Public Service Pensions Bill

Lord Eatwell Excerpts

Wednesday 9th January 2013 Lords Chamber

[Lord Newby]

My Lords, this is an extremely long group of government amendments. I preface my remarks with an apology to noble Lords who have taken an interest in the Bill. The letter that I circulated about government amendments was done at an extremely late stage. There is nothing Machiavellian about that: it flows directly from the fact that we are having this debate two days after the end of the Christmas Recess. The Bill team, myself and others were not working over Christmas to the extent that would have permitted us to get the amendments down earlier and inform noble Lords about them. However, I hope that in most cases, if not all, noble Lords will find them helpful and so will forgive me for that.

I start by noting that I will not move government Amendment 3, which relates to Northern Ireland civil servants. On reflection, that amendment is considered unnecessary because Amendment 9 to Schedule 1 does what is needed to remove Northern Ireland civil servants from the scope of the Bill.

In line with the recommendations of the noble Lord, Lord Hutton of Furness, the Bill was drafted to provide a legislative vehicle for the reform of all public service pension schemes in the UK to make them fairer and sustainable. However, legislative competence for some of the pension schemes is devolved to the Administrations in Northern Ireland, Scotland and Wales. We have always been clear that the devolved Administrations would have the final decision as to whether or not the Bill should apply to their devolved pension schemes.

On 26 November, the Northern Ireland Executive announced their decision to bring forward their own legislation to reform the pension schemes of their public servants. These schemes will be based on the recommendations of the noble Lord, Lord Hutton. This will affect schemes relating to Northern Ireland civil servants, the devolved Northern Ireland judiciary and, in relation to Northern Ireland, local government workers, teachers, health service workers, fire and rescue workers, and police and public bodies whose pension provision has been devolved.

On 28 November, the Scottish Executive announced their decision to exclude the small schemes for which they have legislative competence from these reforms. This will affect a small number of members of the junior Scottish judiciary and some Scottish public bodies whose pension provision has been devolved. The Bill will still make provision for Scottish schemes for which Scottish Ministers have executive, but not legislative, competence. These are schemes relating to teachers, health service workers, firefighters, police and local government workers in Scotland. Consequently, I beg to move these amendments that will collectively ensure that the Bill is disapplied from those pension schemes for which the Northern Ireland Executive and the Scottish Government have legislative competence.

Amendments 102 and 109 relate to the Scottish Government’s wish to extend a power in the Police and Fire Reform (Scotland) Act 2012 to enable pension and other benefit schemes to be made for Scottish police cadets and special constables. This will be done by way of an order made under the Scotland Act 1998 which will be laid before Parliament shortly and is expected to commence in 2013. In anticipation of that order, these amendments will ensure that these pension schemes will be included in the reforms legislated for in the Bill. As such, the new pension schemes made for Scottish police cadets and special constables will be reformed in the same way as the other public service pension schemes in Scotland.

The amendments also ensure that any compensation or injury benefit schemes made under the extended powers will not be subject to the reforms. This is consistent with the Bill’s treatment of compensation and injury benefit schemes in other areas of public service, such as the main police schemes. I am sure that noble Lords will agree that such equitable treatment is fair and proper, and I beg to move these amendments to the Bill.

[Lord Eatwell]

My Lords, I am grateful to the Minister for introducing his amendments, and for his apology with respect to their late arrival. It is of course understandable that this comes after the holiday period, although I was slightly taken aback to hear just now that the Northern Ireland announcement was made on 26 November. What has been happening since then? Christmas started a month later. I am very surprised that we now have Northern Ireland effectively removed from the Bill on the day before Committee, and the House not being informed about this when the team apparently knew of it a month and a half ago.

Before commenting on these amendments, I myself apologise to the House for being unable to be here for Second Reading. I am grateful to my noble friend Lord Davies for having stood in on that occasion.

In considering the Bill most broadly, the first thing that strikes one is the list of professions under Clause 1. These people are the very bedrock of our society. It is crucial to ensure that they have the best conditions, including the best pensions, that are affordable. At the same time, we have to recognise the pressures that an ageing society places on pension provision. The key to squaring the circle is trust; this is going to be a theme in discussing all the amendments to come. We need to incorporate into the Bill a framework that provides clear assurance so that people who perform the public services on which we all depend can face the future with confidence. That means that the Government must place clear, unambiguous commitments in the Bill—not vague promises of Ministers—about what they may really intend. Ministerial promises are simply not good enough, because these measures are intended to be long-term. In the long term, Administrations change and no Administration can bind its successor, so in the long term ministerial assurances are virtually worthless. But if future Administrations are faced with clear primary legislation, then change can be made only by returning to Parliament.

It does not assist in the building of trust when the Government table well over 100 amendments on the day before Committee. Most of these—although not all, as the Minister pointed out and I will demonstrate—arise from the refusal of the Northern Ireland Administration to pass a legislative consent Motion in respect of the Bill. In effect, as we have heard, Northern Ireland is being written out of the Bill. It would be interesting to know what Northern Irish colleagues in this House feel about this. Moreover, given that an important objective of the Bill is to manage the cost of pensions, what implications does this last-minute decision have for the public finances? Presumably this will increase long-term deficit projections—by how much?

More importantly, what negotiations are under way with the Northern Ireland Administration about the future shape of pensions in Northern Ireland; and, indeed, with the Scottish Parliament about the future shape of pensions in Scotland; and, indeed, with the Welsh Assembly, which we are told is still to consider the matter? This Bill has passed the Commons and we do not even yet know who is to be included in it because the Welsh Assembly has not reached its decision.

I am astonished that we have this brief note, circulated the night before, with amendments. We have this brief introduction from the Minister when the Bill has been changed in such a radical and fundamental way. What are the Government going to do now about both Northern Ireland and Scotland? What are they going to do about Wales if the Welsh also refuse to pass a legislative consent Motion? Given that the terms of devolution are different in Northern Ireland, Scotland and Wales, the result of all this is going to be a confused plethora of pension conditions throughout the UK—exactly the sort of confused melange that the admirable report by my noble friend Lord Hutton sought to eliminate. Indeed, it was my noble friend’s recommendation 24 that the Government should introduce primary legislation to adopt a new common UK legal framework for public service schemes. This is clearly what the Government are failing to do.

The reference to Scotland is important, because not all the amendments in this group refer solely to Northern Ireland. The Minister referred to Amendment 96, to a “holder of devolved office”. That therefore applies to Northern Ireland and Scotland. Interestingly, the noble Lord did not refer to Amendment 148, which, in defining what a “devolved office” might actually be, excludes Wales. What will happen to Amendment 148 if the Welsh now refuse to accept being included in national procedures? We really ought to be told to whom this legislation is actually going to apply.

Amendments 102 and 109 expressly include Scottish schemes, established under the Police and Fire Reform (Scotland) Act 2012, within the scope of the Bill. Amendment 139 on the approval of new schemes again refers to all devolved Administrations. What does that mean? It certainly does not mean what is defined by Amendment 148, because we do not know what the Welsh are going to do.

What we have here is a bit of a mess. The Minister must tell us how this mess is going to be resolved. How are we going to try to have some degree of consistency in public pension provision in which people can have confidence throughout the United Kingdom? We can go two particular ways. One is to attempt to negotiate an all-UK structure, which has the sort of simplicity and clarity that was suggested by my noble friend Lord Hutton. The Minister should then tell me what negotiations are proceeding to establish that common UK structure, given the devolved responsibilities of the devolved Governments and Assemblies. We should be completely clear that pensions in Northern Ireland are different from pensions in Scotland, different from pensions in Wales and different from pensions in England, and that the relevant authorities have responsibilities for their particular jurisdictions. However, of course, we do not have that. In Scotland, we have a mixture: some pensions are the responsibility of the Scottish Parliament and some are not.

Our Amendment 28A—which noble Lords may have noticed is buried in this group so that it is almost undetectable, but it is there, although the noble Lord did not deign to refer to it in his opening remarks—seeks to make some sense of this mess by recognising that regulations relating to local government workers in Scotland should require the approval of the Scottish Government. I am well aware that local government pensions are a reserved power under the Scotland Act. In the past, as the noble Lord said, Scottish Ministers have had executive responsibility for making regulations for public service schemes, but they require Treasury approval. But these have typically concerned minor matters. There has not been any big issue which has been likely to bring about a significant difference of opinion between the Scottish Parliament and the Treasury.

However, this Bill completely transforms the situation. It is a framework Bill that will be followed by regulations that are very substantial indeed. Moreover, the local government workers’ schemes in Scotland, like those in England, are funded schemes. It is important, given the extensive powers of interference conferred on the Treasury by this Bill, that the Scottish authorities have appropriate responsibility for decision-making on those funded schemes.

Since, as I understand it, the UK Government have not used their reserve power on Scottish local pensions in the past—in other words there has not been any disagreement in the past, although I am quite willing to stand corrected as it is quite difficult to research these things—it is surely inappropriate to do so now. It is surely right that the Scottish authorities should be responsible if we are going to go for this devolved structure of pensions and give up on the idea of my noble friend Lord Hutton’s proposal for a common UK scheme.

Far from being technical, this huge swathe of amendments raises major questions over the scope of this Bill and introduces complexity where there was once consistency. If the devolved Administrations are to have entirely separate schemes, so be it, but make it clear, rather than this hotchpotch of amendments and qualifications. If we are to have a Public Service Pensions Bill, not a “some people in the public service and some others not” pensions Bill, the Government must reach agreement with the devolved Administrations. They must bring back to this House a proper, comprehensive structure so that we can understand the relationship between those schemes that will obviously be national, such as the schemes for the Armed Forces, who are of course servants of the Crown, and those schemes which are to be devolved. If we are to have a common scheme, let us get on with the negotiations and bring the common scheme to this House. Last-minute changes as far-reaching as these are entirely unacceptable.

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[Lord Newby]

The distinction between the very small numbers that I have been talking about and the rest of the public servants in Scotland is that the rest of the public servants in Scotland are covered by the Bill. The schemes established under the Bill for public servants in Scotland were still negotiated in Scotland, but the framework for public sector pensions in Scotland, with the exception of those very small numbers, will be the same as in the rest of the UK. There is devolved power to the extent of the scheme negotiations within the framework of the Bill.

[Lord Eatwell]

In using the word “power” there, is the Minister aware that it will still require Treasury approval?

[Lord Newby]

I shall come to that in dealing with the noble Lord’s Amendment 28A. I did not fail to refer to it in any slight meant to the noble Lord. I thought that it was more courteous for me to allow him to make his case and then for me to reply to it.

Amendment 28A would change the current devolution settlement. I know how much importance many noble Lords across all sides of the House attach to devolution matters, but a Bill on the reserved matter of public service pensions is not, in the Government’s view, an appropriate vehicle for reworking the devolution settlement put in place by the Scotland Act 1998 or for rewriting the long-standing Sewel convention. I hope that I can explain what I mean by this.

Part II of Schedule 5 to the 1998 Act makes it clear that, with minor exceptions, this Parliament has exclusive competence to legislate for public service pensions in Scotland. This includes the local government pension scheme in Scotland. Requiring the approval of the Scottish Government in relation to reserved matters would run counter to the principles of the Sewel convention. In constitutional terms, approval of the Scottish Parliament in relation to primary legislation on Scottish local government pensions is not needed under the convention. Furthermore, as the Scottish Finance Minister told the Scottish Parliament on 28 November, the Bill does not contain any provisions,

“over pensions for local government, the national health service, teachers or police and fire staff—that would trigger the Sewel convention”.—[Official Report, Scottish Parliament, 28/11/12; col. 14014.]

I can reassure noble Lords that, although the Bill sets a legislative framework setting the parameters for pension scheme designs, Scottish Ministers have the freedom to decide on many of the details of scheme regulations relating to Scottish local government workers. This includes how generous the scheme is. The Treasury has not set a cost ceiling for any of the Scottish schemes. The cost of Scottish schemes will have to be met from the Scottish block grant. Furthermore, Clause 3 explicitly states that Treasury consent is not needed for Scottish local government scheme regulations. When pension regulations are made for the Scottish local government sector, the Scottish Government will design the terms of those pensions under the framework of the Bill, and will put them before the Scottish Parliament. That is how legislation on this topic falls to be dealt with under the devolution settlement. It would be a novel and unhelpful step to make the application to Scotland of legislation that is reserved to Westminster, subject to the prior approval of the Scottish Government in the way suggested by this amendment.

I hope that goes some way to explaining to the noble Baroness, Lady Donaghy, what the situation is in Scotland and why it is not for the Westminster Government to set out or agree the details of the schemes. It is for us to set out the framework and then, under the devolution settlement, for the Scottish Government to have negotiations that will lead to detailed scheme provisions.

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Moved by

[Lord Eatwell]

13: Schedule 1, page 23, line 21, at end insert—
“(d) the Defence Fire and Rescue Service”

[Lord Eatwell]

My Lords, I shall speak also to Amendment 15. These amendments concern the position within the pensions system of Ministry of Defence firefighters and police. Clause 9 provides that the normal pension age of a person under the scheme must be the higher of the person’s state pension age or the age of 65, but three categories of workers are exempted from this provision—fire and rescue workers who are firefighters, members of the police force and members of the Armed Forces. Paragraph 6 of Schedule 1 defines fire and rescue workers as being persons employed by,

“a fire and rescue authority in England and Wales … the Scottish Fire and Rescue Service, or … the Northern Ireland Fire and Rescue Service Board”.

However, none of this includes firefighters who work for the Ministry of Defence. This issue seems not to have been noticed in another place when the Bill was considered there. Amendment 13 would rectify this omission by including the Defence Fire and Rescue Service in the definition of fire and rescue workers. Amendment 15 does the same job with respect to Ministry of Defence police.

We should make it clear that we are not seeking to extend the exemptions provided under Clause 9 but merely to rectify what appears to us to be an oversight and to ensure consistency of treatment across the same profession. In my years in this House, it has always puzzled me that when very obvious oversights appear in the middle of the discussion of a Bill, somehow Governments of whatever party think it necessary to defend their original position as if it was an ultimate truth and not admit that occasional oversights are made.

