegoat, you can justify almost anything. It is good politics. Secondly, it is good politics to inflict the maximum pain on the electorate in the first years of a new Government and save up all the sweeteners for the 18 months or so before an election, when the Government can triumphantly declare deliverance from the misery that they themselves have created. All this is good politics, but it is rotten economics.
On the scapegoat point, noble Lords might have noticed that yesterday in the Budget the Chancellor admitted that the UK debt ratio will peak at 71 per cent. I wonder how many noble Lords were puzzled by that statement. How could that be when there is purportedly such an awful financial mess and so-called record deficits that our debt ratio will peak at a level lower than in every other G7 country other than Canada, and at a level lower than in Germany when it entered the crisis? However, let us not go into another debate about debt ratios, use silly expressions such as Britain being on the brink of bankruptcy, or make foolish comparisons with Greece, Ireland or Portugal.
The scapegoating approach is rotten economics, not because the Government convinced themselves of this nonsense but because they have convinced the markets and business, too. By their own politically advantageous hysteria, the Government have, as my noble friend Lord Myners noted, destroyed business and consumer confidence. It is not surprising that the OBR revealed yesterday that business investment growth is down and has locked Britain into a bond-market straitjacket from which it is now almost impossible to escape without abandoning the scapegoating slogans. It is good politics, but rotten economics.
On the timing of sweeteners and elections, unfortunately that is rotten economics, too. The problem is that you cannot be sure that the economy will have recovered in time to deliver the goodies. As the Bank of England’s Monetary Policy Committee minutes published yesterday record, it is,
“not yet clear that the weakness in output growth seen in the latter part of 2010 would prove temporary, particularly in light of the latest indicators of a further weakening in consumer spending”.
That is the Bank of England’s view. This is before the savage government spending cuts hit the economy next month.
The low growth and increased unemployment that the Government’s policies have produced have, as my noble friend Lord McKenzie, also pointed out, cut projected tax revenues for the next five years. I repeat; they have cut revenues for the next five years, so there will be a lot less to give away. The fall in revenues and the consequent increase in government borrowing revealed in the Budget are an indication that we may have entered a terrible downward spiral in which higher taxes and spending cuts result in low growth and unemployment that in turn result in lower revenues, higher welfare payments and a growing deficit—exactly the scenario painted in the OBR’s economic report. That is what the noble Lord, Lord Higgins, should be afraid of. Instead of falling, borrowing is rising.
However, the real failure of this budget is the subject of today’s debate—the failure to promote the rebalancing of the economy that is necessary to enable Britain to grow its way out of recession, and out of deficit. Consider the measures that the Chancellor claims will create growth. Research and development tax changes sound good, until you realise that these will benefit just 7,000 out of the 4.8 million small firms in this country. The entrepreneurs’ relief sounds good, until you realise that the benefit will go to just a few hundred people. The new apprenticeships that will reach 12,500 young people sound good, until you realise that 60,000 young people have become unemployed in the past year alone, adding to the 1 million young people currently unemployed. The enterprise zones sound good—until one looks at all the academic evidence that demonstrates that they are the most expensive means available of creating jobs, because so many of those jobs would have been created anyway. Enterprise zones are just a neat way of avoiding taxes—perhaps in Cornwall, too.
What of the cuts in corporation tax and fuel duty? The OBR's verdict is that the effects will be “minimal”. No wonder, since the cut in corporation tax has been paid for by cutting investment allowances. How stupid is it to take from companies that invest and hand out the money as a tax cut to all companies, whether they invest or not?
The OBR's verdict on this Budget for growth is that:
“We do not believe that there is sufficiently strong evidence to justify changing our trend growth assumption in light of policy measures announced in Budget 2011”.
That is it: no change.
The real damage to the hope of rebalancing the economy is to be found not in the failure of the Budget but in the announcement on the day before that inflation was at 5.5 per cent, and in the Government’s admission that inflation is likely to stay that high for the rest of this year, and to be higher than previously forecast for the next five years. That point was emphasised by the noble Lord, Lord Griffiths.
