Banks: Money-laundering

Debate between Lord Eatwell and Lord Sassoon

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.

Financial Services Bill

Debate between Lord Eatwell and Lord Sassoon

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.

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[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.

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[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.

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[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.

Financial Services Bill

Debate between Lord Eatwell and Lord Sassoon

Monday 26th November 2012 Lords Chamber

[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.

Financial Services Bill

Debate between Lord Eatwell and Lord Sassoon

Tuesday 20th November 2012 Lords Chamber

[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—

--- Later in debate ---

[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.

Economy: Quantitative Easing

Debate between Lord Eatwell and Lord Sassoon

Monday 12th November 2012 Lords Chamber

[Lord Sassoon]

My Lords, what the Bank of England has been doing through the quantitative easing programme has been targeted at 2% inflation but it has been completely clear about the other effects of the policy on the economy, GDP, inflation and equity prices—it says that that was a large but uncertain impact, estimated within the range that the right reverend Prelate gave. It is wrong to see that as a one-off windfall. In that case, was it a one-off disastrous fall in asset prices caused by the banking crisis that preceded it? It is difficult to say what was the one-off windfall.

[Lord Eatwell]

My Lords, the Treasury announced on Friday that it is to take over part of the Bank of England’s profits from the quantitative easing programme to offset the fiscal deficit. What provision is to be made in the national accounts for those funds to be returned when, as the Governor anticipates in his letter to the Chancellor, interest rate differentials are reversed?

[Lord Sassoon]

My Lords, these were never the profits of the Bank of England, so I am afraid that the noble Lord, Lord Eatwell, has got it wrong. They were always profits that would fall to the Treasury—to the taxpayer. All that has been done by the announcement on Friday is very sensible, prudent cash management to make sure that £11 billion—in total, £35 billion—of taxpayers’ cash is not sitting idle at the Bank of England but is used to pay the Government’s bills. That is prudent cash management.

Financial Services Bill

Debate between Lord Eatwell and Lord Sassoon

Tuesday 6th November 2012 Lords Chamber

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

My Lords, this group of government amendments comprises two straightforward technical concessions, which I signalled in Committee. The first, government Amendment 20, responds to an amendment moved by my noble friend Lady Kramer in Committee. This helpfully highlighted that the legislation does not expressly prohibit the Chancellor from appointing the governor, or one of the deputy governors, of the Bank to be chair or deputy chair of court. As I assured my noble friend at the time, the policy intention—indeed long-standing practice—has always been for non-executives to play these crucial roles. However, Amendment 20 puts this beyond all doubt by explicitly prohibiting the governor and deputy governor from being appointed as chair or deputy chair of court.

The other amendments in the group deal with the terminology around the Court of Directors. In Committee, various noble Lords, including my noble friend Lord Philips of Sudbury and the noble Lord, Lord Burns, commented on the oddity of the Court of Directors being comprised of directors, which refers to the non-executive members only, and the executive members, who are not classified as directors at all. I make a commitment to go away and look at options for clarifying this, and the amendments in this group are the result. The amendments would change all references to “director” to “non-executive director”. This means that all the members of court are now directors, with the legislation distinguishing clearly between non-executive and executive directors. As I have said, these are straightforward concessionary amendments, which usefully tidy up the court arrangements, and I hope that the House will support them. I beg to move.

[Lord Eatwell]

My Lords, I congratulate the noble Lord on the improvement to the drafting of the Bill that these amendments secure. It is worth pointing out that this is not a mere clarification. A persistent feature in the development of corporate governance in this country in the past several years has been the enhancement of the role and responsibilities of non-executive directors. Clear recognition in the Bill that these are non-executives carries with it the potential for them to play a proper role in the overall oversight of the Bank, a matter which we will come on to later when we discuss the role of the oversight committee. I support the Minister’s amendments.

--- Later in debate ---

[Lord Eatwell]

My Lords, in Committee my noble friend Lady Hayter and I sought to ensure that the body of what we can now comfortably refer to as “non-executives” was suitably diverse to overcome the dangers of groupthink. Groupthink, combined with a persistent failure to challenge the executive, has been all too evident at the Bank of England over the past five years and, indeed, in the years preceding the economic and financial crisis.

We were criticised at the time for the imprecision of the term “diverse”, which we included in our amendment in Committee. We have taken those criticisms on board. We have gone away and thought about them. In particular, we were very struck by the words of the noble Lord, Lord Sassoon, in criticising our position:

“As the Committee may be aware, the Treasury’s Select Committee report into the accountability of the Bank of England concluded:

‘The new responsibilities of the Bank will require its governing body to have an enhanced mix of skills’.—[Official Report, Commons, Financial Services Bill Committee, 21/2/12; col. 21.]

The Government agree with this conclusion and in their response to the Treasury Committee they committed to take it into consideration in relation to future appointments”.—[Official Report, 26/6/12; col. 176.]

We have decided to assist the noble Lord in taking it into consideration by using exactly those words, to which he has already agreed, in this amendment.

Let me reiterate the main point. Until now, those involved at the Bank in a non-executive capacity have not shown themselves capable of holding the executive to account. That is a serious failing in corporate governance. Until now, those involved in a non-executive committee at the Bank have been seduced by groupthink or overwhelmed by the power of the governor or deputy governors. This is again a serious failing in corporate governance. It is simply not good enough for the Government to say, “Well, we understand and we’ll do better in future”. It is simply not good enough to provide vague assurances. If we are to create a new Bank of England with new major powers and responsibilities, it should be capable of dealing with those responsibilities in a clear structured way with suitable non-executive scrutiny. That is what Amendment 2A would achieve using the words to which the noble Lord, Lord Sassoon, has already agreed.

Amendment 6A, which is also in this group, makes the same point with respect to the mix of skills on the Financial Policy Committee. Of course, the skills mix will be different on the FPC from on the court. There will be a need for more technical expertise. For example, it would be a huge mistake to rely just on people with experience of working in financial services. I notice, for example, that no one appointed to the interim FPC has done any serious economic research into the phenomenon of systemic risk—not a single one. That is exactly the phenomenon on which the FPC is supposed not merely to opine but to take action. Therefore I think that a degree of diversity in the skill set of non-executive directors appointed to the FPC will greatly enhance its effectiveness and indeed its reputation.

I hope, particularly since I used his own words in my amendment, that the Minister will be happy to accept these two constructive amendments. I beg to move.

[Lord Sassoon]

Noble Lords may be aware that a similar amendment to Amendment 2A was tabled and debated in another place. Then, as now, and as I said in Committee, the Government do not believe that such a legislative provision is necessary or appropriate. Starting with the question of knowledge and experience, the Government have repeatedly confirmed their commitment, as I did in words quoted by the noble Lord, to ensuring the appointment of serious, knowledgeable and experienced candidates who have the appropriate qualifications and skills to carry out the functions of non-executive directors of court. These appointments are fully regulated by the Office of the Commissioner for Public Appointments, which ensures a fair, transparent and competitive process. The code is binding and the Treasury is responsible for ensuring its compliance, thereby ensuring that appointments to court are made openly, transparently and on the basis of merit.

Even without a prescriptive legislative obligation, in order to build an effective court the Treasury is mindful of the need to seek not only an appropriate depth but breadth of skills and experience. Ministers can and do take this into account in forming their recommendation without the need to further impose a duty on Her Majesty to form a view as to the candidate’s knowledge or experience before she makes the appointment.

I turn to the question of diversity, which I understand to mean not only of gender, geography or ethnic background but also of sectoral experience, insight and knowledge, as is suggested by Amendment 6A. Court and, in future, FPC appointments are advertised openly, and applications are welcomed from candidates from a variety of backgrounds. For example, the role profile for the most recent court vacancies sought people with substantial experience as board members, as head of function of major financial organisations and as senior managers in a relevant area of public policy, or in the voluntary sector or a trade union.

The latest iteration of the Government’s code of good practice for corporate governance in central government departments clearly states that,

“a board should have a balance of skills and experience appropriate to fulfilling its responsibilities. Moreover, it stipulates that the membership of the board should be balanced, diverse and manageable in size”.—[Official Report, Commons, Financial Services Bill Committee, 21/2/12; col. 22.]

However, given the size of the non-executive contingent on court and the number of external members of the FPC, it would simply not be possible to prescribe a set of criteria to ensure full diversity—that is, to ensure that each and every different background and characteristic is represented on the board and committee —without severely limiting the potential field of qualified applicants. It is therefore a question of judgment.

I stand by exactly what I said in Committee, which is that the Government are committed to ensuring an appropriate breadth as well as depth of skills; and this is as true of the FPC as it is of the court. While I agree entirely with the sentiments and principles behind these amendments, I do not believe that it is necessary or appropriate to legislate to achieve these aims.

I hope that I have provided sufficient reassurance to the noble Lord and that he will be able to withdraw his amendments.

--- Later in debate ---

[Lord Eatwell]

The Minister in reply says that this amendment is not necessary or appropriate. However, in attempting to substantiate those propositions, he referred to the policy of the Public Appointments Committee, which is not responsible in any way for a mix of skills but simply for the quality of the individuals who come before it. When he referred to the variety of backgrounds, he did exactly the thing that I was afraid he would do: he referred to people with senior board experience in commercial and financial organisations and not to anybody who actually understands systemic risk or how to manage it. If they did, perhaps we would not have got into the mess that we did. So I am surprised—well, I suppose that I am not surprised—but I am disappointed that he finds it neither necessary nor appropriate.

[Lord Sassoon]

Can I clarify that I was citing the advertisement for the most recent court appointments and not for FPC appointments?

[Lord Eatwell]

That is very helpful, and I thank the Minister for it, but my point on the FPC is reinforced by what he has just said. I would hope that in FPC appointments some reference would be made to the appropriate skill set, which was not that quoted, although it may be appropriate for the court. Perhaps if I could nudge the Treasury in that direction when making an advertisement, that might be a result. Having said that, I beg leave to withdraw the amendment.

Amendment 2A withdrawn.

Amendment 2B

--- Later in debate ---

[Lord Sassoon]

My Lords, before I turn to the detail of this amendment, I thank the Bill team for dealing with a significant hatful of amendments, this being the first, that turned up from the noble Lord, Lord Eatwell, rather late yesterday evening.

[Lord Eatwell]

My Lords—

[Lord Sassoon]

I will give way in a moment. I will do my best to engage in constructive and meaningful debate. As I say, I am very grateful to the team because we did not have much notice of a number of these amendments.

[Lord Eatwell]

I am sure the noble Lord does not want to mislead the House. The amendments were sent to the Bill team on Friday afternoon and I had a long telephone conversation with it to discuss them. I assure the noble Lord that I had that telephone conversation. He says from a sedentary position, “not on all of them”. All the major items were discussed at that time. For him to suggest that they appeared only yesterday is inaccurate.

[Lord Sassoon]

My Lords, Amendments 2B, 2C, 3L, 3M, 6B, 6G and 7F, among others—maybe that is the lot—appeared at the Treasury late yesterday and not all the amendments were discussed in the conversation to which the noble Lord refers. However, there are some important and some not so important matters in these amendments and I will do my best to do them justice.

As we have heard, this amendment relates to the role of Parliament in the appointment of the Governor of the Bank of England and has been the subject of much debate both here and in another place. Specifically, Amendment 2B seeks to secure a debate in another place following the appointment of the governor, something which I do not believe is necessary or appropriate. The Government are committed to maintaining an appointments process that is proportionate and attracts candidates of the highest quality. It is important to ensure the credibility of the candidate and safeguard his or her independence. If the appointment was subject to a debate in another place, I suggest that there is a significant risk of politicising the process and undermining the appointment of the new candidate. Of course, it has been argued that such a debate could enhance the credibility of the candidate but previous governors have achieved credibility without being subject to such a debate. Credibility ultimately stems from effective action to meet the Bank’s objectives. If the appointment were subject to a debate in another place, the candidate would not be present to answer questions or defend him or herself.

The noble Lord, Lord Eatwell, has already quoted me in the previous debate. I quote what he had to say on this matter in Committee on 26 June. He said:

“We do not want to politicise appointments to the extent that has occurred in the United States”.

The suggestion that appointments might end up being considered by the whole House made him “nervous” as it would,

“inevitably be whipped and become very political indeed”.—[Official Report, 26/6/12; col. 165.]

I very much agree with that. Therefore, the Government believe that the pre-commencement hearing held by the Treasury Committee strikes the right balance in terms of scrutiny of this executive appointment and allows for a more constructive debate with the candidate in attendance to satisfy the committee’s concerns about his or her personal integrity and professional competence. The Government welcome the Treasury Committee’s ongoing role in holding such hearings and, importantly, as my noble friend Lord Flight reminded us, holding the governor to account throughout his or her tenure. I hope I have provided sufficient reassurance and that the noble Lord feels able to withdraw this amendment.

--- Later in debate ---

[Lord Sassoon]

My Lords, I am not taking it for granted. I am merely quoting the fears of the noble Lord, Lord Eatwell, when he addressed this issue in Committee. “Inevitably be whipped and become very political indeed,” were his words, not mine. However, I agree that this is the way that these things tend to go. The concept of a congratulatory first is not one that sits easily with another place.

[Lord Eatwell]

My Lords, I am grateful for the comments that have been made—some accurate, some less so. First, with respect to the issue of being politicised, my concern is motivated primarily by the powers being translated from elected persons to an unelected person. That is what is happening in this Bill. This will inevitably make the position of the governor much more of a political focus rather than the markets and technical focus it has been very much in the past—perhaps not in the 1930s with Montagu Norman, but in recent years. That is where the politicisation has come from. We need to recognise that powers have been transferred from the elected to the unelected by giving the elected some role.

The Minister did me the honour of quoting me, although of course out of context. I was referring—as I am sure he would agree—to pre-appointment hearings as are common in the United States. This is not the intention of this amendment at all. However, a series of important issues is going to come up again and again unless the Government take very seriously the very considerable conglomeration of powers in the hands of the governor, given by this Bill, and the fact that powers are being moved from the elected to the unelected. It is vital that Parliament should consider this crucial issue. I hope that the Minister will take some of these considerations away and think very carefully about them. In the mean time, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Eatwell]

My Lords, I am grateful to everybody who took part in this short debate, and especially for the support of my noble friend Lord McFall, who has such experience in these areas. I always take very seriously indeed the opinions of the noble Baroness, Lady Noakes. I quite understand her concern that accountability should be a phenomenon that is ongoing and not just on appointment. Why not on appointment, too, so to speak?

I was puzzled by the introduction with which the noble Lord, Lord Sassoon, prefaced his remarks. He stated that financial regulation had been going on for a decade. It has been going on at an international level since 1974. The whole point of this legislation is that macroprudential legislation has not been done at all before. That is why the various reports such as the Turner review by the FSA, the report of the US Treasury in 2009, and the report of the high-level committee of the European Union led by Monsieur de Larosière, all identified a new role for financial regulation in dealing with macroeconomic variables, which it had never done before. This is a new area of financial regulation which is specifically the responsibility of the Financial Policy Committee.

The Minister said that there had been no transfer of responsibilities. Was not the control of credit in our economy the responsibility of the Treasury? Has it not been so since the Second World War? Did not the various Acts on the control of credit start as Treasury Bills? Now the availability of credit is predominantly the responsibility of the Financial Policy Committee. That is a transfer of powers. I wonder if the Minister would like to consider that example.

The Minister then said something truly extraordinary. He said that the non-executive members of the court were not policymakers. Perhaps I may refer him to Clause 4 on financial strategy, which states:

“The Court of Directors must … determine the Bank’s strategy in relation to the Financial Stability Objective”.

That sounds to me as if they are policymakers. They must “determine the Bank’s strategy”. Are the non-execs therefore to sit down and keep quiet?

[Lord Sassoon]

My Lords, will the noble Lord, Lord Eatwell, concede that that is the responsibility of the Court of Directors as a whole, not of the non-executive directors as a group?

[Lord Eatwell]

Certainly, but that is not what the Minister said. He said that the non-executive directors were not policymakers—but they are to participate as a nine-member majority of the court, including the chair, as he pointed out. However, we now hear that they are to sit silently while the executive directors determine policy. That is nonsense and the Minister knows it. These individuals are policymakers—and rightly so; they should be. That is why we need the right sort of people, and why it is right that there should be suitable hearings preceding their appointment, as suggested by the amendment.

The Minister is getting into a muddle. He should go away and think hard about what the Financial Policy Committee is required to do, recognise that there has been a transfer of powers and that macroprudential regulation is something entirely new that has not been done before; and try to get some of the legislation right. In the mean time, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Eatwell]

My Lords, this is a major amendment that I had the pleasure of discussing with the Bill team on Friday. I was going to preface my remarks by saying that there is a developing consensus that the Government are piling responsibilities on the Bank of England. But I hear that consensus is not developing on the other side of this Chamber, since the noble Lord, Lord Sassoon, does not seem to recognise that the Bank and the governor are having these extra responsibilities or indeed that there has been transfer of powers.

Interestingly enough, others do recognise that. Mr Tyrie, just last week, with the oversight committee already in the Bill, referred to the Bank’s defective governance. Then, Mr Bill Winters, a former executive at JP Morgan and author of one of the very tightly constrained reviews into the Bank’s operations that was published last week, concluded that the Bank was too “centralised and hierarchical”. Then Sir John Gieve, a former deputy governor, commented on the same review saying,

“how do you bring more challenge into a hierarchical organisation?”.

That was last week, with the oversight committee in place. Those comments echo criticisms made by a number of former senior Bank of England staff and by serious commentators in the financial press. This is a serious issue.

I have already listed the major issues, but I will list them briefly in the context of this amendment because it may help the House. With respect to the powers assigned to the governor in the Bill, the power of an unelected person will be equivalent almost to that of the Chancellor of the Exchequer. Indeed, it will exceed the Chancellor’s powers in that the Chancellor is under constant scrutiny from Parliament whereas the governor is under less intense and less constant scrutiny.

We have to remember that the governor will not only chair every financial policy committee in the land with the sole exception of the FCA, but will be the lone high-level interlocutor with the Chancellor. He holds these positions while having no statutory responsibility to consult or involve other senior officials at the Bank or non-execs. He may consult and he may delegate, but it is entirely up to him or her. If they do not wish to do so they can ignore them all.

In Committee, the Government took an important step by creating the oversight committee. But noble Lords will notice that within the designations of the responsibilities of the oversight committee, there is one notable oddity. There is a notable absentee. Nowhere does there appear the verb “to oversee”. We have an oversight committee that does not oversee. In fact, a careful reading of the designated activities of the oversight committee reveals that all its key responsibilities are retrospective. It must keep under review. It must monitor. It must review procedures. It must conduct performance reviews. The only thing that it must not do is oversee. This is not an oversight committee, it is a hindsight committee—a valuable role, no doubt, but hardly an activity to moderate the powers of the “Sun King” governor other than by retrospective embarrassment, and governors of the Bank of England seem to be peculiarly impervious to embarrassment.

The amendment introduces the verb “to oversee”. It gives the oversight committee the power of oversight. This will have a number of beneficial consequences. The governor and the executive will, as in all good governance systems, be accountable to the non-executives for their activities and their policies. As in all well run organisations, the non-executives will not design the strategy or tactics of the Bank—that is the job of the executive—but they will be the advisers and the arbiters. They will oversee.

Instead of being either a glorified review committee in the shape of the noble Lord’s hindsight committee, or creatures of the executive, as in the court, the quality of a person likely to be willing to devote a considerable amount of time and effort to the job of non-executive of the Bank will be significantly enhanced because they are getting a real job. The foundations will be laid for the creation of a modern governance structure within the Bank of England, appropriate to the 21st century and to the major powers now vested in the Bank.

In this group there are also Amendments 3B, 3G and 3H, which are a direct consequence of the recognition of the role of the oversight committee in overseeing the activities of the governor in particular, and of the Bank in general. If the oversight committee is to exercise this role effectively it should have the final sign-off to the policies prepared by the court and by other executive institutions. I should be clear that in all well run firms it is the task of the executive to prepare policy and to execute it, but it is the role of the non-executives—of the oversight committee—to scrutinise and sign off the executive’s proposal. The oversight committee should oversee.

Amendment 3K makes clear that the role of the oversight committee in its task of overseeing is to approve the policy prepared by the court; it is the precise role of non-executives in all well run companies. Amendment 6C makes clear that the oversight committee is not to be confined to the impotent ghetto of reviewing procedures of the FPC but can also review the FPC’s policies. After all, if it cannot review policies what will the performance review be about? If it is given the task of performance review, surely it should review policies and not simply procedures.

I quite understand that the Government have not had long to consider this core idea, although they have had a bit longer than the noble Lord earlier suggested. I give credit to the Bill Committee and I understand the pressures it is under; similar pressures are experienced in my office.

[Lord Sassoon]

I do not want to labour the point but would the noble Lord, Lord Eatwell, accept that I did not list Amendment 3A as one that came late? I fully accept that this is not one of the hatful that I referred to as arriving late. We have indeed had longer to consider this amendment.

[Lord Eatwell]

Then I am sure that the noble Lord, having given the amendment such mature consideration, will be able to accept it.

I hope that, at the very least, the Government will agree to take this proposal away and think about it. After all, if we are going to have an oversight committee it should oversee; otherwise perhaps the Government should simply change the committee’s name. I beg to move.

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[Lord Sassoon]

My Lords, I know that the custom of this House on Report is that noble Lords do not make second substantive speeches, so the noble Lord will understand if I do not respond to his points—otherwise we will not make much progress. However, I will clarify one point in answer to the question asked by my noble friend Lord Flight about the removal of the governor and the suggestion by the noble Lord, Lord Myners, that the governor cannot be removed. This is of course wrong, as I am sure the noble Lord, Lord Myners, knows. If he would like to refresh his memory of the Bank of England Act 1998, paragraph 8 of Schedule 1 sets out precisely the conditions under which the governor can be removed.

[Lord Eatwell]

My Lords, I am very grateful for the discussion which I have enjoyed very much. I have been educated and entertained by the remarks made by noble Lords all around the House. The key position that we have to start from is that the Bank of England is different. Its structure is different and the structure of responsibilities is different. When we think about corporate governance, we have to think about the way in which we can maintain a suitable degree of accountability.

In Amendment 3A, I was attempting to nudge the Government a little further on the oversight committee which, as the noble Lord made clear in contradiction to what the noble Baroness, Lady Noakes, said, is entirely retrospective at the moment. In those circumstances, the maintenance of accountability is not really enough, given the degree of responsibility and powers that the Bank will have.

It occurred to me that a non-executive committee often has the final say. When things really go wrong, it is the non-executive committee that has to gather together and deal with what is going wrong in a company. Here the non-executive committee, by nudging it a little further and including the word “oversee”—for an oversight committee—would actually nudge the oversight committee, as conceived by the Government, in a direction in which it could hold to account the executive of the Bank to a greater degree than is the case at the moment. I think that the Government are being excessively complacent about this. We have this massive switch of powers, and we are being told that everything will be all right and that this Committee—which, as the noble Lord says, is entirely retrospective—will somehow create an aura of accountability. I just do not see that happening.

I regret that the noble Lord has not taken a constructive view of what we were trying to achieve. I would have been quite happy to accept some recognition by him that there is a degree of a problem in this particular institution and that we need—in this House and, indeed, in Parliament in general—to address this problem if we are to move forward successfully with the structure of financial regulation and oversight in this country. The noble Lord has given no indication of any sympathy whatever. Instead, he wants to keep the oversight committee purely retrospective, with no ability to take a broad view—not on a daily basis, of course not—and he wants the non-executives to have that specific role. Given that he has shown no interest at all and no understanding of the serious issues involved, I would like to seek the opinion of the House.

--- Later in debate ---

[Lord Peston]

My Lords, I support this amendment in substance. The noble Lord will be delighted to hear that I also wish to make a couple of semantic points. My noble friend said that the committee should have its own staff. My view is that it should not only have its own staff but should appoint its own staff, thereby guaranteeing that the staff are its own, work for it and, to use the slang expression, are not “narks” of the governor. Therefore, the noble Lord ought to accept the amendment.

My two semantic points are as follows. First, I find the committee’s name most unattractive. Will the noble Lord ask the Bill team to look up the definition of “oversight” in the dictionary as it has a very definite meaning which I am sure the Government and the Minister do not wish to be associated with this committee. It may not be too late to choose a more felicitous name. I wonder whether I am the only person who has thought what a ridiculous name the committee has.

Secondly, I congratulate my noble friend Lord Eatwell on solving the problem with which, as your Lordships know, the noble Lord, Lord Barnett, and I are obsessed: that is, the “must/may problem”. My noble friend has solved it in a really interesting way. He does not use “must” or “may” but “will”. I would like the Minister to ask the Bill team whether it would consider going down the path of using “will” rather than “must” or “may”.

[Lord Sassoon]

If the noble Lord, Lord Peston, could persuade his noble friend to rein back to just a couple of amendments a day, I am sure that we could carve out time to look at all sorts of semantics. However, I shall stick to the substance of this amendment, which seeks to place the bank under a statutory duty to ensure that the oversight committee has,

“adequate economic, legal and research support”.

I entirely agree with the sentiment behind this amendment. As we have already discussed this afternoon, the non-executive oversight committee has a very important job to do in reviewing the Bank’s performance and will require access to the information and analytical support that it needs. That is why, for example, the legislation makes it clear that members of the oversight committee have access to the meetings and papers of the MPC and FPC and have a specific remit to commission work and reviews from external bodies and experts.

It is a well established principle that it is the responsibility of the governing body of any organisation to ensure that its members and sub-committees are properly supported. I recognise that the Bank was slow to realise that the external members of the MPC required dedicated resource and support. I am confident that the Bank has learnt its lessons on this. Both the MPC and the FPC members have access to all the analytical and secretariat support that they need. I am wholly confident that the Bank will similarly make support available to the oversight committee to make sure that it is adequately supported without the need for legislation on this point. I hope, therefore, with the further reassurance on that, the noble Lord will see fit to withdraw his amendment.

[Lord Eatwell]

What the noble Lord has said does not address the important issue here. He said that the oversight committee will have access to papers, be able to commission work and have access to the secretarial and research skills of the Bank. However, the point of this amendment is to give what every non-executive group really needs, which is access to independent advice. Any non-executive group of which I have been a member has always prized its access to independent advice: that is, its ability to seek advice outwith the immediate organisation of which it is a part.

The point has been made around the House this afternoon that the Bank of England is different in a series of ways with respect to its overall organisation. It is also different in terms of the sorts of powers which it will exercise. Therefore, I feel very strongly that it is important that the oversight committee, which is, after all, the committee of non-executives, has access to independent advice. It is regrettable that the Government feel that assurances are enough. I entirely accept that the noble Lord and, indeed, the officials who have looked at this question feel confident in giving their assurances but they cannot bind their successors. The point of this amendment is to ensure that successors who hold this responsibility both within the Treasury and within the Bank recognise the importance of the advice and support that the oversight committee should receive if it is to do its job. I hope that the noble Lord will take that away and think about it although I probably hope in vain. Nevertheless, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Sassoon]

My Lords, I am not at this point going to get sidetracked into semantics, fascinating though I find it, as noble Lords know. Let me echo again, because I had said already what a good job the Bill team was doing, that I completely agree about that. I am very sorry that the noble Lord, Lord Peston, thinks—I am sorry; I meant the noble Lord, Lord Barnett. Do forgive me. The noble Lord, Lord Peston, may think that I am doing an excellent job but I know that the noble Lord, Lord Barnett, does not. Anyway, it is entirely my fault and not the fault of my officials, as the noble Lord recognises.

Let me try to be brief on this one. This is not a question of the governor having a power to overrule the oversight committee, as other noble Lords have said. The construction in the Bill is that it is for the Bank as whole—the court of the Bank—to decide and to make an informed judgment whether damage might be caused by the publication of a report on a public interest test. I understand the starting point of the noble Lord, Lord Eatwell, which is some suspicion or concern that the people who commissioned the report—the oversight committee—should be the group of people who decide whether it should be published. However, it is appropriate for the Bank as a whole—that is, the court, with a majority of non-executive directors, as my noble friend has reiterated again—to take the decision.

[Lord Eatwell]

My Lords—

[Lord Sassoon]

Perhaps the noble Lord will let me finish. It is a decision of the Bank. The Bank is better placed to make that judgment and the noble Lord, Lord Kerr of Kinlochard, makes the point that it would be only in exceptional extraordinary circumstances —I cannot remember his exact words—that one would envisage this being overturned somehow on the whim, or rather the view, of the governor, when the Court of the Bank of England looks at it.

Let me make one more point before I give way to the noble Lord, Lord Eatwell, because one critical part of this is that the Treasury will receive copies of all reports, regardless of their sensitivity. I would expect the Treasury to come to its own view on whether each report is genuinely unsuitable for publication. If it believes that the public interest carve-out was not justified, it would challenge that decision where appropriate, because the Treasury ultimately has an even wider perspective on the public interest. It is therefore right to remember that there is that further fallback, because the reports in all cases will go to the Treasury. Let me, as well as asking the noble Lord to consider withdrawing his amendment, give way to him.

[Lord Eatwell]

I just wanted to ask a question of clarification. What particularly disturbed me about subsection (3) of new Section 3D was that it refers to “the Bank”. Can the noble Lord assure me that in that subsection “Bank” means “court”? If he can, I would be happy. That is the point that I was trying to make. I think that I confused the noble Lord, Lord Kerr, slightly in that respect.

[Lord Sassoon]

Yes, my Lords, the court is the governing authority of the Bank, and that is, I believe, completely the right construction for this particular matter.

[Lord Barnett]

What the noble Lord said just now seems to provide a new reason to change the name of the oversight committee. We do not need one. He is saying that the governor and the board of the Bank will know better than the oversight committee. Why bother with an oversight committee at all? That would be a simple solution.

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[Lord Sassoon]

My Lords, I find it is bizarre and slightly disappointing to see this amendment again. My noble friend Lord De Mauley explained in Committee why the FPC requires an express power in statute to make recommendations whereas the Treasury does not. As the noble Lord, Lord Eatwell, recognises, I wrote to all interested noble Lords on 2 July setting out that explanation again, so I had rather hoped that the matter was resolved. I fear I should again explain the legal position, which is that the Government are clear that both the Treasury and the FPC should be closely involved in the ongoing development of the Bank’s financial stability strategy. I am happy to put that on the record. I have said a lot of other things which I am happy to be quoted on, such as comparing the practice under the old tripartite regime of people not talking to each other on a regular basis with what I now observe, which is much more regular communication. However, by amending this part of the Bill, I suggest we will not do anything more on that front. The Government are clear on that, which is why subsection (2) of new Section 9A of the Bank of England Act, as inserted by Clause 4 of the Bill, requires the court to consult both the FPC and the Treasury before determining or revising the Bank’s financial stability strategy. We do not need to overlabour the point, but it is a critically important one that the noble Lord raises and it is in there.

Moreover, the Government’s view is that neither the FPC nor the Treasury should have to wait to be formally consulted on the strategy. This should be part of the normal ongoing dialogue. If either body wishes proactively to suggest changes or amendments to the Bank’s strategy for financial stability, it should and will be able to do so. In order to ensure that this is the case, it is necessary to create an express power for the FPC to make recommendations to the court regarding the Bank’s strategy. As I have said before, this is because the FPC is a creation of statute, which means that the FPC’s main functions need to be set out in the legislation. That is why new Section 9A gives the FPC a power to make recommendations to the court on the financial stability strategy. If the provision did not exist, it would be unclear whether the FPC had the power to do so. In contrast, it is not necessary to create specific statutory provision to allow the Treasury to make recommendations. The Treasury already has a common-law power to make recommendations at any time to whoever it wishes.

Of course, the noble Lord, Lord Eatwell, does not challenge that underlying basis, but he makes a huge drama out of European authorities and overseas bodies needing to understand whether the Treasury has authority to do this, that or the other. I find it very unlikely that European bodies would need to do that, but if they did, their lawyers would understand very clearly the common-law construction, which would be explained to them. If we went down the line of not relying on the common law in legislation, I hate to think how a Bill like this would grow like Topsy.

I am genuinely puzzled by all this, but I hope that the explanation of the common-law position is clear and that it can be explained in these unlikely situations that the noble Lord postulates. Of course, these European authorities will have the benefit of reading Hansard as well. It is an important point that the interaction is much better than in some respects it has been in the past. We expect that to be the case. I would like to think that perhaps we have finally put this point to rest and I ask the noble Lord to withdraw his amendment.

[Lord Eatwell]

My Lords, it would be easier to withdraw the amendment if the noble Lord had actually answered the points. Essentially, all he has done is reiterate the common-law point and make the rather bold assumption that European-trained lawyers on the European Systemic Risk Board would understand the common law. However, if he is confident that that is the case and that a suitable number of British-trained lawyers, or the equivalent, can be seconded to that body, then perhaps things will work out in a satisfactory manner. I am glad to hear that he is confident that the interrelationship between the Bank, the Financial Policy Committee and the Treasury is ongoing and regular today as it was not in the past. That is a considerable improvement and I am pleased to have that assurance. However, there is an important element in financial legislation which the noble Lord overlooks. Financial legislation in a global financial market has to be really clear to all those around that market who read it. Simply saying, “We know because we are trained in the common law,” is really not good enough. I was trying not to change the relationship but to make it clearer. However, given that the Government are apparently not interested in doing that, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Eatwell]

I am sorry that I did not make myself clear. I was referring to a review taking place other than at three years and the effect that that might have on the confidence of the markets. They might feel that the Bank is not sticking to its usual three-year timetable but is bringing things forward because something is going badly wrong that it knows about and perhaps the markets are not fully informed about. An annual review is embedded in so many companies. The annual away-day where everybody goes off and does the annual review is such a standard procedure that I think the three-year business is a mistake.

I want to return to the noble Lord’s revisionist comments on the position that he took on the earlier amendment when we were referring to the business of the oversight committee and the public interest notion of publication. I asked the noble Lord whether in this section Bank meant court. I think that I made clear that if it did mean court, the best option would be for it to say so. Therefore, the best option would be for him to come back at Third Reading and say, “Look, the word Bank occurs all the way through the Bill. It is used in different contexts in different places and let us be absolutely clear who is responsible. We will amend this clause at Third Reading to say ‘court’ because that is what I mean. It is not what I say; it is what I mean”. Let us now say that the noble Lord means court.

I was quite deliberately saying that if the noble Lord really wants the word Bank to mean court throughout the Bill I would read through it. I was confident that I would have no difficulty finding a number of cases where he did not want it to mean court. That is why he has now stood up, having received the advice of his officials, to correct what he said earlier.

[Lord Sassoon]

My Lords—

[Lord Eatwell]

I am just finishing.

With respect to new Section 3D, it is important that we are clear that Bank means court there. We will take on advisement what the word Bank means elsewhere in the Bill.

[Lord Sassoon]

I merely wanted to say that I was not standing up to correct anything I said before: I stand exactly by everything that I said before. I wanted to head off the noble Lord, Lord Eatwell, from wasting a lot of time by going through and analysing the precise meaning and the underlined way in which the powers of the Bank would be exercised situation by situation in the Bill. It is up to the court as the governing body of the Bank as to what it takes unto itself and what it delegates to the executive of the Bank. I was merely trying to make a helpful suggestion that perhaps the noble Lord would find himself doing quite a lot of wasted work if we went too literally down this path.

--- Later in debate ---

[Lord Eatwell]

My Lords, I am sorry to prolong this, but now we are told that the court can delegate to the executive of the Bank. Is that the case in new Section 3D, which we discussed before? I am sorry to prolong this but I thought that the noble Lord made absolutely clear that in that section, Bank meant court—not a delegation to the executive or the governor or anyone else. He actually said himself, if I recollect accurately, that the court contains the nine members of the oversight committee, they would be sitting there and therefore they would not contradict themselves. There was no notion of delegation. They had a role. It is very important that legislation, particularly in financial policy, is clear. Can we please be clear on this particular element?

[Lord Sassoon]

I do think that the noble Lord, Lord Eatwell, is trying to get into semantic games. There is an important point. I was completely clear before and I think it is understood. It would be complete nonsense if a recommendation on such an important matter of the oversight committee, which is a committee of the court of the Bank, was taken by anything other than the court itself. That is plain and completely clear. That is what I said before and that is what I stand by. It would be absurd to suggest that the court would delegate such a matter. That is what I said and that is clear. But there are plenty of other matters throughout the Bill on what the Bank does where, equally, it would be ridiculous to suggest that the court did something itself and did not delegate.

[Lord Eatwell]

Well I rest on the proposition that I made earlier. If that is what the noble Lord means, why does he not say so instead of leaving this ambiguity on the face of the Bill?

However, returning to the issue of three years, I think that it is unfortunate for the reasons that I have spelt out. Annual reviews are completely usual and normal in the corporate and financial worlds. Everyone knows what they are. Three years leaves too much of a gap for unfortunate and disturbing events to occur that could then be exacerbated by the Bank’s seeming need to change tack at that time.

I hope people go away and think a little about this. I know that I almost certainly hope in vain, but hope springs eternal. In the mean time, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Eatwell]

My Lords, I have added my name, as has my noble friend Lady Hayter, to Amendment 5, which is the second-best amendment of the noble Baroness, Lady Noakes. However, even in this second-best version, achieving what the noble Baroness, Lady Kramer, referred to as “a bit more challenge” is an excellent and desirable objective.

[Lord Sassoon]

My Lords, this is an interesting and important area. The balance of the FPC’s members between the Bank and non-Bank executives is an issue that has been raised a number of times in this House, in another place and in the committees that have scrutinised the Bill. My noble friends who have spoken to this issue have done so with characteristic clarity and eloquence.

There is clearly an important argument about the possibility of rebalancing the membership of the committee away from the Bank executives and towards the external members. The external members will need to provide an outside perspective and challenge function to the deliberations of the FPC and, crucially, Amendment 4 achieves the important objective of enhancing the role of the non-Bank members while avoiding creating a situation where the Bank would be in a minority on the committee, which would make it virtually impossible to hold the Bank accountable for the FPC’s actions.

I see a great deal of sense in the alternative ways of doing this, but in the Amendment 4 approach rather than the Amendment 5 approach—the second best approach, as we now know it. I could not talk in the language of cognitive limits and other good stuff but, in a practical sense, I understand why having only nine voting members, which is comparable with the MPC, is better than having 11 members with a Treasury observer. Making the FPC larger by creating additional members would risk making the group unwieldy, and I now understand—which I did not before—that the Tavistock Institute provides a theoretical underpinning to what I see as a practical argument.

On balance, the proposal put forward by my noble friends to rebalance the committee by removing a Bank member is not only preferable to the one of adding an external member but has some attractions. The tone of my noble friend Lord Deben’s remarks was to assume that of course I would dismiss all this out of hand. However, this is a serious point and the committee has come back to it. We have been here before in a number of respects and it is important.

Amendment 6 would ensure that it is the executive director with responsibility for the analysis of markets who would be removed from the FPC. Although the person in this position may have an important role in providing information relating to financial markets to the committee, it is true that this role could be achieved without that person being a voting member. The executive director who would remain as a voting member on the FPC would be the director with responsibility within the Bank for financial stability, and I agree that that executive director would seem to be the appropriate person.

The remaining amendments are consequential in nature and simply remove a later reference to the executive director with responsibility for the analysis of markets and reduce the quorum of the FPC from seven to six, reflecting its reduced size.

--- Later in debate ---

[Lord Sassoon]

No? Sometimes silence speaks volumes. We can all—

[Lord Eatwell]

I am sorry, I will say something. The Monetary Policy Committee has had a damascene conversion. You can see it in the quantitative easing policy. Indeed, the Treasury continuously encourages the Bank to take a more aggressive monetary policy with respect to growth and employment and to ignore the high rate of inflation.

[Lord Sassoon]

My Lords, first, this is well trodden ground for the House so I will be brief. In any case, my noble friends have all made extremely telling points, which knock this one pretty comprehensively on the head. The FPC’s primary focus must be financial stability. That is its primary purpose, in the same way that the MPC’s primary focus must be price stability. Both financial and monetary stability are necessary prerequisites for stable and sustainable growth, so both committees already contribute to growth by achieving their primary purposes. Subject to doing so, they should act to support the Government’s economic objectives. The result of giving the FPC dual, equally weighted objectives for financial stability and economic growth would be to allow the FPC to take action that would damage financial stability with the aim of encouraging growth. This would take the FPC outside its remit and expertise, and frustrate its primary purpose—which has got to be financial stability.

I do not believe that the model proposed in this amendment is appropriate or workable and I ask the noble Lord to withdraw it.

[Lord Eatwell]

My Lords, this has been an intriguing discussion, since it appears to ignore the economic history of the last two years. I was struck by the comment from the noble Lord, Lord Deben, that nobody would possibly accept the notion that financial stability was important when growth was absent. He should come more often and listen to the noble Lord, Lord Sassoon, justifying the current policies of the Government. The Minister continuously says it is vital that the policy which has produced zero growth over a year, and leaves us with a level of output about 3.5% lower than the peak in 2008, is entirely justified by the need to secure financial stability. He refers to low interest rates and financial stability all the time. If the noble Lord would like to hear someone justify that position, he can just turn up and listen to the noble Lord, Lord Sassoon, justifying the Government’s policy. He will get that straightaway.

--- Later in debate ---

[Lord Sassoon]

I really do not want to prolong this too long, but the idea that somehow financial stability is the same as a sustainable fiscal position is really stretching the concepts a bit far. However, there we are.

[Lord Eatwell]

I was merely describing the way that the noble Lord continuously justifies the current squeeze that the Government wish to exert on the economy. The other really intriguing point is that it is the Government’s amendment that has introduced the growth and employment objective here, but he now tells us that it is outwith the committee’s expertise. So he has now introduced an amendment that is outwith the expertise of the committee that he has asked to consider it, even if as a secondary objective. I have been very struck by the debate, which has also failed to recognise, as I suggested earlier, the dramatic change in policy by the Monetary Policy Committee, urged on by the Government. This amendment simply attempted to believe, perhaps naively, that the Government might recognise what is happening in the policy-making of their institutions at the moment might give the FPC some credit for being able to make a mature and balanced judgment, given its overall responsibility for financial stability. However, I was no doubt overly naive there. On that basis, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Sassoon]

My Lords, again, this was an issue on which there was a comprehensive debate in Committee. As set out in subsections (1) and (2) of proposed new Section 9C of the Bank of England Act, the FPC is tasked with contributing to the Bank’s financial stability objective by identifying and monitoring systemic risks and taking action to reduce or remove those risks.

Subsection (5) defines “systemic risk” to mean,

“a risk to the stability of the UK financial system as a whole or of a significant part of that system”.

That means that any risk to UK financial stability is captured within the FPC’s remit. At the prompting of the Joint Committee that scrutinised the Bill in draft, we added subsection (6) to underline the fact that,

“it is immaterial whether the risk arises in the United Kingdom or elsewhere”.

Let me be clear: the FPC must identify and address any risk that could compromise the stability of the UK financial system regardless of its origin.

The purpose of subsection (3) is to specify certain types of systemic risk which the FPC should look for. This does not limit or restrict the FPC’s remit in any way. In other words, just because a systemic risk is not listed in subsection (3) does not mean that the FPC has any less of an obligation to identify, monitor and address it. There could perhaps be a temptation to continue adding to subsection (3) in an attempt to try to define all possible sources of systemic risk. But this would be a fruitless, and potentially counterproductive, endeavour.

Amendment 6E seeks to add,

“factors likely to lead to a loss of confidence in the financial system as a whole”,

to the list. I agree that a loss of confidence can magnify cross-sectional or structural risks captured in the financial system. But I do not believe it would be appropriate to expand subsection (3) in this way. As I have said, the list is not intended to be exhaustive, rather it is designed to highlight the broad categories of systemic risk that have been identified by academic research, something which the noble Lord is rightly keen that we should factor in. Subsection (3) as it stands already serves this purpose by describing the main categories of cross-sectional and cyclical risk. I hope that, on the basis of this explanation, the noble Lord will withdraw what I continue to see as an unnecessary amendment.

[Lord Eatwell]

Before the noble Lord sits down, I heard but one argument against the case that I was making, which was that it was not appropriate. Will he explain why it is not appropriate?

[Lord Sassoon]

My Lords, I thought that was what I had done in the last three minutes. I explained that this is not an exhaustive list. Yes, the factor that the noble Lord identifies is an important consideration, but we have included the much more specific categories of systemic risk which are identified in the research. If we started putting looser considerations in there, it would be difficult to know where the list should stop. Indeed, as one extends lists like this, it risks by implication leaving out other important factors. I do believe that subsection (3) and the whole of proposed new Section 9C as drafted completely embrace the ability and the requirement for the FPC to pick up what the noble Lord is getting at, but does not run the risk of us trying to draft in some of the other things that we all might be able to think of.

[Lord Sassoon]

Yes, I agree with my noble friend. He makes an important point.

[Lord Eatwell]

Well, yes, my Lords, the logic of the noble Lord’s argument is either to accept my amendment or delete proposed new subsection (3) altogether, because one has to ask: what does it do? It says:

“Those systemic risks include, in particular”.

In particular, this is what the committee should be looking at. That is misleading in that it focuses on structural issues of the economy, which are microeconomic —on leverage and on debt, which are microeconomic, and on credit growth, which is moving into the more macroeconomic area. What it fails to do is to take in the general point of the loss of confidence which can come from other sources.

As I pointed out when I introduced this amendment, I deliberately constructed it so as not to get into the trap of attempting to produce a detailed list. It certainly does not do that. It simply alerts the committee. If the committee is to be alerted to deal with a number of factors in particular, it seems that it should also be looking in particular at those factors which might lead to a general loss of confidence in the economy as a whole.

So if the Government really wish to ask the committee to focus in particular on some things, I would like my amendment to be accepted. If, on the other hand, it is quite happy to rely on subsections (5) and (6), I suggest that subsection (3) be deleted, so as not to create this spurious concentration on a particular list of points.