Let us turn to the fire and rescue service. There are two aspects to the job of defence fire and rescue service firefighter. They work at home on domestic military bases and other MoD premises and they work abroad when they are deployed in war zones. In the UK, defence fire and rescue firefighters deal with fires, accidents and floods, and firefighters deployed to war zones deal both with fires and the general catastrophic aftermaths of conflicts. The nature of the work they do—I am sure that the House will appreciate its physicality—is very similar to, if not beyond, that to be expected of a domestic firefighter.

The oversight became evident when the Government were contacted by an MoD firefighter in relation to this issue. In their reply, the Government justified—I was going to say invented—their decision to exclude MoD firefighters from the exemptions in the Bill as follows. First, they said that firefighters are covered by the Principal Civil Service Pension Scheme, and so the benefit structure and contribution rates which apply to MoD firefighters are those of that scheme and not those of the Firefighters’ Pension Scheme. The Civil Service unions accepted an increase in the normal pension age to 65 for all staff joining since 2007 for that general Civil Service scheme. On that basis the Government claimed that MoD firefighters are already subject to the normal pension age of 60 or 65 and so the recommendation of the noble Lord, Lord Hutton, to adopt the new pension age does not apply. The final proposed agreement issued by the Government to the unions on 9 March 2012 includes transitional protection for PCSPS members so that any member who is within 10 years of normal pension age on 1 April will see no change when they retire. However, beyond that there is the proposed tapering arrangement. Although there are many similarities between local authority and MoD firefighters, the Government claimed that the terms of employment, as well as the roles performed, are not identical. Here the Government are correct—the roles performed are more arduous in the MoD than they typically are for domestic firefighters.

During the Second Reading debate, which I had the chance to read, the Minister said:

“The noble Lord, Lord Davies, asked about MoD firefighters. MoD firefighters are in the Civil Service Pension Scheme at the moment. They will have their pension age linked to the state pension age to ensure consistency within the scheme. The Bill does not move any groups from their current schemes. Indeed, these MoD firefighters have always had different terms and conditions from other firefighters. This already includes a pension age of 65 for new joiners as a result of changes implemented by the previous Administration”.—[Official Report, 19/12/12; col. 1585.]

I will make a number of points about the Minister’s statement. First, I am afraid that he misspoke. It is not true that the Bill does not move any groups from their current schemes—it does. Clause 28 closes public body schemes listed in Schedule 10, and the Government have the power to move people from those schemes to schemes established under Clause 1 or to create new public body schemes for them. It is not true that people are not moved from one pension scheme to another in this Bill.

Secondly, there is no reason why the Civil Service scheme rules cannot provide for a different retirement age for MoD firefighters as well as for police. Why can that not simply be put into the Civil Service pension scheme rules?

Thirdly, the fact that MoD firefighters have always had different terms and conditions from other firefighters does not mean that their retirement age should not be aligned with that of local authority firefighters in the light of the recommendation of the noble Lord, Lord Hutton, that uniformed services should have a normal pension age of 60. To quote the noble Lord:

“The exception is in the case of the uniformed services where the Normal Pension Age should be set to reflect the unique characteristics of the work involved. The Government should therefore consider setting a new Normal Pension Age of 60 across the uniformed services”.

MoD firefighters are uniformed, as are the MoD police.

Fourthly, as it stands, the MoD firefighters who have joined since 2007 come under the new rules established then and have a normal pension age of 65, while the rest have a normal pension age of 60. It is true that we on this side of the House, when in Government, introduced the change in 2007, but that was well before the report of the noble Lord, Lord Hutton. In the light of his recommendations, which we accept, all firefighters, including MoD firefighters, should have a pension age of 60.

Finally, in his interim report, the noble Lord, Lord Hutton, said:

“The current public service pensions structure was not designed for modern working patterns and has been unable to respond flexibly to changes in this area and to demographic change over the past few decades. This has led to … unequal treatment of members within the same profession”.

That is what the noble Lord, Lord Hutton, sought to correct. The position of the MoD firefighters is a prime example of the growth of unequal treatment which we now have the opportunity to correct.

It is unfair for firefighters who serve our Armed Forces to have to work for up to seven years longer than other firefighters, remembering that they can—and do—serve in war zones. I hope that the Minister will listen to these concerns, recognise that the physical demands on these firefighters are equivalent to or indeed greater than those on other firefighters, and accept this amendment.

Turning to Amendment 15, I will not repeat all the issues that apply to the MoD police. However, I remind the House that MoD police officers are required to carry weapons and wear body armour in many of the areas in which they serve. The physical demands on them are significantly greater than the demands made on most of our police officers. It is true that some of our normal police officers also carry weapons and wear body armour, although it should be noted that the MoD police often carry heavy machine guns. It seems to me that there has simply been an oversight. Will the Government not own up, say that there has been a slip or oversight here, and accept that MoD firefighters and police, as a uniformed service, should have a pension age equivalent to that of other uniformed services? I beg to move.

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[Lord Newby]

My Lords, these amendments seek to add members of the Ministry of Defence Fire and Rescue Service and the Ministry of Defence Police to the categories of “fire and rescue workers” and “members of a police force” set out in the Bill.

I would like to begin by setting out the current situation before responding to the proposals for change. First, as the noble Lord, Lord Eatwell, pointed out, members of these forces are civil servants who currently, and historically, have access to the Civil Service pension scheme. This scheme currently has a pension age of 65. The principle of working beyond 60 for the MoD fire and police services is already established and has existed for a number of years, while the retirement age for the police and fire services has been well below 60.

Secondly, we should remember that the Civil Service scheme is an extremely good pension scheme with benefits which are far beyond the aspirations of many in the private sector. The scheme has provisions in place to ensure that any individuals who face ill health can be provided with their pension early. Alongside this there is, of course, the option for individuals to retire before their retirement age on an actuarially reduced pension. The value of the Civil Service pension scheme is shown in the fact that DFRS and MDP staffing levels remain good and that individuals in this force have already taken employment on the basis of the package of terms and conditions currently in force. The Government do not believe that there are significant recruitment and retention issues associated with the continued use of the Civil Service pension scheme.

Thirdly, it is worth remembering that the employment status of those working in the Defence Fire and Rescue Service and the MoD Police is very different from those working for fire or police authorities. Members of the DFRS and the MDP are direct employees of the Secretary of State for Defence and their remuneration package is managed in a different way. The kind of changes that are suggested by the amendments would make most sense only as part of a fundamental restructuring of not only the terms and conditions of these forces but their roles and responsibilities and they way in which they are managed. They are currently part of a single scheme that is administered at a national level. There would be significant logistical and administrative difficulties in moving them to be part of a locally administered scheme. The Government do not believe that such a restructuring is a way forward.

Having said that, I should point out that, within the new Civil Service scheme, the flexibility will exist for the impact of the later retirement age to be mitigated for certain groups, should this be felt to be justified. This could, for example, be through fully funded early retirement or more generous early retirement factors.

As the noble Lord, Lord Eatwell, pointed out, these issues were not discussed substantively in another place and the amendments have gone down only in very recent days. However, I can give an assurance that the Government will give these matters extremely careful consideration between now and Report. We are very happy to meet members of the Ministry of Defence Police and the Defence Fire and Rescue Service if they would like to do that. I will be in a position to give a more considered response to movers of the amendments and to the House as a whole on or before Report. I therefore urge noble Lords to withdraw their amendment today.

[Lord Eatwell]

My Lords, I am grateful to the noble Baroness, Lady Harris, for her remarks. I rather pre-empted her discussion of Amendment 15 and I apologise for that. It was, after all, her sensible, balanced and valuable amendment to which we added our names rather than the other way around. I must, of course, accept the Minister’s offer of further consideration. In looking at further consideration, I urge him to put aside the canard of logistical and administrative difficulties. The phrase “logistical and administrative difficulties” is a wonderful excuse for doing nothing on all occasions. As an academic, I recognise that very clearly. It is the doctrine of unripe time: the time is not ripe and therefore we must not do anything. Logistical and administrative difficulties fall into the same pattern.

Nor is the recruitment argument a terribly good one. In this country, where we have 2.8 million people unemployed, it is not hard to recruit people in many professions. The idea that a lack of recruitment difficulties is somehow a justification for maintaining something that is manifestly unfair is not very good. I am delighted that the Government will take this away and consider it. I look forward very much—as, I am sure, does the noble Baroness, Lady Harris—to the Government taking a fair and balanced approach to this issue, which will result in amendments to the Bill that are akin, if not identical, to those we have put down. In the mean time, I beg leave to withdraw the amendment.

Amendment 13 withdrawn.

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Moved by

[Lord Eatwell]

26: Clause 3, page 2, line 10, leave out paragraph (b)

[Lord Eatwell]

My Lords, we now turn to Clause 3, which I believe to be the most unfortunate part of the Bill as drafted. Everything else, broadly, can be dealt with reasonably straightforwardly but this, I am afraid, goes a bit further. The clause undermines everything that was achieved by my noble friend Lord Hutton in building understanding and trust. It would give any Government of the day unprecedented powers over individuals’ property rights—powers which no ministerial assurances or blandishments can dilute.

The damage is all done in subsection (3) of Clause 3. In Clause 3(3)(b), scheme regulations may,

“make provision by amending any legislation (whenever passed or made)”.

It is no wonder that the Delegated Powers Committee of your Lordships’ House objected so strongly. It made the perfectly balanced and reasonable suggestion that Clause 3(3)(b) be limited,

“so far as it confers power to amend primary legislation, to amendments of Acts passed before the end of this session … and to making only consequential provision or provision that is necessary to ensure consistency”.

Our Amendment 26 is designed to do just this by eliminating the offending Clause 3(3)(b) and allowing Clause 3(2)(b) to take the strain of,

“consequential, supplementary, incidental or transitional provision”.

If the Minister has an alternative way of implementing the proposals of the Delegated Powers Committee, we on this side will be happy to support it. However, as the matter stands, the Henry VIII powers in Clause 3(3)(b) really cannot stand.

Of even greater moment is Clause 3(3)(c), which states that scheme regulations may “make retrospective provision”. Just like that: unqualified, unlimited, they may make any retrospective provision, including the withdrawal of previously accrued rights. A central tenet of pension provision is that benefits that have already accrued are deferred earnings and cannot be reduced. To do so would be akin to taking back a proportion of an employee’s wages that has already been paid.

Indeed, it may well be that Clause 3(3)(c) is actually contrary to the European Convention on Human Rights. The Government acknowledge this in the Explanatory Notes, where they say:

“Clause 3: Scheme regulations. This allows for scheme regulations to contain provisions with retrospective effect. Such retrospective changes … may constitute an interference with property within the meaning of Article 1 Protocol 1”.

The noble Lord, Lord Newby, signed the Bill as being not in contravention of the European Convention. It is striking that the Explanatory Notes devote several pages to discussion of this particular issue. Pages 44, 45 and 46 of the Explanatory Notes give detailed legal arguments and case citations on the issue of property rights as protected by the European Convention. Ministers have asserted consistently, both in another place and at Second Reading, that they have no intention of removing accrued rights and that this notion of retrospective legislation will never be used to reduce accrued rights. If that is so, why is there all this stuff in the Explanatory Notes about accrued rights? Why do we have all this material here if it is not relevant because Ministers have no intention? If they have no intention, why is that provision in the Bill?

[Lord Lester of Herne Hill]

I was not expecting to be on my feet at all, but the answer to the noble Lord, Lord Eatwell, is that the Joint Committee on Human Rights, to which I belong, has for many years persuaded successive Governments to be as full as possible in explaining compatibility statements to enable us to scrutinise whether or not those statements are, in our view, accurate. That is why we welcome the fact that any Explanatory Notes are as full as possible in explaining the Government’s view as to whether or not a Bill is compatible with convention rights. I hope that that is a helpful explanation.

[Lord Eatwell]

I am grateful to the noble Lord because he has reinforced my point in a very satisfactory way. My point is that the issue referred to here is the compatibility of the threat to accrued rights. That is what the full statement is about, and that is why I am so interested that the Explanatory Notes deal fully with the question of accrued rights. The noble Lord is quite right to say that the Explanatory Notes are full and comprehensive, but why are they there if accrued rights are not in any way under threat?

I return to the discussion of this issue. As the Bill proceeded in the Commons, the Chief Secretary to the Treasury asserted very clearly that the Government would not reduce accrued benefits, having previously said, in a speech on 20 June:

“I also want to make it absolutely clear that we are fully committed to protecting the pension that has been earned to date”.

That is great, but it is inconsistent with Clause 3(3)(c). When he was asked about the retrospective provisions in Clause 3 by Mark Durkan MP, the Chief Secretary replied:

“The hon. Gentleman will know that the provisions in the clause to which he refers mirror directly those in the Superannuation Act 1972, which this Bill in many cases replaces. It was passed in the year I was born”—

he is younger than me—

“and it has been used by a number of Governments to make adjustments to public service pensions … The provisions to which the hon. Gentleman refers are in fact more limited than those in the 1972 Act”.—[Official Report, Commons, 29/10/12; col. 60.]

However, I am afraid that Mr Alexander misspoke. Section 2(3) of the Superannuation Act provides that accrued benefits can be reduced but only with the consent of affected members. However, the Bill as it stands allows for the reduction of accrued benefits without member consent. As such, it does not mirror the Superannuation Act, as the Chief Secretary said.

Amendment 28 gives effect to the Government’s intention for the Bill to mirror the Superannuation Act 1972 by providing exactly the same protection for members that Section 2(3) of the Act provides. As such, it is difficult to see how the Government could object to this amendment.

I move from the discussion in another place to the debate here at Second Reading. The noble Lord, Lord Newby, said:

“There is a lot of suspicion about this that is misconceived. Pensions legislation has historically contained such powers”—

actually, it has not—

“which have been seen to be necessary for the lawful and efficient operation of the scheme. They are generally used for minor and technical changes, for rectifying errors and making changes for the benefit of members. The intent of the Bill is simply to allow for these minor changes. There is no sinister intent”.—[Official Report, 19/12/12; col. 1584.]

If there is no sinister intent, why is Clause 3(3)(c) maintained in this wide form? Why is there no qualification? If this is indeed the way that pensions legislation has historically contained such powers—and I presume that the noble Lord, Lord Newby, was referring to the 1972 Act—why are there not the same protections for members as those contained in that Act?

It is also worth noting that the noble Lord, Lord Hutton, said:

“In relation to retrospectivity, the Government have a serious problem. We have to be mindful if there are to be DB schemes in the public sector. We know that there are fewer in the private sector, but those 2.6 million people in the private sector who still have access to a defined benefit scheme know for certain, because of the current law that their accrued rights cannot be changed”.