This country has one goose that can lay rebalancing golden eggs: British manufacturing, as the noble Lords, Lord Renton, Lord Empey and Lord Paul, and the noble Baroness, Lady Hooper, noted. Over the past year, manufacturing has performed very well, with rapid export growth stimulated by the sharp fall in the value of sterling. However, the competitive advantage derived from the devaluation is being eroded by our relatively high inflation rate. Moreover, the high rate of inflation is likely to bring forward the day when the Monetary Policy Committee raises interest rates and seeks to reduce inflation by raising the exchange rate, weakening further the stimulus to exports. We have only one goose and we are in danger of killing it.
The danger derives not just from the Government's failed macroeconomic strategy, important though that failure is, but from the timidity of the growth strategy laid out in The Plan for Growth published yesterday. The essence of the plan is summed up under the heading: “What the Government will do now”. The main headings are: “minimise regulatory burdens”, “reform the planning system”, “improve the corporate governance framework”—by removing the need for audits—“provide finance for new and growing businesses”—by small tax incentives—“further improve innovation in the UK”—by small but useful measures—and, “improve competition”.
The clear theme is to reduce the role of government—something that surely pleases the noble Lord, Lord Ahmad—and create a slightly biased playing field relative to our major competitor countries. This is not what Britain needs, as my noble friend Lord Haskel pointed out. We do not need a biased playing field; we need a new game, as the noble Lord, Lord Bates, suggested. The rules of the new game can be learnt readily by studying the success of other economies—something that the noble Lord, Lord Risby, might care to do. What is needed is a secure, plentiful and stable flow of finance to fund industrial investment, together with a structure of corporate governance that fosters a commitment to long-term innovation and investment. Neither of these conditions is present in Britain.
Our fundamental problem is illustrated by the fact that more than 70 per cent of purchases and sales of industrial stocks and shares over the past year have been by day traders and short-term investors. British industry is owned by people to whom the long-term future of a company is irrelevant. The mantra that the duty of the board of a company is to pursue the best interests of the shareholders is vacuous when the shareholders change by the hour. Instead of secure sources of finance for industry, we have a fragile banking system that is overly dependent on short-term wholesale funding and in which a significant proportion of financial innovation is driven not by the demands of economic efficiency but by the desire to avoid taxes and/or the strictures of financial regulation.
Of course, better regulation would not be enough to secure the industrial financing that we need. That will require a fundamental reform of the UK's financial sector that goes far beyond the terms of reference of the Independent Commission on Banking. The reform should encompass not just the welcome creation of the green investment bank but the creation of an industrial investment bank, as called for by my noble friend Lord McFall, with the funding muscle to make a real difference to Britain’s small and medium-sized industries—the industries from which innovation and jobs predominantly come.
Nothing so radical was evident in yesterday’s Budget. Indeed, there was nothing radical at all. Whether there is fuel in the tank is debatable, but everyone can see that all the tyres are flat. That is because the other crucial component of a growth strategy is missing. The Government have chosen to throw away the ignition key. What will ignite growth is demand. Investment will take place only if there is the prospect of stable, growing demand. Without prospective demand, it does not matter how cheap or reliable funding might be, how generous the tax breaks or how innovative the technology. Without prospective demand, you simply stand to lose your money, and there lies the central failure. By consciously suppressing demand, the Government are consciously suppressing growth. That is why growth is down—not just now but for the foreseeable future. The noble Lord, Lord Lawson, described this as being least needed economically. I must say that I prefer the noble Lord of the Lawson boom rather than the one of fiscal masochism.
The OBR’s forecasts show growth recovering after 2013. However, one should not be misled, as the noble Lord, Lord Newby, has been. The OBR made it clear that its medium growth forecasts are based on the forecasts of potential growth—that is, on capacity and not on demand for that capacity. Only if there were some magic fairy that ensured that capacity was fully utilised would those growth rates be attained.