However, given that the argument has made little progress, I beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Eatwell and Lord Sassoon

Tuesday 6th November 2012 Lords Chamber

[Lord Eatwell]

My Lords, noble Lords will notice that this group includes Amendments 6M and 6Q. I apologise to the House for not moving those amendments at the appropriate time, but as noble Lords may recall, there was considerable confusion between the Deputy Chairman and the clerks and everyone here. The noble Lord, Lord Sassoon, was not confused. He never is. But in the confusion I inadvertently failed to move these amendments. I also apologise that at that time I failed to support the noble Baroness, Lady Noakes, when she presented her arguments for Amendment 7, which I wholeheartedly support, as indicated by the fact that I added my name to hers. With the leave of the House, I will proceed with the remaining amendments in group 19, namely Amendments 7A, 7B and 7C.

The purpose of this group of amendments is to ensure that there is regular consultation between the Treasury and the FPC over the FPC’s directions and its recommendations. Leaving aside—since the time has passed—the question of directions, even though they are more important, Amendments 7A, 7B and 7C serve to emphasise the interest that we all have in requiring that regular consultation takes place. The idea is simply that in making a recommendation the FPC would have a discussion with the Treasury about that to ensure that both sides are, if you like, singing from the same hymn sheet.

This is part of the endeavour that we have on this side of the House to ensure that the whole development of the financial stability analysis, the financial stability strategy and the financial stability actions is co-ordinated effectively between the FPC and the Bank as a whole—whether Bank means court or Bank or whatever—and the Treasury. I beg to move.

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

My Lords, this group of amendments seeks to require the FPC to consult with the Treasury before issuing a recommendation, directing the PRA or FCA to take action or revoking an existing direction. I am certain that not only are these amendments unnecessary, they would damage the independence of the FPC.

As I am sure noble Lords are aware, the Bill provides for a non-voting representative of the Treasury to be a member of the FPC. This Treasury representative will be able to ensure that the views of the Treasury are available to the committee if required. This renders these amendments unnecessary.

Let me explain why, more seriously, I feel that the amendments could be harmful to the work of the FPC. The Government have drafted the Bill so that the FPC will be housed within the independent Bank of England. It is paramount that macroprudential policy decisions are insulated from political considerations. The purpose of the FPC is to “take the punchbowl away” when the party is getting too raucous, something that politicians of any affiliation may be reluctant to do.

By insulating the decisions of the FPC from political considerations, it will be much easier for the committee to be a credible and effective policy-making body. The amendments would risk that credibility by requiring the FPC to consult the Treasury before it makes any policy decision. For that combination of reasons, I ask the noble Lord to withdraw his amendment.

--- Later in debate ---

[Baroness Noakes]

My Lords, what the noble Lord, Lord Eatwell, has said is entirely sensible. I cannot see the distinction between those directions which have been made and continue in force and those which have been made and revoked. This is about public communication, the directions being made and their effect. The information that we gain from a revocation must be at least as good as from the making of a direction.

[Lord Sassoon]

My Lords, the amendment reflects a slight misunderstanding of the purpose of the reviews that we are talking about in new Section 9T of the Bank of England Act, as inserted by Clause 4. The purpose of these reviews centres around live actions and requiring the FPC regularly to look again at all live actions—in other words, at the directions and recommendations that still have effect—and to review whether or not the action is still needed. That is a rather different matter from the admittedly important question of reviewing past actions and learning lessons, which is not the subject of the clause.

The idea behind the new section is to ensure that FPC actions do not remain in place if the circumstances which originally merited them have disappeared or changed substantially. Of course, we would expect the FPC as a matter of course to keep its past actions under review and revoke them once they are no longer needed, but new Section 9T ensures that this will be the case by creating a formal requirement for the FPC to review regularly all of its live directions and recommendations.

Amendment 7D seeks to remove the wording in subsection (1)(a) which provides that the FPC need not review directions that have already been revoked. The provision is appropriate because once a direction has been revoked there is no need for the FPC to review it to determine whether it is still needed; the direction is already defunct. It is as simple as that.

The concern of the noble Lord, Lord Eatwell, lies clearly in the importance of the FPC evaluating the impact of its actions. I can reassure him that mechanisms already exist elsewhere in the clause to address this issue. First, new Section 9S requires the FPC to set out for each of its actions an explanation of its reasons for believing that the action is compatible with its objectives and associated “have regards”, including where practicable an estimate of the costs and benefits of the action. Secondly, subsection (4)(b) of new Section 9W requires the FPC to include in each financial stability report an assessment of how its actions have succeeded in achieving its objectives. Finally, the new oversight committee of the court has an explicit remit to oversee the FPC’s performance and can undertake or commission a more comprehensive review of the FPC’s past actions or approach where appropriate.

I am confident that the FPC’s actions are already subject to extensive mechanisms of oversight and evaluation and, as I said at the outset, that the amendment reflects, perhaps, a slight misunderstanding of what the purpose of the specific provisions in new Section 9T is all about. I hope that on the basis of that explanation the noble Lord will feel able to withdraw his amendment.

[Lord Eatwell]

My Lords, my immediate reaction is that if that is what the new section meant, why did it not say so? We persistently have a point where there is a lack of clarity in the Bill and, time and again, the noble Lord says, “That is what we said but it is not what we really meant”. It is truly unsatisfactory.

On the areas which he says cover the issues that I raised, proposed new Section 9S specifically refers, I think—although of course it may not mean this—to a prior explanation of specified purposes. It provides for an explanation of why the FPC is doing something, which seems to be a prior requirement, not an assessment of effect.

The Minister is on stronger ground on new Section 9W(4)(b), which refers to whether the functions of the FPC have succeeded, but it refers generally to its functions rather than to the specific issue in new Section 9T, which refers to the very sensitive and important area of directions.

There is another important point. It is quite possible that a direction would be introduced to deal with a particular set of circumstances and revoked because those circumstances have been mitigated, but then reintroduced some time later because the problem reappears. In those circumstances, all this stuff about live actions is irrelevant. We need to learn from both those actions that are contemporaneous and those that may be introduced from time to time to deal with specific circumstances. I really feel that this is a very unsatisfactory approach to the general issue of review.

I will keep talking so that the Minister can get his note and say why I have got it wrong; he has it now. The issue of keeping matters under review should include those matters that only last for a period within the relevant 12 months, as well as those that go forward. Shall I sit down? No, the Minister did not get a good reply in that note. This is an issue that I want people to think about: either the clause is badly drafted and not clear, or the amendment should be considered appropriate. However, for the moment I beg leave to withdraw the amendment.

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[Lord Eatwell]

I assure the House that this is going to stop soon. First, I draw attention to a drafting error in the amendment as tabled. It refers to the “Chairman of the PRA”, who is of course the Governor of the Bank of England, rather than the chief executive. The objective of the amendment is to widen the group who meet to assess the importance of the Financial Stability Report, a very important document that has been one of the most interesting and creative documents published by the Bank for some years, not least because of the major intellectual influence of the executive responsible for financial stability. Since the FCA and the PRA are the vehicles through which the FPC—I apologise, everything is just three letters—exercises its influence, it is important that informed discussion and assessment between the Treasury and the Bank should include the chief executives of those two bodies and not simply be between the governor and the Chancellor.

The amendments have the added advantage that, should we have a governor who wishes to delegate responsibilities in order to reduce the excessive load placed on his or her shoulders by this Bill, this would in no way reduce the value of the Bank-Treasury meeting and the quality of the assessment of the Financial Stability Report. It seems enormously valuable to have these two individuals—the chief executives of the FCA and PRA—there, because they are the people who implement the proposals of the Financial Policy Committee and will help in the general assessment of the Financial Stability Report. I beg to move.

[Lord Sassoon]

My Lords, are we inserting “chief executive”?

[Lord Eatwell]

It was a drafting error. It should not have said “Chairman”.

[Lord Sassoon]

So it is chief executive. I am not sure whether I heard chairman or chief executive but it should have said, “Chief Executive of the PRA”.

In responding to Amendment 7E it may help if I explain the purpose of the meetings set out in new Section 9X of the 1998 Act. The success of the new regulatory structure will rely heavily on the relationship between the Treasury and the Bank of England. As has already been noted this evening, one of the major problems leading up to the financial crisis was that the tripartite committee established under the previous Government’s regime did not meet at the principals’ level for a decade. The Chancellor and the governor simply did not meet often enough to discuss financial stability. When the crisis hit—I am sorry the noble Lord, Lord Eatwell, thinks this is an amusing matter. Unfortunately, this was one of the most serious issues when it came to handling the crisis.

[Lord Eatwell]

I agree with the Minister. It is a terribly serious matter. When he adds the phrase “for a decade”, it is such desperately bad news that some degree of amusement is the only relief to the depression that one feels at the failure of this mechanism.

[Lord Sassoon]

Believe you me, I was on the standing committee of deputies for three years and I saw it at first hand. There we are—we understand the difficulty. At a personal level and in terms of institutional arrangements and practices, the absence of meetings clearly has a very significant impact when it comes to handling a crisis. However, everything is now different and as it should be. The Chancellor and the governor now meet often. Indeed, under the previous Government, once the crisis hit, of course that was also the case. But it was not always the case, as I have said, and as we understand. Without the requirement in new Section 9X, there would be no guarantee that the regular meetings would happen in the future, once the individuals concerned change and memories of the current crisis have faded.

New Section 9X therefore places a legal requirement on the Chancellor and the governor, in his capacity as chair of both the FPC and the PRA, to meet formally at least twice a year, shortly after the publication of the FPC’s twice-yearly Financial Stability Report. I agree that it is a truly creative, in the best sense of the word—which I am sure the noble Lord, Lord Eatwell, meant—and important document.

Of course, both the Chancellor and the governor may invite others to attend the meeting. For example, the Treasury’s Permanent Secretary or another senior official may attend. The Chancellor’s private secretary may also be in the room. On the Bank’s side, the governor may well choose to invite another deputy governor or the executive director responsible for financial stability to attend the meeting with him. However, I believe the approach taken in the Bill—for the legal requirement to meet to be on the Chancellor and governor only, leaving it up to each attendee to decide if others should be present—is the correct one. The governor will be best placed to decide, based on the content particularly of the Financial Stability Report and the wider financial stability context, which, if any, of his senior executives should attend the meeting.

If the chief executive of the PRA were required by statute to attend every meeting, surely there would be an argument for all the other senior Bank officials who had some responsibility for financial stability to also be added to the list. Equally, if the CEO of the FCA were required by legislation to attend every meeting, would there not be an equal argument for the external members of the FPC also to be required in the room? This could go off in all sorts of directions. A small, personal meeting between the Chancellor and governor could easily turn into a large committee if we were to take that approach.

This is an important opportunity to restate our common objective: to make sure that the principals meet. It should not be necessary to have such a meeting in legislation, but regrettably history has shown that it is. That is the purpose of the requirement, as a backstop for those meetings to happen, but it continues to be the Government’s view that the attendance of others should be left to the discretion of the principals. On the basis of that explanation I again ask the noble Lord to withdraw his amendment.

[Lord Eatwell]

Before the noble Lord sits down, perhaps we could probe the discretion of the principals a little. Supposing the governor wants to turn up alone and the Chancellor wishes the chief executive of the PRA to attend, would that be possible?

[Lord Sassoon]

That is not then a question of legislation but a question of common sense and how the parties get on with each other, and I am sure that common sense would prevail. For that sort of circumstance, no amount of legislation is going to get around people behaving sensibly. If we put a particular attendee or two into these meetings the same question arises about others who one side or the other might believe would be sensible to have at a particular meeting given the topics that might be under discussion. We have to rely on the good sense of the principals here.

[Lord Eatwell]

Yes, well, we hoped that we could rely on the good sense of the principals to run the Financial Stability Committee, but they did not meet for a decade so they were not very sensible, were they?

If I may respond to the noble Lord, I feel that his vision of the committee extending to indefinite size is really excessive. We are identifying the chairman of the Financial Policy Committee, namely the governor, and the two operational figures—the chief executive of the FCA and the chief executive of the PRA—to be in this meeting to assess the financial stability position in the light of the financial stability report. I think that would be valuable. I quite understand that others can be invited in but, as we have seen in the past, these matters are not necessarily as well handled as, in retrospect, we would like. I hope that this matter might be reconsidered in due course, but for the moment I beg leave to withdraw the amendment.

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[Lord Eatwell]

Before the noble Lord sits down, if the FPC wished to seek external advice, would it be suitably resourced to do so?

[Lord Sassoon]

Unequivocally, yes.

[Lord Eatwell]

In that case, I am far more content than I thought I would be, and I beg leave to withdraw the amendment.

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[Lord Eatwell]

My Lords, I agree that these are indeed sensible measures. I have just one question. These days many actions and investigations by regulators are taken on behalf of what are truly other regulators—that is, regulators in other jurisdictions—and that exchange of information and co-operation is a hugely important activity. When the British regulators are taking very sensitive information in an area where there is a great deal of legal activity—for example, the relationship between the FSA and the regulator in Austria is a particular case—would they have immunity in that case as well?

[Lord Sassoon]

If the situation that the noble Lord is suggesting is one in which the FSA or a successor body was taking an action at the request of the Austrian authorities, I can confirm that in that case the immunity provisions would apply to the actions of the UK regulators.

Financial Services Bill

Debate between Lord Eatwell and Lord Sassoon

Monday 8th October 2012 Lords Chamber

[Lord Sassoon]

That the House do now resolve itself into Committee.

[Lord Eatwell]

My Lords, I rise to raise an important issue concerning the conduct of the Committee stage of the Bill. On 3 October—last Wednesday—I wrote to the noble Lord, Lord Sassoon, in these terms:

“The Wheatley study on the future of LIBOR has produced a series of conclusions with which the Labour Party is broadly in agreement. I congratulate both Martin Wheatley and his team for their achievement, and the Government for initiating this investigation.

I note from the statements of Treasury ministers, and from the Treasury website, that it is the Government’s intention to implement the Wheatley proposals by means of amendments to the Financial Services Bill. No such amendments have been tabled as of yesterday”.

That was 2 October, and indeed no amendments have been tabled as of today.

“I presume that such amendments will involve predominantly clauses that have not yet been debated (as suggested by reference to particular FSMA clauses in the Wheatley Report itself)”.

The Wheatley report refers to the first clause that we will debate today.

“However, it is possible that you will also need to introduce amendments to clauses already debated, in which case it would be entirely inappropriate to introduce such amendments at Report. Given the importance of these issues it is imperative that the House have the opportunity to debate these matters in the freedom of Committee, rather than under the constrained rules of the Report Stage.

May I therefore have your assurance that should the Government, as a consequence of the Libor scandal and of the recommendations in the Wheatley Report, plan to introduce amendments to clauses 1 to 5, or at some later stage, amendments to clauses at that time already debated, that you will re-commit the appropriate clauses, hence ensuring that the House of Lords has the scope for full debate”.

It has since become clear that the Government intend to introduce on Report all the entirely new material presaged in the Wheatley report. The noble Lord, Lord Sassoon, wrote to me on 2 October—the day before I wrote to him which was somewhat mysterious. He said:

“I do not believe that it is necessary to recommit the Bill, and see no reason why a substantive debate on the relevant clauses at Report stage would offer insufficient opportunity for scrutiny by the House.

Re-commitment would risk unnecessarily delaying the implementation of both these important reforms to LIBOR setting processes, and of the equally urgent reform of the UK’s financial regulation regime which we have been debating through the Committee sessions to date”.

The noble Lord’s reply does not take into account what I actually asked for. First, I was not asking for total recommitment. I was asking only for the clauses which deal with entirely new material from the Wheatley report to be recommitted. Secondly, I believe very strongly that with respect to financial regulation it is not an issue of quibbling about delay but of getting it right. These enormously complex matters deserve the iterative consideration which is possible only in Committee. I remind noble Lords that on Report they can speak only once. Thirdly, it is quite wrong to deny this House the opportunity to consider entirely new and complex material within a Committee setting. I would therefore ask the noble Lord, Lord Sassoon, to reconsider his rejection of my proposal that the relevant clauses be recommitted.

If he is unwilling to do that, perhaps I may make a constructive proposal. Either he or the Chief Whip, who unfortunately is not in her place, should give an assurance that the rules of Report will be relaxed for consideration of what might be called the “Wheatley” clauses when they are introduced.

--- Later in debate ---

[Lord Eatwell]

My Lords, although I agree with the noble Lord, Lord Sharkey, that it is enormously important that we improve the flow of funding to small firms, particularly given the complete failure of the Government’s attempts to improve the funding through banks to small firms, I believe that we should approach this proposal with great care. The problem with crowd funding is that crowds can often be subject to hysteria. We have seen hysterical funding levels in what might be deemed to be fashionable or popular companies: lastminute.com comes to mind, as does the recent launch of Facebook. In both cases, excessive hysteria associated with the popularity of the particular company led to investors losing quite a lot of money.

However in the SME sector, the fundamental problem for small investors is the risk to which they are exposed. They will necessarily have significantly less information than they would from a listed company. Given that lack of information, and the high mortality rate of small and medium-sized companies—thankfully they have a high birth-rate as well—it is likely to lead to a lot of not-very-well-off people losing significant sums of money.

[Lord Sassoon]

My Lords, I will put some things to one side before I deal with the main substance of my noble friend’s argument in this short and interesting debate around crowd funding. First, for the help of the noble Lord, Lord Barnett, there is indeed no Section 417 because crowd funding has been introduced into this Bill by my noble friend Lord Sharkey. I am sure that in due course he will table a Section 417 which will make us all a lot clearer about the definition. However, for the interim benefit of the noble Lord, Lord Peston, and rather than me banging on about what crowd funding is and boring the rest of the House, I draw his attention to the FSA guidance on this topic put out in August this year. It gives a helpful short introduction to what it is all about.

Financial Services Bill

Debate between Lord Eatwell and Lord Sassoon

Wednesday 25th July 2012 Lords Chamber

[Lord Eatwell]

My Lords, I support the noble Baroness, Lady Noakes, in the amendment that she proposes. I have added my name, as has my noble friend Lady Hayter. It is clear that there must be a satisfactory set of amendments for reviewing the effectiveness of this new regulatory structure and whether it provides value for money as conceived, particularly given the added complexity of what the noble Viscount, Lord Trenchard, referred to as the multiplicity of regulators now created out of this single structure.

I speak, too, to Amendments 128BB and 130AA in the name of myself and my noble friend Lady Hayter. Amendment 128BB adds to a definition of an independent person that a person appointed to review the FCA must be independent of the FCA but also of the Bank of England. We should have somebody standing outside this regulatory complexity who should be deemed to be independent. I suggest that if the person appointed is a staff member of the Bank of England, the notion of independence will be compromised, even though the FCA stands outwith the Bank of England. I hope that none the less there will be continuous regulatory dialogue between all the elements in the regulatory apparatus that we are designing here and that it will therefore be necessary, if somebody is independent, that they should stand outside that regulatory community, of which the Bank of England will be a leading part.

The point with Amendment 130AA is that the Treasury in appointing an independent person to conduct a review should inform the Treasury Select Committee of the nature and arrangements of the review, the idea being that that committee itself conducts reviews of the operations of regulatory institutions and will greatly economise on and facilitate the overall operation of a review procedure if there is no duplication and if there is clear communication and understanding between what the Treasury Select Committee and the independent person are doing. These two scrutiny agents should be co-ordinated and we should not have further segmentation; we have too much in this Bill already, and we should not have further segmentation in the procedures that we are designing.

[Lord Sassoon]

My Lords, first, I will make some comments on Amendments 128B and 130A, and explain who can initiate reviews. One of the main points made by my noble friend was essentially about how things are different from the way they have been up until now, and who can initiate reviews. I am sure we all agree that the Treasury’s power to appoint a person to carry out a value-for-money review is important to support accountability to the Government, to Parliament and to the public, not least because those reports of reviews must be published and laid before Parliament.

However, regarding my noble friend’s particular point, in future the NAO will also be able to initiate its own VFM reviews. As she identifies, that flows as a result of the Bill making the regulators subject to the NAO audit. I hope that provides reassurance to her on that important point. Clearly our expectations should be in the right place. The NAO can only conduct a certain number of VFM reviews each year across the whole of the public accounts which they audit, but I think my noble friend explicitly said—and I agree with her—that it would not be a question of an annual review. At the same time, the Government need to be able to order a review of the FCA at any time, with the option to focus on areas of the FCA’s activities they see as a priority, and be accountable for the way they exercise this power. In practice, the Treasury is likely to choose to appoint the NAO to carry out such a review. As such I do not see what would be added by placing an obligation on the Treasury to order reviews under new Section 1S, particularly as the amendment does not specify the time period or any of the other circumstances in which a review should be held; I think my noble friend recognises that. Particularly in the light of the fact that the NAO itself will be able to initiate VFM reviews, it would be too early to say how frequently the Treasury will use its power, because it will clearly dovetail to some extent with what flows from the audit. However, in response to my noble friend’s key point—she quoted my honourable friend the Financial Secretary—I am confident that the arrangements we have proposed will deliver a step change in the FCA’s accountability to Parliament, as compared to the way it has been with the FSA, for the way in which the FCA uses its resources to achieve value for money.

Amendment 128BB seeks to amend the requirement that a person appointed by the Treasury to conduct a review must be “independent of the FCA”, by adding the requirement that they must also be independent of the Bank of England. I absolutely agree that it is important that VFM studies of the FCA are carried out by someone independent of the FCA itself. That is what is proposed in the draft of the Bill itself, not least to provide assurance that they are objective and impartial. As I have said, in practice the Treasury is likely to choose the National Audit Office to carry out such a review. However, the Treasury will have the discretion to appoint an independent expert or a commercial firm with relevant specialist expertise to conduct a review. In that context the amendment is too wide, in that it could prevent any firm or expert which had done any significant amount of work for the Bank of England from carrying out such a role. From what the noble Lord said I appreciate that that was not the intention, but ruling out that population of firms or experts would be the effect of requiring the FCA reviewer to be independent of the Bank.

--- Later in debate ---

[Lord Eatwell]

If I may say so, that is absolute nonsense. Are we actually suggesting that any independent firm or individual who has done work for a government department is thereby compromised and no longer an independent person? Are we saying that an independent person who has happened to write a few papers for the research department of the Bank of England is now no longer an independent person and is thereby compromised because he is not independent of the Bank of England? That is a misuse of language.

[Lord Sassoon]

First, I am not sure why the noble Lord, Lord Eatwell, talks about advisers to government departments. Here, we are talking about finding firms to carry out value-for-money reviews of the FCA, and independence from the FCA would seem to be the overriding concern. We are not talking about the Bank of England itself or some part of the Bank of England’s wider group doing the review. As I am sure the noble Lord knows, with all the increasingly tough professional codes that exist, the definition of independence is becoming ever tougher. Therefore, although the noble Lord and all of us might like to go back to a sort of common-sense, gentlemanly world that once existed, I absolutely stand by what I said. The amendment—whose effect incidentally goes wider than the noble Lord indicated in speaking to it—would capture a range of firms just because of the way that professional independence has come to be defined these days. Therefore, I stand by my analysis of the amendment.

Amendment 130AA would require that when the Treasury orders a review of the economy and efficiency of the PRA, it informs the Treasury Select Committee of the nature of, and arrangements for, the review. I understand that the amendment is driving at the importance of accountability to Parliament. The Government agree that that is important, which is why there is already a large amount on this subject in the Bill, including the provision for NAO audit, which we have discussed.

Requiring the Treasury to inform the Treasury Select Committee of the nature of, and arrangements for, the review at such an early stage might have some benefits of the sort that the noble Lord identified but I fear that it is more likely to be seen as an invitation for the Treasury Select Committee to comment on or even attempt to change the remit of these important reviews. I suggest to this Committee—I would not suggest anything to the Treasury Select Committee—that adding another political hurdle could slow up the process of producing these reviews. It may even make it less likely that they will be commissioned in the first place if there has to be a negotiation of the sort that I fear.

I hope that those explanations are sufficient for my noble friend to be able to withdraw her amendment.

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[Lord Eatwell]

My Lords, this amendment and Amendment 128BFB seek to ask the Government to clarify their definitions of the scope of the markets in which UK financial institutions operate. We have already seen some very peculiar UK-centric views in proposed new Section 9C of the Bank of England Act 1998, which I hope we will see extensively modified on Report. In this clause, however, the Bill currently refers to having,

“any adverse effect on the stability of the UK financial system”.

This fails to recognise the global nature of UK banking, and that risks may arise anywhere in the world where UK financial institutions operate.

We want to ensure that the actions of UK financial institutions are such as to sustain the stability of the entire financial system in which they operate. Why? It is because destabilising actions in foreign markets may destabilise subsidiaries of UK financial institutions and, ultimately, the home institution. However, this could not be said to refer to the UK financial system. I will put it again: if in a foreign market a subsidiary is destabilised by actions here, that subsidiary ultimately destabilises an institution here—not the system but an institution. Can the noble Lord please explain how the current wording of the Bill deals with the fact that the balance sheets of UK financial institutions are typically written on a global scale?

[Lord Sassoon]

My Lords, these amendments seek to give the PRA a global financial stability remit. Instead of the PRA looking at UK financial stability, the amendment would have it looking at the financial stability of every market around the world in which any PRA-authorised person operates. The PRA would have a new responsibility for the financial stability of many markets where it has no powers, no jurisdiction and no tools. I suggest that this is plainly an absurd position. Although cross-border co-operation is vital to ensure the effective supervision of international firms, it is ultimately for each country and its regulators to ensure its own financial stability, or a single currency bloc may decide that financial stability needs to be supervised ultimately on a currency bloc basis.

[Lord Eatwell]

My Lords, I think that the noble Lord has misunderstood the amendment. If he inserts the amendment and looks at subsection (3)(a), it would refer to,

“seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect”,

on markets in which PRA institutions operate. The noble Lord is suggesting that the PRA would not have jurisdiction, whereas the PRA does have jurisdiction over PRA-authorised persons.

[Lord Sassoon]

I have read and reread these amendments and discussed them with officials on a number of occasions because I cannot believe that this was the effect that the noble Lord, Lord Eatwell, wanted. Actually, it is entirely the effect of his amendments to require that the PRA’s general objective is to be advanced by,

“seeking to ensure that the business of PRA-authorised persons is carried on in a way which avoids any adverse effect on the stability of the”—

if amended—

“financial markets in which UK financial institutions operate”.

They would have to regulate in a way that had regard to the financial stability of all these markets around the world, which does very directly get the PRA into the protection of financial markets way beyond its own control in the UK.

I will explain why I think the Bill adequately covers the noble Lord’s justifiable concern. What I have said so far in no way means that the PRA will ignore the stability of any financial market outside the UK that is relevant to PRA-authorised firms. The PRA will take an interest in the stability of any market that has a significant impact on the safety and soundness of one or more PRA-authorised persons. It will do this not in order to improve the stability of this market but to understand the potential or actual impact on regulated firms and to take steps so that this impact is minimised using all the powers available to it. I cannot identify anything in the Bill that limits the PRA or prevents it from taking account of all those factors. It is quite a different thing to put in wording, as suggested in these amendments, that would make the PRA in some way responsible for the effects on the stability of financial systems outside the UK. With that explanation and reassurance, I hope that the noble Lord will feel able to withdraw his amendment.

[Lord Eatwell]

My Lords, it is very difficult to be reassured by a statement that the PRA would sit back quite happily and watch PRA firms take actions that would destabilise foreign markets. However, given that the Treasury seems to have no concern about PRA firms destabilising markets outside the UK, I beg leave to withdraw the amendment.

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[Lord Sassoon]

My Lords, this amendment reflects a recommendation from the Joint Committee that a secondary general microprudential objective be given to the PRA. It seeks to specify a further means by which the PRA’s general objective should be achieved, by minimising the costs to the FSCS or the use of public funds to support or rescue parts of the UK financial services industry. A similar amendment to this was tabled and debated in another place.

The Government acknowledge that there are some attractions to reframing the objective in terms of the prudential outcomes that the PRA will seek to achieve, as the Joint Committee suggested. However, specifying particular desired outcomes creates difficulties. For example, whether the failure of a firm results in a call on public funds will depend to an extent on the actions of the Government of the day—for example, in taking a decision to nationalise or recapitalise a failing institution. In some circumstances, the orderly failure of a firm followed by an FSCS payout may be the best way of protecting depositors and taxpayers while maintaining market discipline. The effect of specifying such outcomes could be to encourage the PRA to take a highly aggressive and expensive approach to supervision with an end goal of ensuring that, if a firm failed, its potential costs of failure to the FSCS and public funds would be zero or negligible. To ensure this outcome, the PRA would need to intervene extensively in a firm’s day-to-day affairs, undermining the responsibility of firms’ management for running their firm. Ultimately, in an extreme case, it could turn PRA supervisors into shadow directors.

To place such a duty on the regulator would be against the Government’s intention, endorsed by the Joint Committee and confirmed in new Section 2F inserted by the Bill, that the new regulatory regime should not be a zero-failure regime. The amendment would bias the PRA towards a zero-failure regime. On balance, the Government believe that it is better to frame the objective more broadly, requiring the PRA to focus on the safety and soundness of individual firms, so as to improve financial stability. This objective gives the PRA a clear mandate to intervene to address risk-taking by firms.

I hope I have been able to make clear to the Committee why I cannot accept this amendment, and why I ask the noble Lord to withdraw it.

[Lord Eatwell]

The Minister has exposed some very interesting arguments here in the relationship between the degree of protection which should be provided to consumers and the public purse, balancing that against the degree of supervision of firms. The Government seem to want to err on the side of jeopardising the public purse a little rather than providing supervision that would protect the public purse. However, in the context I can see that a balance is being discussed here, and the Minister has made clear where the Government’s view of that balance lies. In that light, I beg leave to withdraw the amendment.

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[Lord Sassoon]

My Lords, the noble Lord, Lord Eatwell, raises an important point here that we want to on one hand future-proof the Bill, and on the other hand make sure that the future ring-fence around regulated activities—the regulatory perimeter—is not widened on a whim. It is not an easy line to draw. If it required primary legislation—not that the noble Lord was suggesting that—to extend the PRA’s objectives to bring other activities within the regulatory perimeter, that would be a complicated 12-to-18 month process that would not allow for a timely response.

The situation that I generally envisage is one where the FPC would ask for the regulatory perimeter to be widened. That, I suggest, is sensible and necessary future-proofing that enables the authorities to react to changes in financial markets and financial risks in a pragmatic way, whether it is to allow for innovation, or for any other reason. To give a couple of examples which could come up where the FPC could recommend such an extension of the perimeter, it might relate to some or all shadow banking activities or to peer-to-peer platforms or activities, which we have discussed fairly regularly.

I am looking to see whether my noble friend Lord Lucas is here, or some of my other noble friends—the noble Baroness, Lady Kramer, and the noble Lord, Lord Sharkey, among them—because at some point activities like this could well be recommended by the FPC to the Treasury to be brought within the regulatory perimeter. The Treasury would then make an order to make these activities PRA-regulated ones, and if necessary apply additional objectives to these activities.

I assure the noble Lord that in this context, in accordance with convention and Cabinet Office guidance, the Treasury, as the relevant department, would of course conduct the consultation in the normal form at that point. I hope that explains why this part of the Bill is drafted in the way that it is, and that there are protections in there.

[Lord Eatwell]

My Lords, that was very interesting because the FPC has not been mentioned at all and it is suddenly being prayed in aid in support of this section. I remain puzzled as to why the Government are willing to risk the Bill appearing to be so restrictive by not including some notion of general consultation. Of course, if the FPC were involved there would be consultation issues around which the FPC itself is hedged. But changes could appear on a whim, as the noble Lord himself put it. I would not expect the Treasury to behave on a whim, but it might appear that way to the industry.

[Lord Sassoon]

I am sorry, but I am pretty sure that I did not say that the Treasury would do anything on a whim: far from it. I would not like the record to say that. Of course the Treasury would not do something on a whim. I would expect recommendations to come from the FPC, which, as the noble Lord said, has its consultation procedures. It does not need a reference in the Bill to say that if the Treasury makes recommendations or an order under this clause nothing else needs to be said. Of course the Treasury will follow the normal consultation processes applicable to this form of order.

[Lord Eatwell]

One should hope so too. One would have hoped that new Section 22A and other relevant sections, perhaps to be added, would recognise that fact. However, having had an interesting discussion of responsibilities and whims, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Sassoon]

I well understand my noble friend’s argument. It is, of course, far from the case that the PRA and the Bank of England will be able to hide from direct questioning of what they do because I am sure that they will be in front of the Treasury Committee much more frequently than annually, under the full spotlight of television cameras and so on. It is not like a normal corporate situation in which the board may be able to hide away from that sort of scrutiny except annually. There will be very regular public challenge, principally through the Treasury Committee, and I can only repeat that it would have been the simple, easy answer to just put both requirements on both the successor bodies, but I come back to the underlying point: we must remember that we are creating two bodies that have to be, in very many respects, different from what we have with the FSA at the moment. If it is merely shifting the chairs around, we need not be spending the many hours that we are spending over the Bill.

[Lord Eatwell]

Hear, hear.

[Lord Sassoon]

Well, that is why we are not merely shifting the chairs around; there will be a very fundamentally better structure in place for all sorts of reasons that we have debated, but as a consequence of that, some of the easy solutions of “one size fits both regulators” is not the right way to go and in this case it is essentially a disproportionate imposition of the public meeting on the PRA, for the reasons I have given.

Amendment 144B seeks to require the FCA to account in its annual report for how often the FCA used the product intervention power in Section 137C and financial promotions power in Section 137P, what the outcome of each intervention was, and how the FCA complied with the statement of policy concerning the temporary product intervention rules in Section 137N. Both powers are very important, but they are also a departure from the current regime and therefore it is important that the regulator accounts for how it uses them. As such, I fully agree with the sentiment behind this amendment, but I reassure my noble friend that it is not necessary. Paragraph 10 (1)(a) of Schedule 3 requires the FCA to report on the discharge of its functions and the FCA’s general functions include making and policing of the rules. The Government therefore fully expect the regulator to account, in this area, for how it has used these powers.

I think that I have dealt with all the amendments in the group.

Financial Services Bill

Debate between Lord Eatwell and Lord Sassoon

Tuesday 10th July 2012 Lords Chamber

[Lord Sassoon]

I am sure that we will not have to wait for very long. I shall address what is more directly the subject of these amendments and the question about possible conflicts between the FPC and the MPC. While it is conceivable that the two committees might seemingly appear to be taking conflicting action, I do not actually believe that that is likely to be the case as each committee’s actions will be designed to address very different aspects of the economy and the financial system. That said, there are mechanisms in place to ensure that conflict does not arise. The committees will share information and briefing in order to aid co-ordination, and the Bill makes provision for joint meetings of the two policy committees if at any time that is required. The Bank has also said that it agrees with the Treasury Committee’s recommendation on this question and that the governor should consult the chairman of court if a conflict arises. It is unlikely, but the Bill makes provision through joint meetings and the consultation with the chairman of court.

I turn to the specifics of Amendments 54 and 55. These amendments seek to require the Treasury to consult the public before making any order which makes macroprudential tools available to the FPC. I agree with the noble Lord, Lord Eatwell, that effective consultation on macroprudential tools is essential, but this amendment is not the best way to achieve it. The practice of public consultation on important matters of policy and legislation is now well established and is engrained in good government practice. My honourable friend the Financial Secretary said in another place:

“As a matter of course and as part of the usual statutory instrument process, I expect that the Treasury will consult on macro-prudential tools”.—[Official Report, Commons, 28/2/12; col.46.]

The Government have already committed to a consultation on their proposals for the FPC’s initial toolkit and will produce a draft statutory instrument as a part of that consultation. The Bill as currently drafted does not prevent the Treasury from consulting the public. The Government have already shown their willingness to consult on macroprudential tools and demonstrated their commitment to transparency by asking the interim FPC to make public recommendations regarding its tools.

I do not quibble with the term “public”. From what the noble Lord said, I suspect that he might have been expecting me to come back and say that this is not for the public, but for consultation with the industry. I accept the context in which he uses the word “public”. That is not my objection. It is good practice to do it. We are doing it. The FPC has been asked to make public its recommendations regarding tools. However, it may not always be appropriate to consult the public, which is why this requirement should not be in the legislation. Not all macroprudential orders will make large changes to the FPC’s direction powers. It is possible that some orders will contain only minor and technical changes and in this instance a three-month public consultation would be unnecessary. The previous Government rightly recognised the risks of undertaking full public consultation in cases where it is not necessary. Their own code of consultation listed seven criteria, one of which stated:

“Keeping the burden of consultation to a minimum is essential if consultations are to be effective and if consultees’ buy-in to the process is to be obtained”.

The Government have stated that they will, in compliance with the principles of good government, consult the public when material changes to the FPC’s direction powers are proposed and in non-urgent cases. I hope that that provides reassurance which the Committee seeks.

[Lord Eatwell]

My Lords, while we are on this point and before the noble Lord, Lord Sassoon, moves on to other elements, I am grateful for his clarification on this issue of consultation. I heard that we expect the Treasury to consult and there is nothing to prevent it consulting. I was seeking that the Treasury be required to consult.

Turning to the point which the noble Lord has just raised about the consultation criteria, which is enormously helpful, would it not be appropriate to write the criteria in to the conditionality with respect to when the Treasury should consult? Then we will not have simply an expectation or a desire and we will not be saying that there is nothing to prevent consultation. We will be saying that the Treasury should consult in all circumstances other than those specified under the consultation criteria. Would that not be helpful?

[Lord Sassoon]

My Lords, of course that could be done, but I make the point again that it is now engrained in the principles of good government that there should normally be three months’ public consultation. There is a code of consultation that the previous Government put out. It sets it all out very clearly, including the point about burdens and so on that I read out. In its full richness, it cannot easily be drafted in legislation. Indeed, if we were going to do it in this Bill, I imagine there could be hundreds of other Bills in which it could be spelled out. I suggest that the Committee should not only take comfort from the standard governmental practice but from the fact that we have already indicated what we are going to do with the FPC toolkit. I believe we have covered it all and do not need to burden this Bill with a lot of detail any more than other Bills are burdened with it.

Amendment 57 seeks to provide that the reasons for making an order without consulting the FPC or the public be subject to scrutiny by the Treasury Select Committee. While I agree that accountability to Parliament will be important and the provisions within the Bill reflect that, I believe, as I have said on other occasions, that it is for parliamentary committees themselves to decide what they will scrutinise. I would expect the Treasury Committee to take a great interest in any circumstances where the Treasury felt it necessary to create a new macroprudential tool on an urgent and therefore possibly not-consulted basis.

I suggest to the Committee that it would be inappropriate for the Government to use primary legislation to force the Treasury Select Committee to scrutinise something. It must be a decision for the committee itself. The committee has already taken great interest in the interim FPC and I hope that this will continue. For those reasons I believe that Amendment 57 is neither appropriate nor necessary.

We then get to Amendment 58—I was going to say “the dangerous amendment”. It seeks to deal with what the noble Lord says is a potentially dangerous situation. He was entirely clear in his reasoning. The amendment seeks to remove the FPC’s ability to confer discretion on the PRA and the FCA as part of a direction.

[Lord Eatwell]

It removes the Treasury’s ability.

[Lord Sassoon]

The noble Lord says that it is the Treasury’s ability to confer discretion. Whoever’s ability to confer discretion it is—I am just turning back to the drafting of the amendment, which really means looking at the clause as well. I will do that as I speak. I believe it is the FPC’s ability to confer discretion, but whether it is the FPC or the Treasury, the purpose of the provision is to allow the direction-making entity to take advantage of the expertise of the PRA and the FCA. Indeed, the noble Lord is completely right. I have now checked the text and it is the Treasury. However, the point is the same. We need to take advantage of the expertise of the PRA and the FCA which hold the expert knowledge relating to the supervision of individual firms. This provision allows the Treasury to take advantage of that expertise in its directions. For example, if the direction required the PRA to require firms with large exposures to hold additional capital, it would be for the PRA to decide which firms had large exposures. That would be something for the supervisor—the regulator—to do. Therefore, I believe that the amendment would unnecessarily hamper the ability of the direction to have proper effect.

[Lord Eatwell]

Shall we deal with it as I go along? It would be easier for the Committee if we deal with Amendment 58.

There is a mistake here. The text of the Bill says that the Treasury may make an order which,

“may confer a discretion on … the FCA or the PRA”.

In other words, the Treasury has direct macroprudential tool access to the FCA or PRA, not via the FPC. Proposed new Section 9G(5) describes the correct procedure, in that a discretion that could be given to the PRA or the FCA comes via the FPC. In other words, it comes via the macroprudential authority—the institution that is responsible for macroprudential measures. The example given by the noble Lord is particularly pertinent in this case. If there were a requirement to increase the capital that is relative, let us say, to large exposures or to other risk-weighted measures, then that must be a decision of the FPC. I do not see how the Treasury could give that macroprudential role in any shape or form directly to the FCA or the PRA.

If the provision’s wording was that an order may confer a discretion on the Financial Policy Committee, which may then be transferred to the FCA or the PRA at the will of the Financial Policy Committee, the point that the noble Lord has just made about expertise would be entirely well taken. However, if we are to maintain the integrity of this experiment, or indeed project, then we must maintain the FPC as the focus for macroprudential regulatory management. That is why I referred to this element as dangerous, in the sense that it undermines that clear structure within the Bill.

[Lord Sassoon]

My Lords, according to these provisions, when the Treasury specifies what macroprudential measures the FPC may exercise, the Treasury may, in relation to those macroprudential measures, confer functions on the regulator. It is intended that this is likely to be used for minor matters such as definitions. For example, the Treasury could provide that the FPC may impose additional capital requirements on exposures to residential property, and that the PRA, as the microregulator, would define the meaning of “residential property”.

There is, therefore, a web of interlocking provisions here, which I fear I did not do justice to in my first attempt to cut through this. Would it help the noble Lord if I take this one away, write to him and copy it to the other Members of the Committee who are here, to try to explain how these provisions will work together? I do not believe that there is any gap here, because it is ancillary to the basic directions that will come via the macroprudentials of the FPC. But there may be some ancillary matters, particularly definitional ones, where the expertise of the PRA or the FCA would be operative and for which we need therefore to keep this element and not to close this off in the way that Amendment 58 seeks to do. I will write to try to set that out more clearly. I am grateful to the noble Lord for that.

Amendment 61 would require the FPC to publish a policy statement within 10 days of a direction being made in relation to a measure made before the FPC had been able to issue a statement of policy under new Section 9L to be inserted into the Bank of England Act 1998 under Clause 3. Again, the Government agree that transparency and openness will be vital to ensure sufficient accountability for the FPC and the use of its tools. However, I believe that this amendment is not appropriate.

The Bill already provides that a policy statement is produced and maintained for each of the Bank’s macroprudential tools. This would also apply to those measures granted using the emergency procedure. However, if a situation were urgent, it would be counterproductive to require the FPC to wait until it has drafted and published a statement of policy before it could use that tool.

We would expect the FPC to produce a statement of policy for the tool as soon as reasonably practical afterwards, assuming that the tool remains in the FPC’s toolkit. I suggest that the requirement in Amendment 61 would be excessively restrictive.

[Lord Sassoon]

My Lords, the requirement is there for the statement to be made. Indeed, it would be the full expectation that a statement would be made. We believe that the Bill does not need any extra amendment in relation to statements that relate to macroprudential measures where they are exercised as a matter of urgency. The statement has to be made in any case.

[Lord Eatwell]

Perhaps I may help the noble Lord. I think that there was a slight misunderstanding in what he said in his initial answer on this amendment. He said that if there were an urgent situation, it would be inappropriate to wait for a statement to be made. That is not what this amendment says. It in no way prevents urgent measures being taken immediately. It simply says that if that is the case—as the noble Lord said, as soon as possible, and as I say, within 10 days—a statement should be produced. Surely, it is appropriate to give confidence and comfort to the markets that they can have some degree of expectation that a measure taken in urgency would be subject to a statement within a timeframe which is known to the markets and therefore provides them with appropriate comfort.

[Lord Sassoon]

My Lords, I do not believe that any additional requirement needs to be put in. The FPC already has transparency requirements at the heart of what it does. I completely agree that in certain cases, if it was an urgent matter, 10 days would not be the answer. It would make a statement based on the merits of the case either immediately, or on some other timescale. The Treasury would need to lay secondary legislation on an urgent basis to create the new tools required. Regardless of this provision, the laying of this secondary legislation would involve a public statement about the need for the tool and how it would be used. There is another backstop. If the new tool was required to be created, Parliament would immediately have a statement in front of it to back up the secondary legislation.

For a variety of reasons, Amendment 61 is redundant. On the basis of some partial explanations, and my commitment to write to him—particularly to explain in more detail how I believe the matters around Amendment 58 will operate—I ask if the noble Lord will withdraw his amendment.

[Lord Eatwell]

I am grateful to the noble Lord. Having a committee process where we go backwards and forwards on each particular amendment is helpful and removes the need for me to make a long summing-up speech. I will simply focus on Amendment 58, which has been the main matter of substance within this group which has exercised us, especially after the noble Lord clarified the issues of the consultations so well. Amendment 58 is still a serious problem, and I look forward to the noble Lord writing to me about it. Once I have his views in writing, perhaps we can consult further to find an appropriate way of sustaining the position of the FPC in the way that I have described. In the mean time, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Eatwell]

And now, my Lords, for something completely different. One of the objects relating to the governance of the Bank of England which we discussed in the first two days in Committee, and which is now coming up again, is to increase the collegiality of decision-making within the Bank, particularly with respect to this project. It seems that the deputy governor for financial stability is going to have an important role in the development of the FPC, the development of its activities and, indeed, its overall credibility and acceptance. It therefore seems entirely appropriate in these circumstances that the deputy governor for financial stability should be given a special status within the legislation, both in respect to consultation with the Treasury when an emergency order is introduced, and with respect to the discussions with the Chancellor of the Exchequer after the publication of the Financial Stability Report.

