Financial Services Bill

Debate between Lord Eatwell and Lord Bishop of St Albans

Committee stage
Monday 1st March 2021 Grand Committee

[The Lord Bishop of St Albans]

My Lords, Amendment 46, in my name and those of the noble Lord, Lord Sikka, and the noble Baroness, Lady Bennett of Manor Castle, probes whether the reporting requirements on financial firms operating from Gibraltar in the UK market are sufficiently robust, and it questions whether we might find a way to make them more transparent. The Gibraltar authorisation regime continues the established practice of companies operating from Gibraltar in the UK, which is why it is important to review whether the UK taxpayer receives a fair deal from this arrangement. The Companies Act 2006 already mandates foreign companies to register and file accounts to Companies House, yet some Gibraltar-based companies with registered subsidiaries in the UK have successfully used this system to reduce their tax bill.

Transfer pricing plays a major role in switching money between jurisdictions so that the costs are burdened on the area with the highest tax rates, with the profits channelled to the areas with the lowest tax. This is of course a global issue that requires global tax co-operation, but that does not mean that where possible we as a nation should not take measures to remedy the situation where we can. Financial services are one of Gibraltar’s primary industries, which is why I have tabled the amendment. Ideally, through stricter and more thorough reporting standards between Gibraltar and the UK, these should apply to all sectors. For example, in the online services and gaming industry, transactions are often placed in the UK by customers but processed by servers in Gibraltar, a technicality that allows what in reality is taxable income in the UK to be taxed in Gibraltar.

If such practices are well documented among the online gambling sector, I do not doubt that they extend to the financial sector as well. Without public country-by-country reporting, identifying dubious transfer pricing will continue to remain difficult. However, that should not deter us from strengthening reporting between Gibraltar and the UK, particularly given our official links. Surely it simply cannot be right that some of the major UK gambling firms pay an actual corporation tax in the UK of between 3% and 13% by either headquartering or using subsidiaries based in Gibraltar. Incidentally, we only know this because the size of these firms has brought them under the scrutiny of journalists who have investigated them. Given the commonality of these methods among larger corporations, financial firms of the SME variety could, and possibly do, engage in similar methods.

The fact that companies have been able to rather openly reduce their corporation tax bill by incorporating some of their operations in Gibraltar calls into question the current mechanisms for the effective and proper exchange of information between the two jurisdictions in relation to profits subject to tax. During his evidence session, the Minister said that corporation tax rate was not a factor in relocation to Gibraltar. No doubt, the Mediterranean climate and lifestyle make it a very attractive place to reside. Indeed, I have thought of little else over the recent cold days. However, for the purposes of reducing your corporation tax bill, only a partial relocation is required. Furthermore, Gibraltar provides a unique service in the “non-resident company”, a simple and cheap offshore corporate tax entity that even the most cursory search online will see marketed as an international investment and tax-planning vehicle, with all the usual connotations that this implies.

I do not want the many good people of Gibraltar to confuse my concerns as an attack on their territory, but the continuation of access to UK financial markets by permitted Gibraltar-based persons without a review into the effectiveness of the information exchange and the transparency of reporting requirements between the two jurisdictions will leave open avenues and incentives for businesses to reduce their actual UK tax obligations through Gibraltar-based tax planning. I hope that the Minister will be able to reflect on some of these issues and perhaps help me understand what we can do to improve the situation because we might need to revisit this later on. I beg to move.

[Lord Eatwell (Lab)]

My Lords, the provisions in the Bill dealing with relations with Gibraltar raise a number of intriguing questions. The probing amendment in the names of my noble friend Lord Tunnicliffe and myself is really seeking some answers. The Bill in effect creates a single financial market with Gibraltar, even to the extent of offering customers of Gibraltarian entities access to the Financial Services Compensation Scheme. In doing so, it forges a single market with a different jurisdiction, a jurisdiction that includes a different regulatory authority and notably—as the wording of the amendment in the name of the right reverend Prelate the Bishop of St Albans suggests—a fiscal jurisdiction that diverges significantly from that of the UK. I welcome the right reverend Prelate’s amendment.

When this country was a member of the European single market, there was, in essence, a single regulatory regime in the UK and Gibraltar, although the implementation of EU directives was not entirely uniform. In the Bill, the provisions on Gibraltar have been presented as a continuity measure. However, the UK’s new-found ability and declared intention to deviate from EU rules signals a substantial shift in our regulatory framework and potentially in its interplay with that of Gibraltar. The first part of Amendment 47 asks the Treasury to present in detail its assessment of how compatible the regulatory systems in the UK and Gibraltar actually are. It is important that people have confidence in the firms that will be allowed to operate in the UK. The Gibraltar authorisation regime, as it is called, being introduced by the Bill seeks alignment of law and practice in the UK and Gibraltar, but it does not prohibit Gibraltarian divergence.

I turn to the impact assessment. It is pointed out that the Gibraltarian authorisation regime will be established by a mix of primary legislation, secondary legislation, regulators’ rules, MOUs, policy statements and guidance. Given the unique nature of the creation of the single financial market, it is important that Parliament has the opportunity to assess this plethora of measures; hence the need for a Treasury statement in 12 months’ time.

It is further noted in the impact assessment that about 20% of motor insurance policies in the UK are written with Gibraltar-based insurers. When replying to the debate, will the Minister tell the Committee why he thinks that might be? What are the peculiar advantages of Gibraltar that have attracted such an extraordinarily high proportion of this UK business, and will those peculiar advantages continue as a result of the Bill?

At a time when the entire regulatory framework is under review, the Government might consider this to be the time to reassess the financial services relationships with the Crown dependencies as well. I am aware of the very different legal status of the Crown dependencies from that of Gibraltar and the fact that, given that the Crown dependencies were never members of the European Union, the UK’s exit does not pose the same range of new problems. However, the Minister will be aware that the financial services provided in the Crown dependencies are a vital part of the financial infrastructure of the UK, in particular with respect to the flow of liquidity into the London markets. Will the regulatory framework review cover the issue of the financial market relationships between the UK and the Crown dependencies? The regulatory framework review could take note, for example, of the fact that many regulatory practices in some Crown dependencies, such as the registration of beneficial ownership, are significantly superior to current practice in the UK. Given that the UK Government happily promote financial relations with Gibraltar, even though the Gibraltarian fiscal regime is significantly different from that in the UK, are they considering some enhancement of financial relationships with the Crown dependencies by, say, extending access to the Financial Services Compensation Scheme?