There is no magic fairy. This Chancellor has undermined Britain’s recovery from the consequences of the international financial crisis. Worse than that, by making the wrong choices at the wrong time he has weakened the growth prospects of the British economy for years to come. The characterisation of this Budget as a “Budget for Growth” is a title worthy to stand alongside Orwell’s Ministry of Truth. It was a Budget for stagnation. However worthy the micromeasures, the verdict remains that of the Office for Budget Responsibility—no impact on long-term growth. No impact at all.
Financial Crime: Legislation
Lord Eatwell Excerpts(13 years, 3 months ago)
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Lord Eatwell
My Lords, “Dictum meum pactum”—“My word is my bond”—has been the motto of the London Stock Exchange since 1801. It embodies an important statement about the role of trust in the operation of markets—not just financial markets but the capitalist economy in general. Trust is a fundamental component of the operation of any successful capital economy. In the absence of trust—trust in the financial system; trust in the rule of law; trust in the ultimate fairness of economic and social organisation—the efficient operation of a market economy is seriously compromised.
The importance of today’s debate does not rest on the specifics of legislation on bribery, tax avoidance, corruption and money-laundering. After all, all these activities have a very different legal status. Bribery is not yet illegal in the manner that Parliament intends, and the Minister must explain why the declared will of Parliament is being frustrated by the Government’s persistent delay in introducing the Bribery Act. The noble Lord, Lord Hodgson, should recall that just the same sort of fears as those that he expressed preceded the introduction of anti-insider trading legislation.
Tax avoidance is not illegal—that would be evasion—but it is clearly undesirable, and I applaud the Government’s request to Graham Aaronson to lead a study as to whether to establish a general anti-avoidance rule.
Corruption is in principle illegal but in practice not as illegal as it should be. For example, the Dodd-Frank Act that reforms US financial regulation also requires US-listed companies involved in extractive industries anywhere in the world to report all payments that they make to Governments project by project and country by country. Those that fail to do so will be excluded from US capital markets. Will the Minster tell us whether the Government would support a similar law here, and will the Government legislate to ensure that reporting failures identified in US legislation, whether at home or abroad, result in exclusion from the London financial markets as well?
Money-laundering is illegal, principally because its very definition relates to criminal or terrorist activities. What unites all these activities, legal and illegal, is that they destroy justice and fairness, and, by destroying trust, they weaken both our society and our economy. Particularly today, when the many are suffering from the greed and folly of the few, restoring trust should be at the very heart of the Government’s legislative programme.
A persistent argument—we have just heard it again—against legislation in all these areas, with the possible exception of money-laundering, although perhaps not, is that an honest economic environment will be an uncompetitive one: contracts will be lost to the foreign firm willing and able to grease a sufficient number of palms. It would be a serious error to fall into the trap of the “Everyone’s doing it, therefore so must we” argument. Condoning illegality, dishonesty or even just sharp practice is no foundation for building a strong economy or a vibrant international financial centre.
Indeed, one characteristic of the British economy which is an unambiguous success story is the recent history of financial innovation. However, Britain’s success has a dark underbelly. The very innovation that has multiplied the volume and sophistication of financial transactions has also multiplied the opportunities for money-laundering and tax evasion. A significant proportion of all financial innovation is driven not by the demands of economic efficiency but by the desire to avoid taxes and/or the strictures of financial regulation. In such an environment, bribery and corruption follow not far behind.
As a world financial centre, the UK has a peculiar responsibility to maintain the highest standards of transparency and accountability, and to have the very strictest legislation covering financial transactions and taxation. The world of finance cannot operate without trust. Lose trust and London is finished.