Amendment 56 seeks to place the deputy governor for financial stability within the framework of consultation when there is an emergency order. Overall responsibility rests with the governor. However, surely the deputy governor, who has the prime responsibility, should be consulted when there is likely to be an emergency order. Moreover, when the Treasury and the Bank have their formal discussions, which are required by the Bill, following the publication of the Financial Stability Report, it is surely appropriate that the person responsible for that report—the deputy governor for financial stability is the acting element in this respect—should be part of those conversations, as we require in Amendment 79.

If the Government accepted these amendments, we would feel much more comfortable about the overall governance structure of the Bank. It would acquire a more collegial framework, which we strongly feel is very appropriate to the development of these new measures. I beg to move.

[Lord Sassoon]

My Lords, these amendments reprise an argument that was raised by the shadow Chancellor during the Bill’s Second Reading in another place.

As the noble Lord, Lord Eatwell, said, Amendment 56 would require the Treasury to inform not only the governor but the deputy governor for financial stability when it considers that there is insufficient time for the FPC to be consulted on the introduction of a new macroprudential tool.

Amendment 79 would place in the Bill a requirement for the deputy governor for financial stability to attend the biannual meetings between the Chancellor and the governor following the publication of the FPC’s annual stability report.

Clearly the Bank plays a crucial role not only in relation to the management of the UK’s economy but specifically, under the Bill, in relation to macroprudential and microprudential regulation. In fulfilling these very important responsibilities, we expect the Bank to act as the serious and respected organisation that it is. This means that the senior executives of the Bank will work as a team to determine the best course of action to achieve the Bank’s objectives and comply with the legal obligations placed upon it. The governor is the leader of that team and, working closely with his senior executives, will ultimately take the key decisions within the Bank.

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.

Therefore, there are clearly things that need to be legislated for, and this is not what the noble Lord is in any way seeking to argue against, but it is important background to this discussion. The Chancellor and the governor must meet regularly to discuss financial stability. That is why the Bill and the regulatory structure that it establishes place at the heart of the matter the institutional relationship between the Treasury and the Bank, and the personal relationship between the Chancellor and the governor.

I do not see any reason to attempt to insert into that relationship a further statutory channel of communication. First, I just do not believe that it is needed. The Treasury ministerial team regularly meets the current deputy governor for financial stability and the chief executive of the FSA. There is also a constant dialogue between the deputy governor and senior Treasury officials via meetings, phone calls and e-mails. The same was true under the previous Government, as I know, since I was part of it for three years, and it was very effective at working level. That has not changed and it will not change under the new structure. In practice, the deputy governor may well attend the biannual meetings between the two principals. If the Treasury notified the governor that a new macroprudential instrument needed to be introduced on an urgent basis, the deputy governor would be well aware of that.

I will just point out one slight correction that is relevant to this, which is that the FPC is responsible for the financial stability report to the deputy governor. That is relevant to the discussion of this amendment because it shows that we should not excessively personalise the relationships or draw attention to particular individuals if that risks, as it may do in this instance, causing confusion about who is responsible for what. I agree that the relationship with the two leaders of the bodies, the Treasury and the Bank of England, should be hard-wired in, as we have done. In practice, the deputy governor is, and will be, very much involved in all the relevant discussions. Amendments 79 and 56 are not necessary and go too far.

There is a strong argument here that such a provision could be positively unhelpful by opening the door to the possibility that the Bank may be divided and encouraged to speak with more than one voice. There is a risk of recreating elements of dysfunctionality that were in the system as it used to exist. I do not want to overplay this, since the main argument is the earlier one. However, I do see a slight but secondary danger that this provision could be built on in the wrong circumstances. On the basis of the earlier explanations, I hope the noble Lord, Lord Eatwell, will withdraw this amendment.

[Lord Eatwell]

My Lords, the noble Lord’s comments have been very valuable. The Government have continuously argued that the tripartite system set out by the previous Government did not work because of its structure. He has now admitted that it did not work because the principals did not work it and did not meet. That is a very different issue. The fact that the principals did not meet, and that we now find the need for them to meet in primary legislation, illustrates that it was not the structure that was wrong but the people working in it that went wrong.

I agree with the noble Lord that the Bank should work as a team. I am very much in favour of that. However, we have to distinguish between the captain of the team and those who take the penalty kicks. We may want Martin Johnson to be the captain but we want Jonny Wilkinson to take the kicks. In those circumstances, the particular specialist role of the deputy governor for financial stability seems to be an important element in effective communication between the Treasury and the Bank. Moreover, the noble Lord expressed, in a careful way, that this might expose differences in the Bank’s position and suggested that this might create dysfunctionality. There are differences in this Committee, but this Committee is not dysfunctional. It is making progress. The differences between us are highlighting, as it is their role to highlight, some problems in the Bill that can make it a better Bill, which is our entire objective. I do not accept that differences within a reasonably run organisation necessarily lead to dysfunctionality. That seems to be Sir Humphrey rampant, determined that there is a singular position.

The whole issue of governance of the Bank is still somewhat in the air. This is one element that we wished to put in the Bill and felt would be enormously helpful. Now the noble Lord has recognised that the tripartite system did not fail because of its structure, but because of the personalities who failed to work it, I hope that he will consider the value of these amendments when we return to them on Report.

--- Later in debate ---

[Lord Eatwell]

My Lords, I have an amendment in this group of a slightly different variety but I have enormous sympathy with what the noble Baroness, Lady Noakes, has said about the strategic objective. When I first read the Bill, my note in the margin said “vacuous”. This notion that “relevant markets … function well” really is gamma minus stuff. It is pathetic and does not mean anything at all. One immediately asks for a definition of “function well”. We find that the objectives for competition, integrity and consumer protection are all defined, but there is no definition of what “function well” might mean.

Moreover, not only is this expression vacuous but it has no separate life. Whenever the FCA’s objectives are referred to in the Bill, it is the other objectives—the consumer objective, the integrity objective, the competition objective and the operational objectives—that are referred to. This strategic objective only has coherent life in other references in the Bill in so far as it lives through these more concrete proposals. If it is to be left as it is, it adds nothing other than spurious solidity and real complexity to the structure of objectives for the FCA. I have tried to give it some life. In our Amendment 101D in this group, my noble friend Lady Hayter and I have added the phrase,

“in the best interests of society as a whole”,

to the term “functions well”. That phrase captures the concept of the social optimum as defined in classical welfare economics. One does not want the technicalities of welfare economics within the definition of the Bill, but serving the best interests of society as a whole is the sort of expression that is used by Professor Amartya Sen in his discussions of evaluations of philosophical propositions relative to the social good. By adding,

“in the best interests of society as a whole”,

I would hope to provide this previously vacuous statement with some structure that could be referred to as a mission statement. Although I take on board the objections of the noble Baroness, Lady Noakes, to mission statements, I must say that I tend to agree with them. A mission statement could provide some framework within which the other operational objectives could be seen. For example, on the competition objective, one would look at the objective of stimulating competition in terms of the best interests of society as a whole. There may be circumstances in which the stimulation of competition is not in the best interests of society as a whole perhaps because it causes some distortion to the operation of the market, but, more generally, we would expect the encouragement of competition to act in the best interests of society as a whole.

We have a simple binary choice. Either we must give this vacuous statement some substance or we should remove it from the Bill, as proposed by the noble Baroness, Lady Noakes. What we should not do is leave this statement, which can do no good other than cause a bit of innocent amusement about how silly some clauses in the Bill might be.

[Lord Sassoon]

My Lords, I was not quick in getting to my feet because I am not sure whether Amendment 101D was moved, taken separately, or where we are.

[Lord Eatwell]

I have just spoken to the amendment, which is in the group.

--- Later in debate ---

[Lord Eatwell]

Will the noble Lord indulge me? What does function well mean? “Function well” for whom? Does it mean functioning well for a consumer? Does it mean functioning well for a trader? Does it mean functioning well in terms of working smoothly without any hiccups but not allocating resources terribly well? Does it mean allocating resources efficiently? All those things come under the term “function well” but contradict one another. What does it mean, and for whom?

[Lord Sassoon]

My Lords, in giving those four examples the noble Lord knows very well that the first and fourth of his examples very much fit the bill, and the second and third very much do not. This is all about markets that work essentially to assist the end user of those markets. It has nothing within it to do with working well for a trader or something superficial that all looks smooth on the surface but does not provide the end result of liquidity, price discovery or choice for consumers. The noble Lord knows very well that it would be impossible within the compass of such a piece of legislation to try to define the well working of a market, but the Bill spells out the main ways in which the FCA will seek to promote the well functioning of markets—those operational objectives that I touched on.

Those operational objectives give clues and pointers to the FCA. It will be for the FCA’s board to consider if and when it needs to consider these questions of well functioning markets. I believe that it will be well equipped with its expertise to consider market by market what well functioning means. I see absolutely no problem with this. However, there needs to be something that brings together the FCA’s very diverse and individual functions, roles and responsibilities.

That relates to one of the questions asked by my noble friend Lady Noakes, who asked why the FPC and the PRA do not have strategic objectives. It is precisely because they have much more narrowly focused objectives that they do not need the overall strategic objectives that the FCA needs because of the breadth of its responsibilities. I agree with my noble friend and others that we have not provided this strategic objective for the FCA on some whim. We have not put it in for the FPC and the PRA because it is not necessary. It is precisely because of the diversity and the potentially conflicting nature of the objectives of the other bodies that we believe it is right to have it in the case of the FCA.

By the same logic, the strategic objective will act as a check and balance. If, say, the FCA seeks to advance its consumer protection objective by placing detailed requirements on firms, we want it always to ask itself whether what it is doing contributes to the ultimate end goal of ensuring that markets function well. What functioning well means will be determined with some commonality across all markets, but some of it will be market-specific, particularly depending on whether it is a consumer or a wholesale market. This is no afterthought. It reflects the Government’s desire to enshrine regulation which seeks to ensure that markets can do their job.

My noble friend also asked a question about how the FCA could act in a way that was not compatible with its objectives. There are examples which we need to take into account, one of which might be a short-selling ban which is, arguably, in the interests of end-consumers but is a measure which is not normally thought to be compatible with a well functioning market.

--- Later in debate ---

[Lord Eatwell]

Before the Minister sits down, did I hear him correctly when he said that the choice of the benefit to society as a whole was not a matter for the regulator but a matter for the governor? Or did he say Government? I did not quite hear him properly.

[Lord Sassoon]

I said the Government. I hope he would agree that it was for the Government, not the governor. Good.

Universities: VAT on Alterations to Listed Buildings

Debate between Lord Eatwell and Lord Sassoon

Thursday 5th July 2012 Lords Chamber

[Lord Sassoon]

My Lords, there has been a consultation; there have been extensive discussions; and the response to the consultation was published on 28 June. Concessions have been made that will significantly help university listed buildings; for example, certain transitional repairs will be allowed to carry on for four summers. I shall not be drawn again into a discussion of listed places of worship, save to say that some of the same considerations apply. For example, anomalies in the arrangements affecting universities include the fact that those listed buildings which are used for business purposes such as teaching are already subject to VAT as are alterations to all non-listed university buildings, so there are very considerable anomalies here which we are clearing up.

[Lord Eatwell]

My Lords, I declare an interest as the president of Queens’ College, Cambridge, which contains some of the most beautiful grade 1 listed buildings in the country. The Minister did not accept the figure of £150 million put forward by the noble Baroness, Lady Deech, so I can perhaps help him by giving him a precise figure for the impact on my institution. My senior bursar tells me that the impact of this change on my institution will be up to 5% of the teaching, research and student support budget. Was that the Government’s intention?

[Lord Sassoon]

My Lords, the intention was to reduce a number of VAT anomalies, of which this was one, and to introduce generous transitional provisions relating to those measures.

Economic Policies

Debate between Lord Eatwell and Lord Sassoon

Wednesday 4th July 2012 Lords Chamber

[Lord Sassoon]

I entirely agree with my noble friend.

[Lord Eatwell]

My Lords, as but one little wavelet on the sea of outrage, may I ask the noble Lord whether, when he referred to the Government achieving stability for the British economy, he was referring to their achievement of reducing the growth rate from 2% to zero?

[Lord Sassoon]

My Lords, I was referring to 800,000 new private sector jobs since the election. I am talking about interest rates at levels we have not seen for 300 years, and more of the same.

Royal Bank of Scotland: LIBOR

Debate between Lord Eatwell and Lord Sassoon

Wednesday 4th July 2012 Lords Chamber

[Lord Sassoon]

It is a fascinating suggestion. Thank you for that.

[Lord Eatwell]

My Lords, the Minister will be aware that at Prime Minister’s Questions today my right honourable friend Ed Miliband emphasised the need for great speed in sorting out the issues around the LIBOR scandal, and the need for more considered speed with respect to wider issues. Surely the greatest speed would be achieved by a judicial inquiry which could now sit for five days per week. How many days per week will a parliamentary inquiry sit?

[Lord Sassoon]

My Lords, it is not a question of trading how many days one inquiry or another will sit. I could read out the long list of judicial inquiries that have taken two, three, four, five or 10 years and more. We believe that a parliamentary inquiry can do its work effectively by Christmas. These matters will be debated in another place tomorrow.

Financial Services Bill

Debate between Lord Eatwell and Lord Sassoon

Tuesday 3rd July 2012 Lords Chamber

[Lord Eatwell]

My Lords, this group of amendments is a rather mixed bag but all of them refer to various duties of the Financial Policy Committee. The first, Amendment 36, which is in my name and that of my noble friend Lady Hayter, adds to the definitions of systemic risk in new Section 9C(3) of the Bank of England Act 1998 the collapse,

“of confidence in the financial system as a whole”.

Academic research has identified four major sources of systemic risk, at least to date: first, linkages, or the connections between markets, referred to in new Section 9C(3)(a); secondly, the distribution of risk, particularly in the context of cyclical variations in risk, referred to in new subsection (3)(b); thirdly, excessive leverage, debt and credit growth, as referred to in new subsection (3)(c); and fourthly, the general collapse of confidence, which is not referred to at all. This is a serious omission—probably a slip in drafting, but none the less a serious omission in the analysis of systemic risk.

There can be a major systemic failure that is not associated with any of new subsection (3)(a), (b) and (c). You can have a situation that is not represented by linkages between firms, is not to do with the distribution of risk, and is not due to excessive leveraged debt or credit growth, but is due to the collapse of a firm in a particular strategic position within the industry, which leads to a general collapse of confidence. There is no necessary visible linkage between the firms, but the collapse of confidence can lead to a general systemic failure. Adding this fourth component—which is completely standard in the usual list of four in the academic literature—would complete the set from which, for some reason, this element has been neglected. To use the felicitous expression of the noble Lord, Lord Sassoon, it would plug the gap.

Amendment 37 is a probing amendment, although it has more substance than that. New Section 9C(4) of the Bank of England Act says:

“Subsections (1) and (2) do not require or authorise the Committee”—

the FPC—

“to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect”,

et cetera. The phrase “in its opinion” seems to me to make the new section completely meaningless. How would you ever tell? If something happened and the committee pursued some set of objectives that had a significant adverse affect on the capacity of the financial sector to contribute to growth—something the noble Lord earlier this afternoon pointed to as a very positive provision in the Bill—how would you then know whether this had been “in its opinion” or not? You would go along to the committee and ask, “Why did you do this?”. It would respond: “In our opinion, it was the right thing to do. End of story”. Consideration of the implications of its acts has been ruled out of court. The phrase “in its opinion” seems to make the clause devoid of meaningful content. If we remove it, we will improve the overall import of the Bill and, significantly, of this section that refers to the functions of the FPC.

With Amendment 39, I have a real mystery. Systemic risks are defined as credit growth, debt and leverage. However, in new Section 9C(7), all those terms are defined with respect to the UK only. Why is that? We live in a global financial market. Why do they refer to the UK? If these conditions had been in place and the FPC was considering the position of the Royal Bank of Scotland, that bank would have been found to be totally secure, because almost all the problems that assailed it occurred outwith the UK. The growth of credit from that bank was excessive outwith the UK. Its debt position was defined not by the debt it owed to individuals in the UK but to bond-holders and individuals throughout the world. I must be reading this completely wrongly but am totally mystified as to why credit growth, debt and leverage, as referred to in the definition of systemic risk, are confined to the UK. I would be very grateful if I could be enlightened and told that somehow I have got this wrong and that this does not confine consideration to the UK but is dealing with some other, wider element.

Continuing the international theme in this pot-pourri of amendments, I turn to Amendment 44, which deals with page 5, line 39, and refers to the overall functions of the Committee, suggesting that it should be,

“assessing its functions in the light of the policies of the European Financial Stability Board”.

As we know, much of the structure of the regulatory rule book for the UK will be written in Brussels. The EU, like the UK, is feeling its way towards defining the proper role of its macroprudential regulator, namely the European Financial Stability Board. The EFSB will, over the next couple of years, build a toolkit not unlike one that we desire for the FPC—rules on leverage ratios, procyclical provisioning, risk-weighted capital ratios and so on.

It is essential that measures taken in the UK are compatible with measures taken at the EU level, and vice versa. That is why the FPC must, at the very least, assess its functions in the light of what the European Financial Stability Board is doing. We will have an independent position, and the EFSB does not have the same European-wide status as the banking securities markets and insurance regulators, but none the less we want the activities of our FPC to be compatible with those of the EFSB.

To sum up, this is somewhat of a bran-tub. You put your hand in and take out amendments to see which aspect you would like to look at, so it is a slightly diverse group. Amendment 36 adds to systemic risk the risk of collapse of confidence in the system as a whole. Amendment 37 removes “in its opinion” from the new subsection whereby the FPC must take account of its impact on the financial sector’s contribution to growth, as the phrase would render the clause meaningless, or at least inoperable. Amendment 39 raises the question of why growth, debt and leverage are defined purely with respect to the UK, when—for goodness’ sake—we in Britain are dealing with some of the largest global financial institutions in the world. Amendment 44 simply adds to the functions and the need to take into account the actions of the European Financial Stability Board. Going back to Amendment 36 and the collapse of confidence in the system as a whole, I beg to move.

[Lord Sassoon]

My Lords, I do not know whether this group is a pot-pourri or a bran-tub, but let me attempt to do justice to a number of these amendments. Fine group though they make, they do not entirely find favour with the Government, as the noble Lord will know, because I do not believe they are necessary. I shall address each of them in turn.

Amendment 36 attempts to add,

“factors likely to lead to a loss of confidence in the financial system as a whole”,

to the list of specific types of systemic risks. I can reassure the Committee and the noble Lord in particular that new subsection (3) is not intended to be an exhaustive definition of systemic risk. The types of risk that have been highlighted in this section are generally accepted to be the main types of macroprudential risk, but systemic risks may well arise in future that are not included in these categories. That is why the FPC is free to look at anything else that it believes might pose a systemic risk to financial stability, and I would certainly expect that something that would undermine confidence in the system as a whole would have an impact on stability. It could be argued that market confidence is a necessary component for financial stability. I therefore believe that this is already included in the FPC’s objectives as they stand, and that Amendment 36 is not necessary.

--- Later in debate ---

[Lord Eatwell]

Yes, I can see that. I put a little question mark linking the two new subsections which seem to me to be contradictory, or at least inconsistent. I still do not understand why new subsection (3)(c) says that the systemic risks which the Financial Policy Committee has to consider are those which include,

“in particular … systemic risks attributable to structural features”,

and,

“unsustainable levels of leverage, debt or credit growth”.

How do we define leverage? It means,

“the leverage of the financial sector in the United Kingdom”.

Why? Debt means,

“debt owed to the financial sector by individuals in the United Kingdom”.

Why? Credit growth means,

“the growth in lending by the financial sector to individuals in the United Kingdom”.

Why? Why do we have these definitions when the noble Lord is quite right that new subsection (6) seems to contradict them?

[Lord Sassoon]

My Lords, the most important thing is that we are talking about financial stability in the UK, and the FPC needs to consider first and most importantly the metrics and indicators of financial stability in the UK. After all, the objective is for the FPC to protect and enhance the stability of the UK, so it is quite right that the definitions refer to the effects in the UK. We are not interested in the FPC deeming that it is not its business to deal with leverage in non-UK markets, but on the other hand it is quite right that the risks themselves may come from factors that arise outside the UK; I think that that is the point the noble Lord is trying to get to, which I believe is well covered by new subsection (6) and which we have made clear in the response to the Joint Committee. It is not the responsibility of the FPC to actually engender results outside the UK; it should be engendering results in the UK.

[Lord Eatwell]

I am sorry; the noble Lord must be wrong on that. If a bank is lending excessively outside the UK, then the FPC most certainly should be concerned. The idea that the FPC should be concerned only in managing results in the UK must be entirely wrong and could not be the basis of successful stability for the UK financial sector.

[Lord Sassoon]

No, my Lords, it is not wrong. If we are talking about a British bank, it is a British bank, and that is linked to these metrics and to the remit of the FPC. Of course that is captured in the FPC’s remit. I think we are getting ourselves excessively excited about a simple issue that is perfectly well drafted in the Bill, which is that the FPC has a wide and appropriate remit to deal with financial stability in the UK, but that it should properly take account of systemic risks that may arise both inside and outside the UK. That is exactly what the drafting of the two clauses taken together means. If the noble Lord had been critiquing the Bill as it was introduced in another place, he would have proper grounds for questioning that, but we have plugged a possible gap, and the construction now works.

[Lord Sassoon]

I shall have another go, because this is tricky but important. The Financial Policy Committee is charged with responsibility for the overall financial stability of the UK: the systemic risks and the macroprudential role. We need to distinguish that from the situation of individual firms which will or may contribute to the overall systemic risk. In this discussion we risk conflating two things. One is the systemic risk in the system, which the FPC is charged with dealing with. That is credit growth, debt and leverage as defined by subsection (7), which is referenced to the United Kingdom. The financial stability of the United Kingdom is the concern of the FPC. That does not mean that risk may not come from the international financial system—that is made completely clear by subsection (6). However, for individual financial institutions for which the PRA will have first responsibility, if the FPC considers that they contribute to the overall situation, it does not rule out or limit consideration of the factors that affect individual financial institutions. The clause and the definitions do not rule that out. We should not confuse what is being defined here. The definitions are not exhaustive of the systemic risks which the FPC should consider. It may consider whatever else it considers relevant.

[Lord Eatwell]

Let me try this just one more time, because the argument that the list is not exhaustive is a toss-away argument: we did not include that, but it does not matter, because it covers everything. Let us be a bit more serious and deal with precisely what is in the Bill. To make the discussion concrete, I shall deal with the first part of subsection (7), which refers to credit growth. In my opinion, credit growth is an important indicator of systemic risk. Indeed, Professor Shin of Princeton University, who is the authority in this field, has identified credit growth as one of the key variables which any macroprudential regulator should have in its sights.

Let us consider credit growth. We are told that with regard to systemic risks in particular,

“‘credit growth’ means the growth in lending by the financial sector to individuals in the United Kingdom and businesses carried on in the United Kingdom”.

That cannot be right, because the stability of banks and financial institutions in the UK often crucially depends on the nature of credit growth in lending to individuals outside the UK. The businesses to which they lend will operate within and outwith the UK. What is the notion that somehow it must be businesses carried on in the UK? Will, say, British Aerospace be included? It happens to be a British company, but I believe that most of its operations take place outside the United Kingdom. I may be wrong about that, but a substantial proportion of its operations take place outside the United Kingdom. Would British Aerospace be covered in respect of lending to businesses carried on in the UK?

We could take out subsection (7) and lose nothing. It is the old adage that you teach pupils all the time: when in doubt, take it out. It adds nothing but confusion to the specification of the role of the FPC and the definition of systemic risk. Of course, the FPC is responsible for systemic risk in the UK, because that is its juridical domain, but that systemic risk can arise from activities by UK institutions on a worldwide scale. When in doubt, take it out. Let us drop subsection (7) and make the Bill more coherent.

[Lord Sassoon]

As there is doubt about this—considerable doubt, it seems, in the noble Lord’s mind—that is precisely why we need to leave it in. Again, he conflates the role of the FPC, which is to deal with financial stability issues, threats and risks in the UK. He says that it is clear that the Financial Policy Committee's remit is only for the UK. I do not know how he comes to that conclusion. If there were no definition of levels of unsustainable leveraged debt or credit growth, that would precisely raise in people’s minds the question of what is their geographic limit.

[Lord Eatwell]

My Lords—

[Lord Sassoon]

If the noble Lord will let me continue, this discussion precisely makes the point that the FPC is responsible for systemic risk, which may be measured in terms of these factors and others listed in the clause. In that respect, we are talking about the UK. That is independent of whether banks are or were lending excessively to foreign companies. That is dealt with in other ways, as I have explained: partly through the PRA looking at the individual leverage ratios or whatever for the individual bank. Equally, if there is a systemically important institution about which the FPC is concerned, this in no way limits the considerations to the business of that institution simply in the United Kingdom, because this is dealing with something else. This is dealing with the overall systemic risk that the FPC is trying to deal with, not any question about where individual firms are doing business.

[Lord Eatwell]

My Lords, if it in no way limits the consideration of systemic risk, I would say again that it is otiose; it is worthless. It adds only confusion to the Bill. With respect to the noble Lord, the juridical domain of the FPC is defined by the definition of “regulated persons”.

[Lord Sassoon]

My Lords, we risk confusing different things again. The definition of “regulated persons” is wholly different from the question of financial stability for the UK. The concept of “regulated persons” is dealt with elsewhere. We are in a completely different part of the financial landscape. We are risking mixing up the microprudential with the macroprudential. When the noble Lord reflects on this debate, he will understand that these definitions are appropriate. He would say that they are unnecessary; I say that they are necessary in order to define the objectives of the Financial Policy Committee. However, a careful reading will show that they in no way restrict the FPC or the PRA in looking at the activities of individual regulated businesses, wherever they are, in so far as they relate to regulated activities or to the financial stability objective.

I shall move on to Amendment 37, which seeks to remove the words “in its opinion” from the economic growth “brake” that prevents the FPC taking action that would have a significant adverse affect on the ability of the financial sector to contribute to long-term sustainable growth. I disagree with this for three reasons.

First, in principle, the FPC is the best placed to assess the likely effect of its own actions. We do not want the FPC to rely on other people in forming this assessment. The FPC will be the expert macroprudential regulator. It is the right body to decide how the brake applies and the drafting should reflect that. Secondly, that assessment will be completely open, transparent and subject to outside scrutiny via publication of the decisions in the FPC’s meeting records. The government amendment, which we will discuss shortly, will go further and require the FPC to explain how it has complied with the duty to consider the “brake”. Thirdly, in practical terms I do not believe that there is any sensible alternative to this approach. In whose opinion would it be, if not that of the FPC itself? I am sure that the noble Lord does not envisage the FPC’s meeting adjourning while it seeks the opinion of some other body.

Amendment 44 would add to the FPC a function of assessing its functions in the light of the policies of the European Systemic Risk Board, or ESRB. I appreciate the sentiment behind this amendment. The Government believe that, given the international nature of financial markets, macroprudential policy will be most effective when co-ordinated internationally. I assure the Committee that, in the Government’s view, the current measures in the Bill and other arrangements are more than sufficient to achieve this.

The Bill requires the FPC to have regard to the international obligations of the United Kingdom. This will encompass the obligation to have regard to any warnings or recommendations from the ESRB that apply to the UK. It is also worth noting that the Governor of the Bank of England, like all European central bank governors, is a member of the ESRB. The current governor is also the first vice-chair of the board. The Bank is, and will continue to be, closely involved with the work of the ESRB and this will be reflected in the work of the FPC. The governor will be able to feed back the decisions and policies of the ESRB directly to the FPC. As the governor and the Bank will influence the policy of the ESRB, I expect that it will often be closely aligned to that of the FPC. As I am sure the Committee is aware, the UK authorities are required to respond to any recommendations that they receive from the ESRB. I am sure that they will give careful consideration to the policies of that board.

On the basis of this more extensive debate than I had anticipated, I hope that the noble Lord, Lord Eatwell, will agree, on reflection, that his bran tub of amendments is not completely necessary. I would ask him to withdraw his amendment.

[Lord Eatwell]

My Lords, I think I am naïve, because I am bemused by the drafting of this Bill. Sometimes we are told that things are unnecessary; of course they are being done, but they do not need to be on the face of the Bill. At other times we are told, “We have got to describe everything in extreme detail. Even though there might be some apparent internal contradictions, at least it covers every base”. We do not seem to care very much, with respect to the logic of the story, whether we have the one or the other. I will comment on the amendments, so that we can take them formally as we go through.

With respect to the collapse of confidence in the system as a whole, that is just leaving a hole in the Bill. If the Minister wants to leave a hole in the Bill, that is up to him. I was trying to make it a bit better, and more comprehensive; just the sort of thing we are told that we should do. It would have helped; it would have provided the FPC with another stimulus in its overall definitions of its objectives, which would have contributed to its effectiveness. The idea that it is just rolled into everything else is not true. It is easy to construct models which do not have the other elements, and this element is important. I refer noble Lords to the literature: Professor Shin is the name reference.

If we turn to “in its opinion”, the noble Lord was very convincing on that one, so I take his arguments. On Amendment 39, and the whole addition of this business about the UK, I think that it is a mess. The noble Lord has been completely unconvincing. He has not been able to justify in any coherent way subsection (7) and that is regrettable. It is regrettable that the Bill is left like this. One would think that the Minister would at least say, “Let’s take it away and look at it, just to make sure that I have got it right”, since he cannot defend it on this occasion.

On Amendment 44, we are told, “Oh, it’s all going to happen anyhow. There are nice informal procedures, whereby these things will be taken into account. So you don’t need it, because it’s going to happen anyhow.” It is going to happen anyhow because the governor happens to have yet another hat: was it vice-president of the organisation? I am sure that the vice-president of that organisation is busier and better informed than the Vice-President of the United States is reputed to be on policy there. None the less, how can we be sure that our next governor—whoever it might be; maybe it will be the noble Lord, Lord O’Donnell, who is not in his place—will not also be the vice-president and be as engaged and whatever else it might be?

We cannot make laws on an ad hominem basis; that is not the right way to do it. Surely, if the noble Lord accepts that these functions are appropriate—indeed necessary—he should accept Amendment 44 or agree to have a look at it and come back with some rather better drafting than mine. In the mean time, I am sorry to be grumpy about this process, but I really thought that we were trying to improve the Bill. I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Eatwell]

My Lords, I support the amendment in the name of my noble friend Lord McFall, and the noble Baroness, Lady Noakes. This is—reflecting our earlier discussions—one of the Tyrie amendments. It is very cleverly drafted because it does not attempt to specify a particular set of indicators. It knows that the FPC is in a learning experience: that we are all going to be in a debate over indicators, instruments and so on in the years to come. Nothing could further that debate better than to propose a set of indicators, such as, for example, the rate of credit growth, which we have just been talking about, although not just in the UK. This is an extremely valuable amendment which, is, I hear, supported all round the Committee and I would expect the Minister to take account of the weight of this support.

Also in this group is a series of amendments in my name and that of my noble friend Lady Hayter. I would like to take a few minutes to address these. They are all concerned with the reports that the Financial Policy Committee is required to make and they all specify characteristics of the report. The first one requires the presentation of scenarios: the attempt by the Financial Policy Committee to look at various potential crises—stress-testing, we call it at a micro level—and assess the impact of their policies and of various events. We have learnt from the Office for Budget Responsibility how useful this technique can be and I am sure it will be extremely effective in the assessment of macroprudential measures. Amendment 73, requiring the presentation of scenarios, fits in with the philosophy of policy-making and of the empirical basis of evidence-based policy-making in finance today. I therefore hope the Government will accept it.

Amendment 74 is consequential upon today’s acceptance of the Government’s Amendment 35A, which we agreed earlier this afternoon. After all, if the Financial Policy Committee is required to take into account government policies on growth and employment, then it is surely appropriate that it should report on its performance on what it is required to take into account. This should really have been down as a consequential amendment to Amendment 35A but I am happy to help the Government out and introduce their consequential amendment for them.

Amendment 75, on the issue of indicators, referred to by the noble Lord, Lord McFall, and the noble Baroness, Lady Noakes, places those indicators in the reporting structure of the FPC. Amendment 76 would relate the FPC’s report to the functioning of financial markets and of the wider economy. If they do not discuss that then I am blowed if I know what they are going to discuss. So let us at least hope that that is agreed by everyone around the Committee.

These are just four amendments to flesh out the characteristics of FPC reporting which will be a crucial part of FPC accountability. Given that we are handing these powers to unelected officials, the reporting structure is an important component. That reporting structure— and the debates over the role of the FPC—would be enormously enhanced by the acceptance of Amendment 40 in the name of my noble friend Lord McFall and of the noble Baroness, Lady Noakes.

[Lord Sassoon]

My Lords, I wish we had a simple tag that we could use for amendments which come up so often when talking about legislation where we all agree on the substance but there is a kind of debate on whether it needs to be in or not. We are substantially in that territory with a number of amendments in this group. I will take them in turn.

First, Amendments 40 and 75 seek to require the Financial Policy Committee to publish a set of indicators of financial stability. I agree that financial indicators will aid the Committee, Parliament and the public in assessing the effectiveness of the FPC’s actions, but I hope I can assure the Committee that the amendments are unnecessary. The noble Lord may groan, but I acknowledged at the outset that this is one of those “is it necessary or not” amendments. Let me try to give the evidence because it is important to adduce the evidence of how things are going already—of which there is quite a lot—to put flesh on to the bones of why I believe it. We have looked very carefully at the Treasury Committee’s recommendations and have accepted a lot of amendments as a result. The Government’s record in picking up the Treasury Committee’s recommendations is very clear. We have been through them very seriously, and we have accepted a lot of them. I am grateful to the noble Lord, Lord McFall of Alcluith, and my noble friend Lady Noakes for assiduously going through them and provoking a further debate on the ones we have not picked up. That is quite right and proper. This is one amendment that we believe is unnecessary. I will give some reasons why I think the Committee should be satisfied on this.

The starting point is the Bank’s statement, in its response to the Treasury Committee’s report on bank accountability, that the FPC will publish and report against a set of indicators. Further than that, the FPC has already given some signals of the indicators it finds most useful for assessing risk through its oversight of the Bank’s financial stability reports over the past year and so too has the governor via a letter to the Chairman of the Treasury Committee last year.

Financial Services Bill

Debate between Lord Eatwell and Lord Sassoon

Tuesday 3rd July 2012 Lords Chamber

[Lord McFall of Alcluith]

My Lords, I shall speak to Amendment 43. The four main Financial Policy Committee functions have been outlined in the Bill, but I would like the Minister to consider providing clear regulatory statements for both the FCA and the PRA, given that clarity is essential: there is an outside audience here, so transparency and clarity are very important. For both those bodies, that would be a helpful submission from the FPC.

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

My Lords, we are into another bran-tub—not a pot-pourri this time, but a bran-tub, I note; I am not sure what the distinction is. This is a varied group of amendments about the functions of the FPC.

I say to the noble Lord, Lord Eatwell, and all other noble Lords taking part in Committee that if there are definitional difficulties—we have got into one or two tangles about definitions, construction of difficult clauses and the interrelationship between clauses and subsections —I am very happy for the noble Lord or any other noble Lord to have meetings including the Bill team to try to thrash out some of those difficult issues outside the Committee if that would be helpful. Some of these things might more easily be done away from the constraints and formality of the debate. I lay that offer on the table to all noble Lords who are interested.

I will come back to Amendment 42, but let me start with Amendment 43, which would require the FPC to prepare and publish regulatory statements for the PRA and FCA. One of the most glaring flaws of the tripartite system of regulation was a lack of clarity about who was responsible for what. As we know, the Bill will create regulatory bodies with clear and separate responsibilities. Although the FPC will have the power to direct the FCA and the PRA, that will apply only in the case of actions required to address systemic risk. The Bill makes it clear that the FPC cannot make recommendations or directions that relate to specified persons—that is, individual firms. Decisions on the policy approach of the PRA and the FCA will be made by their respective boards, not the FPC. As such, the amendment would risk blurring those clear responsibilities of the regulators.

Amendment 47, which would provide the FPC with the power to direct the PRA to require the disclosure of leverage ratios, is simply unnecessary. The Government agree that the disclosure of leverage ratios would be beneficial. That is why we supported the Basel III proposals to require its calculation from 1 January 2013 and its disclosure from 1 January 2015. The Government have pushed for full implementation of Basel III.

The interim FPC recommended in November last year that the FSA encourage UK banks to disclose their leveraged ratios from 1 January 2013, and an update on the progress of that recommendation was included in the financial stability report published last week. I will not, but I could quote extensively from that report. It is clear from reading that FSR that the FPC is already using recommendations to address disclosure issues effectively, so I suggest that Amendment 47 is unnecessary.

[Lord Eatwell]

I do not want to delay the Committee, but will the noble Lord elaborate a little on “addressing effectively”?

[Lord Sassoon]

Perhaps the best thing is to quote what was written by the FPC in its most recent financial stability report, which was published last week. It states:

“Following FSA discussions with chief financial officers earlier this year, the major UK banks and building societies are expected to disclose leverage ratios, calculated according to the fully implemented Basel III definitions, in their end-2012 annual reports. Thereafter, UK banks and building societies will report on both a half-year and end-year basis”.

That is an example of the FPC in interim form, already using recommendations to address disclosure issues to pointed effect.

--- Later in debate ---

[Lord Eatwell]

I should have been clearer at the time about what I had in mind. Would it, for example, include a speech made by, say, the Governor of the Bank of England, if that speech had not actually been printed somewhere or issued on a website, but the governor had made a statement about some matter relevant to the FPC?

[Lord Sassoon]

First, it would be difficult to define the governor as a regulator or other body. If the governor had made a speech that had not been published, it would certainly not be a document. Even if it is a published speech, it is unlikely to be a document in the sense of what I am suggesting—rules, codes, guidance or formal statements. The situation which the noble Lord postulates would not be one that would fall within what we are talking about here; there is no question of that.

Amendment 64 is identical to one that was debated in Committee in another place. They debated a number of amendments, although they did not spend as long as we are going to spend, quite rightly, on all this. However, this was one that debated in another place. I should start by repeating what my honourable friend the Financial Secretary made clear there, which is that the FPC’s responsibility to monitor the perimeter of regulation is not only for the outer perimeter covered by Amendment 64. It also has responsibility for the inner perimeter, between those firms regulated prudentially by the PRA and those that fall outside the PRA’s regulation; that is one of the FPC’s most vital roles. To do this effectively, the FPC must monitor whether activities outside the perimeter of regulation or outside the PRA’s scope are being undertaken in such a way that could cause systemic risk or sufficient risk to other firms or consumers that they need to be made subject either to regulation or to a different style of regulation. When the FPC believes that the perimeter of regulation needs to be changed to bring such activities within regulation or within PRA regulation, it can make recommendations to the Treasury under new Section 90. The Treasury can then use its powers to modify the perimeter of regulation accordingly.

I do not agree that the way to ensure that the FPC undertakes the role effectively is to place it under an inflexible and bureaucratic requirement to produce an annual report on the matter. In particular, it seems unrealistic to expect the FPC to produce recommendations within 30 days of coming into formal existence. We need to allow it to use its own judgment and discretion to decide what activities might pose a risk and how and when it should investigate them.

Amendment 65 would amend the FPC’s power to make recommendations to the Treasury to extend the scope of the PRA’s ability to obtain information from unauthorised persons. Given its expertise in systemic financial stability, new Section 90 gives the FPC a power to make recommendations to the Treasury if it believes that the ability of the PRA to obtain information from those outside the perimeter of regulation is needed for financial stability reasons.

[Lord Eatwell]

If I may interrupt the Minister, for the information of all noble Lords, he is referring not to new Section 90 but to new Section 9O. He lost me for some moments.

[Lord Sassoon]

I am very grateful to the noble Lord. I should have been referring to new Section 9O in the previous amendment as well. What can I say, other than that the hour is late? I was thinking, “Why is there a typo in my speaking notes?”. I probably have a flood of notes coming from the Box on the matter, but the noble Lord got there first—in fact, I see I have only one.

As I was saying, new Section 9O gives the FPC a power to make recommendations to the Treasury if it believes that the ability of the PRA to obtain information from those outside the perimeter of regulation is needed for financial stability reasons. Removing the words “it considers that” from subsection (4) of new Section 9O —O for orange—would defeat the purpose of the recommendation power, which is to allow the FPC to make its own expert judgment about the need for the PRA to be able to obtain information that is relevant to financial stability from the wider class of person and make recommendations to the Treasury accordingly.

It is important to note that the decision to extend the PRA’s power still lies solely with the Treasury and is subject to approval by both Houses. It will be for the Treasury to look at the recommendation from the FPC alongside other information from the PRA and others and make a call on whether the power needs to be extended.

I shall now address Amendments 53, 87 and 88, all of which deal in some way with transparency and publication requirements around the FPC’s direction-making powers. Amendments 53 and 88 would require the Treasury to inform the chair of the Treasury Select Committee if the directions by the FPC were not laid before Parliament or published. The Government do not believe that it is necessary to make a restrictive legislative provision to provide that Parliament is informed in all cases when the publication of information or documents is deferred for public interest reasons. There is a well established principle that where public money is used to resolve threats to financial stability, the chairs of the relevant parliamentary committees are informed, in confidence if necessary. There are formal and informal mechanisms for this to happen, although I would point out that they are non-legislative mechanisms. I do not believe that the case has been made that it would be necessary, reasonable or proportionate to extend this principle to sensitive material that does not involve the use of public funds. The Bill already provides for the FPC to keep any decision to defer publication of information or documents relating to FPC decisions under review and to publish that material as soon as the threat to the public interest has passed—something we discussed in the previous Committee session. The Bill also requires that a copy of any direction included in the record of an FPC meeting must be laid before Parliament. Given these extensive requirements for the publication of FPC decisions, I do not believe that Amendments 53 and 58 are necessary or appropriate.

Turning briefly to Amendment 87, the provision which the noble Lord, Lord McFall, is attempting to amend already has the effect he desires. New Section 9W(3) reads:

“A direction under Section 9V must be in writing and may be revoked by a notice in writing”.

What the second part of this means is that a direction may be revoked as long as the Bank sends a notice in writing to revoke it. The Bank does not have any discretion to revoke a direction without sending a notice in writing. The Bank cannot revoke a direction orally. I hope that provides reassurance on why Amendment 87 is unnecessary.

I return briefly to Amendment 42, where we began, and an important question asked by the noble Lord, Lord Eatwell, about why, in his interpretation, the FPC can endanger the FCA’s objective of making sure that markets function well. I hope I have got his key question right, because it is an important one. I will try to explain why I believe that it is a misunderstanding and how it actually works. The strategic objective is an overarching umbrella objective to provide a common goal for the regulator and, in that sense, it acts as a mission statement. It is an objective which has been amended in line with the recommendation of the Independent Commission on Banking; it was endorsed by the Joint Committee and now reads “ensuring that markets function well”. Legally, actions taken by the FCA in discharging its general functions need only be compatible with the strategic objective but must advance one or more of its operational objectives. As such, it is the operational objectives which provide the crucial mandate for the FCA to act in these areas. The Treasury Committee states that the case has not been made for the strategic objective. The Government believe that the strategic objective will act as a high level mission statement that brings together the diverse aspects of the FCA’s work and, as such, it will serve a useful purpose in focusing the new, regulatory culture of the FSA. It will also operate as a check and balance on the operational objectives and help to ensure that the FCA does not pursue any single operational objective in a manner that undermines the overall functioning of the market.

It might also be worth adding that effective mission statements commonly clarify an organisation’s purpose. They usually set out the aims of an organisation and its key target for shareholders. They do not go into detail of an organisation’s goals or targets and the approach taken in achieving them. The FCA’s strategic objective clearly meets these criteria. It gives an overall purpose or aim to the FSA, which is to ensure that markets function well, and it clarifies that this only refers to the relevant markets as defined in new Section 1F in Clause 5.

--- Later in debate ---

[Lord Eatwell]

I wonder if I have got it right. The noble Lord’s argument about the position being somehow at a different level does not work. What works in the definition of the FCA’s general duties is the following: the Bill states that the FCA must discharge its functions to,

“act in a way which … is compatible with its strategic objective, and … advances one or more of its operational objectives”.

Consequently, the only way in which the FCA can pursue its strategic objective is via one of the operational objectives. Consequently, if you do not prejudice the operational objectives, you do not prejudice the strategic objective. It therefore has nothing to do with higher levels, but simply relates to the word “and” at a relevant point that I had missed—for which I apologise—in the general duties of the FCA. Is that correct?

[Lord Sassoon]

My Lords, I believe that the drafting is fine. I reiterate that in discharging its general functions, the FCA must act in a way that is compatible with its strategic objective but which advances one or more of its operational objectives. The drafting is, I believe, appropriate, but I will of course have another look to see whether the “and” is appropriate. The noble Lord’s colleague in another place was, I am sure, given a clearer explanation by my colleague the Financial Secretary on exactly this point. Of course I will look again, but my belief is that the drafting works. If, on reflection, it does not, I will, in the customary way, write to all noble Lords who have taken part in this discussion.