Accrued rights in the private sector cannot be changed unless members give their consent to a change, perhaps to deal with minor technicalities or deficiencies, which would ultimately improve the quality of their scheme. The noble Lord continued:

“The same rules should apply in the public sector. I do not believe that we can have a different set of rules in relation to accrued rights for people in public sector schemes”.—[Official Report, 19/12/12; col. 1582.]

Therefore, the scope of Clause 3(3)(c) is unreasonable, unethical and directly undermines the trust that is essential to the effective implementation of the Bill. Amendment 28 achieves what the Government claim they wish to achieve. If the Minister has another suggestion for better achieving the same goal, we will be happy to support it. However, I ask him: why is Clause 3(3)(c) written in these unqualified, global terms? Why do we have a clause in the Bill that states:

“Scheme regulations may … make retrospective provision”?

That is unqualified. Why is that provision there? Why is it not qualified in the way that it has been in previous legislation? I beg to move.

[Lord Whitty]

My Lords, I have several amendments in the group that all relate to the same issue of retrospection and the way in which there should be consultation and negotiation on any such change.

Like my noble friend Lord Eatwell, I was not here at Second Reading, for which I apologise, but I thought I should make absolutely clear my overall view of the Bill and my approach to it in my amendments. It can be summarised simply: I do not like the Bill. I do not like the campaign that the Government and their media allies have conducted against the public sector workers who serve them, and against their pension entitlements. In many ways it has been a despicable campaign. In more technical terms, I do not like the way in which the Government have interpreted my noble friend Lord Hutton’s recommendations in terms of attempting to achieve a commonality of approach across all public sector schemes—an ambition in which, as it happens, they have singularly failed because we have ended up with a complete hotchpotch of schemes. The history of all these schemes is different. They relate to different sectors, different industries, different patterns of negotiation and different kinds of jobs. It was therefore difficult to get to commonality. Nevertheless, the Government have attempted to reach that commonality and have made a hash of it.

I have sympathy with all public servants who are detrimentally affected, prospectively and currently, by aspects of the Bill. I have sympathy with firefighters, teachers, civil servants, health service workers and so on. I even have some slight sympathy with the judiciary. However, I am going to focus all my subsequent remarks on the local government scheme. One of the differences between the schemes that exist currently in the public sector is that the local government scheme, unlike the vast majority of other schemes, is a fully funded scheme and always has been. It is therefore on a different basis and the Treasury should approach it differently from the way in which it is attempting to approach the other schemes. Ideally, I would like to exclude the local government scheme entirely from the Bill. I recognise we are not at that point, but it would be the more logical outcome.

--- Later in debate ---

[Lord Newby]

I am very relieved to have that qualification. However, I briefly repeat what I said at Second Reading. The schemes that are now going forward, covered by the legislative framework of this Bill, are, in our view, extremely sensible and generous provisions that reflect the importance that the Government attribute to the work undertaken by all the public servants covered by the schemes.

Having got that out of the way, we quite like the amendment of the noble Lord, Lord Whitty. It has the advantage of simplicity and would allow schemes to make minor and technical changes in the interests of efficiency but restrict changes that were materially detrimental to members. The wording that he has used in the amendment and the sentiments contained in it will certainly form part of our consideration of what we ourselves table on Report.

Amendment 28 deals with member consent locks. I should be clear, as my colleague the Economic Secretary was in the other place, that the Government have significant concerns about the consent locks contained in the amendment. We do not believe that this is the right way forward. I have previously mentioned that there are a number of options in terms of how to facilitate retrospective powers, and in our view consent locks are very much at the extreme end of this spectrum. We do not think that it is appropriate to give members, employers or anyone else the power unreasonably to hold each other or the Government to ransom and to inhibit changes for the greater good. There have been some damaging examples of this in the past. Therefore, the application of universal consent locks is not an avenue that we intend to investigate as we develop our amendment on this subject for Report.

[Lord Eatwell]

My Lords, perhaps it will assist the Minister if I point out that this is not a universal consent lock; it refers purely to accrued rights and indeed, as I said, it reflects the Superannuation Act 1972.

I am the chairman of a private sector pension fund; I did not declare an interest because, as this is about public sector pensions, there is no particular interest for me to declare. With regard to the extreme end of the spectrum, we have used consent locks in the private sector while negotiating various reforms of rights and have always found that negotiations with members are fruitful and produce generally positive results. I therefore do not think that so-called consent locks should be seen as extreme; they are simply the fruitful basis of consensual reform of a pension scheme.

[Lord Newby]

I hear what the noble Lord says and I hope that our amendments can satisfy him in this area; I suspect they will do so without having consent locks. However, it will be a good outcome if he is happy at the end.

On Amendment 30, discussed by the noble Lord, Lord Witty, as part of the debate about retrospective powers, our view is that it simply does not do that. Clause 3(5) deals with the generality of Treasury powers and this amendment would loosen up the area that the Treasury would have to consider. The Treasury would not then look at changes to schemes that were revenue-neutral. Our view is that in order to meet the requirement by the noble Lord, Lord Hutton, that we need a greater degree of consistency across the schemes, it would be sensible for the Treasury to look at changes, whether or not they have a financial implication, to try to ensure that we maintain consistency to the maximum possible extent.

Moving to Amendments 116 and 119, which deal with consultation, this takes us back to a debate in the other place about the appropriate statutory consultation requirements for changes in scheme regulations for the new schemes. In the other place the Government set out the reasons why it is not appropriate that primary legislation should require that all consultation on such changes be carried out with a view to agreement. As made clear in the Government’s consultation principles, consultation can have a number of purposes, including garnering views and preferences, understanding possible unintended consequences of a policy or getting views on implementation. The Bill already goes further than those consultation principles, not to mention the arrangements in place for a number of the existing public service pension schemes, in requiring that all changes to scheme regulations would undergo statutory consultation. However, such consultation must be proportionate; it would not be right for us to establish today that all consultation must seek to reach agreement, as that will not always be possible, or indeed the aim of the exercise.

Amendment 119 goes even further, requiring that all changes to scheme regulations should undergo not only consultation with a view to reaching agreement but also a parliamentary reporting process. In the case of changes to the protected elements set out in new subsection (6), scheme regulations could be changed only by agreement. We believe that this is an impractical measure. Changes are required to scheme regulations for the most minor of reasons. Surely it cannot be right or sensible that such an exhaustive consultation procedure be put in place for every such minor instance. Instead, the Government have established a balance in their consultation requirements. Clause 19 puts in place a statutory requirement for consultation. Clause 20 goes further than this and puts in place more onerous requirements for those situations where a future Government may seek to amend the core elements of the new schemes. This already goes further than some feel is appropriate in binding the hands of future Administrations. However, the Government are determined that this protection should remain in order to give confidence to members of those schemes that the Government are committed to the scheme designs that have been negotiated.

Amendment 119 also makes changes to the protected elements set out in Clause 20. These are the core elements of the schemes protected by the extra consultation requirements in the clause. The Government have included the career-average nature of the schemes, member contribution rates and benefit accrual rates in these protected elements, and are convinced that including these elements strikes the right balance between giving reassurance to members and ensuring that schemes are flexible enough to operate in the real world. Finally, Amendment 119 also seeks to require agreement through consultation to any change to the protected elements before such a change could be made.

The Government are committed to the reforms to pensions set out in the Bill and in the separate documents that describe the details of the new schemes that have been negotiated with member representatives. We have put a great amount of time and resource into developing these schemes and have come to what we believe are the right outcomes in the designs that have been established. However, it would be irresponsible and frankly unrealistic for this Government to seek to bind the hands of all future Governments within the next 25 years, as this part of the amendment would seek to do. Instead we have sought to put in place a more onerous process that would cause any future Governments seeking to fundamentally change these pensions to properly consider the impact of their actions and to justify the need for such changes to those affected and to Parliament.

Amendment 120 is intended to be consequential on some of these other changes and would amend the provision in Clause 21 to specify that scheme regulations will be subject to the negative procedure unless otherwise specified. However, the amendments in question do not propose any change to the procedure around scheme regulations, and therefore we believe that the amendment is unnecessary. I hope that in view of the assurance I have been able to give about amendments coming forward on Report, noble Lords will feel able to withdraw their amendments.

--- Later in debate ---

[Lord Eatwell]

My Lords, I am grateful for the support from around the House for the propositions that I advanced with respect to Amendment 26. I am grateful to my noble friend Lord Whitty, who had his own very sensible amendments, to the noble Baroness, Lady Hollins, to my noble friend Baroness Donaghy and to the noble Lord, Lord Newby. Those sympathetic noises and/or general support are most encouraging. I was also delighted to hear sympathy from the noble Lord, Lord Newby, for Amendment 27 and especially Amendment 28. As currently drafted, Clause 33(a) and (c) disfigure this Bill and we look forward with great interest to hearing the Government’s proposals. It would be enormously helpful if there could be a degree of consultation with those Members who have spoken from these Benches as well as, if she wishes, the noble Baroness, Lady Hollins, prior to those amendments finally being tabled. I hope that the Minister will be able to give the commitment that, whether or not there is consultation, the amendments revising these important clauses will be put down at least one week before Report to allow Members to consider what may be quite complex amendments with some care and be able therefore to respond effectively and appropriately on Report.

I am delighted these remarks have received a sympathetic response, and on that basis I beg leave to withdraw the amendment.

Amendment 26 withdrawn.

Economy: Effect of US “Fiscal Cliff” Solution

Lord Eatwell Excerpts

Tuesday 8th January 2013 Lords Chamber

[Lord Newby]

My Lords, I completely agree with the noble Baroness. That is why the Prime Minister has set promoting a US/EU trade agreement as one of his top priorities for the G8, as well as moving forward on other trade agreements, such as that with Canada, which are already a long way down the pipeline.

[Lord Eatwell]

My Lords, will the noble Lord consider answering the Question asked by my noble friend Lord Barnett? He asked what the assessment was of the impact of the fiscal cliff solution on the UK economy. As the noble Lord said, this had led to a 1.7% increase in the fiscal burden on GDP, and the debt ceiling debates in seven weeks’ time referred to by the noble Baroness, Lady Kramer, may add further burdens to the US economy. Is this good or bad for Britain?

[Lord Newby]

Whether it is good or bad for Britain, it is what is happening in the US. What I said in my original Answer was that the estimates, which were published by the ONS at the time of the Autumn Statement, were based on an assessment of what was likely to happen, which is exactly what has happened. The Bill passed last week is having an impact of 1.7% on US GDP. The ONS assumed that the Bill passed last week would have an impact of about 1.7% on US GDP. We factored that into our calculations and the growth forecast produced for this year will be unchanged because what has actually happened is what we thought was going to happen.

Banks: Money-laundering

Lord Eatwell Excerpts

Tuesday 18th December 2012 Lords Chamber

[Lord Sassoon]

My Lords, on the first of my noble friend’s points, I certainly agree that the banks need to get much more intelligent about this matter. I have met in the Treasury senior bankers on the retail or wealth management side of these banks to make precisely my noble friend’s point: namely, that they need to be intelligent about this matter. This must not be a box-ticking exercise. I have made the same point to the chairman of the FSA. My noble friend raises a very important point.

[Lord Eatwell]

My Lords, I believe that this is the last time the noble Lord will appear at the Dispatch Box in his current position. I am sure that the whole House wishes him well in his future endeavours.

Turning to the Question, the FSA rulebook states that the chief executive function is the function of,

“having the responsibility … for the conduct of the whole of the business”.

Indeed, the notion of chief executive responsibility is at the heart of the FSA’s regulatory philosophy. While I understand the concept of the independence of the FSA, given that it has been established that HSBC has committed very serious money-laundering offences, would the noble Lord expect the FSA to implement its own rulebook and would he therefore expect it to take enforcement action against the relevant chief executive of HSBC?

[Lord Sassoon]

My Lords, I am grateful to the noble Lord, Lord Eatwell, for his kind words, but I regret to say that the House may have me at the Dispatch Box again for the Topical Question tomorrow, unless I can persuade a colleague to take it from me. As for HSBC, the FSA will do what it should as the independent regulator in this area. However, it is important that the FSA has agreed a series of additional measures with the HSBC board, including establishing a committee of the main board of the bank with a mandate to oversee matters relating to anti-money-laundering, reviewing relevant group policies, appointing a group level money-laundering reporting officer and having an independent monitor in place to look at the bank’s compliance across the group with UK anti-money-laundering regimes. The FSA has agreed a tough series of measures with HSBC right across the group.

Autumn Statement

Lord Eatwell Excerpts

Wednesday 5th December 2012 Lords Chamber

[Lord Eatwell]

My Lords, I thank the noble Lord, Lord Sassoon, for formally introducing the Statement. In a way, it is a pity that our new convention does not involve repetition of the Statement for there is no doubt that the Chancellor is to be congratulated on the positive morsels that he managed to identify in a very frugal, even miserly, meal.

Three central facts are revealed in this Autumn Statement and the accompanying OBR report. First, the OBR assesses growth this year to be at minus 0.1%. It had expected plus 0.8%, so it is a reduction of about one percentage point. For next year, 2013, it has downgraded its growth forecast from 2% to 1.2%. I fear that next March the ever overly optimistic OBR will be downgrading its forecast once again. Therefore, the growth outlook is rather bleak.

I wish to refer for a moment to paragraph 1.14 of the Autumn Statement, dealing with the sectoral composition of growth in the UK economy. It argues that, if we leave out the financial sector and the North Sea oil and gas sector, the rest of the economy has done comparatively rather well. That is rather like saying that, if we leave out the bowlers, the batting average of the team tends to go up. This is a disreputable piece of analysis and I hope that we will never see its like again.

The second fact revealed in the Autumn Statement is that, compared with the forecast made just last March, the deficit is up in every year of the forecast. Noble Lords may be rather surprised by that assertion because, if they listened to the Chancellor’s Statement, they will know that he seemed to claim the opposite. How can I claim that the deficit is up? I can quote the OBR, which says that,

“policy decisions by the Government and reclassifications have reduced [public sector net borrowing] this year by £16 billion, more than offsetting forecast changes which overall have pushed borrowing up £4 billion”.