If a general anti-avoidance rule is to be effective in limiting tax avoidance, then fundamental structural reforms are required to the tax system. Complexity and obscurity in taxation are the mother and father of tax avoidance; simplicity and clarity are the enemies of the cheats; and because even simplification will not eliminate avoidance, in the interests of fairness and trust there should be a minimum tax—a rate that no accounting artifice can reduce.
We must not be complacent. Ten years ago Transparency International’s corruption index ranked Britain tenth among the countries of the world, with Finland and Denmark being the least corrupt. In 2010, Denmark was still ranked least corrupt—Finland had slipped to fourth—and our ranking had plummeted to twentieth. The abuse of economic power undermines the economy and destroys trust, and it destroys Britain’s reputation as an international financial and trading centre. Practices that are unfair divide and weaken. That is why effective legislation to tackle bribery, tax avoidance, corruption and money-laundering is of far greater value than the monetary value of the offence. It is also why the Government’s failure to implement the Bribery Act is doing so much damage to Britain’s economy and reputation around the world.
Independent Commission on Banking
Lord Eatwell Excerpts(13 years, 4 months ago)
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Lord Sassoon
My Lords, I certainly agree with my noble friend. He has been thinking about these things for many years and I very much value his thoughts on them. I absolutely agree that the UK wants to do the right thing, but the remit that the commission has been given also reflects the international and global contexts, of which we have to be mindful. I wait with interest to see what the commission says and repeat that I do not want in any way to prejudge its thinking.
Lord Eatwell
My Lords, the Statement that the Chancellor of the Exchequer made on bankers’ bonuses contained a peculiar sentence about the Independent Commission on Banking. It said:
“I should make it very clear that nothing that I will say today about the settlement that we have reached with Britain's banks … in any way prejudges the outcome of the commission”.—[Official Report, Commons, 9/2/2011; col.310.]
What was peculiar about this sentence was that he was answering a question that nobody had asked. Will the noble Lord confirm that in recent weeks there have been threats of resignation from the commission if its remit is in any way constrained?
Lord Sassoon
My Lords, I am attacked one week for not answering questions that have been asked, and now my right honourable friend is being queried as to why he answers questions that he has not been asked. He wanted to make it absolutely clear, which he did in the Statement on Project Merlin, that nothing there pre-empted or in any way cut across the independent remit of the banking commission. I think the position remains clear.
Banking
Lord Eatwell Excerpts(13 years, 4 months ago)
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Lord Eatwell
My Lords, I am grateful to the noble Lord for repeating the Statement made by the Chancellor of the Exchequer in another place. What a pathetic performance—not, I hasten to add by the noble Lord, who read very well, but by the Chancellor. It was described this evening by “Channel 4 News” as lying,
“somewhere … between charade and sham”.
This was a Statement hatched in a smoke-free room in Downing Street, probably not over beer and sandwiches but maybe over smoked salmon and champagne. It sees the unwelcome resurrection of that distinguished and unlamented figure of the 1970s, Mr Solomon Binding. It is not only in their policies that this coalition Government seek to return Britain to the past; they are returning to the old methods of back-room deals masquerading as proper governance.
Before turning to the fundamental issues raised by the Statement, could the noble Lord clarify some of the aspects of the agreement, as published by the banks? The agreement states that there is,
“a commitment by the Government to the stabilisation … of the relationship between the Government and the banks”.
What exactly does that mean? Moreover, the agreement states that the Government accept,
“the right of self-determination by bank boards”.
What could that possibly mean, other than that the Government agree to let the banks do whatever they want?
Let us turn to the fundamental question: what is this for? More importantly, how will it help the recovery of the UK economy? Take first the question of bonuses. The essential problem with bonuses, apart from the sheer immorality of the quantum of money involved, has been that they embody perverse incentives. They encourage excessive risk-taking and reward mediocrity. They absorb resources that could be used to rebuild bank balance sheets and expand lending to the real economy. They attract to an essentially non-productive activity people with skills that could be deployed to perform productive tasks elsewhere in the economy—less financial engineering, more real engineering. Indeed, by their grotesque distortion of pay relativities, bank bonuses devalue the hard work of talented people in the public sector, in manufacturing and industry, and in non-financial services.