--- Later in debate ---

[Lord Eatwell]

My Lords, I first address the amendment moved by the noble Baroness, Lady Noakes. I am now very puzzled by the status of recommendations, given that a recommendation is not necessarily something which needs to be followed. Given that there seems to be no indication, as the noble Baroness, Lady Noakes, pointed out, about the reactions to recommendations, it is difficult to assess the status of this concept within the structure of the Bill. My Amendment 69 simply deals with the offending new Section 9Q and deletes it. It states:

“The Financial Policy Committee may make recommendations to”,

the world. I am sure the world would be very grateful, but we should not expend public money on making recommendations to the world, and especially not on confirming them in writing. It would be interesting to know who these “persons other than those” are defined to be when we are talking about the context of macroprudential regulation; we are not talking about relationships, say, with individual firms or whatever. The noble Baroness, Lady Noakes, has picked up on some important and valuable obscurities in the Bill and it would be helpful if the Minister could elucidate them.

A sort of bran-tub of my amendments has again been grouped together. I am sorry about that but I am not responsible for the groupings. I could ungroup them but that would be tedious for everyone, so let us deal with them. Amendment 48 is included in the group, which again has been tabled in the context of directions. It refers to the point made with respect to the nature of directions. The Bill states in proposed new Section 9G(4) that:

“The direction may relate to all regulated persons or to regulated persons of a specified description, but may not relate to a specified regulated person”.

I understand entirely what the drafting is supposed to do, but given the level of conglomeration and concentration in the financial services industry, I do not think that this will work as it is quite possible to refer to,

“regulated persons of a specified description”,

but for there to be only one firm of that description. It is quite possible for that to happen. If this may not “relate to” in the sense that it may not have a relationship to, that would rule out, say, a reference to,

“regulated persons of a specified description”,

if it just so happened that the set of persons of that description contained but one element—just one firm of that type. We can see that there are various niche firms and highly specialised companies in the City. I can think of very highly specialised money brokers of which only one performs a particular role in the money markets. Perhaps my amendment would have been more helpful if it had changed the word “relate” to “refer”, so that the direction could not refer to an individual specified regulated person. That would be inappropriate and would go beyond what the FPC is designed to do. However, I am nervous that the activities of the FPC may be unreasonably limited by the possibility that there might be just one specific regulated person within a given class of persons to which the FPC wishes to issue a direction.

I turn to Amendment 50, which again refers to new Section 9G. Subsection (6) refers to the fact that a direction,

“may not require its provisions to be implemented by specified means”—

I am not quite sure what that means—but then it goes on to say,

“or within a specified period”.

This is very dangerous in the sense that it may be enormously important that a direction should be operational within a specified period. It may be important for the financial stability of Britain that actions take place within a month or six weeks, or whatever the period might be. Being unable to require that provisions be implemented within a specified period seriously weakens the ability of the FPC to pursue effectively the stability objective. I am also a bit worried about the term “specified means”, but again, I am not sure what it means. Perhaps the Minister could help me on that when he replies. I really think that the business of a specified period should be looked at very carefully indeed for fear of weakening the powers of the FPC.

Amendment 63 has been withdrawn, so I turn now to Amendment 66. It refers to the making of recommendations under new Section 9P(2), and states specifically that:

“The recommendations may relate to all regulated persons or to regulated persons of a specified description, but may not relate to the exercise of the functions of the FCA or the PRA in relation to a specified regulated person”.

Again, this is the problem. It is quite possible that a generic description could apply to just one regulated person. Therefore, this is the same point that I made with respect to Amendment 48. The word “relate”—that is, “have a relationship to”—could result in the FPC not being able to make recommendations because the specified activity was performed by only one particular institution.

Finally, Amendment 69 is where I follow on from the noble Baroness, Lady Noakes, and comments that have been made by the noble Lord, Lord Hodgson, and the noble Viscount, Lord Trenchard, about new Section 9Q being very odd. It states that:

“The Financial Policy Committee may make recommendations to persons other than those”,

namely, the rest of the world. With those comments, I look forward to hearing the Minister’s comments on the amendments in the name of the noble Baroness, Lady Noakes, and the various amendments in my bran-tub in this case.

[Lord Sassoon]

Yet another bran-tub—I am looking forward to another pot-pourri, which will come in due course, no doubt.

On this group of amendments around the levers and powers of the FPC, I will start with Amendments 42A and 62A in the name of my noble friend Lady Noakes, and I will follow with Amendment 69 from the noble Lord, Lord Eatwell. These amendments seek to remove the FPC’s powers to make recommendations. As my noble friend has said, she does not seek to remove those powers but to probe how they will operate and why they are necessary in some particulars, although Amendment 69 is intended to remove the wider recommendation power.

I say at the outset that recommendations will be the primary means by which the FPC will seek to address systemic risks, and I do not think that any noble Lords who have spoken are challenging that. It is a question of how they will operate and whether some of the power is redundant, but I hope that we would agree that recommendations will be at the heart of the FPC’s ability to do its job. My noble friend talked a bit about how it used to work; once upon a time there was, of course, regulation by the governor’s eyebrows, and a carefully calculated arching could elicit all sorts of reactions from the City.

I suggest that recommendations to industry from the FPC will fulfil a broadly similar—if more wordy—role to that of the governor’s eyebrows, by allowing the committee to highlight risks or unsustainable behaviour. However, recommendations, unlike the governor’s eyebrows, will have and need to have legal backing. The Bill allows the FPC to make recommendations to the PRA and FCA. In a moment I will come back to where the reciprocal requirement on those two bodies to follow through on the explanations is—to the Bank, to the Treasury and to other persons.

On the PRA and FCA, the question was: where is the duty? I am slightly puzzled by this, because it seems very clear, in new Section 9P(3), that the FCA and the PRA have a clear duty to comply or explain. They must either,

“act in accordance with the recommendations”,

or explain why not, and that is a firm legal duty.

--- Later in debate ---

[Lord Eatwell]

My Lords, I want to refer to that discussion on Amendment 50. First, the amendment would not give the FPC the power to specify a precise time. It could specify a period: by the end of the month, within six weeks, within two months, or whatever it might be. The notion of a precise time is an inaccurate reading of the amended subsection. Secondly, while it is clearly right that the PRA and the FCA may have specialist knowledge at the micro level of the regulatory system, we are giving these powers to the FPC because it has specialised knowledge with respect to macro- prudential measures. If the FPC feels that it is urgent, for macroprudential reasons, that measures be taken within a specified period and it has the specialised knowledge, it seems to me that denying it the ability to require something to be done within a given time seriously weakens its effectiveness.

[Lord Sassoon]

My Lords, we could discuss at some length what the meaning of a “specified period” might be. Clearly it could, if interpreted as the noble Lord says, be by a certain month end. Equally, it could mean tomorrow, on the day after tomorrow or at the beginning of next month. I did not want to detain the Committee for too long at this late hour but a recommendation or direction dictating that an action be implemented within a certain timescale could have a serious negative implication for the safety and soundness of individual firms or for consumers. The FPC will not necessarily be aware of those negative implications on individual firms or consumers but the regulators themselves will be.

There are scenarios that could be highly undesirable if they led to consumer detriment because the FPC had been specific about the timing of implementation. On the other hand, the arrangements that I have explained at some length, which mean that the FPC could issue the direction on a “comply or explain” basis, would put the individual supervisor or regulator in a position where it had to come back and justify very clearly why it had taken a particular course of action. I believe we have struck the right balance here, which avoids the difficulties to which I have referred.

Turning to Amendments 48 and 66, I will go straight to the critical issue that I was asked about on a couple of occasions in different ways. There may be other points that need to be made, but I will be clear on the questions about whether the FPC can be specific about one firm. The FPC can describe a type or class of firms even if that, in practice, only captures one firm. This is allowed so long as the FPC targets the risk and not the firm. The FPC is not allowed to say: “Do X to Barclays or prevent RBS doing Y”. However, in the circumstances that the noble Lord postulated, where a firm was the only one in a particular area or type of business, the FPC would not be prohibited or prevented from describing a class of one in those circumstances.

[Lord Eatwell]

I do not see how that can be right. Taking the first of the two amendments, the new Section 9G(4) would read:

“The direction … may not relate to a specified regulated person”.

If the direction is a generic direction and there is only one person who satisfies that generic description, it does relate to—that is, it has a relationship to. I think it is just the wrong verb. If you said “refer to”, you would be entirely right. “Relate to” is wrong. Perhaps later, over a glass of wine, we can turn to the Oxford English Dictionary, but I believe the word “relate” does not mean what the noble Lord has suggested it means. The word “refer” would mean that, but “relate” means “to have a relationship to”, and in the case that I have just described, it would certainly have a relationship to a specified regulated person.

[Lord Sassoon]

My Lords, my clear understanding of the drafting here—and like these other drafting points that we have dealt with, if I have got it wrong I will of course write—is that a specified regulated person is the key thing, which in the examples I gave would be Barclays or the RBS. We should not be concentrating on the verb “relate” but what we need to be looking at in new Section 9G(4) is the construction on “specified regulated person” and that would be naming an individual firm.

If the FPC were to make a direction related to regulated persons of a specified direction which happened only to be a class of one firm, then I am clear that that is what is intended here. If I have got it wrong, which I do not believe I have, I will clarify the situation. I wish I had the complete Oxford English Dictionary. It would be quite difficult to bring it in to discuss it over a glass of wine, but I have the Concise Oxford English Dictionary at my fingertips and it might help the noble Lord to say that the concise edition defines “relate” interalia as meaning “having reference to”. I do not know whether that helps him, but perhaps we can move on.

We were on Amendments 48 and 66, and I think that that particular point was the major one here concerning the Committee. I would just say more generally that we are absolutely committed to maintaining clarity of responsibilities and distinguishing micro or firm-specific roles from the macro role. We do not want any lack of clarity here, but on the situation which the noble Lord postulates, I hope that I have satisfied him that indeed the drafting is correct. After that long and interesting discussion, I would ask my noble friend to consider withdrawing her amendment.

Financial Services Bill

Debate between Lord Eatwell and Lord Sassoon

Tuesday 26th June 2012 Lords Chamber

[Lord Sassoon]

I beg my noble friend’s pardon. I think I was looking at the Annunciator, which was misleading at the time. I rather wished we were already where my noble friend Lord Phillips of Sudbury was, on Clause 9, but sadly I looked down and we were still on Clause 1. We will come to all these points in due course.

I will respond to the comments on the form in which the Bill is presented. Although I explained at Second Reading why we are amending FiSMA rather than giving a wholesale rewrite, it is clearly of some concern to noble Lords and I should address the points as I did at Second Reading. Our approach was widely supported by consultation respondents. It will minimise the extent to which regulated firms and other users of FiSMA have to deal with legislative change. I appreciate that there might have been forms that would have made it easier at the margin for your Lordships’ House, but I think the substantive point here is that we are asking a major UK industry to absorb significant and necessary change and it is certainly the watchword of this Government in all that we do to minimise regulatory and administrative burdens; and we listened to what the industry had to say in response to the consultation.

I also believe that the way in which the board is constructed will allow for more focused parliamentary and stakeholder scrutiny of the key changes to the regime rather than open up a full discussion of everything again. The Government recognise that it is difficult. We have well over 300 pages of the Bill before us, which is precisely why we published a consolidated version of the Financial Services and Markets Act, which at some 650 pages was a huge exercise by Treasury officials. It took an enormous amount of time and is available on the Treasury website. I drew noble Lords’ attention to it at Second Reading. A comprehensive amended version, as it would be amended if this Bill goes through, is available for scrutiny on the Treasury website.

[Lord Eatwell]

The Minister is quite right—it is 658 pages, actually, and extremely difficult to read on a computer screen. Will the Treasury undertake to print a copy and provide it to every Member who has taken part in this short debate?

[Lord Sassoon]

My Lords, different noble Lords will want to digest the material in different ways. Some of us may find it much easier to focus on what we are interested in on a computer screen. I am certainly conscious of the wasteful expenditure of resources and taxpayers’ money when people do not want printed copies. I will investigate, but it may be that copies are available through the Library. I do not know—let me have a look at that. But it is certainly on the website. I suggest that noble Lords may not want to download all 600 pages but will be interested in particular sections. I underline the fact that a huge effort was gone into that far exceeds anything that would normally go into a Keeling schedule.

The noble Lord, Lord Peston, asked about Keeling schedules. When he asked about them a couple of days ago, I had no idea what they were. So I asked for somebody to have a look on the internet, where there is a very interesting debate. It starts by questioning whether these schedules were named after the stunt woman, Liise Keeling, or the distinguished former Member of Parliament for Twickenham, Mr E H Keeling, later Sir Edward. It was the latter who did it in conjunction with Mr R P Croom-Johnson, later Mr Justice Croom-Johnson. So there was, indeed, a Keeling schedule, but it is something that has fallen out of common use over the past decade and more. I suggest that we have gone rather further than a Keeling schedule in producing a fully amended version of FSMA on the Treasury website. There is not, before I am challenged, an amended version of the Bank of England Act, because the changes that we propose to that Act are relatively straightforward. The major innovations in the Bill, such as Clauses 3 and 5, which we will get to in due course, are drafted as entire new clauses, and may be read and scrutinised very straightforwardly as self-standing provisions.

--- Later in debate ---

[Lord Sassoon]

My Lords, it may be the largest Keeling schedule ever known to this House. I will certainly make sure that the Library is aware of where to find the amended version of FiSMA, and I am sure that it will print copies off on request in the normal way.

I turn now to the substance of this clause. The amendments put forward by the noble Lord, Lord Eatwell, seek to convert the court of directors into a supervisory board. We will discuss in detail later—as has already been identified by the noble Lord, Lord Burns, and others—government Amendment 13 and related amendments which, I suggest, address all the points of substance behind the amendments of the noble Lord, Lord Eatwell, by creating a statutory oversight committee. I will have a lot more to say about that when we get to Amendment 13.

The only substantive difference, as the noble Lord, Lord Eatwell, has said, between the Government’s amendments and those in his name appears to be in the name of the Bank’s governing body. The noble Lord’s amendments do not seek to change the structure or membership of the court; it is simply, as he identified, that he does not like the term “court”. I agree with other members of the Committee that simply changing the name is not what we should be focusing on. The name of the Bank’s governing body is largely irrelevant. It is important that it is a body that is fully equipped and prepared to fulfil its role in the new structure effectively and that the non-executives on the court have a clear and explicit remit to oversee the Bank’s performance, both in policy terms and operationally. We will come on to why the Government believe the amendments to the Bill that we have put down are needed.

In answer to the questions about why we put the amendments down when we did, I listened very carefully to all the points on governance and other issues that were made at Second Reading and have come forward, at the earliest practicable date, with amendments ahead of discussion in Committee rather than after it, both in relation to oversight and growth. I make no apology, but your Lordships will appreciate that there was not much time between Second Reading and today to get some important amendments sorted out in detail. I hope that explains what we have done.

[Lord Eatwell]

My Lords, on that point, it is my understanding that Mr Hoban made the commitment to produce this committee at Third Reading in the other place. It does not seem to me that the noble Lord had to wait until after Second Reading here to formulate his amendment.

[Lord Sassoon]

My Lords, as I said at Second Reading, I wanted to take full account of the wisdom of this House before we finalised and tabled the amendments. That is exactly what we have done and, as I will explain later, I believe that they meet the concerns of many noble Lords who spoke at Second Reading. The new oversight committee achieves the substance of what is required.

However, as has been said by a number of noble Lords in this debate, if we were to change “court” to “supervisory board”, as suggested by the noble Lord, Lord Eatwell, it would be grossly misleading. What many people, maybe most people, would understand by a supervisory board is that it would be a board of non-executives exercising independent oversight. Actually, as the Committee should be aware, merely changing the name “court” to “supervisory board” would means that it would still be a body made up of executive and non-executive directors, and therefore it would not have the effect that most people would understand by the term “supervisory board”, unlike the oversight committee which the Government are proposing and which we will come on to. I understand the point that the noble Baroness, Lady Liddell of Coatdyke, makes. We want proper, independent oversight, but changing the name of the court is not the way to do it. This has been an interesting debate but, on the basis of that explanation, I ask the noble Lord to withdraw his amendment.

--- Later in debate ---

[Lord Sassoon]

My Lords, when we come to those amendments I will give my view and the view of the Government, but in this group we are talking about the noble Lord’s amendments only.

[Lord Eatwell]

I mean generically. I raised the question in my opening remarks as to whether it would be appropriate for this House to give the other place the opportunity to discuss the amendments tabled by its own committee. Does the noble Lord think that is appropriate?

[Lord Sassoon]

My Lords, we have a series of amendments down in the name of my noble friend Lady Noakes and the noble Lord, Lord McFall of Alcluith. The best thing to do is to discuss them when they come up and take them one by one on their merits. If the noble Lord had wanted to discuss all these matters together, he could have grouped a number of amendments together but he, or the usual channels on his behalf, chose not to do so. We had better proceed as per the groupings list.

[Lord Eatwell]

My Lords, the noble Lord is not answering the question about what he considers to be the generic nature of that set of amendments derived from the Treasury Committee report.

I am very grateful to noble Lords who have taken part in this short debate. As I understand it, the discussion broke into two parts. Many noble Lords were disturbed by the complexity of the legislation before us and felt that this complexity was preventing a satisfactory consideration of the overall implications of the legislation. Having worked on this for some time, I have some sympathy with them. The noble Lord referred to the many hours that Treasury staff had to devote to creating the unified Bill—the Keeling schedule. Similar hours will no doubt have to be devoted to deriving a full understanding of the implications.

Leaving aside the issue of complexity, I turn to the issue of governance, which lies behind the first amendments that I have proposed and which will be before the Committee as we roll through a number of other amendments. Every noble Lord who spoke, with the exception, to a certain extent, of the noble Lord, Lord Burns, felt that there were important issues to be addressed with respect to the governance of the Bank of England and that the court as currently formulated is not fit for purpose. Some of this will be discussed later, in the context of my Amendment 8 and of Amendment 13, which establishes the oversight committee. There are some major questions to be raised about the oversight committee, which we shall deal with at that point. It does not achieve an effective system of clear, transparent governance in the way that one would expect of a major public institution.

With respect to the name, being a bit of a traditionalist myself, I have some sympathy with the noble Lords, Lord Flight and Lord Burns, who felt that the court might as well be called the court. However, when the noble Lord says that the term “supervisory board” is misleading, do we think that the term “court” is not misleading? Whatever does that mean to anybody not steeped in the history of the Bank of England? The Minister has failed to address the generic question about the amendments derived from the Treasury Committee in another place.

This is a significant constitutional development which I think is very valuable, but the noble Lord seems not to want to discuss it. We will return at several points—

[Lord Sassoon]

My Lords, is the noble Lord, Lord Eatwell, aware that what he describes as the Treasury Committee amendments were debated on Report in another place? Does he accept that, perhaps contrary to the impression which he may not have meant to give, they were indeed debated on Report in another place?

[Lord Eatwell]

I think that the noble Lord will find that not all the amendments were debated. Indeed, the key amendments relating to the governance of the Bank of England were withdrawn on the basis of Mr Hoban’s assertion that he was going to bring forward some new arrangements. Therefore, the issue before us is whether those new arrangements measure up to the issues raised by the Treasury Committee—a matter that we will discuss in a moment.

Given the nature of our discussion, which I think has got us under way and raised a number of important issues that are yet to be resolved, for the moment I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Eatwell]

The noble Lord and I are both professional economists and therefore we have disagreement built into our DNA. The role of the Treasury Select Committee in another place is special in this case.

I move on from the amendment tabled by the noble Baroness, Lady Wheatcroft, to Amendment 10, which raises some very difficult issues. Given the new, complex set of conflicting goals that the governor will necessarily need to navigate, the idea that his or her removal from office should be subject to some form of special scrutiny is entirely appropriate. I am not sure whether this is the right form of special scrutiny, but I am certainly going to take this away and think about it and may return to it on Report.

To sum up, Amendment 5 goes a little too far. Consultation is the key in the appointment process. The noble Baroness, Lady Wheatcroft, has identified something very valuable indeed, and we should be grateful to her, as should the Government, who should say so and accept her amendment. A number of very difficult issues have been raised with respect to Amendment 10, which I need to take away and think about at greater length before we come to Report.

[Lord Sassoon]

My Lords, first, of course the Government place great importance on the suitability and independence of the Governor of the Bank of England. We are all clear that the governor’s role is already a challenging one and that future holders of this post will need to possess an even broader range of skills, experience and expertise. We do not in any way seek to deny that. However, although I fully recognise the great importance of this appointment, I am very confident that there are already robust arrangements in place, which I will go through in a minute.

It is good that we are now focusing in this debate for the first time very directly on the amendments that we are discussing, which makes for a much more productive 35 minutes than we have had on this. In the debate, which has been instructive and interesting, I have heard some voices speaking up for some form of parliamentary veto, some arguing for consultation, some arguing that it should be the Treasury Committee in another place and some suggesting that it should be that committee and/or—I am not quite sure which—the Economic Affairs Committee of this House. Although it is not the subject of an amendment, I heard at least one suggestion that if we were going to change anything, we should go rather more radical and make it subject to a vote of the whole House in another place. That is a rather broad menu. There are many ways to skin this particular cat but I suggest that there are already robust arrangements in place

The governor and the deputy governors of the Bank are appointed by Her Majesty the Queen on the recommendation of the Chancellor and the Prime Minister. Since 2009, this Government and the previous Government have agreed that in principle these appointments will be subject to open public competition. That is what happened with the most recent example of Paul Tucker, who was appointment deputy governor in 2009, and that practice will continue. The Treasury Committee already holds pre-commencement hearings with those who have been selected to become governors and deputy governors. Therefore, I do not believe that Amendment 5 is necessary.

To be absolutely clear regarding something that I think I heard the noble Lord, Lord McFall, say, I certainly agree that Amendment 10 is connected with Amendment 5 but, to be technically right, I would not accept that Amendment 10 is consequential on it. I just wish to be clear on that technical point.

Having been appointed, the governor certainly cannot be removed on a whim. Indeed, the Government have no powers to remove a Governor of the Bank of England. Rather, the Treasury must give its consent if the Bank decides that the governor has met the criteria for removal. However, it is the Bank’s decision to make. The legislation is clear that the governor, a deputy governor or a director of the Bank can be removed only with cause—that is, if the Bank is satisfied that he or she has been absent from meetings of the court for more than three months without the consent of the court, that he or she has become bankrupt, or that he or she is unable or unfit to discharge their functions as a member. That is very clear.

Some commentators have suggested that the fact that the appointments of the chair and independent members of the Office for Budget Responsibility are subject to a Treasury Select Committee veto sets a precedent and that governor appointments should also be subject to a parliamentary veto. However, I agree with the noble Lord, Lord Turnbull, who suggested that these cases are rather different. The role of the governor and the members of the OBR are both characterised by the need for especially talented and independent candidates, but that is where the similarities end. The OBR performs an important function in providing an independent and unbiased forecast on which government policy can be based, whereas the governor carries out executive functions on behalf of the state.

More than that, and more broadly relevant to the amendments, this policy-making role makes the appointment of a prospective governor extremely market-sensitive in a way that appointments to the OBR and many other appointments simply are not. The uncertainty created by a public pre-appointment approval process could, depending on the market conditions at the time, be significantly damaging. The noble Lord, Lord Eatwell, may not like this analysis but I suggest that the person performing the role of governor attracts significant market interest. A huge amount of time and effort is spent examining every scrap of information relating to members of the Bank’s policy committees in order to gain insight into their thinking and determine likely future policy responses, and that will very much be the case with candidates for the post of governor.

Once the candidate is announced, his or her particular leanings can be factored into asset prices. The Treasury Select Committee will then be able to conduct pre-commencement hearings, providing a useful insight into the professional competence and personal independence of the appointee. However, I suggest that pre-appointment hearings of the sort suggested and necessitated by the amendments in this group would exacerbate the uncertainty of markets about who will be appointed, and that would be inappropriate.

I am also sure, and I do not need to point out, that I could apply similar arguments regarding the dismissal of a governor. The uncertainty around any such dismissal would be just as damaging. In addition, I cannot see how the position of a governor whom the Bank had sought to remove for reasons of unfitness for the post could be anything other than untenable if the Treasury Committee reversed the decision, so I simply do not understand how that would work in practice.

I believe that the current arrangement of pre-commencement, rather than pre-appointment, hearings provides the right balance. It gives Parliament an opportunity to question the new appointee on their views and qualifications without bringing into question, or placing doubts over, the appointment itself. A parliamentary veto on appointments and dismissals would introduce uncertainty into these processes, and that would apply whether the veto was given to the Treasury Committee in the other place or to your Lordships own Economic Affairs Committee. For these reasons, I believe it is inappropriate for the Bill to provide that a parliamentary committee must approve governor appointments or dismissals.

--- Later in debate ---

[Lord Sassoon]

I attempted to address the pre-appointment versus pre-commencement issue and I shall not repeat my remarks, other than to say that I believe that, for the market reasons I have given, among other reasons, it would be damaging if there were significant doubt over the clarity of the appointment of a particular individual as governor. One can very easily see how such a situation would be damaging and dangerous in present market conditions. Therefore, I repeat that I believe there is a distinction—

[Lord Eatwell]

My Lords—

[Lord Sassoon]

Perhaps I may complete the answer to my noble friend Lady Kramer, then I will give way. As I pointed out, I believe that there is a great distinction between pre-appointment and pre-commencement, that we have the balance right, and that with any appointment put forward to the Queen on the recommendation of the Chancellor and the Prime Minister there will be a very high degree of likelihood, approaching certainty, that the figure appointed will have the confidence of the Treasury Committee.

[Lord Eatwell]

My Lords, following on from the point made by the noble Baroness, Lady Kramer, while I agree with the noble Lord that a veto by the Treasury Committee is not a good idea, I really do not understand his arguments about pre-appointment consultation, whereby a prospective candidate appears before the Treasury Select Committee prior to his or her appointment being confirmed.

The argument about market sensitivity entirely contradicts what the noble Lord told us about the collective decision-making process in the Bank. If there are all these collective procedures in which the governor is challenged and supported by deputy governors, technical staff, and so on, the idea that a new governor arriving would dramatically change the nature of monetary or stability policy seems to be ridiculous. There may be a change of tone or style, but the idea that the governor will somehow be the sole factor who can move markets by the very nature of his character would seem to reinforce all the fears of those who believe that we are appointing a sun king. The noble Lord argued persuasively that there existed a degree of collegiality in the Bank, which some of us were quite surprised to hear, but none the less we understand what he says. However, he cannot argue that and at the same time deny the possibility of pre-appointment consultation because it is market sensitive.

[Lord Sassoon]

My Lords, the noble Lord, Lord Eatwell, always applies impeccable logic but the way in which the markets look at these things is rather different and not necessarily logical. While I entirely accept at one level the logic of the noble Lord’s argument, it is not the way in which the markets seek to interpret what they can read into every tea leaf, let alone something as important as the appointment and the person of a new governor. I certainly do not accept that my two arguments are in any way at odds with one another.

[Lord Eatwell]

My Lords, if the markets are so irrational, as the noble Lord says, why will we have our appointment process distorted by these irrational forces? Surely, if they are so irrational we should simply leave them to their own devices and develop a sensible, coherent appointment process that fits the needs for the appointment of this very important figure.

--- Later in debate ---

[Lord Sassoon]

My Lords, I was not going to bring this up, but I am not sure about the logic of the position of the noble Lord, Lord Eatwell. I understand that he was arguing for consultation but not a veto by the Treasury Committee. I am not at all clear why, if he is asking for consultation but not a veto, he is so hung up on whether it be pre-appointment or pre-commencement. Pre-appointment seems to imply some form of effective veto that goes with it. I am genuinely rather confused.

[Lord Eatwell]

I thought that I had made that clear in my opening remarks on the amendments. An individual who is being proposed by the Government to Her Majesty for appointment may be found by the Treasury Select Committee to be unsatisfactory in various aspects of his skill set or whatever, but while the Government may ignore that, they would at least have to take it into account and justify the appointment. Indeed, in doing so, that would perhaps strengthen the position of the governor thereafter.

[Lord Sassoon]

My Lords, I have dealt as fully as I can with the arguments. All I would suggest is that it further points out that this is not an easy area. As the noble Lord, Lord Turnbull, said, there are lots of possible solutions. If he were to change it at all, he would go to a solution that is not one of the number on the table at the moment. The Government’s position remains that we have an appropriate balance in all of this.

In answer more specifically to the noble Lord, Lord Peston, since I had the time during that little exchange to do a bit more research into “a”s and “the”s, the point is simple. The first reference is to the creation of “a Governor” and the subsequent reference is to “the Governor” who is at that point in the flow of the legislation being created. I hope that that helps to explain what is going on.

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[Lord Sassoon]

I hesitate in replying because the noble Lord, Lord Eatwell, might want to answer that excellent question. However, it is up to the noble Lord.

[Lord Eatwell]

If it is of convenience to the Committee I am quite happy to do that. The noble Lord—indeed, my old pal—Lord Andrew Turnbull, has put me on the spot here by placing me in opposition to some propositions put forward by my noble friend. I was very clear that I was seeking diversity of view. Where someone lives does not seem a basis for that.

[Lord Sassoon]

My Lords, that illustrates one thing about the amendment—that the ways in which people interpret its words are rather different, which in itself is not ideal.

The noble Baroness, Lady Liddell of Coatdyke, got it right when she said that it is a no-brainer, and we do not believe that it is necessary to make legislative provision for it. My noble friend Lord Phillips of Sudbury said so in vigorous and direct terms which I can only echo. On one level, I feel that I should say no more and sit down. Nevertheless, I should explain to the Committee exactly what is going on.

As the Committee may be aware, the Treasury’s Select Committee report into the accountability of the Bank of England concluded:

“The new responsibilities of the Bank will require its governing body to have an enhanced mix of skills”.—[Official Report, Commons, Financial Services Bill Committee, 21/2/12; col. 21.]

The Government agree with this conclusion and in their response to the Treasury Committee they committed to take it into consideration in relation to future appointments. We understand the concern underlying the amendment and have already taken it into consideration, including in the latest appointments to the court. For example, both Tim Frost and Bradley Fried bring extensive experience of financial services as practitioners to the court. However, I do not believe that it is necessary to make legislative provision for this.

I can assure the Committee that the appointments of non-executive directors to the court are fully regulated by the Office of the Commissioner for Public Appointments, OCPA, which ensures a fair, transparent and competitive process. The practical elements of the appointments process are run by the Treasury, with the most recent interview panel consisting of senior Treasury officials, the chair of court and an independent assessor. The Treasury seeks to find the best candidates for these roles. This means people with a deep and diverse range of experience in relevant sectors. This can be, will be and is achieved without a prescriptive legislative obligation.

Court appointments are advertised openly. Applications are sought from candidates with diverse experience and from a variety of backgrounds. For example, the role profile for the last NED vacancy sought people with substantial experience as board members or heads of functions in a major financial services organisation; and/or someone who had built up a successful enterprise of a significant size; and/or someone who had played a prominent role in a relevant area of public policy, the voluntary sector or a trade union.

I can assure the Committee that the decision is taken with full consideration of the impact on the broader composition of the court and the fit of each candidate within the make-up of the court as a whole. I hope the noble Lord feels that he can withdraw his amendment.

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[Lord Tugendhat]

My Lords, I support the amendment of the noble Lord, Lord Eatwell. He draws the lesson from what happened to the outside directors of the Monetary Policy Committee. It might be said that the Bank has learnt its lesson on that and that the situation will not arise in the future, but as I pointed out at Second Reading, the Bank has behaved unacceptably in relation to having an inquiry into its performance during the financial crisis. Whereas the FSA had an inquiry and the results were published, the Bank of England rather stuck to Montagu Norman’s axiom, “Never explain, never excuse”. The Bank of England is a fine and venerable institution, but it finds it difficult to change. Unless there is some provision of the sort that the noble Lord, Lord Eatwell, suggests, one cannot be sure that the supervisory board—or whatever it is going to be called—will necessarily have the economic, legal and monetary advice and so forth that is required. The role that it is taking on is complex. It will deal with highly competent officials in the Bank. It is essential that the non-executives on the supervisory board have absolute certainty that they have all the back-up they require.

When one looks at the demands being placed on non-executive directors of more normal financial institutions, it is clear that, if they are going to fulfil their functions, they will need much more back-up than non-executive directors were accustomed to in the past. Their responsibilities and accountabilities are greater and they will need absolute certainty and right of access. That applies to the Bank of England and I hope that the Government will take into account that, if we are to have proper governance, it requires proper support.

[Lord Sassoon]

My Lords, we debated earlier amendments tabled by the noble Lord, Lord Eatwell, which sought to convert the Court of Directors into a supervisory board. Following on from those amendments, Amendment 8 sets out some of the functions of that board. There is little between the noble Lord and the Government on the substance of the amendment, but my key argument is that the amendment is not needed because its most important parts are addressed by government Amendment 13.

Government Amendment 13, which I will talk to at much greater length when we get to it, will give the new oversight committee responsibility for overseeing the Bank’s performance against its objectives and strategy—precisely what the first part of Amendment 8 seeks to achieve. As for the second part of Amendment 8, I appreciate that in the past the Bank was slow to realise that the MPC members needed their own dedicated support. That lesson was learnt a considerable number of years ago, and both MPC and FPC external members now have access to appropriate resources. The point about the FPC is important and relevant because that has been created in shadow form only very recently.

We can see the considerable output that the FPC is already producing, which it could not possibly do without that support. I am wholly confident that the oversight committee will have sufficient support once it comes into being, and I do not believe that it is necessary to put it into the Bill. I ask the noble Lord to consider withdrawing his amendment.

[Lord Eatwell]

I apologise that I was temporarily distracted by other channels. I am heartened to hear that the Government feel that the Bank has learnt its lesson on the provision of resources. I still feel that it would be appropriate to provide that insurance, particularly legal advice, for independent members. Legal advice is crucial for non-executive or independent directors in any environment because they can so easily be outgunned by the executive in a way that ultimately is not beneficial for the institution as a whole.

By the way, I am heartened by what the Minister had to say about the definitions of the supervisory board’s roles, but we will come on to that issue in our detailed consideration of his Amendment 13.

I am sorry to be so roundabout in this respect, but going back to the issue of resources, I will consider what the Minister has said and decide what I will do on Report. In the meantime, I beg leave to withdraw.

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[Lord Sassoon]

My Lords, it is generally accepted that carve-outs are needed, particularly in relation to the time-sensitivity of reports. As I have explained, this is very tightly circumscribed and the question of when it is appropriate to publish must be kept under review. The publication of the report, or any delay to that publication, can be achieved by the Bank only in those very circumscribed circumstances. They must keep publication under review. Therefore, there will be publication and appropriate challenge at the earliest appropriate time. It is difficult to see what the circumstances might be in which the Bank’s not agreeing with a recommendation would justify non-publication. There is proper but not excessive protection of the position here.

There was also a question from my noble friend Lord Hodgson about the Treasury’s possible ability to step in and in some way redact or hold back reports. The Treasury has no powers here. It merely receives a report. It is up to the Bank, again on public interest grounds, to hold back parts or the whole of a report. I should not say that I quite understand my noble friend’s cynicism about references to the Treasury because I certainly do not. However, I understand why he has properly raised the question.

I think I have already touched on this point but the noble Lord, Lord Eatwell, specifically referred to proposed new Section 3A and whether the government amendment allows the committee to consider the merits of the Bank’s action. Proposed new Section 3A provides that the committee is to keep,

“under review the Bank’s performance in relation to … the Bank’s objectives”.

I reiterate that the main concern here has been addressed.

On the broader question of what the Government have done not only in relation to the Treasury Committee but about the recommendations that the Bank made in January, there is nothing that I can add to what I said in my opening remarks, in which I attempted to be very clear on that point.

[Lord Eatwell]

Perhaps I can clarify the question for the noble Lord. The question is really about whether the oversight committee could pass judgment on the decisions of policy-makers. As the Treasury Committee put it:

“It is unrealistic to suppose that an oversight body could plausibly be expected to commission an external review of a policy decision without assessing the substance”.

This is what the Bank objected to in the initial form of the oversight committee. Has the Treasury put aside the Bank’s objections, and can the oversight committee now refer to make its assessment of the substance of policy decisions?

[Lord Sassoon]

Let me address this very directly. The requirement for the oversight committee to ensure that sufficient time has passed before commissioning a review is there precisely to ensure that it does not put itself in the position of second-guessing the Bank’s decisions when those decisions are still playing out. After that point, it will be appropriate to assess the effect of those decisions, but while they are playing out it will not be possible effectively to estimate how they are playing out and it would be inappropriate to do so. The way that the amendment is drafted is precisely consistent with the Treasury Committee’s recommendation that the reviews be retrospective, rather than in any sense contemporaneous.

I hear clearly what the noble Lord says: there is a difficult balancing act here, between allowing the oversight committee the ability to question everything and not boxing it into questioning the judgments that have been made on policy decisions. Yes, it can challenge and review judgments on policy decisions but it should not be boxed into doing so while the consequences of those decisions are playing out. In substance, that is what the Treasury Committee recommended.

[Lord Eatwell]

Let us focus this by taking a concrete example. It is now generally accepted by everybody except the Bank that the Bank made some calamitous decisions shortly before, or in the process of, the collapse of Northern Rock. Various statements were made by the governor that accelerated the run on the bank. The continuous reference to issues of moral hazard when the bank needed recapitalising did significant damage in that case, and that damage reverberates to this very day.

Now that significant time has passed, suppose we were to commission a review of the Bank’s activities at that time. Would it be permissible for the oversight committee to say, “Look, this decision was made on the wrong analytical grounds and was a serious mistake. The Bank should readjust its perspective to think in a different way. Perhaps it should introduce some other analytical tools so that that mistake is not made again”? Would that be appropriate?

[Lord Sassoon]

My Lords, without wanting to endorse the conclusions of the noble Lord, Lord Eatwell, from the experience in 2007, yes, of course it would be possible and appropriate for the oversight committee to conduct or commission that kind of review. Without detaining the Committee for much longer, I will address a couple of other points.

[Lord Sassoon]

My Lords, I think the critical point here is that the noble Lord, Lord McFall of Alcluith, posited a situation in which this would be, in his words, a sterile debate with the governor. It goes perhaps to the heart of the question that I started with as to why the oversight committee is a committee of the non-executives. It means that it is the oversight committee without the governor or any of the executives of the Bank being members of that committee that takes the decision, under this provision in Amendment 13, to commission reports over a very wide area. So there is no question at the front end of a negotiation with the governor and the executive about whether they would commission a report in those circumstances. That is for the oversight committee to do. We have discussed the timing issue. The report is made and, subject to the issues that we have already discussed, the report is published. I can assure the noble Lord, Lord McFall, that there is no negotiation to be had at that front end. The non-executive oversight committee of the court of the Bank will have a very clear statutory function to take precisely what is proposed in new Section 3A, and it will be untrammelled by any possibility of the sort of sterile debate that the noble Lord suggests might happen. I hope that that reassures him.

I want to address a couple of other points, largely people issues of two kinds here. My noble friend Lord Tugendhat and the noble Lord, Lord Eatwell, questioned the need for the governor to consent to the appointment of an internal reviewer. This is intended to be a perfectly straightforward and practical measure. In practical terms, if the person selected is on the verge of leaving the Bank for another post, going on sabbatical or maternity leave, or whatever, the non-executive directors on the court may not necessarily be aware of this, and it is a practical way of ensuring that the appointment works. It also provides the governor, as the person ultimately responsible for the staff who work for him or her, with the opportunity to determine whether the person selected has the capacity to undertake the review in the timescale envisaged without impacting their other responsibilities. There is no more to it than that.

Lastly, I go back to a point which I believe the noble Lord, Lord McFall of Alcluith, made at the beginning about the size of the court. It is not directly the subject of this amendment, but I think that it is worth answering that point. Given that there will be four executive members—the governor and three deputy governors—if the court were reduced to eight, it would not allow for a non-executive majority because we have four insiders on the court. More generally, if there were such a small number of non-executives, it would be difficult to have sufficient diversity of experience and views, which was a point that we discussed earlier and which I completely agree with. If we had a reduction in size, it would be impossible effectively to have a non-executive majority or indeed, as I say, sufficient diversity.

I hope that I have been able to deal with the very understandable and important questions and concerns on this issue so that the noble Lord, Lord McFall, might see his way to withdrawing his amendment and the Committee will support the Government’s amendments.

[Lord Eatwell]

My Lords, is the Minister accepting my Amendment 29? He seemed to say that it was referring to the right sort of thing. If he is not accepting it, why is proposed new Section 9B(4) left in the form that it is, referring only to procedures? I have another question, but would he answer that one?

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[Lord Eatwell]

The point is that the oversight committee is supposed to keep the activities of the Financial Policy Committee under review. There is an amendment among the amendments tabled by the noble Lord, Lord Sassoon, that changes “court of directors” in new Section 9B(4) to the “oversight committee”. So if we accepted his amendment, it would read that the oversight committee,

“must keep the procedures followed by the Committee under review”.

Why do we have that when we have new Section 3A doing all the work for us?

[Lord Sassoon]

I think that is wrong. It is not the Court of Directors that becomes the oversight committee; the Court of Directors remains the Court of Directors. It is effectively the committee of non-executive directors, or NEDCo, of the Bank, which becomes the oversight committee. The court remains the court. So there may be some misunderstanding of who is doing what here, but the Court of Directors must indeed keep the procedures of the FPC under review, which will be principally done through the oversight committee, which is a committee of the court.

--- Later in debate ---

[Lord Sassoon]

Court means the whole court, and that is in relation to the procedures. The oversight committee has the function and ability to look not only at the procedures but also at the question of whether the objectives of the Bank and the FPC are being met.

[Lord Eatwell]

I am afraid that this does not help, because the amendment tabled by the noble Lord, Lord Sassoon, Amendment 28, says on,

“page 3, line 28, leave out “court of directors” and insert “Oversight Committee”.

So this should actually read, “the oversight committee must keep the procedures followed by the Committee under review”. Why is that there when new Section 3A covers it, we are told? But I shall not pursue this—I shall leave it with the Minister. Either we have just got in a muddle or there is a drafting error.

[Lord Sassoon]

I think that it is me that has got in a muddle. It is kind to say that we have got in a muddle or that there is a drafting error. I apologise to the Committee, as I am the only person who has got into a muddle on this, as I track through amendments and consequential amendments. New Clause 9B(4) is being amended by government Amendment 28 so that it no longer says “court” but says “oversight committee”. I apologise for my confusion on this, but we may have finally got to what it is intended to say. The two things will be consistent so that the oversight committee, to the substance of the point, will be able to deal with both procedures as envisaged under new Clause 9B(4) as amended and as explained in Amendment 13. So I hope that we are getting there.

[Lord Eatwell]

We are getting somewhere. What we have here is redundancy. New Clause 9B(4) is redundant, given the Minister’s explanation of new Section 3A.

I apologise to the Minister for raising a quite different question, which I shall just leave on the table. In my earlier remarks, I did not refer to the schedule. In the enthusiasm to replace “court” or “Bank” with “oversight committee”, the Government have gone a bit too far. Perhaps the Minister could check on this later, because the terms and conditions of non-executive members of the Financial Policy Committee are now amended to be determined by the oversight committee. That must be a mistake—it must be the court as a whole. That is in government Amendment 91. In government Amendment 93, the oversight committee can remove appointed members of the Financial Policy Committee. Surely that must be a mistake as well—it must be the overall court. So I think that there has been a great enthusiasm for replacing “court” with “oversight committee” and somebody has got rather carried away. But I am not going to press this issue now. I shall just leave it on the table for the noble Lord and his officials to consider and bring back to us later.

--- Later in debate ---

[Lord Eatwell]

My Lords, I think the noble Lord said that he was going to take Amendment 28 away to consider it with Amendment 29. Surely he is not moving it now.

[Lord Sassoon]

My Lords, I have no recollection of saying that. I would like to move it formally.

--- Later in debate ---

[Lord Eatwell]

In those circumstances, I think that I should reconsider. The noble Lord did say that he was going to take Amendment 28 away to consider the relationship between Amendments 28 and 29. I do not quite understand why he has now moved Amendment 28.

[Lord Sassoon]

What I said earlier was that of course I would consider whether there were any consistencies in drafting. I think that the noble Lord asked about a number of areas, and I said that I would look at them, but I certainly did not say that I would withdraw the amendment. I said that I would make sure that there was nothing that he had identified that created any difficulty through oversight in the drafting. Of course I will do that, and if we find anything wrong it can be corrected at a later stage. I certainly did not agree to take away Amendment 28.

[Lord Eatwell]

Then we look forward to hearing the corrections on Report.

Banking Reform

Debate between Lord Eatwell and Lord Sassoon

Thursday 14th June 2012 Lords Chamber

[Lord Sassoon]

My Lords, I am sorry that the noble Lord, Lord Eatwell, has not yet had a chance to read the very detailed White Paper because, when he does, he will see that a lot of his detailed questions have been addressed.

I find it disappointing that the noble Lord comes here and takes such a picky attitude towards this fundamentally important reform being introduced by the Government. The previous Government had two years in which to act on the collapse of Northern Rock and then on the failures of RBS and Lloyds and did absolutely nothing about them. Did it not occur to them that there might be a problem with the structure of banking in this country? It seems not. For two years, they sat on their hands, asked no questions and did nothing. When this Government came into office, we established within weeks the Independent Commission on Banking under the chairmanship of Sir John Vickers. It has come up with a very fine report to government. We have considered it very carefully and have published our final response today. What we have before us is one of the most radical reforms of banking that I suggest the world has ever seen.

Why have we done that? We have done that because we face in this country something which my right honourable friend the Chancellor has characterised as the British dilemma: how do we continue to host a world-class financial services sector, a sector in which our banks are able to go out to compete vigorously, as they do, around the world with the best and biggest that the rest of the world has, without putting the UK taxpayer at excessive risk? That is what is encapsulated by our response to the Vickers commission, a response that picks up the essence of what Vickers recommended but which interprets it in a way that is appropriate, flexible, forward-looking and balances those key interests of ensuring that we have a world-class but safe banking system.