I repeat: policy decisions and reclassifications—in other words, fiddling the figures.

What does this fiddle consist of? The main component in padding the numbers is the asset purchase facility transfer of £11.5 billion from the Bank of England to the Treasury. In principle, this seems okay—after all, we are told that the Japanese and the Americans do it too—but what is striking is that no allowance has been made for the requirement expressed in the letter from the governor agreeing to this transfer that, if and when interest differentials change, the Treasury must pay the money back. Will the noble Lord tell us what contingency has been made by the Treasury for transfers back to the Bank in the next five years and what impact this contingency might have on the deficit?

The third fact that is clear in this Autumn Statement is that the end of austerity has been postponed for another year. The noble Lord, Lord Sassoon, has referred us before to his belief that the deficit programme is a five-year rolling programme. So every year the end of austerity is always five years ahead. Like middle age, it retreats before you. Now it has been extended from 2017 to 2018. Under this rolling programme which always extends, austerity will always be with us and it is clear why. We are travelling in the wrong direction, away from growth and away from debt reduction. Surely now is the time to ask why. Why are the British people being subjected to this unending economic misery that is not only cutting living standards now, but as the OBR points out, will cut living standards in the future as productive potential is undermined by low investment and the corrosive impact of unemployment?

In the realms of economic policy there are two entirely different approaches to cutting public indebtedness. The Government’s approach is based on the belief that eliminating the deficit is necessary to produce growth: austerity is the necessary precursor to recovery. Noble Lords will remember that there was even a new expression coined for this approach, “expansionary fiscal consolidation”—a term that seems to have been dropped from government usage in the past year or so. The idea was that cutting the deficit, aligned with a supportive monetary policy—that is, low interest rates—would restore business and consumer confidence, stimulate spending and set the economy on the road to recovery. For the past two and a half years, the UK economy has been the guinea pig on which this theory has been tested. The result: interest rates in a no-growth economy are predictably roughly zero in real terms, but ever looser monetary policy is producing ever less discernible results. Indeed, there is now no discernible result.

Has business confidence returned? The OBR says:

“Lack of confidence regarding the outlook for global and domestic demand is leading firms to postpone investment decisions”.

Has household confidence returned? The OBR states:

“Our forecast for real household disposable income growth is weaker than in March”

It adds that this,

“is expected to constrain household spending”.

So if households are not spending and businesses have no confidence and are not spending, where is the recovery to come from? Net trade has a negative impact on the economy as markets overseas stagnate and the Government are cutting net spending, so making things yet worse. The experiment has failed and the British people are paying the price of the failure. The plans to spend something on infrastructure are welcome after the savage cuts of the past two years, but notice that government investment was down 20% last year and another 9% cut is forecast for this year. The infrastructure plans are a drop in the ocean. Even their impact on demand is offset by the fact that they are to be funded by cuts elsewhere.

On top of all this, the Funding for Lending scheme is not working and the Work Programme is not working. No wonder that in summing up the whole impact on growth of the policy measures in this Autumn Statement, the OBR says they have,

“a limited impact on our economic forecast”.

All the Chancellor’s rhetoric about growth signifies nothing. The Chancellor indicated in the Statement that he intends to make significant cuts in benefits for those out of work, on top of cuts to welfare expenditure announced earlier this year in the Budget. Unfortunately the data supplied in the Autumn Statement do not include the analysis of the distributional impact of policy measures as do Budget documents. Could the noble Lord tell us what is the net impact of the measures announced today on the lowest decile of income recipients?

The most extraordinary aspect of this Autumn Statement is that the Chancellor has implicitly recognised that his policy has failed but is continuing with it none the less. If the policy was working, if expansionary fiscal consolidation had a shred of credibility left, instead of extending austerity to 2018 he would be doing more of it now—let us get on with it, get it done and put us on the road to recovery—but he has lost the courage of his convictions and not found the courage to admit the failure of his policy. There is another way, another approach to cutting the deficit, and that is by stimulating growth that cuts the deficit, not cutting the deficit and hoping that growth appears.

However, growth depends on confidence in growing demand. It requires a substantial infrastructure programme; investment in education and research; substantial reform of the banking industry to deal with the difficulties identified the other day by the governor; and a British investment bank to lead the way in funding the investment that demand would stimulate.

The dreadful growth figures and the slowness of the recovery comprise the worst economic performance of our economy in attempting to come out of recession for more than 100 years. We cannot go on like this. The Government must recognise that their core policy has failed and have the courage to face that fact.

Financial Services Bill

Lord Eatwell Excerpts

Wednesday 5th December 2012 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, in most cases the legislation places duties, powers and obligations on the Bank as an institution. The Court of Directors is responsible for managing the Bank’s affairs. In practice, the Court of Directors, in a similar way to other governing bodies, delegates the vast majority of the Bank’s day-to-day decisions to the executive, with the court itself taking only the most important strategic decisions. There are, however, some instances in the legislation where the duties, powers and obligations are placed directly on the court. For example, the court is responsible for determining the Bank’s strategy, including its financial stability strategy, and it also has the power to delegate additional functions to the FPC.

On Report, the noble Lord, Lord Eatwell, and I discussed whether the court would take the decision whether or not to withhold from publication a report of the oversight committee. I stated clearly that I would expect a decision of this importance to be taken by the court rather than to be delegated to the executive. However, in the light of that debate, I asked my officials to look right through the Bill again to see whether there were other key decisions for which responsibility should lie unequivocally with the court. This group of amendments is the result.

Amendments 4, 5, 6 and 7 confirm that the court will decide whether oversight committee reviews should be withheld from publication in order to protect the public interest.

Amendments 1, 12 and 26 to 31 make the same change to confer a number of other responsibilities directly on the court. These are the power to delegate additional functions to the oversight committee, responsibility for being consulted on the PRA’s strategy, and the power to appoint non-executive members to the PRA board.

Amendment 25 puts beyond all doubt that the court may not delegate any functions that are explicitly given to it in legislation. I should make it clear that this does not mean that all functions that the legislation confers on the Bank will automatically be undertaken by the executive. The court will of course retain discretion either to delegate these roles to the executive or to reserve those decisions for itself. However, I believe that these amendments provide important clarity by identifying those roles within the legislation that will be the responsibility of the court in all cases. I beg to move.

[Lord Eatwell]

My Lords, I am very grateful to the noble Lord for having clarified some obscurities in the Bill that arose from the use of the generic term “the Bank” to refer sometimes to the court and sometimes to the executive. However, the noble Lord has just said something which has disturbed me. He said that, for clarification, when the term “Bank” is used, this does not necessarily mean the executive; it may mean the court. It seemed to me that he was acknowledging that an uncertainty remained. Perhaps I misheard. I should be very happy if I did, because the sort of clarification that he has set out is very welcome.

[Lord Flight]

My Lords, there is one area in this territory on which I would appreciate some clarity. The principle of returning the oversight of banks to the central Bank, which I think has been widely supported, has, to my mind, always been about the concept that the central Bank ought to be in regular contact with banks, that it ought to know what is going on and that it ought to be able to head off practices that are clearly potentially damaging to the banking system. However, I am not clear how the staff of the Bank and the staff of the PRA will interact. One would have thought that quite often it would be the staff of the Bank who were having regular dialogue with banks and learning what was going on and what might be going wrong, but it is the PRA—to some extent a sort of cuckoo plopped into the middle of the Bank of England—that essentially has the legal tasks. Therefore, we have clarification of the definitions of “Bank” and “court” but below what I call the executive level I am still not entirely clear where the staff of the Bank or the staff of the PRA will be carrying out supervisory activities.

--- Later in debate ---

[Lord Eatwell]

Just for clarity, the noble Lord said that it is the responsibility of the directors—that is, the court—to decide who takes the various decisions. I presume what he has said does not apply to the Monetary Policy Committee?

[Lord Sassoon]

Indeed. I should say that it is subject to what is laid down in statute about the Monetary Policy Committee and the Financial Policy Committee and so on. If they are decisions of the Monetary Policy Committee, then they are the decisions of the Monetary Policy Committee. If they are the decisions of the Bank, the court will decide how they are taken. As for the question from my noble friend Lord Flight, of course it will be the PRA staff who will supervise and lead on the direct relationships with the banks or insurance companies, for example, that are being supervised. Technically, the PRA staff will be seconded from the Bank. There will be a close working relationship, which is part of the benefit of bringing it all together under the one umbrella.

--- Later in debate ---

[Lord Newby]

My Lords, Amendment 11 responds directly to a request made by the noble Lord, Lord Eatwell, on Report. On hearing my noble friend Lord Sassoon’s explanation of the underlying purpose of the FPC’s reviews of its live actions—namely, to consider whether they are still necessary and whether they should be removed or revoked—the noble Lord, Lord Eatwell, responded,

“if that is what the new section meant, why did it not say so?”.—[Official Report, 6/11/12; col. 978.]

I believe that the purpose of the reviews could have been derived implicitly from the clause as it was originally drafted. However, I accept that this could be made more explicit in the clause, and Amendment 11 seeks to do exactly that. This is a straightforward amendment, which responds directly to concerns raised in this House about the clarity of the drafting. I hope that noble Lords can support it. I beg to move.

[Lord Eatwell]

My Lords, I am grateful to the Government for having taken on board the fact that there was some infelicity in the drafting at this point. I am delighted to support the amendment.

Amendment 11 agreed.

--- Later in debate ---

[Lord Fraser of Carmyllie]

My Lords, I declare an interest as a director of ICE Clear Europe, and I warmly welcome this extremely valuable amendment. It seems to go wider; noble Lords may think that it is a narrow amendment, but they have no idea what a sense of confidence it has given to the City at this time. I regard that as very important.

During the 1970s, we generally regarded the Foreign and Commonwealth Office as having the function of managing orderly retreat. Now we have absolute confidence that within the Treasury there is a very clear understanding that it will look after the best interests of the City of London and the pre-eminence of the City. It is a difficult task and I do not underestimate how important that is. The amendment is to be warmly welcomed. Noble Lords may think that it is minor, but it does a great deal more than simply to change the position of the clearing house and the direction.

I have one simple question, and I will not be worried in the least if the Minister slaps me down. Amendment 20 says,

“to accept a transfer of property, rights or liabilities of another clearing house”.

Does that refer only to a clearing house that still operates as a going concern? Frankly, I would regard that as unlikely. It is much more likely that the Bank of England would want to intervene at a point when it was in administration or in the process of liquidation. If I am told that that line encompasses all those particular circumstances, I will be more than happy to be told to shut up.

[Lord Eatwell]

My Lords, perhaps I may simply elaborate a little on the question posed by the noble Baroness, Lady Kramer. Given that there is not to be a transfer of obligations between platforms, and given that the collapse of a platform could impose significant systemic risk on the economy with a large number of unclear positions, are we to understand that the lender of last resort will be required to stand behind a collapsed platform?

[Lord Myners]

Perhaps I may also ask a question following that of the noble Baroness, Lady Kramer. The concept of interoperability is very important in the clearing of derivatives, so that corporates in particular can offset a position with one platform where they have a credit with another platform where they have a deficit. Will the Minister clarify that that involves a degree of mutualisation in the event of a failure of a platform because the failure of that platform will transfer to other platforms?

--- Later in debate ---

[Lord Sassoon]

My Lords, Amendments 33 and 34 concern the new power provided for by this Bill for the regulators to disclose the fact that a disciplinary warning notice has been issued. We have of course already discussed this new power and the safeguards to which it should be subject in quite some detail. I am speaking to these two amendments again only because, as a result of being erroneously assigned on the day’s Order Paper, they were not moved on Report on 26 November. I am grateful to the noble Baroness, Lady Hayter of Kentish Town, for being the first to spot this. So to be absolutely clear, these are simply Amendments 97ZA and 97ZB—as they were—retabled from the Report stage.

To remind your Lordships briefly, Amendment 33 brings the decision to disclose the fact that a disciplinary warning notice has been issued into the list of matters subject to the procedures set out in Section 395 of FiSMA. Amendment 34 sets out the criteria with which the process for deciding to disclose a warning notice must comply, noting that the decision must be taken either by a person other than the person by whom the decision was first proposed, or by two or more persons not including the person by whom the decision was first proposed.

The amendments secure the involvement of the Regulatory Decisions Committee, or an equivalent body for decisions, to disclose the fact that warning notices have been issued. It is a proposal that the House supported and endorsed when we debated it last week.

This group of amendments may be the penultimate time that I will speak on the Bill during its passage through this House. With this in mind, perhaps noble Lords will permit me to conclude this debate by reflecting a little on the past months since our lively Second Reading debate on 11 June. It was so long ago that the England football team was still in the European Championship and preparing to play France as we were kicking off our consideration of the Bill. Of one thing we can be certain: the performance of this House on this Bill was rather better, I regret to say, than the performance of the England football team.

I believe that the Bill that we are sending back to another place is greatly improved from the Bill that we debated at Second Reading in June. That is due to the very constructive contributions and engagement from noble Lords right across the House, not least from the Bishops’ Benches, and I pay tribute to all who have contributed to those debates. No other legislative house in the world could have brought to bear such expertise in financial services and their regulation as this House has on this Financial Services Bill.

As I need to keep my closing remarks brief, I can only apologise for not naming individually the many noble Lords who have made important contributions to our debates. However, I would like to thank the opposition Front Bench—too many of them to name—led so ably by the noble Lord, Lord Eatwell, and the noble Baroness, Lady Hayter of Kentish Town. They have shown real tenacity and skill in their contributions. We have not always agreed with the points that they have made, but I have always valued those points and would like to thank them for their constructive and thoughtful approach throughout.

I thank, too, my noble friends Lord Newby and Lord De Mauley for the support they have given me, not least in calming down the House when it seems to have got rather excited by some of my contributions. This has been a long Bill, and it would not have been possible to provide the level of response that the House has rightly demanded without the able assistance of my noble friends.

I should also mention and thank the Bill team, which has worked continuously to provide support to the House throughout the stages of this Bill. It has done an outstanding job, which has been widely and rightly acknowledged. The excellent work of the parliamentary counsel in drafting the Bill and the subsequent many amendments to it deserves special praise.