What now is to be done about bonuses, over and above the measures already being enforced by the European Union, such as the requirement that bonuses be paid predominantly in shares? In the Statement the Chancellor claimed:
“Britain has the toughest and most transparent pay regime of any major financial centre in the world”.
Will the Minister confirm that this statement is incorrect? Will he confirm that the US banks in receipt of TARP funds not only have to provide more wide-ranging disclosure of the details of remuneration, but have to do this for past years, too? This is all detailed in the recent report on bank bonuses by Mr Andrew Cuomo, Attorney-General of the state of New York. Finally, in the section of the agreement on bonuses, we find the wonderful clause 3.5, which is destined to have enduring fame as the ultimate get-out clause:
“Nothing in this statement derogates from the obligation of the banks, and their boards and remuneration committees, to manage pay policy in a way which protects and enhances the interests of their shareholders”.
In other words: “Get lost, Mr Osborne, we’ll do what we want”.
Given that nothing of any matter has been achieved on bonuses, what of the much trumpeted agreement on lending? The agreement clearly states that any increased lending—any of it—must be on commercial terms. If it is on commercial terms, would it not be done anyway? After all, that is what the banks are supposed to be for. We are told that the banks will increase their gross lending to £190 billion in 2011. However, this is a deception, for gross lending is not the relevant figure. What matters is net lending—new lending minus repayments. It is net lending that defines the amount of new spending power funding the investments of British industry. If gross lending increases but repayments increase too, the net benefit to Britain will be negligible. Will the noble Lord tell us: is there an agreed target for a net increase in lending? Will refinancing of current financial facilities be deemed to be new gross lending or not?
Then there is the commitment to a new £1.5 billion business growth fund, building up,
“over a number of years”.
Not too much too soon. That is less than 1 per cent of current gross lending and, moreover, it is not at all clear that this will be new money. There is nothing at all in the agreement about the cost of credit, other than the reference to “commercial terms”. However, ask any small business and they will tell you that it is the price of credit, rather than its availability that is often the problem. It is so easy to avoid making a loan by pricing it out of the reach of the small business borrower.
We are told in the agreement that there is to be an appeal mechanism for those denied credit, managed by “a senior independent reviewer”. Who is this reviewer to be? Who will appoint him or her? What will be the terms of reference? What sanction will there be on those banks that the reviewer deems to have failed in their commitment? Will the reviewer be able to assess all the terms of the credit, including the price? What arrangements have the Government made for the publication of the banks’ lending data to include data on credit refused, so that lending behaviour can at least be subject to some public scrutiny?
This is not the way to make economic policy. Three facts must be obvious to all. First, this crisis was inflicted on the economy by the profligate lending policies of the banks. Secondly, a sustainable recovery of the British economy requires a steady secure flow of affordable credit to British industry. Thirdly, to attain this goal there must be a fundamental reform of banking in this country. Those three propositions will be shared on all sides of this House, other than probably on the coalition Front Bench. This Statement addresses none of those three challenges. It does nothing to limit profligate lending—indeed, I suppose it tries to encourage it—it does nothing to secure a steady flow of affordable credit, and it is irrelevant to the cause of fundamental reform. Let us hope that this tawdry so-called deal will stimulate Sir John Vickers and his committee to address these issues with enhanced vigour.
The Government’s overall policy towards the banks was summed up perfectly in today’s Financial Times, which stated:
“With much noisy showmanship, the Conservative-Liberal Democrat coalition is puffing demands that are little more than cosmetic. A slight change in a levy on bank balance sheets and a commitment to greater small business lending and transparency in bankers' pay may play well politically. But they are no way to fix the banking system”.
I agree.