The noble Lord, Lord Eatwell, talked about risk-taking in the financial markets. The critical thing is that we want to make sure that the parts of the banks within the ring-fence, the parts of the banks in which the savings of the men, women and children of this country go, are properly ring-fenced and protected—the parts of the banks which service the SMEs of this country. We want to ensure that there is not inappropriate risk-taking within that ring-fence. The noble Lord asked how that is to be monitored. It is not for Her Majesty’s Treasury to monitor it; it will be up to the Financial Policy Committee to look at the system as a whole—as it already is in interim form—and it will be for the Prudential Regulation Authority, under the Bank of England, to supervise individual firms in future.

The noble Lord then talked about curbs on growth. That area is very important, because the flow of credit must go on, particularly at this time of challenge in the economy. That is precisely one reason why Sir John Vickers and the commission recommended that the implementation of the recommendations should be concluded by 2019, a recommendation that we have accepted. The numbers are set out in the document, but I suggest that the costs of implementation over that period and beyond on a running basis are very modest in relation to both the cost of the banking crisis over which the previous Government presided and the size of the UK economy.

The noble Lord then referred to the flow of funds in from Crown dependencies. He is clearly an expert on this subject. I believe that he is on the regulatory body of the States of Jersey. I am aware, as he is, that significant deposits flow from that and other Crown dependencies into the UK wholesale markets. That plays an important part of the funding of the wholesale markets and should continue.

The noble Lord, Lord Eatwell, then asked: what compels a saver to deposit his or her money in a ring-fenced bank? The fact is that 87%, or thereabouts, of deposits in the banking system at the moment are within banks that will be subject to the ring-fence. It is highly implausible to suggest that it would be wrong to protect 90% of the deposits of the British public but not to say that there are other places that are not ring-fenced that are accessible. What the noble Lord presents is not a realistic picture. Sir John Vickers and his commission raised the question of a de minimis limit and we set a limit that the ring-fence should not operate for banks with deposits below £25 billion. I suggest to the noble Lord that one thing on which we might agree is that we need more diversity, more competition and more new entrants in the banking sector. It is entirely appropriate, we believe, that the ring-fence should operate for only the biggest of our banks—those which account for some 90% of deposits.

The noble Lord then asked a number of technical questions about the way that the ring-fence will operate. I refer him to the details in the White Paper. If he has further questions that it does not answer, I should of course be happy to write on any supplementary questions that he may put, but there is a very full analysis there.

As to the capital ratios proposed here, the noble Lord talked about the Government proposing them but of course what analysis there was underpinning them was all the ICB’s analysis. The Government have done one thing in this area today, which is to put out a 3% rather than a 4% ratio against total unweighted assets. That is to create a level playing field with what is proposed in Europe. We want this measure to be not a front-stop but a back-stop, in line with what the ICB proposed, and we want to make sure that our banks have every opportunity to compete on a level playing field.

The noble Lord then asked whether we should ask the ICB to return to the operation of the ring-fence by keeping it under review and coming back to it one year after it comes into operation. Given that the implementation date is set by Sir John Vickers at 2019, it might be a little unreasonable to Sir John and his commission, who have done tremendous work on this, to keep them on the hook until 2020, or later, to ask them to come back to these issues. I am sure that there will be other ways of looking at the impact of these measures in due course.

Lastly, the noble Lord asked whether we should put these measures into one Bill with those in the Financial Services Bill, which is already before your Lordships’ House. This is to misunderstand the different nature of what is being addressed here. On the one hand, the Financial Services Bill deals with the structure of regulation and, on the other, the measures that we are talking about today relate to the structure of banking. I accept of course that the two things taken together are the measures that, combined, will make sure that this country has a world-class financial services sector and will not put UK taxpayers excessively at risk. However, they are two sets of distinct measures. Your Lordships will now have them in front of them so that they, can read across from one to another, but any suggestion of delaying the legislative process, which the noble Lord and others have constantly urged us to get on with, would be wholly inappropriate.

[Lord Eatwell]

Before the noble Lord sits down, I would like to press him on a question on which I am genuinely puzzled. The Statement refers to the idea that UK households will place their deposits in ring-fenced banks. Why should they do that if the rate of return is higher on non-ring-fenced banks than it is on ring-fenced banks, and why should not an innovative financial sector create devices whereby households can take advantage of a higher rate of return in non-ring-fenced financial institutions? We are not planning—or are we?—to reintroduce Regulation Q as it was in the United States, where there was a limitation on the return that households could receive on their deposits to force those deposits into the commercial banking system.

[Lord Sassoon]

My Lords, at the moment depositors have freedom as to where they place their deposits. It is certainly not the case that the vast majority of deposits go to the outliers, as there always are, in offering returns. When it comes to the future arrangements, I would anticipate that the vast majority of deposits will stay where they are. For better or worse, that is the system with a number of very large incumbent banks, which will all be ring-fenced. It will be very clear to people what the difference is between ring-fenced and non-ring-fenced banks. The Statement made by my right honourable friend was merely a clear statement of observed behaviour and likely behaviour into the future—not a Statement saying that people “must” or “are compelled to”, or that they do not have any choice. Of course they will have choice, but 90% of the deposits are where they are today and I anticipate that that is not somehow going to be magically changed overnight.

Budget: Cost of Changes

Debate between Lord Eatwell and Lord Sassoon

Tuesday 12th June 2012 Lords Chamber

[Lord Sassoon]

My Lords, what this Government have done as far as the wealthiest are concerned is to raise five times as much tax from them as the Labour Party would have done under its plans, so that the top 1% of the population of earners pay 27.7% of tax. We are very concerned to make sure that tax falls where it should: on the broadest shoulders.

[Lord Eatwell]

My Lords, I am intrigued by the noble Lord’s estimate. Let us say that there is a £150 million cost to these changes. Can he tell the House whether that is the limit of what can be afforded? Could £151 million be afforded, or perhaps two or three times that £150 million, or maybe 10 times that £150 million? What is the limit that can be afforded?

[Lord Sassoon]

My Lords, the recent Budget introduced £9 billion of tax changes. There were a number of measures on which we said we would consult. We consulted and made the changes that were appropriate, which added up to a total in the range of £120 million to £150 million. I can give the House the breakdown if it wants it. Those were the numbers that resulted from the changes that we believed appropriate, having listened to what people had to say to us.

Debt

Debate between Lord Eatwell and Lord Sassoon

Tuesday 29th May 2012 Lords Chamber

[Lord Eatwell]

My Lords, yesterday’s government announcement on VAT will add £110 million to the annual deficit and hence cumulatively to the public debt. Will the Minister explain to the House why the announcement on VAT was not first made in Parliament, in compliance with the Ministerial Code? Will he also tell us what alternative ways of spending the £110 million of petty cash were considered? Does VAT now apply to humble pie?

[Lord Sassoon]

My Lords, I am glad that in the space of three minutes the party opposite’s definition of petty cash has come down from £1 billion to £110 million. On a number of issues, including the VAT changes, we said that we would consult. We have consulted and we have come up with what we believe is the right approach, having talked to a range of interested parties.

Working Tax Credits

Debate between Lord Eatwell and Lord Sassoon

Monday 14th May 2012 Lords Chamber

[Lord Sassoon]

First, I congratulate my noble friend on her new responsibilities as her party’s spokesman on the economy. I can see that she is not going to give me an easy time. It is an important question. First of all, there are important elements of the present tax credits system, such as the child tax credit, which do not relate to hours worked. Of course, when universal credit comes in, the link to hours worked will go altogether. As my noble friend knows, that change will start with natural migration, coming in from October 2013. Then managed migration will take place from August 2014 in a way that means that nobody loses out in cash terms. So it is a transition that has been carefully thought about by my noble friend Lord Freud.

[Lord Eatwell]

My Lords, the examination by the Institute for Fiscal Studies of the impact of the April measures demonstrates that the greatest proportionate burden of those measures falls on those in the lowest deciles of the income distribution. In the light of that independent finding, would the Minister like to correct his inaccurate first Answer to my noble friend Lord Touhig?

[Lord Sassoon]

My Lords, of course I shall read the record very carefully, and if I made any inaccurate response I shall correct it—but I do not believe that I did. There were, of course, a large number of tax and benefit measures announced to come into effect in the last Budget, including 24 million households that will benefit by up to £6.50 a week from the changes to allowances as well as benefits. There are the significant above-indexation increases to child tax credits as well. Therefore, one should look at the total effect, which is very much designed to make sure that those at the lower end of the income scale are protected.

Scotland Bill

Debate between Lord Eatwell and Lord Sassoon

Wednesday 28th March 2012 Lords Chamber

[Lord Sassoon]

My Lords, I do not want to prolong this but I resent the suggestion that we have not tried to be accommodating on this issue. We have all been considerably inconvenienced by the difficulties of the parliamentary timetable. I merely want to make the point that that timetable has been difficult and we have all sat around waiting for things to happen. I am sorry that we have not had an opportunity to take some of that time to discuss the details of this very technical series of adjustments under these arrangements. I say at the start of my response to this discussion that it is simply not possible to go through the adjustment line by line, but I shall make some points on it.

For those who have looked through the adjustment carefully—the noble Lord, Lord Eatwell, clearly has, as he does at such things—I believe that the way that the adjustment works means that the block grant is protected in the way that it should be. Scotland is exposed to the effect of decisions that are taken by any variation in the 10p rate, and that is all it should be exposed to in this case. That is entirely as it should be.

I turn to some of the questions about how the adjustment will operate. The first point related to when announcements are made and in-year adjustments or adjustments within the fiscal period. It is consistent with the Government’s approach to tax policy-making that we would seek normally to make any relevant tax adjustments and announcements well in advance. For example, the adjustments to the personal allowances that were announced in the Budget this year come into effect in just over a year’s time, giving time for any adjustments of a sort that will be needed to be worked up in future. So there is nothing more behind this than simply confirming that we are conscious that an adjustment will need to be made and it will be better if it can be made in advance. That is consistent with the normal approach that we now have to tax-making.

On the question about the OBR’s description of where it is at, the important point is that the OBR will use the period between this year, 2012, and the time when the new tax powers are transferred to refine its approach, including moving from historic to actual data, so that the impact from UK policy decisions will be refined and the methodology will evolve in the periods between 2012 and 2016. I am sure that, as it has done to date, the OBR assessments will set out transparently in successive reports how its methodology is changing. In the spirit of that—although I think this anticipates a situation that we are not remotely in—notwithstanding that there are four years to refine the methodology, if we get to a position where the OBR data are used to make some block grant adjustment and it subsequently discovers that it was misguided, something has changed and it refines that adjustment, I am sure that that will be taken into account. The more important question for the moment is the time period that it has to refine its methodology over the next few years before any question of block grant adjustments comes in.

On the question of macroeconomic shocks—

[Lord Eatwell]

I do not understand what that has to do with income tax and tax allowances. When you have a shock, you do not deal with it through the allowances or tax rates, because they take too long to have an effect; you deal with it through VAT or some other measure which has immediate effect in responding to a shock.

--- Later in debate ---

[Lord Eatwell]

My Lords, when I spoke on an earlier amendment, I said that I was participating in this debate with considerable trepidation. Having listened to this discussion, my trepidation has turned into a state of serious anxiety. However, I will attempt to proceed. My anxiety is raised particularly by the respect in which I hold my noble friend Lord Barnett and the power of the arguments that he put forward. However, as I listened to the debate, any support which I might have had for these amendments slowly drained away for three major reasons. The first is that there is a debate which centres round the need to devise a scheme to abolish the existing Barnett formula. However, that is not an argument in favour of the amendment; it simply identifies a public policy problem which needs to be dealt with, but which I suggest is not necessarily dealt with by this amendment. As those arguments multiplied, my support for my noble friend’s position started to fade away, as I said.

I put down a warning marker for those who have talked about a needs basis for the funding allocations to different parts of the UK. The noble Lord, Lord Lang, is absolutely right that the calculation of need can be done on a clear and objective basis. It could indeed be done by a commission looking at matters such as the number of people under a certain age and the number of people living in poverty according to a certain definition. However, when you start to attach monetary valuations to those needs, you create a policy because you are then weighting them in monetary terms. By weighting them in monetary terms, you are defining a particular policy which you wish to apply uniformly throughout the UK. If you wish to follow the purely unionist line enunciated by the noble Lord, Lord Deben, that may be a reasonable position. However, if you wish to devolve some elements of social policy to the constituent nations of the United Kingdom, you impose policy on them through the needs-based weighting of the funding associated with the underlying formula—and not only that, this amendment would impose the policy through an independent commission. Therefore, an independent commission would vary the policy. Therefore, for example, if one decided that one did not very much care about, say, care for children between the ages of five and 10, but cared very much about children from birth to the age of five, and changed the financial weighting in those two areas, you would be changing the policy because you would be changing the funding available. Handing out this sort of important policy choice to an independent commission would deny what policy-making is all about.

That is just a warning and is not the basis of my slowly ebbing support for my noble friend Lord Barnett’s position. What really settled it for me was the argument of my noble friend Lord Robertson, who made clear that this was an entirely inappropriate way to deal with an incredibly important question. I should therefore like to invoke the great academic principle of unripe time and suggest that we are facing an amendment that is distinctly unripe. We need a much more ripened argument to deal with this very complex matter.

[Lord Sassoon]

My Lords, this has been an interesting debate as we draw towards the end of consideration of the Bill. I am grateful to the noble Lord, Lord Eatwell, whose analysis I very much agree with. It has been a fascinating debate that has taken almost an hour. Sadly, as it has continued, more and more voices have been raised making all sorts of correct arguments that this is not the time and place for it. Many voices in this House accept the starting point of the noble Lord, Lord Barnett, which is that although his eponymous formula has stood the test of time, its time may nevertheless be coming. However, we are not at the point of having a ripe solution, and having a one-country answer within the vehicle of the Bill is not the way to address these proper concerns. I often find that noble Lords from all sides of the House are against me, but it is rare to find myself in substantial agreement with them.

Let me start by reminding noble Lords of one or two things that we should be clear about. First, one of the things that the Bill will do is devolve some of the financial management of income tax to the Scottish Government. However, it will not fix the Barnett formula in stone for the future, and we need to be clear about that, for the avoidance of doubt. It is also worth dwelling on Calman for a moment. My noble friend Lord Forsyth of Drumlean referred to the Calman report, but it is perhaps worth quoting at some length. Recommendation 3.4 states:

“The block grant, as the means of financing most associated with equity, should continue to make up the remainder of the Scottish Parliament’s Budget but it should be justified by need. Until such times as a proper assessment of relative spending need across the UK is carried out, the Barnett formula should continue to be used as the basis for calculating the proportionately reduced block grant”.

The Bill certainly does not therefore lock in the funding formula but, as a number of noble Lords, starting with my noble friend Lord Maclennan of Rogart, have pointed out, this is very much an issue for the whole United Kingdom and should be dealt with at the appropriate time.

Just before I come back to one or two more points on the broader issues, I should for completeness comment on the technical drafting of the amendments.

Economy: Budget Statement

Debate between Lord Eatwell and Lord Sassoon

Thursday 22nd March 2012 Lords Chamber

[Lord Sassoon]

My Lords, I will not repeat myself. I explained the rationale for doing this, which is to make sure that the benefit is targeted correctly. The position is completely clear.

I will address one or two issues that were raised on business taxes. The noble Lord, Lord Haskel, made the point about there being other businessmen in the Chamber. I listened hard to what he said about his recent visit to the US. I, too, was in the US recently. One place I visited was Chicago, which at the moment is the headquarters of Aon, the world’s largest risk management company. It is moving its global headquarters to the UK for a number of reasons, including our lower and more competitive tax regime. I do not remotely believe that we should follow US policies in a slavish way if we want to see a growing business base in this country.

[Lord Eatwell]

As the noble Lord brought up the point, does he agree that Aon announced its decision to move here before there was any intimation that top-rate tax would be reduced?

[Lord Sassoon]

My Lords, as I understand it, Aon based its decision principally on the very clear road map on corporation tax. However, I believe that the change in top-rate tax will see many other companies reconsider their location.

On oil taxation, my noble friend Lord Northbrook asked about the apparent position in the Red Book that shows that receipts are rising. Indeed, that is the case, but it is because decommissioning certainty and the new field allowances will lead to new investment that will in turn give rise to additional tax receipts, so it is a clear win-win situation.

Turning to one or two of the pro-growth policy questions that were raised, infrastructure remains very important, but I would say to my noble friend Lord Newby, who presses, quite rightly, on this important point, that the initial commitment to £2 billion of investment by the pension funds is good news, as he recognises. It is for the pension funds to decide how much further and faster they want to go. From my experience, I observe that rapid investment decisions sometimes lead to poor investments, but that is for the pension funds. The other thing is that there is only a limited pipeline of shovel-ready projects, but as projects come through, the appetite is there.

The right reverend Prelate the Bishop of Chichester asked about Sunday trading and the Olympics. I can assure him that there will be proper time for debate in this House. I know that the right reverend Prelate the Bishop of London has written to the Chancellor today and the Chancellor will be responding shortly. I will make sure that the right reverend Prelate gets a copy of that response.

Outstanding in the contributions on the Government’s pro-business policies was, of course, the maiden speech of my noble friend Lord Heseltine. It was a one-of-a-kind maiden speech in my experience and, I am sure, the experience of all of us. He set out in a very measured and realistic way the scope of the challenge that he is taking on in the benchmarking exercise, as he characterised it. We all very much look forward to the early autumn when, I think, we will get the fruits of his deliberations.

Turning to other pro-business areas, there were a number of questions from the noble Lords, Lord Bilimoria and Lord Sugar, and other noble Lords about the National Loan Guarantee Scheme. Let me assure your Lordships that there is now lots of publicity on the participating banks’ websites and in their branches. There is clear branding of the scheme. HSBC is not in it because its funding structure is different. There is nothing about it other than its funding structure. As to where the risk falls, it falls on the banks that make the loans. The credit risk remains there.

As to our progress on the rest of our plan for growth, I draw the attention of the noble Lord, Lord Eatwell, to the progress report that was put up on the HM Treasury website yesterday.

I come back to what I heard from my noble friend Lord Bates and others who reminded us of the very positive things that are happening in business and particularly in challenged areas, such as the north-east. That is an important reminder to us of what is really going on in the economy.

Lastly on areas of business policy, I say to the noble Baroness, Lady Worthington, that we took an important step forward in our energy policy in a joined-up way between DECC and HM Treasury yesterday when the Chancellor confirmed the important look at a gas strategy as part of our overall energy mix going forward. The picture I got from talking this morning to the chief executive of one of our largest companies invested in renewable energy in this country was that the company is very supportive of the Budget, while noting, quite rightly, that there are many policy areas in this area that we have to consider.

In conclusion, we will build a recovery in this country through the ambition of those who aspire to do better for themselves and their families. I am particularly encouraged by what I have heard from noble Lords with business experience on all sides of the House.

This Government are building a sustainable and prosperous economy and a recovery that builds on our strengths across all regions of the country and all the creativity and productivity of our private sector.

Economy: Quantitative Easing

Debate between Lord Eatwell and Lord Sassoon

Monday 19th March 2012 Lords Chamber

[Lord Sassoon]

No, my Lords, I certainly will not. It has actually led to inflation already. In the estimates made by the Bank of England in the third quarter bulletin in September last year, it was estimated that quantitative easing had raised UK inflation by around 0.75 to 1.5 per cent. I firmly believe that the greater benefit of raising real GDP by around 1.5 to 2 per cent was what really mattered in the economic circumstances in which we find ourselves. Then the question is what happens to the unwinding of QE? The stock will be held and sold back into the market in due course.

[Lord Eatwell]

My Lords, the noble Lord’s reference to growth of GDP is rather odd, since that is no responsibility of the Monetary Policy Committee. Its responsibility is for inflation and, as he said, it added to inflation last year which, as noble Lords will remember, was already at 5 per cent. How does the noble Lord judge the success of QE and how is it to be balanced against the decimation of the annuities of hundreds of thousands of pensioners as a result?

[Lord Sassoon]

My Lords, first it continues to be the judgment of the MPC that if it had not acted on this operation under the asset purchase facility inflation would undershoot the 2 per cent target in the medium term. I remind this House that inflation has already come down from 5.2 per cent on a CPI measure last September to 3.6 per cent in January and is expected by the Bank, and most other commentators, to fall very considerably during this year. The success of QE will be measured on the performance of inflation.

As to the question of savers and pensions, as the deputy governor, Charlie Bean, said on 21 February:

“While annuity rates have fallen, that is only part of the story. Those pension funds will typically have been invested in a mix of bonds and equities, with perhaps a bit of cash too. The rise in asset prices as a result of quantitative easing consequently also raises the value of the pension pot, providing an offset to the fall in annuity rates”.

Banking: Accounting Standards

Debate between Lord Eatwell and Lord Sassoon

Monday 19th March 2012 Lords Chamber

[Lord Sassoon]

My Lords, I have not read every word that was said in the Committee last week, but I have certainly read the very interesting remarks of my noble friend Lord Lawson of Blaby and the very challenging seven proposals that he made, many of which the Government are already acting on in the structure of banking and regulation. I do not dismiss this issue at all, but there is a tension between the transparency and other requirements of investors on the one hand and the requirements of prudential regulators on the other. There are very difficult issues of conflicting objectives here, which it may be impossible for one set of figures fully to reconcile. However, I take my noble friend’s suggestions very much to heart.

[Lord Eatwell]

My Lords, as the noble Lord pointed out, the Financial Reporting Council is playing an important role in reviewing the IFRS proposals. However, the FRC also seems to be contemplating the abolition of the UK Accounting Standards Board. Do the Government agree with this, and will it not leave the UK without the expertise and credibility necessary to make an effective contribution to the international debate?

[Lord Sassoon]

My Lords, the structure of the various bodies that fall under the Financial Reporting Council is a matter for the Financial Reporting Council. I do not believe for one minute that anything it does to the structure of the number of bodies under the FRC will weaken the very distinguished and important contribution which the UK makes to international standard-setting.

EU: Economic and Financial Issues

Debate between Lord Eatwell and Lord Sassoon

Monday 12th March 2012 Lords Chamber

[Lord Sassoon]

Absolutely. I completely agree with my noble friend.

[Lord Eatwell]

My Lords, a Written Ministerial Statement was issued earlier today about the ECOFIN meeting in which it was argued with respect to the financial transaction tax that,

“the proposal will have significant negative impacts on jobs and growth”.

No evidence is provided for that statement. Perhaps the noble Lord can tell us what is the negative impact on jobs and growth of the current stamp duty on share transactions?

[Lord Sassoon]

I believe that the effect of UK stamp duty on jobs and growth is negligible. The European Commission conducted its own assessment of the effect of the financial transaction tax, which is what I think is relevant, and the numbers that have been produced by others indicate the range of negative impacts. We think that it makes no sense to introduce a financial transaction tax on the basis of Europe going it alone without the rest of the world being there.

Social Security (Contributions) (Re-rating) Order 2012

Debate between Lord Eatwell and Lord Sassoon

Monday 27th February 2012 Grand Committee

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

My Lords, I am pleased to introduce the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2012 and the Social Security (Contributions) (Re-rating) Order 2012 to the Committee. As both the regulations and the order deal with national insurance contributions, it seems sensible to debate them together. I can confirm that the provisions in the regulations and the order are compatible with the European Convention on Human Rights.

All the changes covered by these two instruments were announced as part of the Chancellor’s Autumn Statement last November. It is worth noting from the start that the basis of indexation that has been used to calculate most of the changes covered by these two instruments is different from that used for the 2011-12 tax year. In the Budget last year we announced that from the 2012-13 tax year the basis for indexation of most national insurance contribution rate limits and thresholds would be the consumer prices index, CPI, instead of the retail prices index, RPI. This is because the Government believe that the CPI is the most appropriate measure of the general level of prices. The exceptions to this are the secondary threshold and the upper earnings and upper profits limits. I will explain why in a moment.

I will start with the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations. These regulations are necessary in order to set the class 1 national insurance contributions lower earnings limit, primary and secondary thresholds and the upper earnings limit for the 2012-13 tax year. The class 1 lower earnings limit will be increased from £102 to £107 per week from 6 April 2012. The lower earnings limit is the level of earnings at which contributory benefit entitlement is secured. However, NICs do not need to be paid by the employee until earnings reach the primary threshold. The class 1 primary threshold will be increased to £146 per week from 6 April 2012. The secondary threshold is the point at which employers start to pay class 1 NICs. In line with the commitment given in last year’s Budget, this is being increased by RPI to £144 per week. This will help employers, large and small, during this difficult economic climate.

From April, the personal allowance for people under 65 will be increased above indexation by £630 from £7,475 to £8,105, and the basic rate limit will be decreased by £630 to £34,370. This means that the point at which higher tax kicks in will remain at £42,475 in 2012-13. As I mentioned, the upper earnings limit is not subject to CPI indexation. In order to maintain the existing alignment of the upper earnings limit with the point at which higher rate tax is paid, the UEL will remain at £817 per week. The regulations also set the prescribed equivalents of the primary and secondary thresholds for employees paid monthly or annually.

There will be no changes to NICs rates in 2012-13. Employees will continue to pay 12 per cent on earnings between the primary threshold and the upper earnings limit, and 2 per cent on earnings above that. Employers will continue to pay contributions at 13.8 per cent on all earnings above the secondary threshold.

The social security order sets out the NICs rates and thresholds for the self-employed and those paying voluntary contributions. Starting with the self-employed, the order raises the small earnings exception below which the self-employed may claim exemption from paying class 2 contributions. The exception will rise in April from £5,315 to £5,595 a year. Many self-employed people choose to pay these contributions to protect their benefit entitlement, although they may claim exemption from paying class 2 contributions. The rate of class 2 contributions for 2012-13 will rise from £2.50 to £2.65 a week. The rate of voluntary class 3 contributions will also increase from £12.60 to £13.25 a week.

Today’s order also sets the profit limit from which main rate class 4 contributions are paid. The lower limit at which these contributions are due will increase from £7,225 to £7,605 a year, in line with the increase to the class 1 primary threshold.

At the other end of the scale, the upper profits limit will remain at the same level as the 2011-12 tax year. This is to maintain the alignment of the upper profits limit with the upper earnings limit for employees. The changes to class 4 limits will ensure that the self-employed pay contributions at the main rate of 9 per cent on a similar range of earnings as employees paying class 1 contributions at the main rate of 12 per cent. Profits above the upper profits limit are subject to the additional rate of 2 per cent, in line with the 2 per cent paid by employees.

My Lords, I commend the draft Social Security Contributions Limits and Thresholds Amendment Regulations 2012 and the draft Social Security Contributions Re-rating Order 2012 to the Committee.

[Lord Eatwell]

My Lords, when the index number used to calculate and evaluate the performance of the Bank of England was changed from RPI to CPI a few years ago, the target inflation rate was lowered from 2.5 per cent to 2 per cent to take account of the difference in the indices. No such change has been enjoyed by the rest of us. The Bank of England has a better arm-lock on the Treasury than does the general public, particularly those of us who pay national insurance contributions or, as we shall discuss later, receive tax credits.

As someone who has taught a course on index number theory for a number of years, one of the most important lessons one can take from index number analysis is that there is no such thing as a true measure of any particular variable in a complex index. In this case, there is no such thing as a true measure of inflation. The choice of index is purely a matter of the purpose for which it is to be used. In the cases before us today, the purpose of the change in the index is to increase taxation by stealth. The role of indexation is supposed to be to protect real positions, whether of benefits or contributions. As is evident from the Government’s own impact statement, which shows a benefit to the Treasury of £1 billion a year by the fiscal year 2015-16, real values are not being protected in this case.

Much has been made in the discussion of the changes to personal taxation and national insurance of the increase in the personal tax threshold. The change in the level of national insurance contributions debated today may appear minor in comparison and has received far less attention—but as it stands, the decision to index direct taxes by CPI and to contract out national insurance rebates produces a net increase to the Treasury revenue of £1 billion.

There is more to come. The two orders combine to create a fiscal drag which by 2015-16 will increase the tax burden by £1 billion a year, as I mentioned. With contribution thresholds increasing at CPI—the lower of the two standard measures of inflation—more workers will be caught in the higher bracket of payments than would otherwise have been the case. I note with interest that the impact assessment note issued by the Treasury indicates that 21 million employees will lose out by £6 a year on average in the next fiscal year. The Government are rather coy and do not tell us what will happen in the subsequent fiscal years of 2013-14, 2014-15 and 2015-16, even though they give the aggregate figure, so they must know what is happening. Why are they not telling us? If they do not know, the aggregate figure is simply a fiction. I believe the aggregate figure, so what is happening to individuals in this case? Given that the Treasury expects to raise £1 billion in 2015-16, what is the impact of the change on individuals over the course of the Parliament?

Finally, I would be grateful if the Minister could offer his view on what the benefit is of a whole variety of uprating mechanisms being used by the Government across various departments, different benefits and payments, and contributions. For example, he will be aware that other price rises such as student loan repayments or rail fares continue to be uprated at RPI. Why is one on the CPI and the other on the RPI? The answer is simply that it maximises the benefit to the Treasury. We all know that. The Minister will also be aware that the Chancellor has previously stated that he has an ambition for the default indexation assumption for indirect taxes to be moved to CPI when the fiscal position allows. Why can we not move to it now? The answer is that it would reduce the rate of taxation, and so we are sticking with the higher rate on indirect taxes so as to get the biggest benefit for the Treasury.

Let us not be deceived by this uprating story. It is a minimalist move, and one which with respect to thresholds has been designed to extract more from the contributor to national insurance. That is what is clearly conveyed in the Government’s own assessment of the figures. So in presenting the changes to thresholds and contributions, why does the Minister not simply come clean and say, “We have increased contributions”? The last Budget was one that actually increased direct taxation, contrary to what the Chancellor of the Exchequer told us.

[Lord Sassoon]

My Lords, that was a brief and focused debate, and I am grateful to the noble Lord, Lord Eatwell, for focusing on what is clearly an important issue, which is the question of the basis on which benefits and contributions are uprated. The noble Lord asked about the targeting of the Bank of England as changed by the previous Government of rail fares and a host of other things. Certainly the starting point on which we agree is one on which he is the acknowledged expert and I am not: that the measurement of inflation is far from an easy matter, as was shown when the last Government moved the targeting of the Bank of England but did not seek to change the basis on which a number of other government-related measures, such as the ones we are talking about today were not changed. Getting consistency across the piece, even if that is theoretically the right answer, is something which his Government certainly did not do.

In answer to the questions about the effects of the move of some of the indexation to the CPI it is important to point out, first, that in some cases lower increases may be beneficial. For example, increasing the lower earnings limit by the CPI, which is typically lower than the RPI, means that over time more people will qualify for contributory benefits because the lower earnings limit will rise more slowly. Similarly, the weekly class 2 and class 3 national insurance contribution rates will rise more slowly over time under CPI indexation.

If you look at national insurance contributions in isolation, some people will be worse off because the primary thresholds and the lower profits limit—the point at which they start to pay class 1 or class 4 national insurance contributions—has risen by less in 2012-13, but I should point out, as I did in my opening remarks, that the income tax personal allowance will go up significantly, by £630.

We are trying to get what the Government believe to be the most appropriate measure of the general level of prices, given that CPI is calculated in a way that more accurately reflects consumer shopping habits in response to price changes. I see a wry smile across the face of the noble Lord, Lord Eatwell. We probably do not have time for an intellectual analysis, but that is the underlying basis on which the switch has been made. As has already been pointed out, the CPI forms the basis of the Bank of England’s inflation target and is indeed more consistent with the European Central Bank harmonised index of consumer prices. I am not sure that there were questions about that, but there were assertions about it, and I hope that that clarifies the Government’s position on the noble Lord’s main points about the RPI and CPI.

On the question of the impact on individuals, let me give as much information as I have to hand. About 40,000 people will have to pay national insurance contributions because of the changes; 21 million people will lose by £6 a year; but the increase in the income tax personal allowance to £8,105 in 2012-13, to which I just referred, reduces tax bills by £214 for basic rate taxpayers, easily outweighing the small increase in national insurance contributions through the CPI indexation—£6 versus £214 as the impact of those two offsetting measures.

In addition, the Government have introduced a significant above-indexation increase in the primary threshold in 2011-12 of £29 per week, so all class 1 national insurance contribution payers earning up to about £21,600 will pay less in national insurance contributions in 2012-13 than they would have done under the usual indexation of national insurance contribution thresholds since 2010-11. I am not aware that there is available information on the impact on individuals, which clearly depends on all sorts of future decisions, not least about what happens to personal allowances in future years.

[Lord Eatwell]

Perhaps the noble Lord can help me. The Treasury document tells us that the overall impact of the changes and benefits to the Treasury will exceed £1 billion by 2015-16. That figure must be made up of the assessment of the impact on the various people who are contributing to national insurance. If we have the overall figure, why can we not be told what are the components?

[Lord Sassoon]

I was going on to say that I will certainly undertake to take that question away. As the noble Lord will be aware, sometimes only aggregate figures can be given up to the auditable standard that is required. If the information is available, subject to the usual way that these things are announced, I will see whether I can help. I will look at that and write if there is something I can do to be helpful to the Committee. However, the changes to the contribution rates generally speak for themselves. They are in the normal form of these things that are done on an annual basis other than the major change which we have debated. I commend the regulations and order to the Committee.

Guardian’s Allowance Up-rating Order 2012

Debate between Lord Eatwell and Lord Sassoon

Monday 27th February 2012 Grand Committee

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

My Lords, I am pleased to introduce the draft Tax Credits Up-rating Regulations 2012, the draft Guardian’s Allowance Up-rating Order 2012 and the draft Guardian’s Allowance Up-rating (Northern Ireland) Order 2012. In my view these regulations and orders are all compatible with the European Convention on Human Rights.

The regulations and orders before the Committee put into effect a number of reforms to tax credits announced in Budget 2010 and the Autumn Statement last November. The changes I will now outline will ensure that we tackle the deficit in a fair way and that tax credits are targeted at those who need them most. Tax credits are made up of a number of different elements for people in different circumstances. Some of these elements will continue to be increased by the CPI at 5.2 per cent, including elements for disabled workers and severely disabled workers, for children, disabled children and severely disabled children. However, the couple and lone parent elements of working tax credit will be frozen and the basic element and 30 working- hour element will remain frozen.

The family element of child tax credit is currently payable to families with an income of up to £40,000. From April 2012, this threshold will be removed and therefore the family element will be withdrawn immediately after the child element. A disregard of £2,500 for falls in income will be introduced, meaning that any in-year falls of less than £2,500 will be disregarded when recalculating the award. The 50+ element of working tax credit will also be removed. This is time limited to one year and will not affect anyone who is currently claiming. Couples with children will need to work at least 24 hours combined, with one partner working at least 16 hours per week, to qualify for working tax credit. Previously, depending on a family’s circumstances, new claims and changes of circumstance could be backdated by 93 days. From April 2012, this will be reduced to one month.

The changes the Government have made will ensure that we tackle the deficit in a fair way and ensure that tax credits are targeted at those who need them most. Reforms to tax credits included within these regulations and orders mean that support for higher income households will be reduced by increasing the rate at which tax credits are withdrawn while reducing the threshold at which tax credits are paid. Under the previous system around nine out of 10 families with children were eligible for tax credits. This reduced to closer to seven out of 10 families in April 2011 and will be reduced further to six out of 10 from April 2012.

Spending on tax credits has increased from £18 billion in 2003-04 to an estimated £30 billion in 2010-11. The system of tax credits under the previous Government was not only unsustainable in fiscal terms, it was also unrealistic in terms of meeting its stated policy objectives. Let me be clear that this Government are committed to making work pay. The best way to help working people is by taking them out of tax altogether. In April 2012 we will make a £630 increase in the income tax personal allowance, taking it up to £8,105. This is in addition to the £1,000 increase in April 2011. Together, these increases will benefit 25 million individuals and take 1.1 million low-income individuals out of tax from April 2012.

Universal credit will unify the current complex system of means-tested out-of-work benefits, tax credits and support for housing in one single payment. The award will be withdrawn at a single rate, with the aim of offering a smooth transition into work and encouraging progression in work. For parents on working tax credit, the Government continue to provide support for 70 per cent of childcare costs, up to a weekly limit of £175 for families with one child and £300 for two or more children. This support will be extended under universal credit to those working fewer than 16 hours, allowing 80,000 additional families to receive help with childcare costs. This will give second earners and lone parents, typically women, a stronger incentive to work.

This Government are committed to restoring the country to sustainable growth and prosperity. We know that it is not an easy path to tread and we have not shirked our responsibility to take the tough decisions to return the UK to economic stability. It is in that context that I commend these regulations and orders to the Committee.

[Lord Eatwell]

My Lords, once again these indexing procedures are being used as a stealth tax. As the noble Lord has actually admitted, the shift imposes a significant cost on the poorest families. He has described this as providing an incentive to work. When the economy is growing at 0 per cent a year, there are no extra jobs. What is the point of an incentive to work when there are no jobs for people to work in? In these circumstances, the overall effect is exacerbated by the number of technical changes and by a failure to uprate various thresholds even at the rate of the CPI.

Will the Minister tell us the net benefit to the Treasury—that is, the net loss to the receivers of tax credits—of the changes that are made in these orders? The changes that derive from uprating less than the CPI, and various technical changes, represent one set of losses to the recipients of tax credits. Will he also tell us the overall impact on recipients of tax credits of using the CPI rather than the RPI? Those are the two components of the extra burden that the Government have decided to impose in increasing the incentive to work—while their policies are destroying jobs.

Will the Minister also confirm that the shift from the RPI to the CPI is deemed by the Government to be a permanent aspect of future policies rather than a measure to deal simply with any fiscal difficulties that the Government are encountering? Will he tell us the Treasury’s estimate of the reduction in tax credits by the time the universal credit is introduced?

Finally, the Explanatory Memorandum contains the extraordinary statement:

“This instrument has no impact on business, charities or voluntary bodies”.

Surely this cannot be the case. All charities and voluntary bodies that provide services—for example, to poor children, to the disabled or indeed to anyone struggling to get by—will be shocked by this pathetic excuse for failing to estimate the impact of the Government’s actions. How can the Government justify the statement that there is no impact on the charitable or voluntary sector, which at its most obvious and trivial level is untrue?

--- Later in debate ---

[Lord Sassoon]

My Lords, let me deal with some of those questions. I do not like to do this, but I think this may be a case where I had better go away and follow up by writing to the noble Lord, Lord Eatwell, and the noble Baroness, Lady Lister of Burtersett, because I suspect that I will not cover all their questions in the detail that they merit. I shall make one or two broad points in response and then, as I say, I will follow those up with detailed answers.

The noble Lord, Lord Eatwell, talked about the context in which these orders and regulations are coming forward. It is clear that the level of unemployment is higher than the Government would wish to see. Of course that is the case, but nevertheless, it is a level of unemployment within which the private sector has been vigorously generating new jobs—in excess of half a million new jobs in that sector in the past two years. On the specific point raised by the noble Lord about the availability of jobs, the latest monthly figures show that there are some 476,000 vacancies in the country.

It is simply not the case that jobs are unavailable, and the private sector has been investing vigorously in what are very difficult economic circumstances as we rebalance the economy from an overreliance on the public sector and on excessive leverage. It is critically important that we press on with everything we are doing to encourage people into work, partly through the construct we are talking about this afternoon, by raising the starting rate of tax and with the other measures we are taking.

The noble Lord, Lord Eatwell, raised the question of RPI and CPI. Again, this is not a measure that we take lightly or will reverse in some way. It is a change that we are making because, as I explained in our previous debate and on other occasions, we believe that CPI is the better measure in this instance.

The overall impact of the effects of the measures is best looked at in the distributional effects set out in each of the Budgets and Autumn Statements since the election. These distributional analyses were never published by previous Governments. They are all laid out. If one looks at the cumulative impact on households of tax, tax credit and benefit reforms introduced up to the Autumn Statement, and including the previous fiscal events, the critical thing is that the top income decile sees the largest reduction in income, both in cash terms and as a percentage of net income. In cash terms, the top income decile sees losses 9.8 times that of the bottom decile. The cash losses of the bottom expenditure decile are less than one-tenth—in fact, 6 per cent—of that for the top expenditure decile.

The Government have been concerned to make absolutely sure that the distributional effects of the measures taken as a whole are progressive and that the top 20 per cent of households will make the greatest contribution to what is a challenging deficit reduction.

[Lord Eatwell]

My Lords, would the noble Lord concede that the impact on the upper decile is almost entirely due to the 50 per cent tax rate introduced by my right honourable friend Mr Alistair Darling?

[Lord Sassoon]

What I will concede is that we look at the effects of tax, tax credits and benefits together. Therefore, whatever makes up the bundle—some of it inherited, some not—comes in to that mix. Regardless of where individual measures came from, it is important to look at them in the round, which is what we have done and will continue to do.

In relation to the questions of the noble Baroness, Lady Lister, I concede that I will probably fall into the trap of answering in a way that does not quite get to the nub of one or two of them, but I will come back to them. In headline terms, regarding the impact of the Autumn Statement on the number of children in relative income poverty, analysis shows an estimated increase of around 100,000 in 2012-13 on the measure used previously. However, this does not represent a forecast of the actual change in child poverty year on year because the measurement does not take into account, among other things, the value of public services that benefit children such as education and healthcare. These are very important in improving life chances, particularly among poorer households. Again, we have to be very careful here about whether we are using measures that properly capture the full effect of government policies.

In relation specifically to childcare, as I am sure the noble Baroness knows, the Government are investing a further £380 million a year by 2014-15 to extend the offer of 15 hours’ free education and care a week to disadvantaged two year-olds, and to cover an extra 130,000 children. Under the universal credit we are investing an extra £300 million so that 80,000 more families will get help with their childcare costs. However, I have not had a chance to see what has been published today. As I say, I will write on those points.

As I said in my opening remarks, the employment situation in this country is not easy. However, we had to take urgent action to tackle the deficit that we inherited, particularly the unsustainable welfare bill. I have mentioned the extraordinary increase in expenditure on tax credits in seven years from £18 billion to £30 billion a year. It is spending that is poorly targeted and totally unsustainable. The reforms to tax credits in these regulations and orders that we have been discussing are a fair and proportionate way to deal with this very difficult inheritance, as I have explained.

Essentially we have ensured that those most able to contribute to the deficit do so while those with the lowest incomes continue to be supported. It is because of that commitment that the highest decile of earners will make the greatest contribution towards reducing the deficit both in cash terms and as a percentage of their income, as I think the noble Lord, Lord Eatwell, recognises. In that context, the orders and regulations before the Committee are an important step towards realising our ambition to restore the UK to economic stability, but in a way that drives prosperity and means that we tackle the deficit in a fair and responsible manner. I commend the orders and regulations to the Committee.

Government Resources and Accounts Act 2000 (Audit of Public Bodies) Order 2012

Debate between Lord Eatwell and Lord Sassoon

Monday 27th February 2012 Grand Committee

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

My Lords, the Government Resources and Accounts Act 2000 (Audit of Public Bodies) Order 2012 has been laid under the Government Resources and Accounts Act 2000. It is intended to give the Comptroller and Auditor-General public audit responsibility for auditing the accounts of a number of public sector bodies and companies. It also removes the Comptroller and Auditor-General from auditing a number of public bodies and companies because they have been abolished, merged or ceased to meet the criteria for public sector audit.

The main provision in the order is to give the Comptroller and Auditor-General statutory audit responsibility for 34 English probation trusts. The English probation trusts are currently subject to audit by the Audit Commission. As noble Lords will be aware, the Audit Commission is to be abolished and it is necessary to find suitable auditors for the probation trusts to take the Audit Commission’s place. While there are plans to introduce an Audit Bill to implement a new local audit framework, the parliamentary timetable is uncertain. In line with discussions with the probation trusts, it makes sense to make the change now, using the powers in the Government Resources and Accounts Act 2000.

It is already the case that the Comptroller and Auditor-General exerts his influence over the external audit of trust accounts by the issue of group instructions. Those instructions are necessary to obtain the assurance needed to certify the consolidated accounts of the National Offender Management Service. The new arrangements envisaged under this order will not lead to any loss of autonomy for the trusts.

The Horserace Betting Levy Board is also included in the order. It is not the role of government to be involved in horseracing matters and Ministers are exploring how the body might be reformed or replaced. Until final decisions are made on the future of the levy or the board, it remains a central government body and should be audited by the Comptroller and Auditor-General. This order also removes four museums from the C&AG audit, as they have been subsumed within the new National Museum of the Royal Navy and their accounts will be consolidated with the accounts of the new body. The National Museum of the Royal Navy is one of the companies made subject to C&AG audit, thus retaining parliamentary accountability for the museums. The other two companies are HS2 Ltd and UK Anti-Doping. I think that that is not to do with horseracing explicitly but with other aspects of sport. We will come to that later.

HS2 was set up to carry out a feasibility study for a new rail line in the UK. Following a triennial review of its future, it was decided that HS2 should remain a non-departmental public body and continue to focus on the West Midlands line from London to Birmingham and the link to Heathrow. As a non-departmental public body, it is right that HS2 be audited by the Comptroller and Auditor-General. As the principal adviser to government on drug-free sport, UK Anti-Doping is responsible for protecting sport from the threat of doping in the UK. It is an NDPB and therefore also should be audited by the C&AG.

Finally, the order removes three non-profit-making companies from the scope of the Government Resources and Accounts Act 2000 (Audit of Non-Profit-Making Companies) Order 2009 because they are no longer eligible for audit by the C&AG either because they have been moved into the private sector or have ceased operation. These companies are Firebuy Ltd, Phoenix Sports and the School Food Trust.

In conclusion, the proposals in the draft order confirm the Government’s commitment to achieve consistency in the public audit arrangements for public bodies and provide a net gain for Parliament and the public. I commend the order to the Committee.