I believe that we have significantly improved this important Bill in key areas. We have enhanced the governance of the Bank of England; given economic growth a higher priority in the new regime, for the FPC, FCA and PRA; significantly improved the robustness of the UK financial system by bringing investment firms, recognised clearing houses and holding companies within the special resolution regime; responded to industry concerns, in particular over the new warning notice power; offered consumers better protection, particularly in relation to payday loans; and, in the LIBOR clauses, moved swiftly to tackle the shameful behaviour of some in the industry.

The Government have listened carefully to the views of noble Lords and the amended Bill reflects many of the concerns of this House. The Bill will be an important addition to the statute book, and one that has been greatly improved thanks to your Lordships’ expertise. I beg to move.

[Lord Eatwell]

My Lords, I rise not with respect to the amendment but to reflect on the latter comments of the noble Lord, Lord Sassoon. As he said, the Bill began its somewhat laborious journey with its First Reading back in May. The process has been extraordinarily laborious considering that it was a politically non-contentious Bill. We should perhaps learn some lessons from this. The main lesson is that, if there is pre-legislative scrutiny, a valuable process that we introduced, more notice should be taken of the conclusions of that scrutiny than is evident in the Bill before us. I refer particularly to the advice from the Treasury Select Committee that a new Bill be drafted rather than that we rely on the complex structure of amendments to prior legislation that we have had to wade through over the past several months.

Given the weighty nature of the work that we have had to deal with, it is appropriate to thank those who have been involved with the Bill. I add my thanks to those of the noble Lord, Lord Sassoon, to my noble friends Lady Hayter, Lord Davies, Lord Stevenson and Lord Tunnicliffe. I also thank Mr Whiting and the Bill team, who have been helpful and courteous throughout, and the noble Lord, Lord Sassoon, for dealing with often complex matters and, occasionally, defending the indefensible with his usual good humour. Finally, in thanking individuals, I must thank Miss Jessica Levy, our talented and all-knowing researcher.

Effective regulation at the macro and micro level of systemic risks and the risks associated with individual firms is in the interests of households and industry and is essential for the success of the UK financial services industry. Therefore, we on this side wish this Bill well. I hope that the measures over which we have laboured will prove a success.

[Lord Barnett]

My Lords, I cannot let the Bill pass without saying a few words. I described the Bill as “shambolic” and was told by an old friend—a normally good friend who happens to be a former Conservative Cabinet Minister—that he was surprised that I was so political in using that unusual expression. I apologise to the noble Lord, Lord Sassoon, and the House. I could not think of a better word to describe what was in the Bill and what had happened.

My main concern with the Bill is the very principle of giving such huge powers to the Bank of England—and they remain. It is the principle that worries me. We have given huge powers to the Bank of England. We have added to the Bank of England Act, as I mentioned earlier today. We have given the Bank powers over the OFT, FCA, FSA and PRA, and over changes in FiSMA—so many different initials that one forgets precisely what we did do. We amended a lot because there was a lot to amend, because unfortunately these days, under both Governments, the House of Commons guillotines so much that very little gets done properly. Legislation comes to this House for amendment and we amend it well, I am happy to say, as we did on this occasion.

My worry is that we started off with an unusually large Bill: two volumes of clauses and schedules. It was so big and it has become even bigger because we put in provisions dealing with the LIBOR scandal. This should have been a Bill on its own. We on this side of the House rightly agreed with the changes resulting from the Government’s acceptance of the Wheatley report. These provisions dealt with it properly and the Opposition accepted them, but they did not just come forward in a Bill; they came forward scattered in amendments throughout the Bill. I hope that it deals with the LIBOR scandal but it is difficult to tell if it really did, because on top of all this we are now told that there will be secondary legislation as well. I regret to say that we do not understand what we have passed here, because we still do not know what is going to happen.

I hope that we have done the right thing and that everything is going to work out, but the plain fact is that, with the LIBOR scandal, there were some in the Bank of England, the FSA and many other bodies whose main concern was primarily with interest rates. They knew nothing whatever about what the noble Lord, Lord Sassoon—I nearly said “my noble friend Lord Sassoon”; I feel he is that—was talking about. He described this LIBOR scandal as a global one, affecting some $300 trillion. It affected all that, but nobody in the Bank of England or the FSA or anybody else knew the slightest thing that was going on in the LIBOR scandal. Therefore, I would like to finish by asking the noble Lord, Lord Sassoon, a question.

Financial Services Bill

Lord Eatwell Excerpts

Wednesday 28th November 2012 Lords Chamber

Moved by

[Lord Eatwell]

107AA: Clause 57, page 141, line 8, at end insert—
“( ) The first case requires the Bank of England, FPC, FCA or PRA to provide the Treasury or the Secretary of State with an early warning of the possibility that a notification of a material risk to public funds may be given, and full information about the circumstance.”

[Lord Eatwell]

My Lords, this set of amendments is inspired by the words of the noble Lord, Lord Sassoon, in Committee. He said:

“It is clear that the success of the new regulatory structure, which, rightly, we are spending so much time debating, relies heavily on the relationship between the Treasury and the Bank of England, and I believe that the Bill provides the necessary clarity of responsibilities. However, it also depends on the personal relationships at play here, particularly between the most senior leaders of the two bodies—the Chancellor of the Exchequer and the Governor of the Bank of England. One of the major problems leading up to the financial crisis was that the tripartite committee did not meet at principals level during the previous decade”.—[Official Report, 10/7/12; cols.1051-2.]

The noble Lord’s words are an important warning to us all, in considering this part of the Bill, on the relationship between the Treasury and the Bank of England at times of crisis. That relationship will depend not only on the personalities involved, but on the statutory responsibilities which the Bill places on those personalities. This group of amendments is intended, in some parts, to extend the statutory responsibilities of the Bank and the Treasury; but, most especially, to clarify those responsibilities, so that the failures which we saw under the previous arrangements, which were due to the principals in the tripartite structure not actually meeting for a decade, will not recur.

Amendment 107AA requires the Bank to give early warnings to the Treasury of a threat to public funds. At the moment, the Bill refers to the possibility of a threat to public funds, which must be immediately notified. However, I think that this notion of possibility is far too vague. Suppose that the Bank thinks there may be a catastrophic event, with a probability of 5%. Is that a possibility? But then, what if the probability is 1%—is that a possibility? What if the probability is only 0.5%—is that a possibility? In our view, a full, continuous exchange of information between the Bank and the Treasury, and the addition of a requirement of an early warning, does just what is needed. It ensures that the Bank is required to convey the information when it first has any indication of a threat—let alone any notion of possibility, whatever “possibility” might mean. If we incorporate the idea that the Bank must give early warning to the Treasury as soon as it knows what is going on, or has some inclination of a threat, without fussing about whether it is “possible” or not, then information will flow in an appropriate way.

--- Later in debate ---

[Lord Newby]

My Lords, this group of amendments was debated at length in Committee. I am sure that, like the noble Lord, Lord Eatwell, many of us were indeed inspired by the way that my noble friend Lord Sassoon sought to reject them. Amendments 107AA and 107AB, and Amendments 107AD and 107AE, attempt to create an early warning system for public funds notifications. I understand that this reflects a concern on the Benches opposite that the drafting of the Bill—specifically, the legal effect of the term “material risk”—does not require the Bank to notify the Treasury in enough cases, even those in which there is a very low probability of public funds interventions being required.

After our debate in Committee, my noble friend Lord Sassoon asked Treasury officials and legal advisers to look again at the material risk wording to make absolutely clear that it delivers the low bar that we are looking for: a possibility test rather than a probability test. Our officials have concluded that the legal effect of the existing wording is indeed to require the Bank to notify the Treasury where there is a realistic possibility of circumstances arising in the future in which public funds could be put at risk. I do not think it would be appropriate to lower the bar even further from “material risk”. The result of doing so would be to require the Bank to notify relatively trivial and implausible risks, which could mean the Treasury receiving a large number of notifications of far-fetched risks that require no action or engagement from the Treasury whatever. I am satisfied that the material risk terminology will give us the right result.

Let me reassure the House that I agree entirely that the Treasury must be informed well in advance of a risk to public funds crystallising in order fully to consider and evaluate different options for managing or mitigating the risk and, ultimately, with a view to avoiding entirely any recourse to public funds. As my noble friend Lord Sassoon said in Committee, no one would be keener than us to have an early notification mechanism in place if we believed it necessary to achieve this aim. However, I am confident that the existing trigger in Clause 57 already sets the very low bar that we need.

The other aspect of these amendments is to extend the duty to notify to the PRA, FCA and FPC. I feel strongly that diluting accountability in this way would be a mistake. As we saw with the failed tripartite system, the clear disadvantage of spreading responsibility across several different organisations is that each can blame the others when things go wrong and risks can fall between the gaps. I believe that the system set out in the Bill, which makes the Bank the single point of responsibility for financial stability and crisis management, is the correct approach to eliminate confusion and overlap and ensure that the Treasury is always informed of risks to public funds.

In a similar vein, Amendments 107AC and 107AF seek to add references to risks to the objectives of the PRA and FCA into the notification duty. I can reassure the noble Lord that any risks that arise in the spheres of responsibility of the PRA and FCA that could potentially pose a threat to public funds must be notified to the Treasury by the Bank in the normal way. As was made clear in Committee, the duty to notify the Treasury of risks to public funds will require the Bank and its senior management to identify and evaluate risks emanating from all parts of the financial sector, working closely with the PRA and the FCA. The Bill itself places duties on the PRA and the FCA to co-ordinate with the Bank in this work. New Section 3P(1)(b) of FiSMA, as inserted by Clause 6 of the Bill, requires the regulators to take steps to co-operate with the Bank in connection with its duty to notify the Treasury of risks to public funds. We believe that that is an adequate provision.

Amendment 107AG would add “comprehensive” to the requirement that the crisis management MoU make provision regarding the obtaining and sharing of information. I do not quite see what “comprehensive” would add. Surely the most sensible approach here is for the Treasury and the Bank to agree between themselves what information the Treasury would find useful, including the format of the information and its frequency. That is exactly the approach taken in the MoU. Paragraph 18 makes it clear that the Treasury and the Bank will determine between themselves a suitable frequency for updates on each different risk, reflecting the severity and immediacy of the risk to public funds. Paragraph 21 states:

“The Bank will provide the Treasury with information needed on the options for managing the situation, including on options commissioned by the Treasury”.

I therefore do not think that Amendment 107AG is necessary.

Amendment 107AH attempts to turn the MoU into a piece of secondary legislation, subject to parliamentary approval via the affirmative process. I agree with the noble Lord that the MoU is a very important document, which sets out how the Bank and Treasury will interact in a crisis, to a level of detail and in a style that simply would not be possible in legislation, either primary or secondary. Having looked again at the MoU, I continue to believe that its content and style make it unsuitable for inclusion in secondary legislation. I would be loath to lose the level of nuance and detail that is currently included in the draft MoU but which is not legislative in nature. It would also make the MoU less flexible and make it more difficult for the Bank and Treasury to adapt or change the MoU to reflect changing circumstances. On the basis of these explanations, I hope that the noble Lord will feel able to withdraw his amendment.

[Lord Eatwell]

Will the Minister explain why he always qualified the notion of “threat” as a threat to public funds and failed to accept the argument of serious threats to the financial system that do not necessarily pose a direct threat to public funds?

[Lord Newby]

The reference in the Bill to public funds goes to the heart of the Treasury’s responsibility vis-à-vis the regulators in managing the financial services sector, and we have been very clear that we want to do that. On the more general issues that the Bank may want to raise with the Treasury, which go beyond a risk to public funds, the Bank and the Treasury are in regular contact via non-statutory routes, as it were, which give ample opportunity for the two to discuss at great length and with great frequency any emerging issues that they feel the other should be aware of.

[Lord Eatwell]

My Lords, we have seen a display of remarkable complacency from the Minister, even in his final remark suggesting that the Bank and the Treasury can informally arrange regular contact. I remind him that the head of the FSA and the head of the Bank did not meet for a decade within the tripartite structure. Now we are going to have a structure of not just three regulators but five or six regulators and he is not even willing to contemplate ensuring a statutory requirement for them to provide a suitable exchange of information.

I am sure that the noble Lord’s officials assured him that the term “material risk” was satisfactory. It would not be surprising as they drafted the legislation. It would be nice to hear that some independent opinion had been taken. He said that our amendments would lead to the Bank notifying “trivial and implausible risks”. Yes, trivial and implausible risks, such as credit default swaps, might fail to transfer risk. Those were trivial and implausible. There was the trivial and implausible risk that an economy of just 2% of the eurozone—the Greek economy—would lead to stagnation in the whole zone. There is another trivial and implausible risk.

The extreme complacency being displayed by the Government over these arrangements really beggars belief. With respect to the amendment which would insert the word “comprehensive” before “sharing of information”, “Oh, it’s unnecessary. We know that they will exchange all the necessary information”—just like they did not do in the past. Why can we not create a proper statutory requirement when there has clearly been such a deficiency in these procedures in the past? That, after all, is what this Bill should be for.

Having said that, and I hope having established some matters for discussion at Third Reading, I beg leave to withdraw the amendment.

Amendment 107AA withdrawn.

--- Later in debate ---

Moved by

[Lord Eatwell]

107AG: Clause 64, page 145, line 3, after “and” insert “comprehensive”

--- Later in debate ---

[Lord Eatwell]

My Lords, Amendment 107AG is very simple. It seeks to insert the word “comprehensive” before “sharing of information”. The very least we can do to ensure that there is proper exchange of information between the Bank and the Treasury, particularly given the comments by the Treasury official that such information exchange does not take place, is to take this amendment seriously. I should like to test the opinion of the House.

Financial Services Bill

Lord Eatwell Excerpts

Monday 26th November 2012 Lords Chamber

Moved by

[Lord Eatwell]

80B: Clause 23, line 21, leave out “of practice”

--- Later in debate ---

[Lord Flight]

I think that I was interrupted right the way through, as a matter of fact.

[Lord Eatwell]

My Lords, the government Front Bench should calm down and allow us to conduct this discussion broadly under Report mechanisms but in a way which takes us forward on what, as my noble friend has said, is an enormously complicated Bill.

I am afraid that I think the proposal of the noble Lord, Lord Flight, is unfortunate and I cannot support it. It is unreasonable to provide this sort of protection to financial advisers, who should take full and appropriate care in the advice that they give. If they have taken full and appropriate care, they will be able to defend themselves at a later stage against the problem that the noble Lord, Lord Phillips, raised a few minutes ago, but I think it inappropriate that they should not be sensitive to potential comeback for advice which is inappropriate and misconceived.

[Lord Newby]

My Lords, when we debated this issue in Committee, my noble friend Lord Sassoon made it clear that this was an important issue for the regulator to review. The FSA has now committed to consider whether to investigate the case for a longstop as part of its business planning for 2014-15.

The amendment deals with the Limitation Act. It is important to be clear about both the nature of the issue and why I do not think that requiring the regulators to apply the Limitation Act when making rules provides the solution.

First, it is important to be clear that time limits apply for consumers bringing complaints to the FOS. These are: six years from the event that the consumer is complaining about, or, if later, three years after the consumer became aware, or ought to have become reasonably aware, that they had cause for complaint. The question which we are now debating is whether there should be a further absolute or overriding limit, possibly of 15 years. This is an extremely important question for the regulator to review and it is clear that it needs to take into account the particular features of financial services and financial service products in doing so.

When the FSA considered the issue previously, it noted that the long-term nature of some financial services products means that it can take many years for consumers to be made aware that they may have suffered detriment. An example from recent years includes inappropriate pension advice to switch from one investment or one type of pension to another. Consumers did not necessarily realise that this advice was inappropriate until many years later and as they approached retirement. This kind of advice was the subject of the FSA’s pensions review covering the period 1988 to 1994, and concerns about advice given in this period came to light only some years later. Advice from this period is still the subject of consumer complaints now.

It is important to realise that many of the matters that the FCA or PRA, or indeed the FOS, which is also relevant here, will be dealing with will not be subject to the Limitation Act at all. The Act applies to certain causes of action in private law, such as actions for breach of contract or negligence, but the FOS is required to determine cases by reference to what is,

“fair and reasonable in all the circumstances of the case”.

In some cases, there will be no private law course of action and so nothing for the Limitation Act to apply to.

It is also worth remembering that the Limitation Act is very context-specific legislation. Time limits vary considerably according to the nature of the claim; for example, the time limit for libel is one year whereas for negligence it is six years. The time limit also varies on the facts of the case. For example, it is extended in certain cases involving fraud or where the claimant has a disability. Even the 15-year, longstop period that applies in cases of negligence has exceptions—for example, for claims involving personal injury. Therefore, it would be particularly inappropriate as a guide for the FCA in its rule-making powers. It would be next to impossible for the FCA to know how the Limitation Act would apply to all the cases that could be subject to any proposed rule. Far from bringing the financial services into line with other sectors, we would, in our view, be failing to acknowledge that in financial services, as in other sectors, there are many claims to which the Limitation Act does not apply.

Having said that, the regulator will look again at the case for a longstop. In view of my arguments and this commitment by the regulator, I hope that my noble friend will feel able to withdraw his amendment.

Bank of England

Lord Eatwell Excerpts

Monday 26th November 2012 Lords Chamber

[Lord Eatwell]

My Lords, I thank the noble Lord, Lord Sassoon, for repeating the Chancellor of the Exchequer’s Statement, and I commend the Chancellor and the Government on their choice of the new Governor of the Bank of England, Mr Carney. Perhaps the noble Lord could let us know why the Government have brought forward the announcement of this post, which we were told on several occasions by the Treasury would be included in the Autumn Statement. What motivated the decision to bring the announcement forward?

We have been discussing the role of the Governor of the Bank of England extensively during the passage of the Financial Services Bill, which is before your Lordships’ House right at this moment. One of the issues that have dominated our discussion of the role of the governor is the extraordinary number of responsibilities which are going to be heaped upon him by this Bill. The Chancellor has said that Mr Carney will maintain his position as chair of the Financial Stability Board, which is also a very onerous job at the very centre of international financial regulation, especially innovation in financial regulation. Are the Government really content that it is appropriate for all these tasks to be heaped upon one individual or have they received assurances from Mr Carney of plans to spread the load somewhat among his deputy governors when he actually assumes these very heavy responsibilities?

In this respect, I wonder what commitments the Governor-elect may have given with respect to the future organisation of the Bank to ensure that it is properly accountable in a way that the Financial Services Bill, which is before us, does not ensure? For example, have the Government examined the structure of accountability of the Bank of Canada? They would find that there are much more rigorous procedures in place than those that we are currently putting in place for the Bank of England.

We on this side are delighted that Mr Carney has requested that he have a pre-commencement hearing before the Treasury Select Committee. Do the Government now recognise that this should be a standard form for senior appointments of this type at the Bank and, indeed, at the major regulators being put in place by the Financial Services Bill?

The Government will be aware that in August Mr Carney was asked whether he was a candidate for the governorship of the Bank of England. He replied, “No, never”. Can the noble Lord, Lord Sassoon, enlighten us as to what led Mr Carney to this fortunate change of mind?

Finally, I am delighted that the Chancellor took the opportunity to pay suitable credit to the current Governor, my former colleague and friend, Mervyn King. I, too, look forward to the opportunity of thanking him in an appropriate way when he retires from his position. However, in the mean time, I return to my first comment and congratulate the Government on the appointment they have made.

Financial Services Bill

Lord Eatwell Excerpts

Monday 26th November 2012 Lords Chamber

There are some government amendments within this group. I see nothing wrong with them as far as I understand them. They are quite sensible amendments. I hope that the Minister will recognise, in a complementary way, that my amendments are also very sensible and that they would give some cohesion and equality of treatment to the whole of this changing sector. I beg to move.

[Lord Eatwell]

My Lords, I support my noble friend Lord Whitty. He has clearly hit on something that is very real in the development of consumer financial services today and is very beneficial to the expansion of competition in the provision of financial services. It seems peculiar that, in the drafting of this clause, the Government both include the condition, in subsection (4), and then say, a few lines later, “We may leave this condition out”. Surely there is already enough evidence of the importance of non-financial parent institutions developing financial services. Why, then, as my noble friend has so clearly described, do we not recognise it now?

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, new Part 12A of FiSMA, as inserted by Clause 26, extends and strengthens the regulatory framework by giving the regulators powers to act in relation to a parent entity, which is itself not regulated, but controls and exerts influence over a regulated entity. As we have heard, Amendments 90 and 91 seek to make significant changes to the scope of the powers over parent undertakings. We have not heard new arguments this afternoon, and regret that I probably will not advance any significantly new ones either—as is often the case. However, let me go through the argument as clearly as I can.

The Government are extending and strengthening the regulatory framework, so it is important that these new powers, which are untried and untested in the UK, have safeguards in place to ensure that they are used in a targeted and proportionate manner. I stress the new powers; they are not powers that previous Governments have sought to put in place, so we will put an important additional series of safeguards in place. However, their untried and untested nature is principally why the Government have proposed limiting the power to financial institutions of a kind prescribed by the Treasury in order to keep it within reasonable bounds.

As has already been identified today and on other occasions, if your main business is owning or managing authorised persons, you are caught, but if your main business is making or selling bread, then you are not. That is what the Government intend at this stage. We do not wish, at this stage, to give the financial services regulators powers of direction in relation to parent undertakings whose main business is not related to financial services. However, the Government are very much alive to the concerns raised by the noble Lord, Lord Whitty, which is why we propose to take a power to remove the limitation to financial institutions. We accept that it may be appropriate to widen the scope of Part 12A powers to catch a wider range of parent undertakings but the Government remain unconvinced that now is the appropriate time for these new powers to apply to parent undertakings which are not themselves financial institutions. It is a developing area of financial services industry practice. We need to watch it closely and the noble Lord, Lord Whitty, is right to remind us of that. The provision future-proofs the powers and ensures that the Treasury has the flexibility to respond if circumstances change and firm structures evolve, such that parent undertakings are no longer captured within the scope of the power.

I know that in both Houses there has been interest in strengthening the application of the powers over unregulated parent undertakings. Government Amendments 91A to 91E seek therefore to improve the usability of the powers. Amendments 91A, 91B and 91C lower the trigger for use of the power against parent undertakings and make the power more usable. Amendments 91A and 91B clarify that the regulators can give a direction if it is considered desirable in order to advance the FCA’s operational objectives or any of the PRA’s objectives, or if the giving of the direction is desirable for the purpose of the effective consolidated supervision of the group. Amendment 91C is a related consequential amendment.

As a result of these amendments, the FCA and PRA, would no longer have to demonstrate that,

“the acts or omissions of the … parent … are having or may have a material adverse effect on the regulation … of one or more … authorised persons … or the effectiveness of consolidated supervision”.

After reviewing the powers in light of statements made in this House about the imperative need for the regulators to have effective powers over the parent undertakings of authorised persons and consulting with the authorities, the Government consider the previous threshold was set too high, which would have made the power difficult to use in practice. The high threshold may also have hindered and sometimes prevented the regulators properly supervising complex financial groups.

These amendments will mean that the powers can be used effectively by the regulators to address difficulties within the group as a whole. That will better fulfil the Government’s objective of ensuring that the regulators have the tools they need to conduct suitably robust supervision of unregulated holding companies.

Amendment 91E would make similar changes to the power of direction that the Bank of England has in relation to the parent undertaking of a recognised clearing house. Amendment 91D would remove the requirement that a direction must specify the period during which each requirement remains in force. This ensures that, in appropriate cases, the regulator can give a direction of an indefinite duration. It better aligns the new Part 12A powers with the provisions in new Sections 55L and 55M to be inserted into FiSMA, which provide for the imposition of requirements on authorised persons by the FCA and PRA of an indefinite duration.

While we think that directions in relation to unregulated parent undertakings should generally be of limited duration, we can conceive of cases—for example, in connection with structural reform of the kind envisaged by the Banking Reform Bill—where it would be appropriate for a direction to have an indefinite duration. Amendment 91D therefore provides the regulator with the flexibility to give a direction of an indefinite duration.

--- Later in debate ---

[Lord Eatwell]

My Lords, I support my noble friend’s very sensible amendment. I loved his last line: that “may” may be what is required in this respect. The amendment does two things. First, it is future-proofing—something on which the Treasury is usually very keen. Secondly, in an area where we know—and the Government have acknowledged—that abuses are taking place, it preserves the potential for self-regulation but is a shot across the bows, which should make those who are behaving improperly take much greater care. It preserves a spirit of self-regulation, if self-regulation is seen to work effectively. Given that the Treasury or the Secretary of State may by order amend Schedule 17 in the manner set out by my noble friend, I would like to commend this amendment to the Government.

[Lord Hodgson of Astley Abbotts]

I rise briefly to support these amendments. They seem extremely sensible. I do not want to repeat what the noble Lord, Lord Eatwell, has just said. I like the idea of “may”; I like the idea of self-regulation; and I like the chance for the industry to be able to put its house in order. That is clearly very sensible. The only point I would add is that we now have a situation where a substantial proportion of claims coming forward are fraudulent, semi-fraudulent or unjustified. In each case, the firm about whom the complaint is made must pay £850 to have the case investigated. That is a staggering sum of money and it ends up being paid by the consumers. We really need to find a way to short-circuit that, so that where the claims are fraudulent, something can be done to ensure that the claims management companies, rather than the firm, end up with some of the costs—and, indeed, to ensure that the costs are not passed on to the rest of us. There is a good idea here. I hope that the Government will give the amendments a sympathetic hearing.

Financial Services Bill

Lord Eatwell Excerpts

Tuesday 20th November 2012 Lords Chamber

[Lord Eatwell]

My Lords, we on this side of the House broadly support the conclusions of the Wheatley report and commend Mr Wheatley and his team for the prompt delivery of such a comprehensive document. I say “broadly” because there are a number of details that we believe are not quite right and which require careful consideration in these—let us call them—quasi-Committee proceedings.

The grouping of all the amendments relating to LIBOR into a single group is exceedingly unwieldy and not conducive to constructive scrutiny. After all, as the noble Lord himself pointed out, there are three distinct elements within this group: first, the amendments designed to bring the setting of benchmarks within the compass of regulated activities under FiSMA; secondly, the rules requiring participation in the process of establishing the benchmark; and, thirdly, the establishment of criminal penalties for abuses of the process of setting a benchmark. Each of these three elements merits separate discussion. Rolling them all into one group just because they carry the label “LIBOR” is, to put the matter politely, extremely unhelpful.

For the purposes of this debate, at least, let us degroup the cumbersome group 1 into group 1A, definition of a benchmark; group 1B, establishing the benchmark; and group 1C, criminal offences. Group 1A encompasses Amendments 70 and 71. Amendment 72 is simply consequential. Amendment 70, which incorporates benchmarks into the order-making process, requires some clarification in that, as far as I can read through the existing FiSMA, an affirmative resolution of both Houses will be required for that order to be made. I think I heard the noble Lord say that in his speech, but he said so many other things as well that I hope he can confirm that incorporating any new benchmark into this process will require an affirmative resolution of both Houses.

Moving on to Amendment 71, which is the definition of a benchmark chosen by the Treasury, I disagree with what the noble Lord said. He asserted that this proposed new subsection would also cover commodity benchmarks and he was probably thinking of the recent scandals in the gas market and the accusations levelled at Barclays by the US authorities over the manipulation of the electricity market in California. These particular benchmarks were not specifically involved with investment, but would really come under the heading of trading. Amendment 71 refers to “relating to investments”. All the qualifications are in proposed new subsection (6)(c). Proposed new subsection (6)(c)(i) refers to,

“the interest payable, or other sums due, under loan agreements or under other contracts relating to investments”.

Proposed new subsection (6)(c)(ii) refers to,

“the price at which investments may be bought or sold”.

Proposed new subsection (6)(c)(iii) measures “the performance of investments”.

The scandal in the gas market was to do with trading, not investment. Similarly, I believe the problems in the Californian electricity market are to do with trading, not investment. Unless the noble Lord is extending the meaning of the word “investment” to include all trading activities, which, I suggest, is an abuse of language, then the commodity benchmarks are not included, as he asserted, in Amendment 71. Moreover, if this were true and what the noble Lord says is correct, why did the Financial Secretary to the Treasury make the following statement? He declared:

“The recommendation to consider the use of benchmarks in other financial and commodities markets will be taken forward through the relevant international bodies”.—[Official Report, Commons, 17/10//12; col. 25WS.]