[Lord Eatwell]

My Lords, I have no comments on this order.

Revenue and Customs Appeals Order 2012

Debate between Lord Eatwell and Lord Sassoon

Monday 6th February 2012 Grand Committee

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

My Lords, the order before us today makes a small but important change to the Tax Credits Act 2002. It inserts a reference to the First-tier Tribunal in Great Britain into Sections 63(5) and 63(8) of the Tax Credits Act. This corrects an error in the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009.

As the legislation currently stands, the settlement process at the review stage of the appeals process for tax credits applies only to appellants living in Northern Ireland. This order will update the legislation so that appellants in Great Britain are also covered, just as they were before the functions were transferred from the former appeals bodies to the new tribunals.

Let me provide further detail on the appeals review process. There has been an appeals review process in place since April 2003, when tax credits were first introduced. When a claimant lodges an appeal against a tax credit decision, the first step is for HMRC to confirm whether the information used to make the tax credit decision is correct. This is a substantial undertaking on the part of HMRC. In 2010-11, for example, HMRC had to deal with around 40,000 appeals against a tax credit decision. By actively seeking settlement, however, around 80 per cent of those cases have been revised and agreed at the settlement stage. Where HMRC’s review indicates that the original decision is incorrect, HMRC will revise it, but if the appellant does not agree to settle then the appeal will be sent to the tribunal to decide.

Once the tribunal receives the appeal request, it will contact all parties to arrange for the case to be heard and may require the appellant to present his case. Even at this stage, if the parties involved agree a settlement, then the case will not proceed to the tribunal and the appeal is withdrawn. Of the 20 per cent of cases that go to the tribunal, HMRC’s decision is upheld 87 per cent of the time.

This brings me to the need for this order today. According to the appeals process as it currently stands in legislation, all tax credit appeals in Great Britain should be sent directly to the First-tier Tribunal, without HMRC having the opportunity to review the case and offer the possibility of a settlement. As I am sure your Lordships will appreciate, the settlement process saves appellants from going through what can be an emotionally demanding and challenging process in the tribunal. I reassure the Committee that HMRC none the less has continued to review cases since 2003 and has aimed for settlement of appeals in the normal way.

The order before us today embeds that process in law for the whole of the United Kingdom, not just Northern Ireland. It ensures that the legislation is restored to the intended policy position in the whole of the UK, when the former appeals bodies in Great Britain were abolished and their functions transferred to the new First-tier Tribunal. This important reference to the First-tier Tribunal in Great Britain was inadvertently omitted when tax tribunal functions were transferred to a new tribunal system in 2009. The omission occurred when amendments were made to the Tax Credits Act 2002, and came to the department’s notice only early in 2011.

I therefore hope that noble Lords will recognise the need for this order so that individuals appealing tax credit decisions in Great Britain do not by law have to have their case heard by a tribunal. It ensures that we embed a fair, efficient and transparent system of tax credit appeals across the entire UK, and it avoids the unnecessary and burdensome process of taking tax credit appeals to tribunal, freeing HMRC time to focus on its core function of collecting tax revenue. I commend the order to the Committee.

[Lord Eatwell]

My Lords, I am most grateful to the Minister for introducing the order in such a thorough manner. Of course, no impact assessment was made in the explanatory information but there was a helpful reference to the impact assessment made at the time of the Transfer of Tribunal Functions and Revenue and Customs Appeal Order 2009. The questions that I wish to put to the Minister arise from assessing the arguments made in that impact assessment, or from attempting to project them on to this case.

First, the impact assessment made the point that the transfer to the new tribunal system would involve what it described as,

“a slight increase in administrative burdens on small businesses and individuals”.

Here, with respect to tax credits, we will be talking predominantly about individuals. The description of the regularisation of the process of tax credit appeals that the noble Lord has put forward will still contain the 20 per cent of appeals going on to the tribunal. Has there indeed been an increase in administrative burdens on tax credit appeals and, if so, how significant is that burden assessed to be? Moreover, since it is now nearly three years since the general transfer was made, I wonder whether the recognition that there has been an increase in administrative burden in general for income tax appeals was indeed forthcoming; and what the impact on appeals has been.

Secondly, at the time of the transfer, a strong case was made by many stakeholders that the transfer from the general commissioners of income tax to the tribunal system involved a significant increase in the burden on appellants, given that there was a reduction from 400 geographic divisions to just 130. Has this affected the appeals with respect to tax credits? If so, what is the assessment of the impact on appellants?

Thirdly, in the impact assessment there was some general assessment of the economic advantages of the new appeals system. It was argued that costs would be reduced from £3 million to £2.75 million per year. Has that cost saving been realised? It was also argued that the set-up costs would simply be £1.25 million. Was that the figure, or was it greater or lesser? What is the estimated cost, if any, of the introduction of this order?

[Lord Sassoon]

My Lords, I thank the noble Lord, Lord Eatwell, for his focused contribution, even if it sets me some challenging questions about the burdens involved.

The easy question to deal with is the one on burdens. There has been no increase in administrative burdens or in the burden and costs on appellants. That is key, I think, for the narrow discussion this afternoon—

[Lord Eatwell]

My Lords, can the noble Lord tell me how he can confidently assert that there has been no increase in burden on appellants? What evidence does the Treasury have?

[Lord Sassoon]

My Lords, these things are tracked by HMRC, which put together the underlying information in the original impact assessment.

In essence, I think that we need to look at two aspects of these questions. First, what continued to be done as a matter of administrative practice by HMRC was in line with what had happened before the new system came in and what was intended by the policy set out by the previous Government. In that sense, what we are doing this afternoon is neutral in terms of burdens and costs, as the noble Lord, Lord Eatwell, recognises—I see him nodding. I hope that he accepts that that is indeed the case. The assessment is that there has been no increase in burdens on appellants and no increase in costs.

On the question of the set-up costs and annual costs given in the original impact assessment, which is a perfectly fair and more broadly relevant question but does not, I suggest, touch on the narrow question of costs relating to sorting out the wording provided by the order this afternoon, if it would be acceptable to the noble Lord, I will see what other information is available at reasonable cost. I hope that he will understand that, on the narrow point, I have given him the assurance and, on the wider one, we will look at the matter and, if the information is available without inordinate cost, I will see what other information I can give him on the costs of the new regime.

The critical issue, which I come back to, is to reassure the Committee that no claimants have been affected by this missing reference in the Tax Credits Act. HMRC has continued to seek settlement for appeals in the normal manner in Great Britain as well as Northern Ireland. Where the appellant agrees with the settlement, the appellant is asked to withdraw the appeal; it is only in cases where the appellant does not wish to settle a case that it is passed to the tribunal to decide and, even then, there remains the option of reaching a settlement. So, in that sense, this is a neutral piece of tidying up. This order seeks legally to embed that process for the whole of the UK and to ensure that legislation is restored to the intended policy position for the whole of the UK. I commend the order to the Committee.

Individual Savings Accounts: AIM Shares

Debate between Lord Eatwell and Lord Sassoon

Tuesday 31st January 2012 Lords Chamber

[Lord Sassoon]

My Lords, first, I explained the reasons why the Government decided—as the previous Government rightly did—not to make AIM shares eligible. On the other hand, I am happy to summarise some of the measures to support small businesses that the Government are taking—for instance, credit easing, with up to £20 billion of lower-cost lending; £1 billion through the business finance partnership for mid-sized companies through non-bank lending channels; greater tax relief for EIS and VCT schemes; more than £500 million going into venture capital funds, including through business angel co-investment funds; and the extension of the enterprise finance guarantee. I could go on.

[Lord Eatwell]

My Lords, the noble Lord referred to the problem of devaluing the brand by including riskier assets. To what degree was the brand devalued when ISAs were extended from cash ISAs to share ISAs?

[Lord Sassoon]

My Lords, it is entirely appropriate, because ISAs are the main savings vehicle for people in this country, that a range of products, both cash and equity and debt products, should be eligible for an ISA. As I explained, there is an appropriate line to be drawn, and it is where the previous Government and this Government drew it. This Government are fully continuing on AIM with the previous Government's policy.

Taxation: Avoidance

Debate between Lord Eatwell and Lord Sassoon

Thursday 26th January 2012 Lords Chamber

[Lord Sassoon]

My Lords, as I am sure my noble friend would recognise, all government departments are having to tighten their belts; otherwise, the deficit is not going to be tackled. I hope to reassure him by explaining where HMRC is focusing its efforts. The recruitment of over 1,200 staff in new posts to tackle non-compliance is significantly upping HMRC’s efforts in this area and will bring in significant additional revenue in each tax year, so the answer to his question is yes.

The customer relationship model that HMRC uses has considerably improved its ability to identify risk and to handle these issues. The report by the National Audit Office on HMRC’s 2010-11 accounts, which underlay one of the reports referred to by the noble Lord, Lord Eatwell, noted that HMRC’s high-risk corporate programme has brought in a yield of over £9 billion and that it contributed to reduced avoidance activity by major companies. The investment is there. On another point made by my noble friend Lord Dykes, we do not forget the cash economy in those efforts.

I am grateful to the noble Lord, Lord Eatwell, for drawing attention to the question of the general anti-avoidance rule, the GAAR. We are exploring that option to see whether such a rule could help to deter and counter tax avoidance in a fair way. Attention has been drawn to the work of Graham Aaronson and his colleagues and their report. We received the report in November last year. We will be considering it and are actively discussing its implications with businesses and tax professionals. We will respond to the report at the Budget and set out our plans if appropriate. We have said clearly that we would not introduce a GAAR without a further formal round of public consultation, so that is very much work in progress.

I am also grateful to the noble Lord, Lord Eatwell, for applauding the introduction and the work of the Office of Tax Simplification. The complexity of the tax system has been much remarked on, and I can echo many of the remarks made by noble Lords on that. The OTS has started its work and published recommendations on tax relief, avoidance legislation and IR35, as well as an interim report on small business tax. More is coming down the pipeline and this ongoing work will be an important part of what we all want to see: a simpler tax system that is easier for individuals to comply with. I may disagree with the emphasis of my noble friend Lord Phillips of Sudbury on some things, but I certainly agree that this is fundamentally about individuals doing what they are required by the law to do.

Another critical component of preventing avoidance is the way in which HMRC engages with the largest taxpayers proactively to identify and tackle avoidance. We do not have the time to go into the detail of this but, in response to some of the somewhat one-sided interpretation and selective quoting of the recent Public Accounts Committee report, I draw the attention of the House to HMRC’s detailed rebuttal on many factual points in the conclusion of that report. In brief, to be clear, this effort with large businesses is not in any way HMRC being soft on large business or on those with complex tax affairs. HMRC treats all taxpayers even-handedly and does not allow them to settle for anything less than the full amount due. It is through its engaged and intelligent approach to tax avoidance that the additional revenue to which I have already referred is coming in.

[Lord Eatwell]

The noble Lord referred to erroneous statements in the PAC report. Did they include the observation that senior HMRC officials had had lunch and dinner with the companies that then had a reduced tax burden?

[Lord Sassoon]

My Lords, the substance of the issues to which HMRC takes exception is to do with the size of unresolved tax bills and some of the details of cases in which errors were found that HMRC disputes. That is the substance, rather than the question of who met whom with what refreshments laid on. We should stick to the substance.

Other noble Lords have been scrupulous in keeping to their time. I am conscious that, with the interventions, I risk going over my time, so I will press on. I want to answer just one more question, raised by my noble friend Lord Dykes, about the tax treatment of overseas companies. I just confirm that we are reforming the controlled foreign company rules very much to protect against the artificial diversion of profits to low-tax jurisdictions, just as our general reforms are being made to make the UK a good place for global corporates to have their headquarters. Having said that this is a matter for individuals, I will not comment on the affairs of any individuals.

In conclusion, I have very briefly explained our strategy for tackling tax avoidance to ensure that everyone pays their fair share. This is an important topic and I am glad that we have had this debate. The Government are taking real, decisive, concrete action to close the tax gap. We are making good progress, but there is much more to do. We will ensure that every sector of society pulls in the same direction to tackle the deficit and the woeful economic legacy left to us by our predecessors.

Taxation: Inheritance Tax

Debate between Lord Eatwell and Lord Sassoon

Wednesday 21st December 2011 Lords Chamber

[Lord Sassoon]

My Lords, I hear clearly what my noble friend says and I am sure that the Ministry of Justice will want to move faster, but I am just giving what the backstop date is.

[Lord Eatwell]

I think that everyone is in agreement that the structure of inheritance tax at the moment is unsatisfactory, as illustrated by the data that the Minister presented in his Answer. It has stimulated a large avoidance industry and it contains perverse incentives. In the spirit of the season, may I offer the Minister the gift of a constructive proposal? We should cease to levy inheritance tax on estates and instead should levy it on recipients. That would significantly reduce avoidance and would incentivise the wider distribution of wealth.

[Lord Sassoon]

My Lords, as I said, we have no plans to review the law, but we are always interested in constructive suggestions, wherever they come from.

Economy: Private Capital Investment

Debate between Lord Eatwell and Lord Sassoon

Tuesday 20th December 2011 Lords Chamber

[Lord Sassoon]

My Lords, we are very interested in anything that keeps credit flowing. However, although my noble friend is very good at reminding us of that issue, we are getting a bit far away from fiscal measures.

[Lord Eatwell]

My Lords, I am sure that the Minister will agree with the noble Lord, Lord Empey, that, however low interest rates may be and whatever fiscal incentives may be in place, ultimately investment is determined by business confidence. Is he aware that the Institute of Chartered Accountants in England and Wales produces an index of business confidence? In its latest report, it says:

“The Confidence Index has suffered its largest quarterly decline since the survey began”.

The survey began in 2004. Is it not clear that the destruction of business confidence is the main outcome of the Government’s economic policies?

Consumer Insurance (Disclosure and Representations) Bill [HL]

Debate between Lord Eatwell and Lord Sassoon

Tuesday 20th December 2011 Lords Chamber

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

My Lords, I beg to move Amendment 1, which leaves out Clause 2(5). This subsection was added to the Bill following acceptance of an amendment in Committee. I will also speak to Amendment 2, which proposes an alternative and—I hope that the House will agree—improved approach to addressing the Committee’s concerns about renewal of insurance contracts. Having considered the amendment accepted by the Committee, we felt it was necessary to come forward with alternative drafting to achieve what noble Lords had in mind through the original amendment.

Taken together, these two amendments will mean that insurance companies are expected to have to show that they told their policyholder that answering questions on renewal was important. However, they also avoid some unintended consequences of including this requirement in its current form as part of Clause 2.

These amendments address something which the Bill Committee touched on extensively in its deliberations. There was much discussion of the implications of the Bill for consumers renewing insurance. Renewal involves entering into a new contract and consumers are therefore under the same obligation as when first purchasing their policy—that is, they must take reasonable care to answer the insurer’s questions, or the insurer may be entitled to refuse a later claim. Noble Lords were concerned that consumers might not recognise the significance of questions asked on renewal, as they may not understand that it is a new contract, and as a result might not take sufficient care to answer these questions.

The Government agree that insurers should take measures to ensure that their consumers are aware of the importance of responding to questions which they are asked at renewal. However, as I mentioned, to ensure that the effect of this change to the Bill reflects the wishes of noble Lords, we felt that it was necessary to come forward with alternative drafting. There are some relatively small drafting points.

The inserted text splits subsections of the current clause which need to run together, and the phrase “make clear” may be a difficult standard. However, most importantly, it leaves no remedy for an insurer who has not included the right wording, even if the consumer’s failure to reply was a deliberate or reckless misrepresentation. I am sure that the Committee did not intend to give consumers a “get out of jail free card” in circumstances where they knowingly and deliberately deceived their insurer. The amendment therefore removes the drafting accepted in Committee stage and substitutes an alternative in Clause 3. That explicitly adds to the list of factors that a court may take into account, when determining whether a consumer acted reasonably, whether the insurer communicated the importance of answering questions on renewal. Both the Association of British Insurers and the Investment and Life Assurers Group agree that that is a more suitable approach.

There are many ways in which an insurer may communicate the importance of answering questions at renewal. The Committee discussed whether wording which explicitly told the consumer that they were entering into a new contract would achieve that. That is indeed one way in which an insurer may communicate the importance of answering questions as required by the amendment.

It might be helpful if I set out for noble Lords current market practice at renewal and the effects of the amendment in this context. An insurer will often send the consumer a letter to say that their insurance is up for renewal. Market best practice is usually to send a list of the facts that the consumer told them the last time. The consumer is asked to read and consider the list, and to contact the insurer if the facts have changed.

In motor insurance, it is common practice for insurers to renew the policy even if the consumer fails to reply. It is now a criminal offence for a motorist to allow their car insurance to lapse without notifying the Driver and Vehicle Licensing Agency and we therefore welcome any practice which makes renewal a simple process for the consumer. If nothing has changed, there is no need for the consumer to reply, but if something has changed and the consumer fails to respond, this is capable of being a misrepresentation. As my noble friend Lady O’Cathain stated during the last Committee sitting, it may be that nothing has changed in relation to your car insurance. Alternatively, you may have been convicted of a new driving offence which you should tell your insurer about. As a result of this amendment, the insurer should clearly communicate the importance of mentioning such changes. If the letter is poorly laid out or in very small print, or if it fails to tell the consumer that failing to mention changes may lead to claims being refused, then a consumer may act reasonably in overlooking it.

In circumstances where the consumer fails to respond because they did not understand the implications, the insurer would be expected to show that they told the consumer how important it was to respond to the questions at renewal time. The insurer would know that it could not just point to the consumer’s oversight. This last important point was teased out in Committee and was, I believe, noble Lords’ real intention. I believe that the amendment addresses the concerns raised by noble Lords during those discussions.

[Lord Eatwell]

My Lords, as I have stated throughout our proceedings, we on this side of the House fully support the Bill as a measure which makes a major improvement to the relationship between insurer and insured in consumer insurance. We have sought to improve the Bill, making clear elements of the drafting which were unclear or which, on careful examination, did not correspond to the declared intentions of the Law Commission and therefore required amendment. Accordingly, in Committee I proposed the amendment to which the noble Lord has referred and which in due course the Committee passed almost unanimously, the only dissenting voice being that of the Minister himself.

Before dealing with the substance of the Minister’s amendments, I first ask him whether he consulted the Companion before tabling them. Paragraph 8.133 states that,

“an issue which has been debated and voted on in committee can be reopened, provided that the relevant amendment is more than cosmetically different from that moved in committee”.

When we look for the meaning of “cosmetically different”, earlier in the same paragraph it is stated that amendments must not be identical or of identical effect. Consequently, the Minister cannot argue that this amendment has identical effect. If he does, he must withdraw the amendment.

[Lord Sassoon]

I wonder whether it would be helpful at this stage to confirm that the government amendments have been drafted in full recognition of what the Companion says. As I tried to explain in setting out the rationale for the amendment, I do not believe that it has the same effect because it provides greater clarity and, I believe, delivers what, in Committee, noble Lords wanted to achieve. My understanding of the process is that, if there had been a problem with the technical raising of the amendment, the Public Bill Office would have raised questions on it. Therefore, I believe that both in substance and in form the right things have been done.

[Lord Eatwell]

I think that the noble Lord is contradicting himself. He said that it was what noble Lords wanted to achieve when they voted on the amendment in Committee, yet he says that it is not identical in effect. That does not seem consistent. However, let us move on.

Turning to the substance of the amendment, I accept that its placement in the Bill is superior to that which I proposed in Committee, and for that I am grateful. However, the intention of the Committee was that insurers would be required to make clear to consumers that when a policy was renewed, it would in fact be a new policy, and consequently the importance of questions asked would be of the same order as when new business was written. As many noble Lords argued in Committee, they were not aware of this—indeed, I believe that the Minister himself admitted that he was not aware of it—and they could well understand a consumer failing to be aware of it too. This lack of awareness might result in the consumer taking insufficient care in answering questions posed by the insurer.

The Government’s amendment does not refer explicitly to the fact that a renewal is a new contract and hence this is not of identical effect. Instead, it proposes the vague test of,

“how clearly the insurer communicated the importance of answering those questions (or the possible consequences of failing to do so)”.

That is a very vague rendition of what was intended by the amendment in Committee. Instead of being explicit, the matter is now to be left to the courts to decide. However, I note that the Minister stated that explicitly telling the consumer that they were entering into a new contract would be “one way” in which the insurer could communicate the importance of the questions asked at renewal. I fully expect that the ABI and the ILAG will draw this passage in Hansard to the attention of their members and that it will form a background to any subsequent court proceedings. On that basis, I shall raise no objection to the government amendment.

Finally, I would be grateful if the Minister would clear up the matter raised in Committee by the noble Lord, Lord Goodhart, and not subsequently resolved. That is the relationship between Clause 5(1) and Clause 5(3). As the noble Lord, who is in his place, pointed out, they seem to duplicate one another and hence, potentially, they are a source of confusion. As we still have a chance to sort this out at Third Reading, perhaps the Government could enlighten us about the reasoning behind this dual oddity of drafting.

Economy: Deficit Reduction

Debate between Lord Eatwell and Lord Sassoon

Thursday 15th December 2011 Lords Chamber

[Lord Eatwell]

My Lords, the Minister has made it clear to the House today that the Government’s deficit reduction strategy is based on sand. It is always five years ahead. He has told us today that the target is to balance the budget by 2017; next year it will be 2018, the year after that 2019 and, like old age, it will simply retreat before us. Given that the Government’s strategy has been pushed off track and is failing to meet its deficit targets, why in the autumn Statement did they not cut expenditure more and raise taxes more to put the deficit reduction strategy back on track?

[Lord Sassoon]

My Lords, first, the deficit reduction strategy, as the OBR confirms, is absolutely on track. If the noble Lord is suggesting that we should cut expenditure and raise taxes, is that the policy of his party?

Economy: Monetary and Fiscal Policy

Debate between Lord Eatwell and Lord Sassoon

Tuesday 8th November 2011 Lords Chamber

[Lord Sassoon]

The debt is going up. Far be it from me to criticise my noble friend, who quite rightly makes this point. If the deficit was running at the level that we inherited from the previous Government, of 11.1 per cent a year—the highest deficit level in our history—it would not take very many years before our debt got up to the level of the Italian and the Greek debt. That is why we will continue to keep our deficit policy on track and keep our interest rates low. I entirely agree with my noble friend that we must be reminded about the level of debt as well.

[Lord Eatwell]

My Lords, in his first Answer to my noble friend, the Minister said that the Monetary Policy Committee takes account of growth and inflation, but its statutory responsibility is to take account only of inflation. When did the Treasury change the policy?

[Lord Sassoon]

My Lords, I will let the noble Lord, Lord Eatwell, read the actual words in Hansard tomorrow. [Interruption.] No, I am not changing anything. The MPC has to take account of the prospects for growth and inflation when it is judging how to set the direction of monetary policy. Its target is an inflation target, but it needs to take account of a wealth of other factors when making its decision, so that is what it does.

Devolved Administrations: Financial Flexibility

Debate between Lord Eatwell and Lord Sassoon

Tuesday 8th November 2011 Lords Chamber

[Lord Sassoon]

My Lords, a lot of factors have to be taken into account in setting expenditure for the devolved Administrations, not least our favourite Barnett formula, but the fact remains that expenditure on a head-count basis in Wales will, in the present period, be some 12 per cent higher than the per head expenditure in the United Kingdom.

[Lord Eatwell]

My Lords, was the Welsh Assembly consulted before this decision was made?

[Lord Sassoon]

My Lords, the United Kingdom Parliament—this House and another place—was not consulted before an awful lot of spending decisions were taken. That is the way that Governments make spending decisions.

Financial Services and Markets Act 2000 (Exemption) (Amendment No. 2) Order 2011

Debate between Lord Eatwell and Lord Sassoon

Monday 31st October 2011 Lords Chamber

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

My Lords, I beg to move the Motion standing in my name on the Order Paper.

[Lord Eatwell]

My Lords, I am afraid that this may take a little longer than expected, the order having been considered previously in Grand Committee. Unfortunately, at the time of the Grand Committee consideration, noble Lords did not have available to them the results of the consultation on the order and consequently were not then able to give the order the scrutiny it deserved.

I would be grateful if the Minister could answer a couple of points raised in the consultation that the Government have not addressed. First, given the peculiar importance of credit unions in Northern Ireland, are the Government intending to address the issue raised in the consultation of whether an office of the FSA or a successor organisation should be established in Northern Ireland? This is clearly a sensitive issue in the Province, and it ill behoves the Government simply to ignore it, as they do in this document.

Secondly, I am unclear about the Government’s position on question 2(a) of the consultation on whether the Northern Ireland Assembly would retain legislative control of credit unions in Northern Ireland. As the Government acknowledge, considerable concern was expressed about the loss of Northern Ireland influence over an aspect of financial life that is very important in the Province but less so in the rest of the UK. Could the Minister please clarify the Government’s position? Again, in the consultation document the question was simply ignored. As a corollary to this last point, what are the Government doing to ensure that no adverse effects are felt in Northern Ireland from the legislation on credit unions passed in this House on Thursday, 20 October? That legislation allowed businesses to assume up to 10 per cent of the share of the capital of a credit union and eliminated the role of the common bond as the basis of a credit union.

How will the Government ensure that credit unions in Northern Ireland do not, in some cases, become dominated by local business members, with the potentially unfortunate impact on investment decisions, particularly when the credit union considers investment in the local community? How do the Government intend to monitor the impact of the loss of the common bond in Northern Ireland credit unions, when it is evident that the common bond has played an important role in the unique character of the credit union movement in the Province?

[Lord Sassoon]

My Lords, for the benefit of noble Lords who did not take part in the discussion in Grand Committee on 17 October, it is perhaps worth explaining that this statutory instrument transfers responsibility for regulation of Northern Ireland credit unions to the Financial Services Authority. It implements a policy decision of the previous Government announced in March 2010—which has the support of all three main parties—the outline of which is the subject of this statutory instrument. There will be further instruments dealing with the detail of the transfer and a number of the consequentials arising from that.

It is unfortunate that the consultation issued by the previous Government in March 2010, having said that the decision had been taken that regulation would transfer to the Financial Services Authority, slipped into a consultation about how this is best achieved and what other associated action should take place. Those matters will be the subject of further statutory instruments in due course and it is unfortunate that there was one somewhat confusing question that could have been taken as touching on the statutory instrument before us today. I regret that. Had I known that that question was there, we could have had the consultation responses out earlier, even though it was not intended that the previous Government’s consultation should have anything to do with the business before us today.

On the issues raised by the noble Lord, Lord Eatwell, the question of the FSA and the allocation of its resources to offices is a matter for it. The responses on this point were linked to concerns about what the regulatory regime was going to entail and the FSA has worked hard to address those concerns by carrying out visits to Northern Ireland and answering questions from the credit unions.

As to the common bond and possible domination of local businesses, as we discussed in Grand Committee, the credit unions do not feel that this issue will be a threat. Of course, along with seeing how the credit unions sector generally across the United Kingdom develops—it is prospering and the Government wish to see it do so—it is one of the many factors that the Government will continue to have in view. The matter does not touch directly on this instrument, but it is relevant to the whole of the credit unions sector across the United Kingdom.

The other points will be the subject of ongoing work by the FSA following another consultation that the FSA and the Treasury had issued, which closed last week and which will be the subject of further statutory instruments in due course.

[Lord Eatwell]

And what about legislative control?

Economy: Inflation and Unemployment

Debate between Lord Eatwell and Lord Sassoon

Thursday 27th October 2011 Lords Chamber

[Lord Sassoon]

I am sure that the authorities of both Houses have heard what the noble Lord, Lord Martin of Springburn, has said. Of course, skills will be part of the supply-side reforms that we continue to work on going forward.

[Lord Eatwell]

Does the Minister agree that the very high rate of inflation in this country is one of the key factors leading to a significant reduction in the living standards of ordinary households and is therefore contributing to lower expenditure and lower employment? Will he explain to the House why, at over 5 per cent, the inflation rate in this country is almost double that of all other European countries and that of the United States?

[Lord Sassoon]

My Lords, the noble Lord, Lord Eatwell, seeks to get me to commentate on matters that we have given to the independent Monetary Policy Committee of the Bank of England. It was the party opposite in government who took the right step of giving the Bank of England independence. Therefore, as I have already explained twice in my answers today, it is for the Bank to explain, as it does very transparently, the track of inflation. The Government are ensuring that we relieve wherever we can the pressures on household bills because I accept that inflation puts a high burden on our households. That is why we cut fuel duty by 1p per litre in the Budget and why we announced in recent weeks a further £805 million to enable council tax to be frozen for a further year. The Government are concerned to make sure that our hard-pressed households are relieved of pressures. That is why we need to keep interest rates low, which have contributed to £10 billion of lower mortgage payments than there would otherwise have been.

Financial Services and Markets Act 2000 (Exemption) (Amendment No. 2) Order 2011

Debate between Lord Eatwell and Lord Sassoon

Monday 17th October 2011 Grand Committee

[Lord Eatwell]

With the leave of the Committee, I wonder whether I might make a statement before the Minister rises and request that he withdraw this order on the following grounds. First, much of the relevant material of this order is still under consultation by the Financial Services Authority. The consultation concludes on 31 October and today is 17 October. Secondly, I draw the Minister’s attention to the report of the Merits of Statutory Instruments Committee, which, on 13 October, wrote to the Treasury with a reminder of the need to make summaries of consultation responses available at the time an instrument is laid and to ensure that the summary for this draft instrument is available before the debate in this House.

Thirdly, a lot of the scrutiny of this order is dependent on the Opposition and other noble Lords having access to the results of the consultation so that they can properly and fully scrutinise the consequences of the order. The results of the consultation are not available and it is therefore not possible for noble Lords to effectively scrutinise this legislation. If we proceed, it would be the sort of action that brings Parliament into disrepute.

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

My Lords, there is perhaps some confusion about what we are doing here today and what else needs to be done in connection with this order from the Joint Committee on Statutory Instruments.

Let me start by explaining the situation we are in, because it is complicated. The previous Government in March 2010 made a decision—a joint decision of Treasury Ministers and Ministers of the Department of Enterprise, Trade and Investment in Northern Ireland—that credit unions in Northern Ireland should no longer be exempt from regulation under the Financial Services and Markets Act 2000 and that responsibility for their regulation should transfer from the Department of Enterprise, Trade and Investment to the Financial Services Authority. That decision was taken by the previous Government and we are considering the order today. As the Deputy Chairman reminded us, the formal business is moved on the Floor of the House. We are considering the statutory instrument that puts into place a decision by the previous Government.

The running consultation is about consequential provisions relating to the details of the transfer, the transitional arrangements, grandfathering, temporary powers for the FSA, how information will transfer between the department and the FSA, and consequential issues to do with money laundering and terrorist financing. Those will all be dealt with—to the extent they need to be—in the appropriate way through instruments or regulation. Therefore, what is being consulted at the moment is nothing that should detain us from putting in place a decision by the previous Government with which this Government completely agree. In our view, it is about time that we got on with the enabling instrument and there is no reason not to allow the consultation on the “how” of the transfer to carry on in the normal way.

The Treasury is publishing today responses to the original policy proposals in principle. However, the decision was originally taken and announced in a joint document by the UK Government and the Northern Ireland department in March 2010. I think we should turn to the substance of the order.

--- Later in debate ---

[Lord Sassoon]

That the Grand Committee do report to the House that it has considered the Financial Services and Markets Act 2000 (Exemption) (Amendment No. 2) Order 2011.

Relevant document: 28th Report from the Joint Committee on Statutory Instruments

[Lord Eatwell]

My Lords, I put a question to the noble Lord, which he has not answered, regarding the response of the people of Northern Ireland to the question about whether they agree with the order. On this side of the Committee we are entirely supportive of the objectives of the order. That is not the point that I am raising. My point is that the Merits Committee wrote to the Treasury on 13 October, reminding it to ensure that the summary of this draft instrument was available before the debate in the House. I have not been able to find a summary of the consultation on this draft instrument. Without the reactions of the people of Northern Ireland, who are closely and greatly involved in credit unions, as the Minister pointed out, it is very difficult to offer the order proper scrutiny. Therefore, I cannot continue, other than to say that it would be appropriate for the Treasury to ensure that relevant consultation material is published, as the Merits Committee requires, prior to consideration of draft legislation by the Committee.

--- Later in debate ---

[Lord Sassoon]

My Lords, notwithstanding the welcome rare appearance of the noble Lord, Lord Myners, as a former Treasury Minister in this Committee, it is a bit rich of the Opposition to talk about delay in this order. The Northern Ireland credit unions were left out of FSA regulation from the time that the Financial Services and Markets Act was enacted in 2000 until the previous Government left office 18 months ago. So for members of the Opposition to talk about the delay of this Government in not getting the order through earlier while on the other hand asking for evidence of a decision that they had taken before the election—seemingly without waiting for the evidence that they are now asking for—is indeed a bit rich. If noble Lords on the other side really want to persist with this line, this order will not get through, as it has to in the next few days and weeks, in order to give the people of Northern Ireland proper protection of their money in mutuals from the proposed transfer date to FSA regulation of March 2012.

What does the noble Lord, Lord Eatwell, who has come along with all kinds of clever procedural tricks this afternoon, have to say to the people of Northern Ireland if he is to deprive them yet further of proper protection under the Financial Services Compensation scheme? We need to get this order through if the people of Northern Ireland are to be protected from March of next year.

[Lord Eatwell]

My Lords, to refer to the fact that the Government have apparently published only this morning the evidence of the consultation and the raising of the objection of not having had access to it as a clever procedural trick is an abuse of language.

The point we are making is that the Government should take seriously the consultation with the people of Northern Ireland and make the results of the consultation available to the Opposition so that they can properly scrutinise and assess the impacts of the change. That is all that I asked for. I also pointed out that on 13 October the Merits Committee wrote to the Treasury requesting that the material be published, and it was not published until this morning.

As my noble friends and I have made clear, we are entirely supportive of this legislation. We want to get it through as soon as possible, but we want proper due process. This is an abuse of due process. I think it would be best if we let the Minister proceed with his Motion, because he is not interested in actually debating the issues.

EU: Credit Rating Agencies

Debate between Lord Eatwell and Lord Sassoon

Monday 3rd October 2011 Lords Chamber

[Lord Sassoon]

I agree with my noble friend. I know that he was a member of your Lordships’ sub-committee which produced an excellent report published in July. Among its conclusions is that:

“The criticism that credit rating agencies precipitated the euro area crisis is largely unjustified; their downgrades merely reflected the seriousness of the problems that some Member States are currently facing”.

[Lord Eatwell]

My Lords, the noble Lord, Lord Sassoon, has made it clear on several occasions that appeasement of the private credit rating agencies is a central plank of government policy. What reconsideration of that policy have the Government undertaken, given the point just raised by the noble Lord, Lord Hamilton? When the United States was downgraded, the rate of interest in the US did not rise, which the noble Lord, Lord Sassoon, on several occasions predicted would be the relationship between credit rating and interest rates; quite the contrary, interest rates in the United States fell.

[Lord Sassoon]

If the noble Lord means by appeasement what the Government want to do in terms of reducing the over-reliance of the market on credit rating agencies, getting away from being hardwired into arrangements that drive the debt markets, and what we want to do through increasing transparency and disclosure by the credit rating agencies, increasing competition and seeing more new entrants into the market, that is what I mean by appeasement, but I do not think it is what he means by it. We want a much more healthy market. We are going about it through a series of practical suggestions in discussion with our European partners in advance of the next proposals from Brussels.

Office for Budget Responsibility

Debate between Lord Eatwell and Lord Sassoon

Wednesday 6th July 2011 Lords Chamber

[Lord Sassoon]

My Lords, first, it is not our forecast. These are the forecasts of the independent Office for Budget Responsibility. Secondly, what is very heartening in the economy is the growth of manufacturing output and the growth of exports. Since last May, manufacturing output has been 4.2 per cent higher than in the same period in the previous year. Since last May, volumes of exports to the rest of the world have been nearly 13 per cent higher than in the same period a year earlier. The private sector has created 520,000 extra jobs in the past year and that is three-and-a-half times the number of jobs by which the public sector has contracted. I really do not think that noble Lords should get pessimistic. We always said that the recovery was going to be choppy but the manufacturing side of the economy is doing very well to rebalance, which is what the economy needs.

[Lord Eatwell]

My Lords, it is very helpful for the noble Lord to introduce the idea of rebalancing. Will he confirm that a vital component of the coalition’s policy to rebalance the economy is growth in business investment? Indeed, the OBR budget forecast contains a projected growth rate of 6.7 per cent for business investment. Will he confirm that latest figures show that business investment is not growing at all, but falling by more than 3 per cent a year?

[Lord Sassoon]

My Lords, I do not know where the noble Lord, Lord Eatwell, gets his figures from. Since last May, businesses have invested £91.4 billion across the economy and that is 9 per cent higher than in the same period in the previous year. That is very positive confirmation by business of what it sees as the prospects for this economy.

Monetary Policy Committee

Debate between Lord Eatwell and Lord Sassoon

Wednesday 6th July 2011 Lords Chamber

[Lord Sassoon]

I apologise to my noble friend for cutting him off earlier, but I am glad that he has got in now. It is certainly a bit of a puzzle that there is continued weakness in broad money growth at a time when nominal GDP is growing. I am no macroeconomist, but when I look at the tables I see that, among other things, the velocity of the circulation of broad money is increasing. I cannot see behind me to see whether my noble friend is nodding, but I think he is, so I am all right on that one. Any question of additional quantitative easing or withdrawal of quantitative easing will be decisions for the MPC whenever it sees fit.

[Lord Eatwell]

My Lords, would the Minister agree that increases in commodity prices and oil prices affect the economy of France, Germany and the United States just as much as they do of Britain? Why then is Britain’s inflation rate more than twice that of France, twice that of Germany and significantly greater than that of the United States?

[Lord Sassoon]

My Lords, the really important thing here is that the inflation expectations remain very low. All the range of forecasters is predicting that inflation will come down to the range of 2 per cent to 2.1 per cent in 2012 and beyond. That is the critical challenge for the MPC, in which it has the market’s confidence, and that is what underpins the very low interest rates that we continue to enjoy. We suffer, inherited from the last Government, a deficit the size of Portugal’s, but we have interest rates at the level of Germany’s.

Banking: Northern Rock

Debate between Lord Eatwell and Lord Sassoon

Thursday 30th June 2011 Lords Chamber

[Lord Sassoon]

My Lords, I am sorry if I cannot work up enough enthusiasm at 11am on a Thursday morning. The first thing to say is that not only has the foundation done good work in the north-east but its footprint covers Cumbria. We must not forget Cumbria. The previous Government agreed that Northern Rock would donate £15 million per annum to the foundation for a three-year period, 2008-10, and that commitment was honoured. Yes, the new agreement has an initial expiry date of December 2012, as I said, but it has the potential for a rolling one-year extension by mutual consent, to be agreed under certain terms. The door is open there, and it will be one of the things that I am sure prospective purchasers will want to take into account.

[Lord Eatwell]

My Lords, in the determination of best value for the taxpayer, how will the Government balance the short-run cash return from the sale with the long-run benefit to the taxpayer of there being a stable and successful mutual?

[Lord Sassoon]

The noble Lord makes a presumption there about the form of sale. We will be guided by the experts who have been appointed to conduct the sale, who will give advice on these matters to the Treasury.

Undertakings for Collective Investment in Transferable Securities Regulations 2011

Debate between Lord Eatwell and Lord Sassoon

Wednesday 29th June 2011 Lords Chamber

[Lord Sassoon]

That the draft regulations laid before the House on 10 June be approved.

Relevant document: 24th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 27 June.

[Lord Eatwell]

My Lords, I wish to bring to the attention of the whole House some aspects of these regulations that are a source of grave concern. During the discussion on the regulations in Grand Committee on Monday, it became evident, to me at least, that the Government have seriously misjudged the regulations’ importance, notably in their potential impact on the savings of British families and on UK consumers of financial services in general.

These regulations are the latest stage in the programme to establish throughout Europe a single market in transferrable financial instruments, where Europe is defined as the EEA—the European economic area. The programme began in 1988. An important component of that process has been to give fund managers in non-member states the ability to passport their services into another member state. Today—29 June—this is done by complying with various requirements of the regulator in the jurisdiction in which the funds are to be marketed. For example, the FSA typically requires fund management companies to establish a legal presence in the UK that can be regulated and supervised by the FSA. As of this Friday—1 July, when these regulations come into force—that will no longer be the case. Instead, the so-called simplified notification procedure established by these regulations removes the rights of national regulators to vet funds before they are marketed. Thereby, British savers will be relying on the regulator in, say, Iceland, Romania or Malta to ensure that their savings are adequately protected.

This is a fundamental change. It is not, as the noble Lord, Lord Sassoon, argued in Grand Committee,

“a sensible piece of tidying-up”.—[Official Report, 27/6/11; col. GC 145]

In fact, the European authorities have recognised some of the potential dangers and, by means of the same regulations, have introduced two measures to attempt to protect consumers. First, there is to be a simplified prospectus—a key investor information document—and, secondly, there is to be improved supervisory co-operation across member states. Of course these are desirable measures, but it has for many years been a fundamental tenet of financial regulation in this country that caveat emptor is not a satisfactory doctrine in the complex world of financial instruments. However well informed the buyer might be, the seller always has the upper hand. Moreover, having sat on the boards of various national financial regulators of the past 20 years—I sit at present on the board of a regulator outwith the European Union—I assure noble Lords that exchange of information between regulators is often imperfect and sometimes downright misleading, particularly where sensitive national interests are involved.

In the Treasury's own assessment of the impact of the regulations, it is conceded that the new management company passport,

“may cause some operational and supervisory difficulties which could reduce consumer protection”.

Having apparently recognised the problem, the Government have decided to do nothing about it, over and above what they are required to do by the European regulations themselves. The safeguards built into the regulations are significantly inferior to those enjoyed by British consumers today; they will lose those safeguards on Friday.

I have just one question for the Minister: what additional measures of consumer protection will the Government introduce on Friday to compensate for the erosion of UK consumer protection by the regulations?

Undertakings for Collective Investment in Transferable Securities Regulations 2011

Debate between Lord Eatwell and Lord Sassoon

Monday 27th June 2011 Grand Committee

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

My Lords, these regulations transpose into UK law the updated fourth EU directive on Undertakings for Collective Investment in Transferable Securities—UCITS IV—and are supplemented by new FSA rules. I will give a little background on the UCITS framework before explaining why the Government are seeking to introduce the new regulations.

The UCITS directive sets out a common set of cross-EU rules for how eligible investment funds should be run. The rules emphasise transparency and consumer protection, which means that UCITS funds are designed particularly for retail investors. However, they are frequently used more widely, including by pension funds and insurance companies. UCITS funds account for roughly three-quarters of funds under management across Europe.

The UCITS framework is very important to the UK fund management industry and to investors. For investors, the directive ensures strong consumer protection—for example, through clarity in marketing—and integrates the EU market, which gives investors a wider and more diversified set of funds to select from. UCITS has been a key contributor to the growth of UK asset management firms. The directive brings down barriers, allowing them to market across the EU based on authorisation by the FSA. The UCITS brand is recognised worldwide and EU fund managers market it globally. There are now some £500 billion of UCITS assets under management in the UK. This is the third update to the UCITS directive since it was introduced in 1988. It is intended to ensure that the market can operate more efficiently, bringing further industry and consumer protection benefits.

UCITS IV addresses four widely recognised shortcomings. The first is the difficulty that fund management companies face in establishing UCITS funds in other member states. UCITS IV removes this barrier by streamlining the way UCITS funds are notified in other member states. Funds can access the market without delay once their fund manager has notified the domicile’s regulator.

The second shortcoming relates to investor disclosure. UCITS rightly emphasises clear and transparent disclosure to retail investors so that they can easily understand the information about the fund that they are considering investing in. In practice, the requirements have led to prospectuses that are too long and complex and do not allow investors to make effective comparisons between UCITS funds. UCITS IV improves investor disclosure, replacing the required prospectus required with key investor information that will be contained in a simple document and will give key facts to investors in a clear and understandable manner.

Thirdly, European funds are often not taking advantage of economies of scale and are generally smaller than their American counterparts. Again, this has led to increased costs for investors. The directive addresses this in two ways. For the first time, UCITS will allow master feeder structures to be marketed across Europe. For example, feeder funds in different domiciles across the EU will be able to invest in the same master fund located, for example, in the UK. This will allow a single portfolio of assets to be offered across jurisdictions and for different types of investor. The directive also introduces a framework to allow UCITS funds to merge across borders, again removing a barrier to the creation of larger funds.

The final criticism made of UCITS is that it prevents specialisation. All the most important activities associated with a fund’s management have to be located in one member state as only the fund can be passported. So, in practice, even though much of the investment management activity may be carried out in the UK, funds not based in the UK would have to establish extra fund management companies in the domiciles of each of their funds. That has pushed up the administrative costs that ultimately have to be borne by the investor, and prevents gains from scale and specialisation.

UCITS IV introduces an effective management company passport. This allows a management company to operate a fund in a different member state without the need to be established in the member state of the fund. To support this, UCITS IV requires improved co-operation between UCITS regulators, particularly when they are supervising a UCITS management company and fund established in different member states.

The new UCITS regime has been warmly welcomed by the UK industry, which considers it a further opportunity to grow, while serving investors better. The Government are taking all available means, within the current fiscal constraints, to maintain and build on the UK’s lead as a centre for asset management, and that includes capitalising on UCITS IV.

In particular, the Government want the UK to be a home for new master funds. To achieve that, we are working with industry to develop the most suitable vehicle to meet the real demand for a tax-transparent vehicle in Britain. This year’s Budget announced that the Government will legislate to introduce a tax transparent fund, from 2012. We are amending tax law to accommodate the conditions introduced by the management company passport, removing any risk that a foreign UCITS fund may become taxable in the UK as a result of having a manager resident in this country.