If commodities markets were already included, why did the Financial Secretary say that there was to be a process to take them forward through international bodies? Given the rather lackadaisical attitude displayed by the Financial Secretary, which was quite out of tune with the repeated arguments for the necessity of speed that peppered the noble Lord’s remarks, why are the Government, with respect to these other benchmarks, taking the long, slow route through the international institutions when the revelations about commodity benchmark manipulation have been made over the past few weeks? After all, commodity market trading manipulation has just the same scale of impact, if not a greater impact, on ordinary households, as does the manipulation of LIBOR. Perhaps I may suggest to the noble Lord that if we look for clarity instead of the abuse of language, it would be worthwhile for the Government at Third Reading to extend the scope of the new subsection put forward in Amendment 71 to include trading as well as investment.

Group 1B, as I call it, comprises Amendment 70 moved by the Government and Amendments 80A to 80C, 80CA and 80D tabled by my noble friend Lady Hayter and me. Amendment 80 is the key to the Government’s approach to setting out the rules requiring participation in the benchmark. That participation involves two distinct types of legal person: first, those providing information for the setting of the benchmark and, secondly, the legal person charged with setting the benchmark. A peculiarity of this legislation is that it has an enormous amount to say about the former and virtually nothing to say about the latter.

Proposed new Section 137DA, as inserted by government Amendment 80, refers to,

“the setting by a specified person of a specified benchmark”.

But as regards who this specified person might be or even what might be the process by which they are specified, who has the responsibility for specifying them and with what characteristics they are endowed, on all these matters the Bill and the government amendments are entirely silent. Mystified, our team asked the Bill team for the answers to those questions. Following a long and what we interpreted to be a somewhat embarrassed silence, the answer was that all this was to be left to later. That is not good enough.

Mr Wheatley’s report suggests that the responsibility for LIBOR be taken from the BBA, which anyway does not want it any more, and given to another body determined by tender. Here we part company with Mr Wheatley. It is not clear that a private organisation that has the experience and the expertise to set a benchmark will not also have serious conflicts of interest. It is especially not clear because the Government have so far failed to publish the criteria which they believe any successful tender should fulfil. All we know is that a committee has been established under the noble Baroness, Lady Hogg, to define the criteria and to establish the tender process. Before examining the tender process, will the Minister tell us why the Government did not consider establishing an independent body to set LIBOR? After all, one of the most important benchmarks in this country was for many years set by such a body, the Retail Prices Index Advisory Committee. Why was that model not followed in this case? Why is there this putting out to tender?

Turning to the route chosen by the Treasury, why, given the continually professed urgency of LIBOR legislation, does the committee to be chaired by the noble Baroness, Lady Hogg, still have no membership other than the noble Baroness herself? What brief is the noble Baroness working to, what criteria is she expected to work to in establishing a tender process and what characteristics is she expected to seek in the specified person? Why is the Bill totally silent on these matters?

The fact that these serious matters are, to quote the email we received, being left for later not only suggests complacency on the part of the Government—they are putting on a show of doing something rather about the LIBOR scandal than actually doing something—but it also places a number of serious question marks over the legislation as drafted.

The amendments in my name and that of my noble friend Lady Hayter in group 1B address some of these deficiencies, though I confess that more time and more careful scrutiny would probably not only allow us to prepare more focused amendments but would also reveal other deficiencies in the current drafting.

Amendment 80A refers to the,

“code or other document published by the person responsible for the setting of the benchmark”.

The responsibility for setting the code, like so much in the LIBOR amendments, is rather amorphous. We suggest that the Financial Reporting Council might be included as a possible institution for setting and regulating the code. The reason is obvious to anyone who has worked with the FRC or studied its activities. The FRC is the only body in the UK that has general oversight over such codes of conduct in the financial services industry. For example, the FRC oversees the codes produced by the professional bodies—the Institute of Actuaries, the Institute of Chartered Accountants and so on—ensuring that their codes are appropriate to the needs of the organisation. It oversees supervision in enforcement.

Of probably even greater importance, though, the FRC includes independent persons in its council. This means that it is not just the actuaries who agree their code or the accountants who agree their code. So we have introduced the FRC into the Bill at this point—remarkably, the only point in the entire Bill at which it might be mentioned—in order to stimulate the Minister to say that, in setting a code to control behaviour of those participating in the setting of the benchmark, the responsibility will not be given to insiders—to the bankers—to establish their own code. There must be the same sort of external oversight as that practised by the FRC to ensure that the code is objective, effective and enforced. How will the Treasury ensure that that is the case?

Amendment 80B, which the Minister has already referred to, tabled by my noble friend Lady Hayter, would clear up a drafting error in the Government’s amendment, establishing consistency in references to the code. I asked my noble friend what would happen if she decided not to move it, and I think the answer is that the Government would be embarrassed—but there we go.

Amendment 80C addresses a serious deficiency in what we believe is the Government’s proposal with respect to the specified person responsible for setting the benchmark. We understand that the committee—as yet not established under the chairmanship of the noble Baroness, Lady Hogg—will devise procedures and rules for a tender process to select the specified person.

First, what if that person does not perform satisfactorily? What if there is another scandal with LIBOR or some other specified benchmark? Who then steps in to clean up the mess? At the moment it has been the Treasury and the FSA/FCA, but this is in circumstances in which the BBA wishes to give up its role. What if the specified person is underperforming but does not wish to give up the role? Moreover, it is not clear at the moment whether the award of a tender is to be time-limited or whether it might be subject to some sort of review. We need to be clear. Who is responsible on an ongoing basis for awarding and revoking the tender?

Secondly, what happens if there is an interregnum? There might be a delay in awarding the contract, or it may be that the specified person runs into difficulties—goes bankrupt, for example, or simply wishes to resign. Who picks up the reins then?

The purpose of Amendment 80C is to ensure that the credibility of the benchmark is sustained by its continuity. The FCA, in our amendment, has that fallback responsibility. The amendment is suitably general so that the FCA may decide to deal with the difficulties in the way “it deems necessary”, but at least the amendment ensures that someone is ultimately responsible, not simply for regulating the setting of the benchmark but for ensuring that one is actually in place.

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[Lord Sassoon]

I tried to make that clear in my opening remarks, but let me have another go. We have a serious LIBOR problem which needs dealing with. These clauses put in place a framework within which the Wheatley recommendations for dealing with the LIBOR problem can be dealt with. Many of the issues I have set out and will come back to will be dealt with in secondary legislation, which I can confirm will be by draft affirmative order. The consultation on the secondary legislation will start very shortly, as I said, with a view to that secondary legislation being laid as early in the new year as the parliamentary timetable permits. So, on LIBOR, we will have a framework and secondary legislation to bolt down much of the detail in the normal way.

There are a considerable number of other benchmarks out there. It is entirely possible that, because of the way in which the framework within these amendments has been constructed, other benchmarks, through affirmative orders and secondary legislation, could at some point in the future be included. My noble friend Lady Kramer asked for clarification in this area but I crave her indulgence for a couple of weeks or so until the consultation document comes out so that, rather than receiving a half-hearted letter from me, the consultation document will deal with the issue. The LIBOR problem needs to be addressed immediately. There are other benchmarks that people may, now or in the future, wish to be covered and the framework is sufficiently flexible and future-proof in this respect. If and when a case is made for other benchmarks to be treated in the same way as LIBOR, this framework will allow for that. However, it will have to come through the appropriate secondary legislation.

[Lord Eatwell]

My Lords, I was waiting to deal with the scope of Amendment 71. I entirely understand that the particular benchmarks to be included will be determined by subsequent order—and that is fine—but Amendment 71 confines the category of benchmarks to an index, rate or price that has something to do with investments. Can the Minister explain?

[Lord Sassoon]

The noble Lord, Lord Eatwell, asked the question very clearly earlier. If he would give me another minute or two I will get to his important point. He asked a lot of questions, as did other noble Lords, but it is the next point that I shall come to.

The noble Lord identified something that is consciously in the drafting: it sets a line between purely physical commodity markets where there are other provisions in place which cover price setting. In energy markets, if we are talking about a purely physical commodity price setting, Ofgem is the regulator and has the investigative and enforcement powers for the manipulation of physical markets under the so-called remit legislation. I appreciate that the line drawn raises the questions that the noble Lord has quite rightly asked. With pure commodities that are consciously dealt with in other legislation, Ofgem would be the principal regulator. However, gas, oil and other commodity benchmarks may well be referenced by derivatives or other financial instruments, in which case they are included in this definition. So, pure commodities are not included, but if they are referenced by derivatives or other financial instruments, that is covered in this definition of investment.

[Lord Eatwell]

That is very helpful. But I still think that the language is not clear. A derivative instrument may essentially be a traded instrument and there is no reason to define it as an investment. An investment is something on which one expects to receive a return either in terms of capital gain or a coupon. But you could easily conceive of a derivative instrument that is simply used as a hedge in a trading operation, which is not then an investment. This is a misuse of the word. I think that it is entirely appropriate that such instruments should be included under the broad definition that could be incorporated into subsequent law by order, but the Government should achieve clarity on this matter by specifying with greater precision exactly what they are doing.

I understand that precision can be a trap—you risk leaving so many things out when you are trying to be too precise. I understand that. But there is a bit of special pleading here, particularly because the Financial Secretary to the Treasury said that financial and other commodities markets were going to be referred to other international bodies and were not in the Government’s acceptance of the Wheatley report. So what did the Financial Secretary mean about referring this on to discussions with international organisations?

I want to press the Minister for clarity here. Take the manipulation of the gas market revealed last week. Would that benchmark be included in consideration under Amendment 71? Would it be accessible to an order made under Amendment 71 or not? Would the benchmark of the manipulation of the California electricity market also be susceptible to being included under an order expressed under Amendment 71?

[Lord Sassoon]

Again, to an extent the noble Lord, Lord Eatwell, pre-empts what I was going to say. First, let me deal with this question about the international situation, which I believe I addressed in my opening remarks. We have identified a clear problem with a critical benchmark, LIBOR. We intend to fix it. Work is going on in the international arena to look at questions of benchmarks more generally. As and when there is a conclusion, that will then be factored in as to whether within this framework there is more to be done to regulate other benchmarks. Of course, if through applicable international rules there were some change to the framework required, which we do not anticipate, we could also change the framework through primary legislation.

In the mean time, having identified LIBOR, we will have a consultation. That will be an opportunity to people to give their views about what other benchmarks, if any, should be regulated. I do not see any contradiction in my remarks with my right honourable friend the Financial Secretary’s remarks at all. We will see what the international community comes up with as IOSCO and the FSB look at these matters.

The noble Lord, Lord Eatwell, is of course right that the definition here is one of the more difficult ones. I will have a look again to see whether anything of the sort that he suggests might be missed out is not covered. Although clear understanding is that the word “investment” as taken sometimes in a common- sense way does not necessarily fit with some of the examples that he gave, I will take it away and have a look at it again to make sure that it does cover everything.

On the series of petroleum-related examples that the noble Lord gave, I am not going to say whether the manipulation of the Californian electricity market would fit within the regulations because that is beyond the scope of what we are talking about, but let me talk about the gas market. I do not want to pre-empt the specifics of the gas market review, but I am quite clear that, between the provisions that we are putting in place in this Bill, and those to which I have already drawn attention and the powers of Ofgem, we will be covered.

Also in this definitional area, one or two questions were asked about GDP and RPI. In particular, the noble Lord, Lord Peston, asked about references to the GDP deflator. Since the GDP deflator is not set by reference to the state of a market but is wholly different, I do not see that coming within the scope of what we are looking at here. GDP is clearly a matter for the ONS; it is not derived from the markets in the sense that we are talking about here.

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[Lord Sassoon]

As I said in response to the noble Lord, Lord Eatwell, I will look again. I believe that, as I have set it out, everything that is intended to be covered is covered. I am grateful to my noble friend for pointing out that,

“‘Investment’ includes any asset, right or interest”,

for this purpose. That points to the wide scope of the definition. I will take away these points and make sure that it all knits together in the way intended. If it does not, I will write and seek to put matters right at Third Reading.

Let me move on to some other questions that have been asked. I can assure the noble Lord, Lord Peston, that this group of amendments does what Mr Wheatley intended and that he and, on his behalf, his FSA team have rightly crawled all over it. I just want to be clear that it does not go beyond Wheatley except in the sense that we are future-proofing it for other possible benchmarks, which is entirely consistent with what Mr Wheatley wanted. While I am dealing with one or two of these questions, I can also confirm to my noble friend Lady Noakes that the definition of financial crime catches the new offences. The definition in proposed new Section 1H(3) provides that,

“‘Financial crime’ includes any offence”,

and the list of offences is not exhaustive, so the answer to my noble friend is yes.

I see the noble Baroness, Lady Hogg, in her place. It is good to see her here. There were various questions about the process for appointing the administrator. I can assure noble Lords that the noble Baroness, to whom I am very grateful for taking on this responsibility, will be taking this forward in a measured way, as your Lordships would expect. That process will take place over the next few months. My understanding is that considerable interest has already been shown in the opportunity to be the administrator. It would have been inappropriate to have an independent body setting LIBOR. As we know, it has been set by the BBA. That has presented all sorts of difficulties and conflicts of interest. Independence was weak. The BBA is handing over to the new administrator but, critically, the oversight of that new administrator will be the responsibility of the FCA. The behaviour of the new administrator will be regulated, not just the behaviour of the banks supplying the information.

[Lord Eatwell]

As we are in Committee, it might be helpful to take questions as we go along. It would be enormously helpful to the House to understand how the specified person who will be the administrator will act and what sort of person they might be. Given that there has been considerable interest in the position, perhaps the noble Lord could give us a flavour of the sort of organisations that might be interested—not by naming any names, which I am not suggesting at all. That would help us understand how the system might work.

The Minister said that an independent body is not appropriate. Why not? I referred to the previous advisory committee on the retail prices index, which was entirely independent. It included a number of users of the index, a number of professional statisticians and academics, and representatives of the CBI and the TUC. It was an independent committee which looked at the whole structure of the index. That was a crucial benchmark in British public life. After all, it affects uprating of benefits and all sorts of things, although it is now being superseded by CPI. There was an independent body which did the job and was highly respected. Why, in the Minister’s words, would such a body be inappropriate?

[Lord Sassoon]

My Lords, we risk comparing two totally different sorts of animal here. The measurement of prices, which of course now comes under the Office for National Statistics and is clearly wholly independent of government or anybody else, is an index that is currently under significant review. It relates wholly to UK activity, whereas, as we have seen, the LIBOR index does not. The LIBOR index relates to daily movements in markets, whereas RPI is a different sort of exercise that measures the monthly movement in prices. In comparing a market index such as LIBOR, however important, with the key measurement of retail prices which, under the framework that all countries buy into, should be independently set by a national statistics agency, we are talking about two different animals.

The draft criteria for the administrator of LIBOR were outlined in the Wheatley review. When the committee moves to the next stage of tendering for the role of administrator, it will be for it to set out the detailed criteria. If the noble Lord wants to see the outline criteria, they are set out in the Wheatley review. He can draw his own conclusions as to whether it would be accountants or others who might be interested in doing it. I am not privy to the specific names, nor do I need to be aware of who the people are. However, I have made inquiries, because it is relevant to one of the amendments that I will come to that there has been considerable interest, even at this early stage, before the full rules of the competition have been set out. There will be details of all that to follow.

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[Lord Eatwell]

That is very helpful and I am grateful to the Minister. What would happen then when the administrator is not performing adequately and the FCA decides that it will take it away? Let me give another example so that I do not have to ask two questions; we can roll these in together. The second example is that the administrator goes bankrupt and is therefore unable to continue the activity. What happens then?

[Lord Sassoon]

If I ever get to the amendments in the name of the noble Lord, Lord Eatwell, we will get to that point because it is raised by one of them. It is completely clear that the FCA will have the power to act as the administrator of the benchmark in question, if necessary. That is in the FCA’s general powers. It does not need to be written into these amendments, but I will address that when I talk about the noble Lord’s amendments. Within the FCA’s general powers it is absolutely clear that it has the vires to step in and act as the administrator, if that is necessary in a market context.

I should address the scope of the offences. The first question was whether LIBOR should be limited to the UK. What is proposed in these amendments reflects the current approach in Section 397 of FiSMA. It surely must be right that UK authorities can act only where misconduct has some connection with the UK. We have a very clear approach to extraterritoriality in our legislative framework. The amendments take a broad approach within the UK’s normal approach to these matters. There has to be a connection, which may be any of a statement made in or from the UK, a person at whom the statement was targeted being in the UK or a relevant agreement being entered into in the UK. Within the normal constraints about extraterritoriality, in which we would expect certain offences of the sort that the noble Lord postulates to be prosecuted by the US authorities, we have nevertheless drawn the connection with the UK widely as it is currently drawn in Section 397.

The noble Lord, Lord Barnett, is perhaps suggesting that he does not want the offences to be retrospective. I think that raises slightly wider questions, even in the case of LIBOR. We do not need to go into the human rights basics. I am glad if, on reflection, the noble Lord, Lord Barnett, accepts that.

[Lord Sassoon]

I would never accuse any noble Lord, least of all my noble friend, of ever getting muddled, other than accusing myself. The basic construct is that we do not as a general principle take the same approach to extraterritoriality as the US does. The US takes a unique approach to extraterritoriality and that has raised a number of extremely difficult cases in recent years where Members of Parliament in both Houses have raised questions about whether the UK should acquiesce to the US approach. I certainly do not think that we should be using this discussion as a way of opening up the question of whether the UK should take a different approach to extraterritoriality. The fact is that the US takes a different approach, and that is how it is.

What we are doing for this benchmark issue is to draw the offence and the connection to the UK in precisely the way in which it is done for the generality of offences under FiSMA, which by UK standards is a pretty broad definition. I shall not read them out again, but I read out the three different conditions that could apply and that is on the record. I suggest that the House would not want to put some special definition of territoriality and extraterritoriality into this offence as opposed to all the other criminal offences within the financial services arena. I hope my noble friend will accept that general principle. For the moment, I think she does.

[Lord Eatwell]

Before the Minister leaves the issue of offences, I asked a question about the exemptions around price stabilisation rules.

[Lord Sassoon]

I have some understanding, but I am a non-lawyer and it was a long time ago so it is only slight. Price stabilisation rules go back to pre-1991. They are very specific rules that allow things to be done in markets in very prescribed circumstances that would run against what might be perceived to be the free flow of markets. As the noble Lord knows, they were introduced in the context of ensuring a safe and stable aftermarket following a large share issue. I think they were first used in this country by the Government in the second sale of British Telecom shares, and they relate to that regime. If there is something else going on there, I will write to the noble Lord, but they are not intended to be some carve-out that could be used to get people off a charge of manipulating LIBOR.

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[Lord Eatwell]

I thank the Minister; that is very clear and helpful. My only question arising from that is whether the noble Lord is confident that the FCA would have the appropriate range of skills, the intellectual property, to perform the task of administration. Is there going to be a shadow specified person within the FCA, ready to take over? As he pointed out, this may be very unlikely, but if it occurred it would be catastrophic. If there is a collapse or other form of demise of the specified person through inappropriate behaviour, inadequacy or some other reason, is he confident that the FCA would have the appropriate skills to do the job straight away?

[Lord Sassoon]

Yes, my Lords, I am confident that the FCA, on the risk approach that it takes to preparing itself for a huge range of potential eventualities, will prepare appropriately to step in. I have said, however, that those are a very low-probability set of circumstances.

The last thing that I was going to do, because I think that noble Lords are probably sick of hearing my voice for the moment—

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[Lord Sassoon]

They will have another opportunity very shortly because I am afraid I will be introducing the next group as well, so I am encouraged by that reaction. I was going to go on to Amendment 80D, which is all about the Treasury Select Committee being involved, but I am not sure that the noble Lord said very much about that, so—

[Lord Eatwell]

I said quite a lot about it, so perhaps I could remind the noble Lord.

[Lord Sassoon]

It has suddenly come back to me; it was just a momentary lapse. The noble Lord spoke about the merits of the Treasury Select Committee being involved in the process of selecting the person responsible for setting the benchmark. There may be a slight misinterpretation of the process for selecting a successor to the BBA and administrating LIBOR, which was outlined in a government Statement on 17 October. As I have already mentioned, the successor to the BBA will be nominated by an independently chaired committee, convened by Martin Wheatley and the Treasury and at the commission of the British Bankers’ Association, which has publicly relinquished the nomination of a successor to the committee.

Those involved in the process can be called to account by the Treasury Committee. However, the transfer of responsibility for administering LIBOR from the BBA to a successor body is not a legislative matter. I do not think it would be appropriate for Parliament or the Treasury Committee to be directly involved in what is ultimately a process between private sector commercial bodies. For that rather technical reason—but nevertheless constitutionally rather important —I am unable to accept the noble Lord’s proposed amendment. I stress that those involved in the process can and may be called to account—I do not know—by the Treasury Committee.

[Lord Eatwell]

The noble Lord has completely misinterpreted what I said and apparently has not read Amendment 80D. One of the main points I made was that currently we have this particular conjuncture where the BBA has said that it does not want to continue doing the job. Quite rightly, the Treasury and the FCA have stepped in and set up an entirely appropriate procedure, as far as we can tell. I am sure that it will be appropriate, given that it will be under the chairmanship of the noble Baroness, Lady Hogg.

However, this is not the only potential benchmark covered by this legislation. There may be other specified persons to be appointed with respect to other benchmarks. To achieve the transparency to which the noble Lord said the Government aspire, the rules for determining the identification of a specified person—the objectives and the characteristics that the specified person might have—should be agreed in broad terms with the consent of the Treasury Select Committee. We then would have a procedure which everyone has looked at and has agreed upon. It can be used not as a reactive measure after a crisis but would be in place, ready to be used, at any time the Government deem it appropriate that, by order, a new benchmark is specified, and that there is a need to search for a new specified person to manage and to be responsible for setting that specified benchmark. I hope that the amendment is now clear.

[Lord Sassoon]

I may not have expressed myself clearly but I was entirely clear that that is the purpose of the amendment. I illustrate the situation by reference to LIBOR but the same considerations would apply in relation to any other benchmark where the process of the transfer would be very dependent on the private sector current administrator of the benchmark. It would be very specific to the nature of the market and the benchmark about which we were talking. I just do not see this as a class of activity that normally ever would be set down in some sort of framework of rules that would be agreed with the consent of the Treasury Select Committee. It is not territory into which that committee gets in terms of setting rules.

However, the noble Lord does not say that: Amendment 80D states:

“The rules determining the identification of the specified person responsible for setting a specified benchmark must be agreed with the consent of the Treasury Select Committee”.

It gets the Treasury Select Committee into vetting rules of a sort which I am not aware that the committee gets anywhere near, particularly because there will be secondary legislation, which case by case needs to deal with what benchmarks come in. The Treasury Select Committee at all stages can call people in to discuss the process. I entirely stand by my remarks on the amendment. This does not work with the nature of the transfers about which we are talking, with the flexibility we need to have, or with the way in which the Treasury Select Committee operates. However, what works very effectively is the committee calling people to account, which it may well do in this area.

The final amendment I wish to cover is Amendment 80CA, which requires that 12 months after Royal Assent,

“the Treasury shall report to Parliament on the progress of the extension of”,

the regulatory regime to cover benchmark activities. Given that the extension of the regulatory perimeter into a new type of activity may well have significant consequences, I agree that there is merit in making an assessment of the efficiency and operation of this new area of regulation.

I can confirm that it is the intention of the Financial Conduct Authority to conduct a thematic review into the system and control procedures of LIBOR-submitting firms and the LIBOR administrator in the first year of the implementation of the LIBOR supervisory regime. The FCA will be accountable to Parliament through the usual procedures, which we have debated at length.

I believe that the suggestion of a review is good but a review by the regulator itself is likely to be far more fruitful than a review by the Treasury. It is the regulator rather than the Treasury which will be best placed to modify and fine tune the regulatory regime to accommodate lessons learnt from the review. Of course, should the review suggest that there are difficulties with matters for which the Treasury is responsible, such as the scope of regulation, the Treasury stands ready to consider and, where appropriate, implement the recommendations made by the review. The underlying point is very good and the FCA will take it on board but I cannot accept the amendment.

I hope that, at some length, I have dealt with as many of the points raised as I could.

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Moved by

[Lord Eatwell]

73B: Clause 10, page 47, line 32, at end insert—
“( ) The regulators must co-ordinate their procedures for, and provide clear and detailed guidance on, the processes for applying for, varying and cancelling permission that are applicable to authorised persons regulated by both PRA and the FCA.”

[Lord Eatwell]

My Lords, Amendment 73B reflects a concern that we have expressed at numerous stages in the discussion of the Bill about the process by which entry is possible within the financial services industry and the processes by which permissions are varied and are cancelled.

Our prime objective is to stimulate greater competition within the financial services industry. Entry is notoriously difficult, particularly in the banking sector, and it has been made more difficult since the financial crisis as the stable door has been banged firmly shut. The shutting of the stable door, of course, has not implied any extra sanction on those banks or other institutions which already exist but has made it much more complicated for new banks to be established or new firms to enter other major parts of the financial services industry.

From an examination of the provisions of the Bill on the issue of permissions, it seems clear that there will be firms that are regulated by both the PRA and the FCA and, indeed, that there will be firms that are regulated by one of these organisations but the process of granting permissions, variations and so on will require reference to the other organisation. Given the way in which permissions are dealt with at the moment, it seems likely that this will introduce further bureaucratic steps inhibiting entry. Those bureaucratic steps will be entirely unnecessary if the regulators have a statutory requirement to co-ordinate their procedures. If, on the other hand, as we suspect, the PRA and the FCA develop different procedures relative to their differing objectives, the possibility that processes will become excessively complex, slow and expensive increases significantly.

The objective of the amendment is simply to require the PRA and the FCA to,

“co-ordinate their procedures for, and provide clear and detailed guidance on, the processes for applying for, varying and cancelling permission”,

in order to facilitate competition and ease of entry into, particularly, the banking sector and into financial services in general. I beg to move.

[Lord Newby]

My Lords, as I said in Committee when we debated this issue, we are extremely sympathetic to what the noble Lord is seeking to achieve. However, as I also pointed out, the PRA and the FCA are already required by proposed new Section 3D in Clause 6 to co-ordinate their regulatory processes, including the authorisation process, so this element of the amendment would have no effect.

On the publication of detailed guidance, I point out that in order for the regulators to carry out authorisation, they will need to give instructions to firms about how to engage with the process. That is what the FSA does now, and what the PRA and the FCA will have to do in the future. Firms need to be authorised before they can enter the market and the Government agree that it is extremely important to encourage new entrants. The noble Lord talked about the shutting of the stable door in respect of new banks. The truth is that the stable door has been shut for many decades and there have been no new banks. We have to try to change the culture, in terms both of the regulators and of the regulated, that has been in place for many decades, and we are very keen to do it. That is why we had brought forward an amendment requiring the PRA to have regard to the need to minimise the adverse effect on competition that arises from its actions. One of the effects will be to ensure that the PRA works to remove unnecessary obstacles to new entrants; for example, by ensuring that the authorisation process runs as smoothly as possible.

The Government agree that it is important that the regulators explain how they will co-ordinate their regulatory activities. That is why there is a statutory duty to co-ordinate and to set out in an MoU how that co-ordination will operate in practice. The process for applying for permission is one of the things that proposed new Section 3E specifically envisages being in the MoU.

The Government entirely agree with the thinking behind the amendment but we do not believe that anything further is needed to implement what it seeks to achieve.

[Lord Eatwell]

That is rather complacent. If the noble Lord thinks that the FSA provides clear guidance at the moment, he has not tried to establish a bank. I can assure him that it does not. There is a reason for that. Given that most business plans are rather different and the guidance has to be specific, the FSA has expressed a reluctance to get involved in specific cases.

General guidance is of general use but is seldom useful in the establishment of a given institution. That is why the amendment calls for the provision of,

“clear and detailed guidance”.

That is not available elsewhere in the Bill. The Government are being seriously remiss by discouraging the competitive process as regards this aspect. I know that they want to increase competition but it is a mistake to do it in this way. It is not an intentional discouragement and so it would be enormously helpful if the amendment were to be accepted or some version of it were to be considered at Third Reading. I admit that it may well be belt and braces, but the amendment derives from experience of dealing with the FSA on these matters. It is in this area that the Government do not live up to the picture of assistance and guidance that the noble Lord has painted. However, at this stage, I beg leave to withdraw the amendment.

Amendment 73B withdrawn.