I hope that the Committee will support the making of these regulations today. I hope that this brief speech has reassured noble Lords that the regulations will bring considerable benefits to both the UK industry and consumers, and that they will therefore gain their support.

[Lord Eatwell]

My Lords, I do not like this legislation, because it is moving in exactly the wrong direction with respect to regulatory responsibility in a multijurisdictional context; namely, it is legislation that empowers the home regulator, not the host—and this when recent events, particularly in international banking, have shown beyond all reasonable doubt that power should be flowing in the opposite direction, towards the host regulator.

I understand that one of the ultimate objectives of the programme to create a single market in financial instruments in Europe is to make the home-host distinction irrelevant. That can be done only by the development of a regulatory regime in which the domain of the regulator is the domain of the market—that is, there is effectively a single regulator for the entire market space. However, that is not the case in the EU, or the EEA, and will not be in the foreseeable future; indeed, I rather suspect that the Government hope that it will not be the case. Therefore, the Government must face up to the fundamental weakness of home-based regulation—that it encourages regulatory arbitrage.

It may be argued that one of the purposes of these regulations is to encourage the adoption of common standards, to which the noble Lord referred, particularly in conduct of business regulation, and that that will tend to reduce the potential for arbitrage. We hope that that is true, but arbitrage will not be eliminated. For example, different enforcement standards can provide rich pickings for mobile and perhaps not entirely respectable firms. That is evident even in the much more coherent financial space that is the United States of America. It is far more likely in the somewhat less coherent European Union.

I was surprised that I could find nothing in the Treasury’s impact assessment that refers to the impact of regulatory arbitrage. Nor could I find any reference to the role of the new European Securities and Markets Authority, the successor to CESR, which might be seen as a medium-term solution to the single-regulator problem. What is the Treasury’s assessment of the impact of this legislation on regulatory arbitrage? Is the Treasury content that regulatory arbitrage is in the best interests of UK consumers? If not, what steps is the Treasury taking to discourage regulatory arbitrage, and more generally, what are the costs and benefits of such arbitrage for the UK, as will be encouraged by these regulations? What will be the role of ESMA in the definition of procedures to be followed in the UK both in the short and medium term?

A key element enhancing the likelihood of regulatory arbitrage is the simplified notification procedure to which the noble Lord referred. This removes the right of national regulators to vet funds before they are marketed. Is that not a regulatory weakness at a time when the need for the efficient and effective regulation of financial instruments has been clearly demonstrated? Why are we giving up our right to vet instruments marketed to UK consumers? The FSA or any successor organisation will now have a significantly diminished capacity to ensure that new fund managers seeking to enter the national market will conform to our standards.

This leads to the vexed question of consumer protection. The impact assessment, in considering the role of the Financial Ombudsman Service, states:

“We have also asked whether … FOS referral rights should be made available in: Scenario 3—a UK management company operating a UCITS authorised by a regulator in an EEA member State other than the UK, on a cross-border services basis”.

The assessment apparently asks the question, but unfortunately does not tell us the answer, so could the Minister tell us now? Will UK consumers have access to the FOS in such circumstances and, if so, what authority will the ombudsman have with respect to activities authorised in another jurisdiction? When answering these points, perhaps the Minister would like to consider whether his answer would be the same were the relevant authority to be, say, Romania or Malta. That is not a criticism of those states; rather, it is a reflection on their capacity to manage complex instruments. So the crucial question, as yet unanswered, is: what extra measures are Her Majesty’s Government taking to protect UK consumers once UCITS IV is agreed?

Finally, I turn to the question of the review of the impact of this legislation. The Explanatory Memorandum states that:

“The Treasury will review the operation and effect of the Regulations within five years”.

However, the European Commission plans to make further reforms regarding the roles and responsibilities of UCITS depositories and expects to publish proposals later this year. There are therefore no plans to have a post-implementation review until these further changes have been developed and proposed. Is that wise? Are we not likely to get into something of a muddle as to the impact of various changes layered upon one another over time? The changes about to be implemented have significant ramifications for the regulation of fund managers in national markets and on the options available to consumers. Would a review of the current changes not be in order sooner, regardless of other changes being proposed, to ensure that any problems are identified and addressed before they develop?

While this legislation will undoubtedly increase consumer choice by easing the market access of UCITS managers throughout the EEA, I cannot but feel, despite all the warm words on exchange of information between regulators and the introduction of the key investor information document, that it represents a significant diminution of consumer protection. That, to say the least, is unfortunate.

[Lord Sassoon]

My Lords, I thank the noble Lord, Lord Eatwell, for his contribution to the discussion, but I am sorry that he does not seem to see much of merit in what should be a sensible piece of tidying-up of a regime in Europe which has been in place since 1988. It has taken with it the interests of not only the industry but also the consumer groups as it has been developed successfully through three amendments—and now the fourth—to the directive. We have transposed the directive by way of copy-out without any gold-plating. It rather surprises me that the noble Lord takes this basic stance to a framework which has stood consumers across Europe very well for a considerable number of years and not to date raised any of the concerns that he suggests that this series of amendments might raise.

I shall go through those concerns. I hope that the noble Lord agrees that there is considerable work to be done to complete the single market, whether it is fund management, other parts of financial services or business services more generally. In areas of completing the single market, consumer protection has to be taken seriously but I would interpret that, as a starting position, as not wanting to help complete the single market. That is protectionist in its import if not in the intention, given how the noble Lord, Lord Eatwell, spells it out. That is an unfortunate starting point. We should be looking at ways to sensibly advance what is a well worked regime and to see how we can enable both consumers and the financial services industry to take advantage of sensible further development and the opening up of the single market.

On the noble Lord’s specific concerns, there are two aspects to the question of regulatory arbitrage. First, in the regime, the directive leaves little room for member states’ discretion. It is not that the UK will be transposing these rules in one way and other member states in a radically different way. I know that this is probably not the main thrust of the charge that the noble Lord made on this but it is important to be clear that it is not the rules themselves that will give any significant scope for regulatory arbitrage. Beyond that, it is of course important that we ensure in the UK that funds passported into the UK are suitably regulated. Broadly speaking, that is what has happened under UCITS to date. There are already a good number of funds passporting into the UK under the UCITS directive. The FSA has powers to regulate their marketing activities. This is not opening up some completely new avenue here.

[Lord Eatwell]

The noble Lord is quite wrong. It certainly is new. The whole point of the new regulation is that funds can be passported into the UK without the prior agreement of the FSA. That is entirely new.

--- Later in debate ---

[Lord Sassoon]

My Lords, it is completely possible—it is done widely now—to passport funds into the UK or other European member states. What is new is that, for example, there will not have to be a multiplicity of management companies set up, so that the passporting in will happen on a much more flexible basis. That is why in UCITS IV there is the introduction of enhanced supervisory co-operation measures between European regulators, precisely to take account of this point. The noble Lord may shake his head and tut-tut but this is what the directive introduces, precisely to address the sorts of concern that he has.

For example, if the FSA has concerns that an inwardly passporting fund is not being managed in accordance with the directive, it is laid out how it can raise the matter with the home state regulator, which must take appropriate action and inform the FSA of the outcome. While I accept that not all regulators will necessarily have the same capacity round Europe, the fact that the FSA or other host regulators will have those sorts of powers gives adequate protection given the sort of regime that we are talking about. We are not talking about bank capital or things that go to the heart of financial stability. Therefore, it is important that the proposed regime is proportionate. The points the noble Lord raises are very reasonable but they have been thought about and are accommodated in the regime.

Arrangements regarding access to the FOS and to compensation arrangements for foreign funds passported into the UK are covered by FSA rules. The FSA rules require that EEA UCITS management companies that passport into the UK in order to operate a UK-authorised UCITS fund will have to contribute to the FOS and FSCS levies so that they are treated equivalently to UK-authorised firms carrying on the same activity. If a claim arises against such an EEA firm under the FSCS rules, it will be met from the general levy on firms in the fund management subclass. We believe that that is appropriate and justifiable because of the need that the noble Lord properly identifies to protect eligible UK investors.

I hope that I have addressed the two main issues which the noble Lord raises on this regime. As I have said, the regulations will work alongside FSA rules to implement the fourth UCITS directive. If they are approved by this House, it is intended that they will come into force on 1 July 2011. The Government will in parallel continue to develop the tax and regulatory landscape to ensure that the industry is able to take full advantage of new opportunities provided by the directive, and to maintain—the noble Lord may not want to see this but the Government do—the UK’s position as a major centre of fund management activity in Europe.

[Lord Eatwell]

My Lords, I am very keen that the UK fund management industry should develop, grow and be successful; whether this piece of legislation will contribute to that only the future will tell. My main concern is consumer protection. I also asked when the regulations would be reviewed.

[Lord Sassoon]

The noble Lord is often one step ahead of me; I was coming to exactly that point. One of the best answers to the charges that the noble Lord puts is review. It should be good regulatory practice to review any regulation or directive of this kind. Indeed, the Commission is required to review the UCITS IV directive two years after its implementation. The Government will, of course, continue to monitor the UCITS framework and engage constructively with the European review. We do not anticipate the noble Lord’s worst fears being justified but if that is the case a review is indeed built into the structure to address anything that arises.

I hope that I have addressed the noble Lord’s concerns on the directive. Having heard that those concerns are already addressed in the directive, I hope that the Committee will support the making of these regulations.

Banking: Government Shares

Debate between Lord Eatwell and Lord Sassoon

Monday 13th June 2011 Lords Chamber

[Lord Sassoon]

My Lords, I am grateful to my noble friend as she enables me to point to the mandate which UK Financial Investments was given by the previous Government. It was that in creating and protecting value for the taxpayer it must have due regard to both financial stability and competition. At all stages, whether it is the involvement of the Independent Commission on Banking or the mandate of UKFI, competition is at the centre.

[Lord Eatwell]

My Lords, the noble Lord has mentioned Project Merlin on a number of occasions. Will he explain to the House why the lending targets set for the banks under Project Merlin and announced to this House have now been reduced by a good 10 per cent? Why are the Government fiddling the figures?

[Lord Sassoon]

Number one, this is a Question about the disposal of bank shares; number two, I would not believe everything that you read on the front page of the Financial Times every day.

Consumer Insurance (Disclosure and Representations) Bill [HL]

Debate between Lord Eatwell and Lord Sassoon

Monday 13th June 2011 Grand Committee

[Lord Sassoon]

My Lords, I start my response to what has been a helpful discussion by thanking the noble Lords who have taken the trouble to contribute this afternoon. The points have been wide-ranging and constructive. I am grateful to the noble Lord, Lord Eatwell, for his faith that I can respond so quickly to the huge number of very detailed points that he raised in his constructive intervention. He may forgive me in advance if I do not manage to cover all the details. Of course, I will write to the noble Lord and copy that to others who have taken part in the debate this afternoon.

[Lord Eatwell]

My Lords, I entirely understand the noble Lord’s position and am quite happy to receive written answers to my questions.

[Lord Sassoon]

I am grateful for that, because some of this has been a touch technical and some rather fundamental. I will talk about the process in a moment, as my noble friend Lord Higgins asked about the procedure for Law Commission Bills. The fact that it is a Law Commission Bill and has, as my noble friend pointed out, been the subject of a big report subsequently consulted on by the commission means that we can be fairly confident that all the fundamentals of the law have been considered in great detail. Otherwise, this Bill would not be going through this procedure. This is the first Bill to go through the Law Commission procedure since the procedure was made permanent last year. I am pleased that, as my noble friend Lord Higgins recognised, this innovation has allowed for parliamentary time to be found for this legislation, which would clearly otherwise have been difficult.

On what happens next, the important thing is that this is not in any sense a fast-track procedure, because the Bill will follow the usual parliamentary process but for two exceptions. First, the substantive Second Reading debate is held in Committee—that is what we are doing this afternoon—rather than on the Floor of the House. Secondly, the Committee stage will be, as the noble Lord, Lord Eatwell, said, taken by a Special Public Bill Committee, which is indeed empowered to take evidence from witnesses as well as to conduct the usual clause-by-clause examination of the Bill. I have no present intention to suggest from the Government’s side that we should call witnesses, but that is allowed for in the procedures. For the benefit of my noble friend, I draw the Committee’s attention to paragraph 8.44 of the Companion to Standing Orders, which says:

“The House agreed in 2008, on a trial basis, that second reading debates on certain Law Commission bills should be held in the Moses Room … The Committee debates the bill, and reports to the House that it has considered the bill. The second reading motion is then normally taken without debate in the House, though it remains possible, in the event of opposition, for amendments to be tabled or a vote to take place on the motion. Law Commission bills are normally committed to a special public bill committee”.

I hope that that is as clear as it can be. I do not know whether that allows for speakers lists, gaps and things this afternoon, but I am grateful that my noble friend got to his feet and contributed to the discussions in his usual lively way.

As I said in opening, we believe that this Bill is necessary in order for the law to catch up with best practice. It will also ensure that the legal duty of consumers is reasonable and clear. In answer to the questions asked by the noble Lord, Lord Eatwell, in this area, I am not sure whether it is right to look on it in the context of shifting the onus of good faith. It is clear that it is up to the insurer to ask the questions and to the consumer to answer them, with the potential consequences of misrepresentation in the way that I outlined in opening. The effect of this is to shift the burden between the insurer and the consumer in the consumer’s favour as against the law as it stands in the 1906 Act. That is entirely appropriate.

It is worth reiterating in this context—I think that this is the point on which my noble friend Lady Kramer asked for confirmation—that any information that the consumer misrepresented or failed to disclose must be proven to have been relevant to the content and/or the price of a policy before the insurer is entitled to a remedy. There is a shift in the legal position, but it is a shift towards a position that is in line with industry best practice and the standards that are currently imposed by the Financial Ombudsman Service.

I am particularly grateful to my noble friend Lady Kramer for drawing attention to a shocking but classic case of the sort that this Bill is intended to obviate and to ensure does not happen in future. The case that she put forward was interesting because it was a question not of unreasonable loss to the consumer—as I understand it, after a two-and-a-half-year struggle, the FOS found in favour of the insurer—but, as was explained to us, of the very real distress and the time and effort that had to go into getting to the right answer. That should be eliminated in similar situations as a result of this legislation.

As I said in opening, the industry will benefit, as we anticipate a reduction in the costs of handing complaints internally and with the ombudsman. In that context, I can confirm to my noble friend Lady Noakes that we will be mindful of the burdens of implementation on the industry. She rightly and helpfully pointed out the various other initiatives that will bite on training, information and standards of scripts, whether in relation to the retail distribution review or simplified advice. Her points are well taken.

My noble friend Lord Higgins referred to paragraph 10.30 of the Law Commission’s report, which discusses the pros and cons of giving legal effect to industry guidance. My noble friend quoted from paragraph 10.30, but the report discusses the issue at some length in paragraphs 10.32 to 10.43. The Law Commission decided not to include such a provision for the reasons set out in paragraph 10.38, principally because the role of guidance is different from that of legislation. I think that the discussion is extensive in the Law Commission’s report.

[Lord Sassoon]

Good. I, too, am grateful that we have nailed that one.

On the other questions raised by the noble Lord, Lord Eatwell, there is first this difficult issue about permissible questions and specifically questions of gender and race. They are made particularly difficult by the recent judgment of the court in relation to motor insurance. This issue is dealt with elsewhere and not in the Bill, which is solely focused on the transmission of information in the context of underwriting risk. It is not part of the scope of the Bill to discuss questions of discrimination or equalities legislation—nor should it be.

On the definition of consumers and micro-businesses, we discussed informally last week what would happen with respect to the insurance of the foot of a ballet dancer or a footballer. Maybe we could call this the “David Beckham’s foot” question. The Explanatory Notes on Clause 1 define a consumer as,

“an ‘individual’ who is acting wholly or mainly for non-business purposes. Thus the consumer must be a natural person, rather than a legal person (such as a company or corporation). The definition expressly provides for mixed use contracts”—

for example, the insurance for a personal car that is sometimes used for business travel to be defined as a consumer insurance contract. It means that the Bill will not apply to individuals purchasing insurance that is mainly for purposes related to their trade, business or profession, which would clearly be the case in some of the examples that have been discussed.

Lastly, on the cost of insurance, HM Treasury has not made an estimate of the impact of the Bill on insurance premiums. However, we have estimated that the net impact will be savings for the industry—that is, when we take account of the initial training costs and the savings as a result of fewer FOS complaints among other factors. On the basis that the industry should have net savings from this Bill being enacted, there is absolutely no reason to believe that there should be any additional cost passed on to consumers. In relation to the overall cost of insurance, these are relatively small marginal costs but ones that would impact favourably—that is, downwards—on insurance costs.

[Lord Eatwell]

I should perhaps explain the point about cost. Given that the catch-all clause from the Marine Insurance Act 1906 is removed, necessarily the range of risks to which the insurance company is exposed will be greater. Given that, it is likely that the premium charge will be greater. That was the point that I was making.

[Lord Sassoon]

My Lords, I do not believe that the range of risk will be any greater. Under this Bill, the range of risk to which the insurers are exposed will be brought in line with the current industry best practice and the standards to which insurers are held under FSA rules and by the FOS. There is no extension of the range of liabilities; there is merely—this is an important “merely”—an alignment, a clarification and an important legal codification of where the duties lie at the point at which the insurance contract is taken out. There is also clarification of the remedies—the remedies that are already applied by the FOS—should a misrepresentation occur. So, yes, the position under the law will change from that of the 1906 Act, but in substance the Bill will put insurers in a position that they are already in under current practice. Therefore, I would not accept that there is a greater range of liabilities and costs to which the insurer is liable; if anything, as I have said, there will be a modest saving because of the clarity that the new architecture will bring.

I have gone on at some length in response to the important questions that have been raised. I will sweep up anything else that I have not had the chance to cover and get back to noble Lords in good time ahead of the Special Public Bill Committee. I hope that I have, nevertheless, responded to as many points as I can this afternoon. I look forward to further discussion in the Special Public Bill Committee in due course.

Banks: Cheques

Debate between Lord Eatwell and Lord Sassoon

Monday 6th June 2011 Lords Chamber

[Lord Sassoon]

My Lords, we are straying a bit from the rather important and focused question of cheques and the Payments Council, which those other forms of payment extend rather beyond. The critical thing is that no decisions are to be taken precipitately. As I have said a couple of times, the banks recognise what they have to do. This issue will remain a matter of considerable public focus, not least because the Treasury Committee in another place recently announced that it is reopening its own inquiry into the future of cheques. The issue will remain very much in the public eye and the pressure will be on the banks and the Payments Council to come up with a solution that works for the whole country.

[Lord Eatwell]

My Lords, the Minister said just now that it was the Government’s view that cheques should not be phased out until suitable new arrangements have been made. Can he tell us what criteria the Government will use to judge the suitability of any arrangements? If those criteria are not met, will the Government require that cheque payments be maintained?

[Lord Sassoon]

To those noble Lords who were listening to some of my previous answers, forgive me for repeating myself: the criteria which the Payments Council itself put forward and which the previous Government welcomed back in December 2009—I echo that welcome—were that the new system had to be generally available, generally acceptable to its users and widely adopted. There also has to be, in the view of the Government, a paper-based system. Those are the criteria that have been set and we are making sure that the Payments Council sticks to them.

Public Expenditure: Reserve

Debate between Lord Eatwell and Lord Sassoon

Monday 9th May 2011 Lords Chamber

[Lord Sassoon]

Yes, indeed. As ever, my noble friend Lord Newby gets it absolutely right. Fiscal discipline is absolutely the watchword of this Government. I should say that the Armed Forces will get all the expenditure that they need in relation to net additional costs of military operations in Libya and elsewhere, but that is the exception to the rule.

[Lord Eatwell]

My Lords, before answering my question, perhaps the noble Lord could tell the noble Lord, Lord Newby, what impact the threatened downgrading by Standard & Poor has had on the funding of US debt. I am sure that I could help the noble Lord by telling him that its impact was nil. Will the noble Lord tell us what criteria the Treasury uses to judge whether events merit using the reserve and, given those criteria, would an increase in unemployment of 100,000 or 250,000 fall within the rules?

[Lord Sassoon]

My Lords, first, in relation to this discussion about borrowing costs, I am pleased to say that as of last week the UK’s 10-year borrowing costs, the benchmark for our gilts, hit practically the lowest that they have ever done, while the margin we pay in relation to the German bund has hit its best position since the general election. We absolutely must do these things to make sure that our interest rates remain low. As to how the reserve operates, I am happy to copy to the noble Lord the published rules that the Treasury uses. However, they are for consideration only in exceptional circumstances and would not be linked to the sorts of factors that he sets out.

Fraud: Staffing Levels

Debate between Lord Eatwell and Lord Sassoon

Monday 9th May 2011 Lords Chamber

[Lord Sassoon]

I am grateful to my noble friend for bringing up that specific issue. Of course the question of local coverage is important. I will do as he suggests and take that back to my ministerial colleagues and to the management of HMRC.

[Lord Eatwell]

My Lords, the Minister will be aware that many of the organisations involved here, especially the FSA, have suffered serious and debilitating rates of staff turnover in the past few months—in part explained by the uncertainties associated with the reorganisation of financial regulation and management. A major source of that uncertainty has been that the Government’s Bill to change the status of the FSA and associated organisations is at least four months late. When will the Government bring this legislation forward? Why did they not get on with it and end the uncertainty?

[Lord Sassoon]

My Lords, I suppose it is my fault for raising the FSA in my Answer, even though it is not a government agency and therefore, more than the other bodies we have been talking about, manages its own affairs. I would not for one moment, though, agree with the noble Lord’s assertion about the state of staffing at the FSA, which continues to do an important and extremely difficult job—albeit within a flawed regulatory structure. We have been through rounds of consultation. If we brought the legislation forward too quickly, I would be criticised about the lack of pre-legislative consultation and scrutiny. It is coming forward with due speed because, as the noble Lord recognises, this is a big mess that we have to clean up, we have to get it right this time, and we will do so.

EU: Financial Management

Debate between Lord Eatwell and Lord Sassoon

Wednesday 6th April 2011 Lords Chamber

[Lord Sassoon]

My Lords, I am very grateful to my noble friend for recognising the practical steps that the Government are taking to get round this issue. I very much respect his many years of involvement in European issues. We are working very practically. Only next week, my honourable friend the Economic Secretary is meeting the three Commissioners who have responsibilities for the budget and the audit of the budget. She plans to meet the Court of Auditors and she has met the one and only state Minister who is solely responsible for the management of EU funds. We are very much on the case in making sure that EU funds are handled in a much simpler and transparent way in the future so that control can be improved.

On the question about a debate, I shall take that suggestion on board. In another place, I believe they have a debate in committee which normally takes place in January or February before ECOFIN considers the annual discharge. We shall consider that suggestion.

[Lord Eatwell]

In his first answer to the noble Lord, Lord Campbell of Alloway, the Minister referred to the development of the process of financial regulation. As that term usually applies to regulation in the private sector, I was a little unfamiliar with its use in respect of the public sector. Can he explain what practical measures of financial regulation are relevant in this case?

[Lord Sassoon]

My Lords, I am not responsible for some of the curious terminology which the EU uses, but I believe that financial regulation is the term it uses in this context. The relevant issue about which the Government are concerned is reducing the administrative burden on how expenditure is handled, particularly at member state level. We are worried about some specific questions: the proposal, for example, that loans might be used by the Commission to purchase EU buildings, which is something that the Government oppose; and the question of introducing a concept of tolerable risk of error within the accounting framework, which we oppose. I said before but I will say again that we want to push for much greater transparency in how assigned revenue is used. A host of issues come under that heading, but I cannot be responsible for the terminology.

Independent Commission on Banking

Debate between Lord Eatwell and Lord Sassoon

Monday 28th February 2011 Lords Chamber

[Lord Sassoon]

My Lords, I certainly agree with my noble friend. He has been thinking about these things for many years and I very much value his thoughts on them. I absolutely agree that the UK wants to do the right thing, but the remit that the commission has been given also reflects the international and global contexts, of which we have to be mindful. I wait with interest to see what the commission says and repeat that I do not want in any way to prejudge its thinking.

[Lord Eatwell]

My Lords, the Statement that the Chancellor of the Exchequer made on bankers’ bonuses contained a peculiar sentence about the Independent Commission on Banking. It said:

“I should make it very clear that nothing that I will say today about the settlement that we have reached with Britain's banks … in any way prejudges the outcome of the commission”.—[Official Report, Commons, 9/2/2011; col.310.]

What was peculiar about this sentence was that he was answering a question that nobody had asked. Will the noble Lord confirm that in recent weeks there have been threats of resignation from the commission if its remit is in any way constrained?

[Lord Sassoon]

My Lords, I am attacked one week for not answering questions that have been asked, and now my right honourable friend is being queried as to why he answers questions that he has not been asked. He wanted to make it absolutely clear, which he did in the Statement on Project Merlin, that nothing there pre-empted or in any way cut across the independent remit of the banking commission. I think the position remains clear.

Equality

Debate between Lord Eatwell and Lord Sassoon

Tuesday 8th February 2011 Lords Chamber

[Lord Sassoon]

My Lords, the Government take extremely seriously the question of fairness, which is why we introduced for the first time a distributional analysis to show the effects of not only our Budget but also our spending review decisions. In the measures that we have announced so far, in what is a very difficult fiscal situation, there is a fairness premium of £7.2 billion. The Government are putting these issues centre stage. In relation to bankers’ pay, my right honourable friend the Chancellor of the Exchequer has announced today that the levy on banks will be brought forward, so that the banks will be taxed at a higher level than under the previous Government’s one-off spending plans. We will await further developments in relation to discussions ongoing with the banks.

[Lord Eatwell]

My Lords, in the noble Lord’s reference to his Government’s policy on this matter and to the Budget, was he not being a little misleading, as the equality analysis in the Budget included the measures introduced by Mr Darling in March? When the measures introduced by the coalition are taken alone, they do not contribute to greater equality.

[Lord Sassoon]

My Lords, we took some very difficult decisions about which of the previous Government’s measures we would continue with and which we would not. The principal measure of the previous Government that we did not continue with was the full national insurance tax—the jobs tax—which would have been a significant drag on the growth prospects of this economy. Of course it was right that we should take into account the distributional effect of the total package of measures that we put through as a Government this year in the Budget and in the spending review. That is just what we have done.

Budget Responsibility and National Audit Bill [HL]

Debate between Lord Eatwell and Lord Sassoon

Monday 7th February 2011 Lords Chamber

[Lord Sassoon]

That the Bill do now pass.

[Lord Eatwell]

My Lords, the passage of the Bill through your Lordships’ House has been an excellent example of the importance of this House as a scrutinising and revising House. On behalf of these Benches, I thank the Treasury Bill team; Miss Jessica Levy from my office, who managed most of the relationship with the Bill team; and the Ministers, notably the noble Lord, Lord Sassoon, for the way in which they have approached the discussions and constructive negotiations on the content of the Bill.

The Office for Budget Responsibility established by the Bill is a peculiar institution. It is both outside government and of government. We need to ensure that legislation provides a framework for its independent operation as far as possible. That is what, working together, we have managed to do. We have clarified the role of non-executives, we have removed the statements in the Bill that seemed to qualify independence, we have enabled the OBR to consider issues of national risk, and we have enabled a process of external review of operations.

A number of factors remain. We on this side of the House are not entirely content with the budgetary provision for the OBR, or with the role of the charter as a qualifying agent that qualifies the OBR’S independence and instructs it.

Currency Markets

Debate between Lord Eatwell and Lord Sassoon

Wednesday 2nd February 2011 Lords Chamber

[Lord Sassoon]

My Lords, I think that we had better see how this plays out. It is encouraging that the European financial stability fund was able to make a successful bond issue at the end of last month. There was something like €45 billion of demand, which, in the technical phrase of the markets, was considered a blow-out—a hugely successful deal. That brings into question whether the terms can in any way be softened, but we had better wait to see how this evolves.

[Lord Eatwell]

My Lords, the noble Lord has said on numerous occasions to the House and again today that the stability of the eurozone is in Britain’s best interests. He has also told us today that Britain will participate in the design of the new stability mechanism. Will he tell us whether Britain will participate fully in the operation of the new stability mechanism, once designed, or will we continue to hover irrelevantly on the sidelines when Britain’s interests are at stake?

[Lord Sassoon]

My Lords, I have been completely clear, as has my right honourable friend the Chancellor of the Exchequer on numerous occasions, that while we wish to see a stable eurozone, which is indeed in Britain’s best interests, we will not be a part of the new permanent European stability mechanism, which is a matter for the eurozone countries. However, that does not mean that we are not rightly concerned, as I have just explained, to make sure that the stability mechanism is established in an appropriate way. Just as we played a constructive role in relation to Ireland, we will continue to play a constructive role in relation to all these matters as we go forward.

Banking: Royal Bank of Scotland

Debate between Lord Eatwell and Lord Sassoon

Tuesday 1st February 2011 Lords Chamber

[Lord Sassoon]

My Lords, the Royal Bank of Scotland is due to announce its results on 24 February. It normally makes its remuneration disclosures on or around that date, so we will have to wait. I have no knowledge of the number of bankers who might or might not be getting particular levels of bonus. Our relationship with the Royal Bank of Scotland is managed on a commercial, arm’s-length basis through UK Financial Investments.

[Lord Eatwell]

My Lords, as has been well-publicised, the Treasury and the Chancellor of the Exchequer have been entering into negotiations with the banks on bonuses and other activities. Will the noble Lord give me a categorical assurance that the results of those negotiations will in no way prejudge, constrain or compromise the findings of the committee into banking structures headed by Sir John Vickers?

[Lord Sassoon]

My Lords, with regards to the proposed possible settlement with the banks in Project Merlin, discussions are ongoing with the intention of seeing that the banks pay smaller bonuses than they would otherwise; that they are more transparent about their pay; that they make a greater contribution to local communities and the regional economies; that they treat customers fairly; and that they lend, materially and verifiably, more than they were planning to the businesses of Britain—especially small and medium-sized enterprise—so that they can grow and create this year. If we do not get such a settlement, my right honourable friend the Chancellor has made it clear that nothing is off the table. As to the Independent Commission on Banking, it is an independent banking commission and it will do its own thing as it sees fit.

Monetary Policy Committee

Debate between Lord Eatwell and Lord Sassoon

Monday 31st January 2011 Lords Chamber

[Lord Sassoon]

My Lords, I am grateful to my noble friend because, while again I will resist the temptation to second-guess the Bank of England, it has indeed attributed the recent rise in inflation, which has been significantly to the depreciation of sterling, to the increase in VAT which the last Government put in place and to the rise in energy prices. These are external factors.

[Lord Eatwell]

My Lords, the noble Lord in his Answer earlier referred to temporary factors accelerating inflation and reducing the living standards of the British people. Is not one of the most important temporary factors that are accelerating inflation through the rest of this year the increase in VAT to 20 per cent?

Budget Responsibility and National Audit Bill [HL]

Debate between Lord Eatwell and Lord Sassoon

Monday 31st January 2011 Lords Chamber

[Lord Sassoon]

My Lords, producing high-quality work requires the OBR to have access to all relevant information and expertise. The Bill provides for this through a right of access to information, a Budget Responsibility Committee of experts and a duty to act transparently. In response to the discussion in Grand Committee, these arrangements are intended to be bolstered by the two amendments that we are bringing forward.

Amendment 3 gives the non-executives a duty to keep under review the processes that the OBR uses to assure that it is producing the best possible work. These are likely to be management processes that the non-executives will be well placed to consider. Examples might include: whether the OBR is consulting with a wide and appropriate range of experts, including academics and internationally; whether it is working effectively with the rest of government to produce analysis; and, to make sure that it follows up lessons from internal reviews.

Amendment 5 requires the non-executives committee periodically to commission independent expert reviews of the OBR’s work. In detail, it needs to consider frequency: these reviews could be carried out at times considered appropriate by the non-executives, but “at least” every five years. In scope, the review will consider work published in the relevant period. The non-executives will determine which of the OBR’s reports are to be considered. That could be all the OBR’s work or a particular theme could be focused upon. This flexibility is important to ensure that maximum value is always gained from the reviews. There is then the question of the reviewer. The non-executives would appoint a person or body with the appropriate knowledge or experience to carry out each review. Although we expect the reviews to have minimal costs, there is provision in the Bill for the OBR to make payments to the reviewers—for example, for their expenses. Each review will be published and a copy laid before Parliament. I beg to move.

[Lord Eatwell]

My Lords, I think that everyone who took part in Grand Committee will feel that these amendments should be dedicated to the noble Baroness, Lady Noakes—who I am afraid is not in her place to hear this—as it was she who, at Second Reading, raised the issue of writing one’s own school report and the necessity of having an independent assessment of the OBR’s performance. Amendments 3 and 5 therefore establish the responsibility of the non-executives to keep under review the activities of the OBR, relative to its main duty. An important component of this monitoring will be the commission of the third-party reviews of the OBR’s performance, as described by the Minister.

We are entirely supportive of the Government’s amendments in this respect, other than in one crucial aspect. Amendment 5 proposes that an assessment by an independent person or body should be carried out,

“at least once in every relevant 5-year period”.

The final part of the amendment, proposed in new sub-paragraph (7), says,

“the period of 5 years beginning with 1 October 2010”.

However, as will be evident from Amendment 6, which I shall be moving, we on this side think that five years is too long a period. First, as a professional economist, I feel that five years is much too long for an organisation to be running before its activities are assessed independently. After all, the OBR will be producing more than one report a year—in fact, there will be three or four reports—so within three years there will be a substantial body of material for an independent assessor to consider. The independent review will also have value for the OBR. It will provide informed third-party input into its techniques and procedures, and postponing that for five years will unnecessarily weaken the expertise that feeds into the OBR’s work. Of course, expert appraisal of the OBR’s activity will also be an important input into parliamentary scrutiny, and I think that in parliamentary terms we should want more regular consideration than is provided by this amendment.

That parliamentary element leads me to the second reason why five years is too long. Setting a five-year appraisal period politicises a process that should be entirely apolitical. If the Government secure the constitutional reforms that they have proposed, five years will be the length of a fixed-term Parliament; hence the OBR review will become part of a five-year political cycle. Indeed, as I emphasised to noble Lords just now with regard to proposed new sub-paragraph (7) in the amendment, the timing has been set carefully so that a review takes place just after the next election. Review of the work of the OBR should be divorced from the political cycle and not linked to it in any way. That is why my Amendment 6 sets the review period at three years. This will achieve the dual objective of allowing timely consideration of the work of the OBR, giving Mr Chote and his colleagues the benefit of that professional input and stimulus, but most important of all, establishing a cycle of review which is divorced from the political cycle. That is a crucial aspect in maintaining independence and cross-party respect for the work of the OBR.

--- Later in debate ---

[Lord Sassoon]

I thought that I heard support from across the Chamber on this point. As I say, the issue is one of a backstop date. The noble Lord, Lord Eatwell, is seeing chimera where none is to be seen in trying to link the political cycle with this five-year backstop date. We think that it is appropriate to have a date in there to ensure that the independent review happens at some stage, but it is most likely that the non-executive directors will indeed choose to have reviews on some other cycle or whenever they think it is appropriate. I absolutely agree with the noble Lord, Lord Burns, that we have to allow—it is proper to allow this—the non-executive committee the freedom to make up its own mind on this. A shorter period may well be decided on, particularly in the initial period of operation, just as, in the context of the Monetary Policy Committee, a review was carried out a couple of years into the new arrangements. Therefore, we should leave this to the committee’s judgment and not impose a rigid pattern on it.

It might be relevant to consider read-across or precedents from other comparable bodies. However, I have been able to tease out only one comparable read-across involving the Dutch Central Planning Bureau, which has a provision for external reviews every five years and has stuck to that model since 1945. That continues to work for that body.

[Lord Eatwell]

Does that body hold the review every five years or over a lesser period?

[Lord Sassoon]

I believe that it has the review every five years, but I think it would be wrong to have a fixed provision of five years. One of the dangers of having a shorter time such as three years is that it might become a regular feature. What we need here is flexibility but with a sensible and appropriate backstop date. It is also important to remember in this context that these external reviews are far from the only means through which the OBR is being and will be scrutinised. I remind noble Lords that the package of scrutiny goes much wider. First, there is the duty on the OBR to act transparently, which means that all its work is open to ongoing challenge and review—this is proving to be the case already—from any of the well regarded and distinguished think tanks and academics looking at its work. The OBR is required to produce an annual assessment of the accuracy of its fiscal and economic forecasts.

There is also the fact that the OBR intends to establish an advisory panel of experts to support and challenge its work on an ongoing basis, which not only is an important additional element of external challenge and review but brings the OBR into line with the best practice, drawn in this case from the United States’ CBO. I see the noble Lord nodding on that point.

On the basis of the argument put forward by the noble Lord, Lord Burns, and backed up by my noble friend Lord Newby, and considering the other elements of scrutiny that are ongoing and challenged externally, I ask the noble Lord to withdraw his amendment.

--- Later in debate ---

[Lord Sassoon]

My Lords, perhaps I may just get my head round the formal non-moving of an amendment that has not been put down. I shall try to give the noble Lord, Lord Eatwell, the reassurance that he seeks in this area. The Government support the spirit of the amendment. Transparency and parliamentary scrutiny of the OBR’s budget are absolutely central to safeguarding its independence. I do not think that there is any difference between us on that point.

The next issue is getting a proportional arrangement which achieves the objective. The effect of the proposed amendment has already been achieved. In line with the Treasury Select Committee's recommendation, the annual budget of the OBR will be identified separately in the Treasury's estimate and it will be available for the Treasury Committee to scrutinise in another place. Nevertheless, we have gone further than the Treasury Committee asked for in order to enhance the transparency of the OBR’s budget and critically to protect it from any suggestion of politically motivated cuts. Again, in line with the Treasury Select Committee’s recommendation, the OBR will also be able to submit to the Treasury Select Committee an additional estimates memorandum alongside that of the Treasury in which it can explain for itself the reasons for changes in the available budget for the year ahead. I think that will go beyond what is proposed, in effect, in this amendment because the OBR will be free to explain in full what any changes in the budget mean.

I agree with the noble Lord, Lord Burns, that if we need to be concerned about anything here it is the multi-year aspects of it, which the proposed amendment does not address. The OBR has already been provided with an agreed and publicly documented multi-year budget, so that an annual budget exercise cannot be used to exert hidden pressure on the OBR. This specific element has been welcomed by the IMF.

I will divert for a moment to address one or two of the points raised by the noble Lord, Lord Eatwell, on some of the international experience in this area. While I am sure that the Toronto Globe and Mail is a fine source of reporting, I think it is relevant to remember that the Canadian Parliamentary Budget Officer is really not in any comparable position to the OBR. Its budget is not separately identified anywhere within the estimates of expenditure presented to the Canadian Parliament. It is a very different office from the one we are looking at. The Parliamentary Budget Officer in Canada was not given an agreed and published multi-year budget. I think we are in very different territory from Canada.

Hungary was mentioned. It is interesting to note that Hungary’s Fiscal Council chairman pointed out—I do not know whether this is correct—in the context of saying it was very, very rare to introduce substantial changes or abolish fiscal councils that the only example he could point to was Venezuela under Hugo Chavez abolishing its fiscal council. So there are one or two examples but they are not comparable examples. It is precisely to guard against any suggestion of such interference that we have put in place the measures that we have.

In trying to give the noble Lord the reassurance he seeks, we have discussed already the responsibility of the OBR’s non-executives. Critical to that is their duty to report on anything that appears to them to constrain the OBR’s discretion. Of course, that would include any attempt to control the OBR through manipulating its budget. To quote the chair of the Treasury Select Committee:

“It is vital that the OBR has the resources it needs. The Committee will monitor this carefully: the terms of reference suggest that the Treasury accepts the importance of transparency and separate disclosure, and we will have the information we need”—

we, the Treasury Select Committee—

“to do our work”.

The package of measures we propose for the OBR in the Bill follows the recommendations of the Select Committee and in the judgment of the Treasury fully reflects that intention. The chair of the OBR has already made clear that he has adequate resources and that he will promptly raise any issues on funding with the Select Committee—a very public forum in which to raise any concerns.

Finally, I will quote Robert Chote at his pre-appointment hearing in front of the Select Committee. He said:

“If you accede to my appointment and I find myself being squeezed in that way, this committee will be hearing about it very promptly. That’s how we make that public and ensure that those sorts of pressures do not go unremarked”.

I suggest that there are a considerable number of safeguards in place. Indeed, we go further than the noble Lord’s amendment because we believe that the multi-year dimension is as important as, if not more important than, the single year dimension to which his amendment refers. In view of the reassurance that I have been able to give him, in particular pointing to the role that we have just now confirmed for the non-executives, I hope that he will withdraw the amendment.

[Lord Eatwell]

My Lords, I am grateful to all noble Lords who have taken part in this short debate, not least because there seems to be a unanimity of purpose around the House. Perhaps I may address a couple of the points that were made. The first is the point made by the noble Lord, Lord Burns, supported by the noble Lord, Lord Sassoon, about the word “annual” in my amendment. I think they are absolutely right. It should refer to the budget; the word annual should be taken out, then everything would flow quite nicely. However, the noble Lord, Lord Sassoon, still does not quite grasp the idea that the OBR should not have to fight its own corner but should be given parliamentary protection in the budgetary field for the long term, not simply for the period for which Sir Nicholas Macpherson’s letter is relevant. We are looking beyond that provision.

The one element from which I derived some comfort in the reply of the noble Lord, Lord Sassoon, was the issue of a separate line in the Estimates, which will provide the Treasury Select Committee with the opportunity separately to identify the budget of the OBR. My amendment would require that to be brought for scrutiny, rather than it simply being available, but I am willing to accept that that is a small point.

I suppose that I should accept being chided by my noble friend Lord Barnett for leaving the House of Lords Economic Affairs Committee out of the amendment. I felt that since this was particularly an expenditure matter, it should be handled by the committee in another place. I am willing to stand corrected on that point.

However, I feel that there is general unanimity around the House that this issue is important in sustaining the independence of the OBR. I am grateful for the assurances that the Minister has given. I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Sassoon]

My Lords, I should perhaps speak briefly to Amendment 9 at this stage. I will respond later if other noble Lords speak to Amendments 8 and 10.

On Amendment 9, the risks and assumptions of the OBR in producing its reports are critically necessary for a full understanding of its analysis. Provision to require the OBR to set those out was originally included in the draft charter. However, we recognise that a key purpose of the Bill is to provide appropriate assurances that the good practice already adopted by the OBR will continue. For that reason, Amendment 9 will elevate the provision from the draft charter to the face of the Bill and broaden the requirement to apply to all reports produced under the OBR’s main duty.

[Lord Eatwell]

On Amendments 8 and 10, the noble Lord, Lord Higgins, will have to suffer the possibility of inconsistent forecasts because that is, in a way, embodied in the independence and separation of the Bank of England. The whole point of an independent Bank of England, and the way the Labour Government set up the independent status of the Monetary Policy Committee and the Bank of England, is that it should be allowed to take an independent view. That independent view will be informed by its own research. This can lead not just to forecasting inconsistency but to policy inconsistency, but that is the price we are going to pay if we think this is an appropriate policy mix. The very distinguished late economist Sir James Meade pointed out many times that this separation could lead to serious policy inconsistency, and he was entirely opposed to its, none the less, that is the way we have constructed policy-making in this country, and that separation will bring with it the possibility—indeed, the probability—of some forecast inconsistency. However, we should note that recently the Governor of the Bank of England has been making many statements about fiscal policy, which is not his territory. That is very unfortunate. He seems to have encouraged the Prime Minister to make comments on interest rates, which are not his territory either. If this separation is deemed to be a good thing by our Parliament and policy-makers, I hope that the governor and the Prime Minister will respect it.

The problem I have with Amendment 10, tabled by the noble Lord, Lord Higgins, is that I do not think the output gap is a precise notion which can be believed if you say it is 2.5 per cent or something like that. In the Budget debate and in the debate on the comprehensive spending review, I argued that it is a statistical construct. It has embedded within it a series of statistical assumptions. It was quite striking that in the first OBR report, the definition of the structural deficit was changed, to the benefit, I might add, of the Government’s arguments. Therefore, I do not want too much credibility to be put on what is a useful indicative statistic. The weight put on it can be taken too far.

I strongly support the Government’s amendments both on transparency of assumptions and consideration of the risks to which the economy might be exposed. The latter issue, with the OBR now being required to talk about the risks to which the economy is exposed, is very important. For example, let us suppose that we had had an OBR of 2006 vintage. That OBR could have expressed concerns about the fiscal risk the economy was subject to by being dependent on such a high proportion of tax revenues coming from just one sector of the economy, that of financial services. It would have had the opportunity to say, in facing that risk, that some diversification of revenue sources might be desirable. Similarly, in defining the sustainability of the public accounts, the OBR should take into account the risk to sustainability generated by the foreign balance and by the savings and spending behaviour of the private sector, and their interactions with the public balances. Providing these insights into the risks of public sector financial management would extend the debate about the public finances in a very useful way and would ensure that the debate is far better informed than it has been in the past. So I would like particularly to add the support of this side for government Amendment 9.

Charities: VAT

Debate between Lord Eatwell and Lord Sassoon

Thursday 13th January 2011 Lords Chamber

[Lord Sassoon]

My Lords, the increase in taxation from charities, as from other parts of hard-pressed society, including working families and businesses, is regrettably necessary to reduce the enormous deficit that the country has to bear. That is the regrettable state of affairs. It is not easy to consider where the burden should fall. Charities are, in this respect, sharing part of the burden. As I said, there are other tax proposals that the previous Government had that would have hit the charity sector, in this respect, harder. Charities get tax relief of the order of £3 billion through VAT, gift aid and other provisions.

[Lord Eatwell]

My Lords, I declare an interest as the master of a Cambridge college that is registered with the Charity Commission. I am sure that all noble Lords will know that changes in fiscal policy, with respect to both irrecoverable VAT and the fall in the standard rate of taxation, which has reduced the return on gift aid, have made considerable inroads into the support that government has in the past provided for charities through the fiscal system. We on this side quite understand that these are unintended consequences of fiscal policy, but we do not accept the negativism and complacency that the noble Lord has displayed. There is an easy answer to this question. He usually asks for policies because the Government cannot think them up themselves, so I will give him one: why are charities not allowed to make a return to the Treasury of the VAT paid, so that the Treasury can then apply a clear discount for charities, thus making its revenue from charities transparent, not disguised as it is at present?

[Lord Sassoon]

My Lords, we look at charitable-related VAT schemes and have a number under consideration at the moment. I am always happy to look at schemes. I stress that the Government have made special recognition of the importance of the charitable sector through the tough spending review. The Office for Civil Society will be spending around £470 million on programmes supporting the voluntary and community sector over the spending review period. The big society bank will have a further contribution to make and my right honourable friend the Chancellor announced a £100 million transition fund for those voluntary and community sector organisations that are affected by spending reductions. The Government absolutely recognise the support that is needed for this sector.

Finance and Insurance Market: Underwriting Fees

Debate between Lord Eatwell and Lord Sassoon

Wednesday 12th January 2011 Lords Chamber

[Lord Sassoon]

My Lords, I am obviously interested to hear from the noble Baroness who has great experience in these matters. However, as she well knows, a range of outcomes could emerge from the OFT market study. Those could include enforcement action taken by the OFT through a market investigation reference to the Competition Commission, recommendations to government to change law or regulation, voluntary action by industry players or, indeed, a clean bill of health. We should wait to see what the OFT recommends.

[Lord Eatwell]

My Lords, is not the truth of the matter that the complete failure of the Government to persuade the banks to lend has forced companies into increasing rights issues and that the banks have used corporate desperation as a lever to charge higher underwriting fees even when market conditions have improved? Does the Minister agree that this is prima facie evidence of an underwriting cartel? Does he regard this as a legitimate way for banks to repair their balance sheets?

[Lord Sassoon]

My Lords, first of all, I do not accept for one moment the premise about government action in some way preventing companies borrowing from the banks, because, as we discussed at some length yesterday, the Government are taking a considerable amount of action to make sure that the banks lend and increase the amount of lending over what they would otherwise have done. As to the noble Lord’s questions about the underwriting market, again I would wait until the OFT has come up with its report within the next few weeks.

EU: Financial Assistance

Debate between Lord Eatwell and Lord Sassoon

Wednesday 15th December 2010 Lords Chamber

[Lord Sassoon]

I am grateful to my noble friend, because his question enables me to say that Article 122.2, under which the financial stability mechanism was set up, was originally intended to provide support for member states following natural disasters. It was European Finance Ministers, before my right honourable friend the Chancellor took office, who decided in May to apply that article to deal with the eurozone crisis at that time. It is absolutely the position that my right honourable friend who is now the Chancellor opposed the use of the article at that time and in that way. It is the Government’s position that this is a temporary solution and should absolutely not be the permanent way of doing things.

[Lord Eatwell]

My Lords, will the noble Lord confirm that the Government will themselves have to borrow the money to provide the loan to Ireland? Will he also acknowledge that the National Audit Office has now determined that any interest paid on such borrowing should be included in current expenditure? Will he therefore tell us how much this interest payment will increase the deficit, and whether any other expenditure cuts are to be made to pay for it?

[Lord Sassoon]

My Lords, first, there will be no hypothecated borrowing by the Government to back up—as far as I am aware—the loan to Ireland. Of course, the loan to Ireland—as and when it is drawn down—is subject to approval in legislation if and when it comes to your Lordships’ House. We might return to it over the next few days. The loan has to be approved by Parliament. It is then drawn down. Of course funds have to come from somewhere, but there is no intention to back that up with a specific loan.

It will not be for the Government to determine the accounting, but the intention is that the bilateral loan will carry an interest rate that is 2.29 per cent higher than the sterling seven and a half year swap rate that applies at the time. On this week’s figures, that would be an interest rate of 5.9 per cent, which would be considerably in excess of the UK Government’s borrowing rate. My understanding—as I say, it is not the Treasury’s decision—is that the net interest margin, which would of course be a gain because the receipts from Ireland would exceed the costs to the Exchequer, would indeed be a positive contribution on the fiscal balance.

Budget Responsibility and National Audit Bill [HL]

Debate between Lord Eatwell and Lord Sassoon

Thursday 9th December 2010 Grand Committee

[Lord Eatwell]

I support Amendment 41A proposed by my noble friend Lord Touhig, albeit on a slightly different basis. Given that this appointment will now be for only one term of tenure, it is important that we attract people of the highest quality to the post. If they felt that their future career prospects were endangered, it is likely that we would not have the very best field from which to choose. Therefore, when someone comes to the end of their tenure, it is appropriate for them to receive advice from an established committee whose procedures and standards are well known and in the public domain, and whose approbation or approval of a particular post is seen as having undergone a strict assessment as to the impact on the integrity of the post and the individual. If we are to get the best applicants for this sort of job, we must give some certainty about the nature of their future careers. The involvement of an established body with agreed procedures and standards would help to provide that.

Interestingly enough, if my noble friend’s Amendment 41A were accepted, his Amendment 42 would be less important. The committee would have given its approval of the post and that would receive general acceptance. Therefore, the longer time period might not be so necessary. However, I defer to my noble friend, who has much more experience in these matters than I do. The Government should look carefully at Amendment 41A, which would improve both the Bill and the performance in this particular post.

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

My Lords, I apologise to the Committee for my failure to be here on time. I should like to place on record my gratitude to the police officer outside—I should probably not name him, but I will write to the commissioner—who let me vault the double line of barriers, even though that caused lots of other people in the square, whose intentions in getting to this building were probably not as well meaning as mine, to try to follow me. I place on record my gratitude to the Metropolitan Police officer who exercised some judgment in letting me through. I am sorry that I did not get here at the beginning.

I am grateful to the noble Lord, Lord Touhig, for raising this question again because it is important that we get right the balance. We must protect the matters of propriety around this office and balance that with what the noble Lord, Lord Eatwell, said about attracting the best candidates to the office.

The fact that this amendment is named Amendment 41A rather than Amendment 41 points out the difficulty with naming a particular body, which could come and go over the years. I believe that it is appropriate to leave it to the specification of the Public Accounts Commission, which can decide on the appropriate body to make the decision at the time. I see the point that the noble Lord, Lord Touhig, is making about the desirability of certainty. Of course, it would be open to the Public Accounts Commission to specify at the time of the appointment—obviously not of the current Comptroller and Auditor-General but of future C&AGs—which relevant body would apply. Specifying a body now that could change over the years would provide a degree of unnecessary inflexibility and the law would have to be changed if the body specified ceased to exist. Critically, we have the protection that the appointment is in the hands of the Public Accounts Commission. The certainty point is something that could be taken into account at the time of the appointment.

[Lord Eatwell]

The amendment reads,

“such person as may be so specified”.

From that, it is not clear to me that the person is to be determined by the Public Accounts Committee, which does not seem to follow the way that the Bill is drafted. I take the noble Lord’s point about succession, although usually when bodies succeed each other their responsibilities are passed on in a reasonably coherent way. This wording does not quite seem to achieve what the noble Lord believes it to achieve, but I shall leave him to consider that. I am not trying to make a difficult point; it is just that the drafting does not seem to be quite right.

[Lord Sassoon]

That is the intention behind the drafting but I shall see whether, on reflection, it achieves that. I think that we can accommodate the degree of certainty, albeit that, even in the period of appointment of a C&AG, the relevant advisory committee could change.

I turn to the question of abiding by the committee’s decisions. I hear what the noble Lord, Lord Touhig, says about this being different from ministerial appointments or other Senior Civil Service appointments, where similar conditions apply. However, as we have seen in recent years, there is, as there should be, a considerable focus on current and former Comptroller and Auditors-General. It is inconceivable that similar pressures to those that apply to Ministers and officials would not apply very directly in this case. Therefore, just as, so far as I am aware, it is not written into other Bills, I do not believe that there is a need to write into this Bill the necessity to abide by decisions. If it were thought appropriate to draw attention to this point, I believe it would be more applicable to the terms of appointment rather than the Bill.

On Amendment 42, I certainly agree with the noble Lord, Lord Eatwell, that we must make sure that we get the best field of candidates. If the matters that are the subject of Amendment 41A are addressed properly, which I believe in the total construct they are, then I believe that a period of two rather than five years strikes the right balance when considering the terms of the appointment. Again, it is difficult to say what the appropriate read-across should be, but two years is the period during which former Ministers go through clearance procedures, and this is a tighter requirement, as it should be.

In addition, there are potential difficulties concerning the legal enforcement of such a restriction. The issue here is whether, by specifying five years or some other relatively high number, we would risk infringing age discrimination legislation by making the appointment process exclude those who were getting closer to—I do not know what the term should be—perhaps our best years. Therefore, there are real concerns and there is clearly no easy answer to the question of what the right number might be, but the legal advice that the Government have received is that, as one pushed that number up—and five years would certainly lead to the legal advice being uncertain—there would be a significant risk that the restriction would be thought to be an infringement of age discrimination legislation. Therefore, subject to making it absolutely clear that Clause 15 works as intended—I think that it does, but I will look again—I believe that we have struck a proportionate balance which ensures that we get the best candidates for the job but does not in any way leave open a suggestion of impropriety afterwards.

Budget Responsibility and National Audit Bill [HL]

Debate between Lord Eatwell and Lord Sassoon

Monday 6th December 2010 Grand Committee

[Lord Eatwell]

My Lords, before moving on to Amendment 20, I shall make a couple of general remarks about how we have done so far. All sides want, I think, to make the Bill a success. That is not really a matter of political dispute. The Committee has already unearthed some serious failings in drafting. For example, on fiscal policy, the OBR is supposed not to regard a critique of economic policy as within its remit, but on the issue of judging the sustainability of fiscal policy the context of general economic policy is within its remit. What is it to do? Is it one way or the other?

Then there is the question of Clause 5(3)—the clause with the inverse meaning, as I think of it now. Everybody thought that it was designed to prevent something from being done, but then we discovered to our amazement that it is all about what has to be taken into account. This sort of obscurantist drafting gives the law a bad name. There were also the statements in the charter, notably the reference to “intergenerational fairness”, over which we have the grave suspicion that the person who drafted the phrase had not the faintest idea what it meant.

Yet none of these is a political issue. None of them really merits the instruction, “Resist”. All of them are items to debate and to correct. This is a fine example of why technical Bills such as this should go to pre-legislative scrutiny. Be that as it may, my message to the Minister and to the anxious officials behind him is: “Loosen up”. Let us use this Grand Committee for the constructive purpose that it was intended to have and try to do what we all want, which is to ensure that this Bill works, works well and works for the long term.

With respect to Amendment 20, the OBR has made a major step forward in recognising the uncertainty around the probabilistic nature of economic forecasting —and quite right, too. However, this has clearly not yet penetrated the thinking of government Ministers. In the Chancellor’s Statement last Monday, he boldly declared that the OBR had ruled out the possibility of a double-dip recession, when in fact it had done nothing of the kind. The OBR suggested that there was a 50:50 chance that the growth rate would be 2.1 per cent next year but that, at the same time, there was a significant chance of between 10 per cent and 20 per cent that growth would be zero—that is, that there would be a double dip.

However, while the assessment and presentation of the uncertainty of forecasts have been greatly improved, no progress has yet been made on the other risks embodied in the Government’s overall fiscal position. For example, it is now clear that for the last decade—and I recognise that this was under the previous Government—tax revenues have been overly dependent on taxation of financial services. The severe problems in financial services contributed disproportionately to the fall in government revenues and to the growth of the deficit. This, which is a sort of all-eggs-in-one-basket problem, is a standard feature of corporate risk analysis and could, with value, be introduced into the analysis of public policy as well. Similarly, everyone is now aware that the UK economy has become seriously unbalanced, which is just the sort of issue that would be highlighted by regular and careful risk analysis. If the OBR were to extend its analysis of uncertainty to include a risk-sensitive analysis of the public finances, it would provide a complementary and extremely valuable service to policy-makers and align public policy-making with the best practice in private policy-making and private risk assessment.

Chapter 4.10.1 of the charter relates risks only to,

“risks surrounding the economic outlook”,

but associates the economic outlook only with the forecast, not with the state of the economy as it is. This amendment focuses attention on a wider concept of risk—the risk inherent in the underlying parameters of the fiscal and economic stance—and, by doing so, extends risk analysis into the areas of best practice that are now found in the private sector. I beg to move.

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

My Lords, I am happy to start by saying that I agree that we should, as far as possible, stick to the technical. I am grateful to the noble Lord, Lord Eatwell, for confirming that he would like to make this a technical analysis of the Bill.

I agree that it is critical for the OBR to assess the risk to the public finances and that that should be clearly set out. The amendment proposes that this provision should be in the Bill, whereas we propose that it should be in the charter, first focusing on the economic risks and secondly focusing on the fiscal risks. As the noble Lord said, there are references to risks in chapters 4.10.1 and 4.10.2 of the draft charter: the first relates to the economic forecast and the second relates to the forecasting of the public finances. I believe that together those two references to risk give the OBR a clear and wide-ranging remit. I will think about the specific drafting in the light of the points that the noble Lord has made, but I believe that the charter is the right place for this. Clearly, the drafting on the sorts of risks that the OBR looks at should not in any way constrain it from looking at the relevant risks, so I will have a look to make sure that, on reflection, we have got all the risks covered.

The OBR has, of course, a duty to act consistently with the charter, so it should not be necessary to include this provision in the Bill. However, we must get it right in the charter, which is where I think we should leave it. I ask the noble Lord to withdraw the amendment.

[Lord Eatwell]

Gosh, that was quite a loosening up. I think that the noble Lord has taken the point. In my reading, the charter seems to confine risk analysis to the probabilistic analysis of forecasts—to the fan charts and so on. I want to stimulate the OBR to think about the risks inherent in the economic posture, if we may call it that, of the country at any one time. On the two illustrations that I gave, I think that if forecasters, particularly official forecasters, had been sensitive over the last decade to the excessive share of taxation coming from the financial services and had realised the risk of having all one’s eggs in one basket or had been sensitive to the problems associated with the overall balance of the economy, which I know the Government wish to address, we might have had some danger signals hoisted earlier than they were. However, in the context of the Minister’s assurance that he will look at this issue and perhaps amend the charter accordingly, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Higgins]

My Lords, we are grateful to the Minister, who has clarified a number of points. I will come back to an obvious and fundamental one. I am still not in the least clear why we will have both an OBR forecast and an official one from the Treasury that will be useful for Ministers. I simply do not understand this.

[Lord Sassoon]

Perhaps I may clarify that. There will be one official forecast, which the OBR will produce. The Treasury will retain a modelling and forecasting capability, but it is absolutely not the intention, and will not be the case, that there will be another official forecast from the Treasury. Ministers simply require the Treasury to retain that capability, so that if, in circumstances that we do not at all anticipate, the Chancellor or the Treasury want to take a different view from that of the OBR, they will retain the capability of doing so. There is absolutely no intention that there should be anything other than one published forecast, which will be put out by the OBR.

[Lord Eatwell]

I do not quite follow that. If the Treasury is going to disagree, or at least have the capability of disagreeing, with a forecast put forward by the OBR, how can it do that other than on the basis of a forecast of its own? I note that the word “published” was slipped into the Minister’s final sentence. Surely if the Treasury is going to have the capability of assessing and disagreeing with the OBR model, it must have some forecast of its own.

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[Lord Eatwell]

I was hoping to provide space for those who feel as strongly as I do, as apparently does the noble Baroness, Lady Noakes, to suggest alternative arrangements. Indeed, I have put forward my own proposals, which we will discuss later, but a variety of methods could be suggested.

[Lord Sassoon]

My Lords, I, too, am a bit puzzled as to why we are discussing only half the linked story, but my noble friend has it right when she talks about the defective nature of this amendment in taking out the requirement for an assessment of the accuracy of fiscal and economic forecasts. No doubt we shall come to the question of whether there is any other way of doing it later, when I might not be quite so keen on what she has to say. However, I certainly agree with her that it would be inappropriate to remove the requirement for an assessment of the accuracy of the forecasts. It is an important requirement that there should be such an assessment—

--- Later in debate ---

[Lord Eatwell]

While agreeing with the noble Baroness, Lady Noakes, I think that there is an important point here. If there is a process of scrutiny that is designed to give us a degree of confidence in the Government's costings and in the forecasts made by the OBR, it would be helpful to know, when the OBR scrutinises the costings by the various departments of their savings, whether it agrees with them 100 per cent. If it does, that would be very disturbing and unfortunate: it would be like an old Soviet election. We would expect a degree of disagreement—perhaps not much, but a bit—which would give us confidence in the scrutiny process. It would be helpful if the Minister would tell us whether in the scrutiny process the agreement was 100 per cent or rather less.

[Lord Sassoon]

I am grateful to my noble friend for trying to bring this back into perspective. Of course the OBR scrutiny, as the noble Lord, Lord Eatwell, acknowledged just now, will be based on challenging the assumptions underpinning the AME costings. How it then formed the judgments that it did is for the office, not me, to interpret. However, I am happy to point noble Lords towards what has been published and see whether there is anything else that the OBR thinks would be helpful to say on the matter after the discussion this afternoon. Clearly, the OBR will not sign off on its scrutiny of AME savings if it does not think that the methodology and the numbers are reasonable.

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[Lord Turnbull]

I support the amendment, at least in so far as it relates to Clause 5(2), for much the same reasons as those set out by the noble Lord, Lord Eatwell. These words are meant to be drawn either from the seven tenets of public life set by the Committee on Standards in Public Life, or from the synonyms for them in the Civil Service Code. If there is any amendment to be made it is that Clause 5(2) should bring the words used into line with the accepted vocabulary that is used in these other documents. You would then dispense with Clause 6(1)(b) as it relates to subsection (2).

At Second Reading, the most telling criticisms that were made on an occasion where this initiative was largely welcomed, was the sense that independence was being granted with one hand by the Treasury and that another clause subtly began to claw it back, and that this somehow undermined the sense of true independence. We can dispense with this and, if any changes are desired, the wording of Clause 5(2) can be brought into line with the vocabulary that is used in these other statements of the values of public life.

[Lord Sassoon]

My Lords, I find this interesting because what the noble Lords, Lord Eatwell and Lord Turnbull, have said exemplifies why we need some back-up explanation of these terms in the charter. That must be the right place for it because the noble Lord, Lord Eatwell, started by saying that we could rely on the Oxford English Dictionary definition of the three terms but then went on to refer to the usage given to the terms by the Committee on Standards in Public Life. That in itself points out that, even on his construction of how these words should be used, there are at least two sources. I have neither the OED nor the committee’s statement in front of me, but I would be surprised if they were precisely the same. Then the noble Lord, Lord Turnbull, referred to the Civil Service Code.

In arguing for the amendment, the noble Lords have precisely explained the difficulty that we are in: however you do it, you go back to different sources for the meaning of these important terms. It is therefore important in the charter to try to tease this out. I agree that this could be done in a number of ways; it could refer to the OED, the Civil Service or a number of other things. However, this discussion has reinforced my view that somewhere we need to provide some guidance.

I shall give the Committee another example, very much in this space, about the kind of difficulty that we can otherwise get into, and this relates back to one of our previous discussions. The US Congressional Budget Office has an impartiality remit, but it defines “impartiality” to mean that it has to include analysis of policy proposals made by all political parties. I think that we all agreed earlier that that is precisely what we do not want the OBR to do, and that suggests to me that it is a reason why we need to give a bit of guidance in the charter for what the three critical terms mean. Indeed, Robert Chote himself, following questions on impartiality, told the Treasury Select Committee:

“I think you want to make sure that the remit of the OBR is agreed ex ante, rather than the subject of a contentious debate ex post on whether it is doing what people want it to do … if it is left to the OBR on its own to draw the line, there will always be people just below the line who will be disgruntled … which will reflect on the OBR”.

That was in the context of a wider discussion about the virtues of, and the need for, clarity.

Nothing is set out in the charter that can undermine the Bill. The guidance can relate only to functions conferred by the Bill; it cannot add to or distort them. Further, as we have noted, the charter must be approved by another place before it can come into effect. I have listened carefully to the debate, which has suggested to me that even those who say that we do not need the interpretation of the charter are actually using different definitions. I think that the charter is the right place in which to provide the OBR with the clarity that it quite rightly seeks. For that reason, and because the noble Lord admits that the amendment does not quite work technically, I ask him to withdraw it.

[Lord Eatwell]

I am grateful to the noble Lord. If we get Clause 5(3) right, it may work very well, but we have been chewing this matter over perhaps to excess. The Minister made one point about the issue of impartiality with respect to the Congressional Budget Office. While there is some relationship between the CBO and the OBR, the Congressional Budget Office is actually a creature of Congress. That is different from the OBR, which is a creature of the Executive. It means that we have a very different issue before us.

I am still disturbed by the definition of “objectively”. As I pointed out, the notion of merit and demerit is rather difficult in and of itself, and therefore, in preparing for the final draft of the charter, I would like the Government to consider whether the word “merits” conveys exactly what they want it to.

[Lord Sassoon]

I am not sure whether this will help, but just to be clear, we are expecting the OBR to assess the impact of policies on forecasts. So there is no question of merits and demerits, other than that we are trying to exclude all questions of merit and demerit and keep to the factual impact of policies. I am struggling a bit with any suggestion that we are somehow dragging the OBR into considerations of merit or demerit. The noble Lord took the example of employment and unemployment. All we ask of the OBR is that it should tell us what the factual situation is and absolutely not to comment on its merits or demerits. There is no question of enormity of judgment by the OBR in this or any other respect.

The basic underlying language here is the same as that which applies to the National Audit Office in the National Audit Office Act 1983. That is all we are trying to replicate in this respect, even though this is scrutiny and not audit.

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[Lord Sassoon]

My Lords, of course the OBR should be cost-effective and efficient—there is no question about that—and the amendment seeks to increase the requirement for it to be so. However, in reality the amendment would not change in substance the requirement on the OBR because, if it was ever challenged on this point, the challenge would be subject to what it would have been reasonable for the OBR to have done. I agree with my noble friend that it would be nice if we could have more direct language here but I am advised that the amendment would make negligible difference. That is because if it was ever tested in a legal context—one hopes it will not be—the reasonableness of what the OBR had done would be encapsulated in the words “aim to”.

At the risk of the noble Lord, Lord Eatwell, jumping up again, I have to say that this is the same as the requirement on the National Audit Office, as set out in Part 2. It is not necessarily a good defence; I merely observe—

[Lord Eatwell]

We have always done it that way.

[Lord Sassoon]

Of course, in the wider context, the accounting officer will have to answer for the OBR’s cost-effectiveness and efficiency and it will be subject to the normal governance and scrutiny arrangements for public bodies. Those scrutiny arrangements will include an audit, I say advisedly, by the NAO, which will have the power to examine and report to Parliament on a number of matters, including the economy, efficiency and effectiveness of the OBR.

I thank my noble friend for trying to tease out what is going on here. It has enabled me to ask questions and to establish that the words as originally drafted essentially encapsulate the test that a court would use if the OBR was ever challenged. On the basis that we are trying to arrive at the same point, I hope he will withdraw the amendment.

Budget Responsibility and National Audit Bill [HL]

Debate between Lord Eatwell and Lord Sassoon

Wednesday 1st December 2010 Grand Committee

[Lord Eatwell]

My Lords, I want to speak to Amendment 15 in this group, which is tabled in my name and that of my noble friends Lord Davies and Lord Myners. The amendment seeks to provide a specific and important role for the non-expert members who, in the Explanatory Notes, are defined as non-executives. The role of the non-executives is very important indeed because, as we have already identified, the OBR is a strange beast. It is independent in an important way, or at least we hope it is, and yet it is an essential ingredient of policy-making within a particular department, mainly the Treasury. So it is not really a non-departmental public body as we know many independent bodies because it is very much part of the Treasury, and yet it is also very much not part of it. It is therefore important that we bolster the “not” side of that equation to ensure that not only is there the reality of independence in a way that I know the Government are seeking, but also the appearance of independence, which will be equally important, especially in more tempestuous political and economic times.

Amendment 15 seeks to clarify the role of the non-executives in a particular way. What is striking at the moment is that the non-executives have no role whatever except that of being involved in audit activity and the production of the annual report; otherwise, they simply make the tea for the experts. We want to give the non-executives a particular role, that of bolstering and supporting the independence side, let us call it, of the OBR. It will be done by requiring the office to include in its annual report an assessment of how the OBR and the Treasury have adhered to the terms of the OBR’s independence as set out in Clauses 5 and 6(2).

Noble Lords will recall that Clause 5 makes the particular point that not only does the OBR have “complete discretion” but, as set out in subsection (2):

“The Office must perform that duty objectively, transparently and impartially”.

One of the oddities of the draft charter is that it seeks to define the terms of Clause 5(2) which are perfectly well defined in the noble Lord, Lord Sassoon’s, favourite reference book, the Oxford English Dictionary. I do not see why we need any further definition, but we will come to that in a moment. The non-executives can comment on these provisions, but more especially they can comment on the provisions of Clause 6(2), which is the really crucial piece of independence in the Bill—the independence of method and of forecasting approach. That is because, as we discussed on Monday, the Treasury is to retain its own forecasting unit and the non-executives will have the responsibility of assessing whether the mutual influence between the two forecasting organisations compromises the OBR’s independence.

It is important that the Government should realise that forecasting organisations influence each other to a considerable degree in respect of introducing new and different ideas, concepts, judgments and methodologies. Moreover, first-class forecasting units interact with one another. That is absolutely inevitable at any level of serious intellectual endeavour. For example, in economic forecasting, the very method used can have a significant influence on outcome, and unwarranted influence on the outcome can be exerted as much by a debate over method as over judgment.

The role of the non-execs is simply to stand there as defenders of the independent side of the OBR, and we could give them the responsibility of reporting on that independence in their annual report. They would then have a specific, valuable and important role.

I admit that Amendment 9, tabled by my noble friend, is cast in much more general terms, but I think that it is seeking to achieve the same ends. It is seeking to define a role for the non-executives. I suggest that the statutory role that we are suggesting—as guardians of the independence of the OBR—will be of enormous value to the Government, to Governments in future and to the organisation itself.

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

My Lords, although the noble Lord, Lord Peston, says that this is not necessarily the opportunity to try to clarify what is intended, I think that it is worth spending a moment or two to try to tease out what is going on here, although from what both noble Lords said, it is probably now clear what is going on.

As I said at Second Reading, when I was first shown a draft of the Bill, it categorised the two groups as professional and non-professional. That was changed to expert and non-expert, but we are talking about, on the one hand, a group that is expert in the sense of having all the competencies to carry out the role of the OBR—so they are both expert and executive—and, on the other, another group of people who are described in the Bill as non-expert, but we are rightly talking about them as what they are in substance, non-executive. They might be expert or they might not, but the critical thing is that they bring to bear a degree of support and challenge that comes from a different perspective. If they happen to have some relevant expertise, fine, but that is not the point.

The so-called non-experts are non-executives, but are full members of the OBR, which means that they can help to carry out any of the OBR's functions beyond those reserved for the BRC. As I see it, their role will be principally one of support and constructive challenge to the executive members, just in the way that non-exec directors would normally exercise those functions. They may form part of some committee structure, if the OBR so decides—audit is a particular role often assigned to independent non-executives—and they will carry out an important role in safeguarding the independence of the OBR. I have no difficulty with the principle behind Amendment 15, spoken to by the noble Lord, Lord Eatwell. It is just a question of the best way to achieve that.

For a start, we have a statement from the Treasury Select Committee in its recent report on the OBR. It states:

“We will take evidence”—

from the OBR—

“regularly as part of the budget process. We will intervene if we believe the OBR's independence is threatened. We expect the members of the Budget Responsibility Committee or the non-executive directors to report any concerns they have to us. Only if it is independent will the OBR be successful”.

We completely agree with that and would expect both the executive and the non-executive members, whether collectively or separately, to report any concerns on independence. That is clearly implied by the whole nature of the construct. The non-exec non-experts must be people of independent mind and character.

The question is whether this needs to be written in further. My slight problem with requirements to report on things like independence on a regular basis is the risk of becoming formulaic. We want the OBR and the non-experts to report whenever they see any question of a lack of independence arising, and I hope that that will never occur, but my hesitation is that if you get people to report regularly it becomes another box that they tick and another standard sentence that they write. It may actually be more difficult for them to do what in substance there is nothing stopping them doing—there is every encouragement from the Government and from the Treasury Select Committee already—which is to raise any independence concerns in the appropriate way, which may not be in any particular form with any regularity.

I have noted the points that have been raised, but at the moment I am not convinced that writing more into the Bill will necessarily do anything but lock us in to one particular formula. However, I will reflect further on the points that have been put. For the moment, though, I hope that I have answered the questions that have been raised and that that is sufficient for the moment for the noble Lord to withdraw the amendment.

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[Lord Sassoon]

That is a very helpful thought. I shall in another context say that the parallel with the MPC is not at all inappropriate. For example, in the MPC or the board of the FSA there is a good record in the UK in recent years of bringing in relevant experts from overseas. I entirely agree with the noble Lord’s thought.

[Lord Eatwell]

My Lords, I am grateful for the noble Lord’s reaction to our Amendment 15; he said that he did not have any difficulty with it in principle. He then suggested that the independence of the OBR should be guarded by an external body—namely, the Treasury Committee of another place. While I have enormous respect for that committee, it would be better to bolster the independence of the OBR within its own organisational structure, rather than relying on an external body to deal with this issue. That is what I was trying to do in my amendment.

The other aspect is that if it is clear that the important role of the non-execs is to bolster the independence of the OBR, it will affect the sort of person who is appointed. You will want people of stature and self-confidence who would be willing to make themselves unpopular in defending the independence of the OBR. That would be a particular sort of person. It is especially valuable that we do not rely on an external organisation and use an internal structure with the non-execs. After all, they are there; we might as well use them to do this job.

I understand the point that a regular report might become formulaic, but this is such a serious duty that serious people would not treat it in a formulaic manner. However, I will take away the noble Lord’s point and see if I can modify the amendment a little.

[Lord Sassoon]

I want to clarify one matter. I was not for a minute suggesting that the Treasury Select Committee would be the sole policeman of independence. Under the current construct without the proposed amendment, I absolutely regard the OBR to be the guardian of its independence—which it shows every signs of being fiercely committed to. I was merely using the wording of the Treasury Select Committee report to point out that there are already external pressures on the OBR from a number of directions, but in no way was I suggesting that it will not already be expected to raise concerns on independence. The reporting mechanisms could include the annual report that will happen anyway. I am simply suggesting that making that mandatory in the legislation risks a formulaic approach.

[Lord Eatwell]

As I have said, I understand that; but when you are in the executive position, as the very distinguished people you have been lucky enough to attract to run the OBR are, it is very easy, because you have to get the report out and do things, to be so immersed in the incredible pressures that you slip across boundaries. If non-execs are there, like a non-executive chairman with a chief executive, they could help with guidance and prevent that slip happening. If we give the non-execs this particular role, it will not only bolster the appearance of independence of the OBR—which is valuable in itself—but provide an important check in reality. Including that duty in the Bill would be so serious that I do not think that serious people would treat it in a formulaic manner.

--- Later in debate ---

[Lord Sassoon]

My Lords, I have not had a chance to read that article. If we have another break, I shall go and do so. The arguments of the noble Lord, Lord Myners, are always powerful and coherent, but there are plenty of instances of where the appointment process does not, for all sorts of different reasons, necessarily have much to do with where reporting lines go. At the moment, quite properly, banks have to do a huge amount of reporting to the Financial Services Authority but the FSA does not appoint the boards of directors, who are appointed by the banks’ shareholders.

[Lord Eatwell]

But the FSA now interviews non-executive directors from major financial institutions.

[Lord Sassoon]

The FSA does not appoint the boards of directors. We are talking here about public sector boards, and I feel that there is little more to add. The Treasury Select Committee has not asked for this, and it does not happen with other appointments. Critical bodies such as the statistics authority work perfectly well under the sort of construct that we are proposing here.

--- Later in debate ---

[Lord Sassoon]

My Lords, on the latter point, I say again that the fact that it is intended that, as part of the nomination process, there should be an openly advertised way in will make it clear that we looked widely for the non-executives.

Implicit in the remarks of the noble Lord, Lord Myners, about the non-executive members not going through the process of getting the imprimatur of the Treasury Select Committee is the suggestion that all the non-executive board members of a huge range of public sector boards who do not go through parliamentary scrutiny are subservient and subordinate. I do not know why it should be different here. As I have explained, we are applying the same rigorous, high standards to these appointments as are applied to all other bodies. I see no reason why they should be subservient or subordinate simply because they have not had Treasury Select Committee endorsement.

The critical thing is that these are non-executive non-experts carrying out an important role similar to that of non-executives in a huge number of bodies across the public sector. That is very distinct from the expert members who, because of their special role at the heart of economic forecasting—the Treasury Select Committee agrees with this distinction—should be subject to the special veto.

[Lord Eatwell]

My Lords, having had the opportunity to listen to noble Lords who have taken part in the debate, I have become more convinced of the value of the amendment. My conviction derives from the following points. First, we must recognise that this is a very peculiar body, as a number of noble Lords have emphasised. It is of the Treasury but not in the Treasury. It is of the Treasury because it plays an important role in the formulation of the Treasury’s policy by providing it with the information and forecasts that are necessary for the development of policy. However, it stands outside as well. It is that independence with which we have all been concerned. Analogies with other public bodies do not work very well. This is a very peculiar body that we are trying to get right in the Bill.

Having listened to the arguments, the major reason why I am even more convinced of the value of the amendment is that I was involved in such a process when I was chairman of the British Library. I had a very tough and effective chief executive, and we tried to build a board that would serve various important roles at the library. However, we were continually—I was going to say “interfered with” but that does not sound quite right—guided in a very decisive way by the Department for Culture, Media and Sport, which is not one of the most powerful departments, certainly when compared with the Treasury. It played a very active role in the so-called independent nomination process. I was continually having vigorous arguments with the Permanent Secretary at the DCMS in which I would tell her to take her tanks off my lawn and allow us at least to nominate members, as was our right under the relevant Act. I am not convinced that the nomination process will be as independent as might be expected from looking at the simple structure laid out in the Bill.

The amendment would protect the Treasury and the Chancellor from the accusation that there was any compromise to the independence of the OBR in the nomination of non-executives by granting oversight to the Treasury Select Committee. The point is important. Members of the Treasury Select Committee are politicians, and therefore they are very sensitive to issues of political independence. It is what they know about and their area of expertise. They can spot political tendencies a mile off because they are experienced politicians and that is their job. Having listened to the argument, I have become much more convinced of the value of this amendment. I was a little tentative when I set out, but now I am convinced that it is the right thing to do. We will return to this on Report. In the mean time, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Sassoon]

My Lords, let me see if I can help by making clear what is actually going on and what is intended here. The first point to bear in mind is that HM Treasury is not incentivised to underfund the OBR because it will be relying on the office to produce the official forecasts. We need to bear it in mind that the OBR provides a critically important component to feed into the Treasury’s economic and fiscal policy-making. I am not sure what the circumstances could be in which the Treasury would want to starve the OBR of funds because it provides such a critical service to the Treasury itself.

The second point is this. Noble Lords may not have seen it, but the funding has been put in place not for one year but is committed through the spending round period from 2011-12 through to 2014-15. The spending letter from Sir Nicholas Macpherson, the Permanent Secretary to the Treasury, has been published by the OBR. It makes it clear that the funding allocation is £1.75 million per year flat cash at a time when the Treasury group settlement is minus 33 per cent. The position for the next few years is clear. Sir Nicholas goes on to say in his letter:

“Should you find that you are unable to manage within the constraints of this allocation, please raise this with me at the earliest opportunity”.

So the initial funding is in place with an open invitation—which, as I have said, is very much in the interests of the Treasury—to the OBR to raise any matters of any potential underfunding. Robert Chote himself highlighted the importance of the OBR’s funding position when talking to the Treasury Select Committee:

“If you accede to my appointment and I find myself being squeezed in that way, this Committee will be hearing about it very promptly. That’s how we make that public and ensure that those sorts of pressures do not go unremarked”.

He is clear in the substance about where he would immediately go.

There are a number of specific safeguards in the legislation that go further. Schedule 1, which provides for the funding arrangements, ensures that the OBR’s independence and effectiveness will be protected. There will be a separate line for the OBR in the Treasury Estimate and the body will produce its own accounts which will be laid before Parliament. Furthermore, it will be able to submit an additional memorandum alongside that of the Treasury, which will be submitted to the Treasury Select Committee.

[Lord Eatwell]

Will the noble Lord give me the paragraphs in Schedule 1 in which those propositions appear, so that I can follow his argument?

[Lord Sassoon]

I will come back to the noble Lord on that: I do not have the Bill in front of me. The point that I was going to make was that there will be a role for both the Treasury Select Committee and the Public Accounts Committee in relation to the expenditure of the OBR. The Treasury Select Committee will take an interest in whether there is any pressure caused by inadequate funding of the OBR. In addition, because the accounts of the OBR will be audited by the National Audit Office, the Public Accounts Committee and the NAO can be expected to take a critical interest not only in the accounts themselves but in any conceivable underfunding that the accounts reveal. Any future Chancellor who attempts to impose any underfunding will get caught, both because the chairman can go to the Treasury Select Committee and can go public at any stage, and because the accounts will be subject to audit. It is paragraph 15 to which we should turn.

[Lord Eatwell]

I thought that it was, but paragraph 15 does not contain the propositions that the noble Lord suggested were in Schedule 1. Paragraph 15 is very short and consists simply of two short sub-paragraphs.

[Lord Sassoon]

Paragraph 15 provides for the Treasury to make payment of grants in aid from the resources devoted by Parliament, as reported in the Treasury Estimates. That brings with it various responsibilities to report the estimates, in this case in a separate line in the Treasury Estimates. I refer also to the production of accounts and the voluntary ability of the OBR to publish any additional memorandum that it wishes. In the incentivisation of all the parties concerned, and principally the incentivisation of the Treasury not to underfund, there is an alignment of interests.

Secondly, in respect of the formal reporting position, through the accounting, Treasury Estimates and the ability of the Treasury Select Committee, the Public Accounts Committee and the National Audit Office to look at the numbers, there are many formal structures. In addition, we have a funding letter agreed by the Permanent Secretary to the Treasury and the chairman of the Office for Budget Responsibility that covers the period up to 2014-15—a settlement that is markedly more generous than the Treasury's own and that contains an explicit invitation for the chairman of the OBR to come back to the Treasury at the earliest opportunity if they find that they are unable to manage within the constraints of the allocation. This is very important and, as with many issues that we are discussing today, there is no difference between us on the objective. There are plenty of safeguards already in place in the legislation and the development practice between the Treasury and the OBR.

[Lord Eatwell]

My Lords, I am grateful for the Minister's reply, although I am still confused about what he thinks is in Schedule 1 and what he thinks is not. I will deal with the points that have been made. First, the noble Lord, Lord Higgins, echoed by the Minister, talked about the role of the Public Accounts Committee and the Auditor-General. They will audit the accounts for honest and true accounting, efficient management of funding and so on, but they will not be sensitive to the issue of the independence of the OBR and its activities, and the degree to which they are constrained by budgetary methods.

--- Later in debate ---

[Lord Eatwell]

Absolutely. I agree with value for money, but the issue that we are discussing is the independence of the OBR in the pursuit of its activities. It may have pursued a constrained raft of activities very efficiently, providing good value for money, but the issue is the constraint. The Treasury Committee would be sensitive to exactly that kind of issue. That is why I have incorporated the Treasury Committee into my amendment.

[Lord Sassoon]

Perhaps I may help the noble Lord on the point of sensitivity. He is absolutely right: the Treasury Select Committee is sensitive to the point and has taken it into account already. It may help him to know that the Treasury Committee issued a press release on 12 October—perhaps he has not seen it—headlined, “Treasury Committee Chairman Welcomes Chancellor’s Statement on the OBR”, particularly on this point. The press release stated that the chairman, Andrew Tyrie, said:

“It is vital that the OBR has the resources it needs. The Committee will monitor this carefully: the Terms of Reference suggest that the Treasury accepts the importance of transparency and separate disclosure, and we will have the information we need to do our work”.

I am grateful to the noble Lord for raising the question of sensitivity, but I trust he notes that the Treasury Select Committee has already said that it believes that what is proposed meets its requirements.

[Lord Eatwell]

The Ministers might care to look over their shoulders; they are being handed advice.

There are two points here that the Minister is getting wrong. First, on the business of being incentivised, of course the Treasury is incentivised to fund the OBR to do the things that the Treasury wants it to do; it is not incentivised to fund the OBR to do things that it does not want it to do. That, I am afraid, dismisses the incentivisation argument. It just does not make sense.

The second point concerns the funding in the current spending round and the comments by Mr Tyrie about that funding, which I welcome, but which do not address the point made by the noble Lord, Lord Burns, about the future. That is what the amendment is about; it is not about what is happening now. As far as concerns the Treasury Committee, the launch funding seems to be adequate—maybe even generous—but the question is whether we are to provide a mechanism in the Bill that will prevent future Administrations using the budget as a constraint on the OBR. It is the most effective constraint of all because no one really notices it.

If we are going to secure the independence of the OBR in the Bill, we should take the position supported by the noble Lord, Lord Burns, and clearly by Mr Chote, who said, “I will be off to the committee”. Let us ensure that the committee has full information and powers to recognise the chairman of the OBR at an appropriate time, and to defend him. We are not talking about subvention or incentivisation. The incentivisation argument is false—it is the other way round—because, if the Treasury is incentivised, it is of course incentivised to stop the OBR doing things that it does not want it to do.

Let us think about the future of this organisation and ensure that it has the independence that we seek. I will return to the issue on Report, because it is important. I am most encouraged by the support of a former Permanent Secretary, who has identified this as an important issue.

[Lord Sassoon]

Since the noble Lord is coming to the end of his remarks, I wanted to put something into, if you like, his work plan for thinking more about this matter before Report. This is another point that I had thought hardly needed to be made. The grant-funded NDPB model which we are talking about is common to a great many credibly independent bodies such as the Advisory, Conciliation and Arbitration Service and the Equality and Human Rights Commission. I do not believe that there is any question of funding for other grant-funded bodies of this sort being compromised. They produce explanatory memoranda; the OBR can produce an explanatory memorandum, which will go to parliamentary committees for scrutiny. I simply put on the table that if the noble Lord wants to go on thinking about this, he should also consider the read-across to other NDPB models.

[Baroness Noakes]

Before the noble Lord, Lord Eatwell, takes this away to consider before he comes back on Report, he might want to look at the debates on setting up the Statistics Commission. Very similar points were raised at the time. Although it was a non-ministerial government department rather than an NDPB, the principles are exactly the same. When I sat on that side of the Grand Committee, the concerns were that insufficient resources would be made available to the Statistics Commission to enable it to do the work that it needed to do because it was to be subject to Treasury control.

One of the arguments, which I am not sure has been fully deployed, although many good arguments have been, is that the annual report required by Schedule 1 is the vehicle for the body—the Statistics Commission in that case, and the OBR in this case—to say exactly what it wants. The Treasury has no ability to stop anything being put in the annual report, which must be laid before Parliament. This is in addition to the undoubted ability of Robert Chote to get Mr Tyrie to obtain a Treasury examination if he thought there was a problem, which can be done by informal means. Therefore, Mr Chote has a formal means of bringing to the attention of the wider public any concerns that he has about funding.

--- Later in debate ---

[Lord Sassoon]

I was going to make two points. There is a further important consideration here, which is that we have the draft charter in front of us. It is worth bearing in mind that paragraph 4.12 of the draft charter, at page 13, states:

“The OBR’s published forecasts shall be based on all Government decisions and all other circumstances that may have a material impact on the fiscal outlook”.

So it is quite clear from that paragraph that the published forecasts shall be based on all government decisions. It continues, in the first bullet point, or tiret, as the Treasury used to call it—I do not know whether it still does since the departure of the noble Lord, Lord Burns; I fear that it now calls them “bullets”. Anyway, in the first blob—

[Lord Eatwell]

Standards are falling.

[Lord Sassoon]

They are slipping terribly. In paragraph 4.12, the first bullet point states,

“where the fiscal impact of these decisions and circumstances can be quantified with reasonable accuracy the impact should be included in the published projections”.

So we have in the charter a lot of the clarification, if there is any doubt to be avoided. I think that we have exposed all the issues here. I believe that between the two clauses and the charter, we have covered it all. I will look at the issue again in the cold light of day with officials. If, on reflection, there is anything more, I will write with further thoughts, but in the mean time, I ask the noble Lord to withdraw the amendment.

[Lord Eatwell]

I am grateful to the noble Lord. This debate has been much more valuable than I expected when we started. We discovered in the imperfect drafting of Clause 5(3) a real drafting difficulty, which has nothing to do with trying to make any political or more general economic point, but just concerns clarity. That was very valuable. I want to return to this, and want to associate with the notion of sustainability a general notion of economic policy. The reason for that is illustrated by the Irish case. The Irish Government looked incredibly stable in 2007, yet the overall economic position was completely unsustainable. If you just looked narrowly at the government finances, they looked terrific, but once you placed those government finances in the context of what was happening in the financial sector in Ireland as a whole, taking into account the Government’s economic policy with respect to the banks, for example, you would have seen that the position was unsustainable. It is that broader context that I was trying to get at here, and which informed my remarks on the sustainability analysis in the report published on Monday. We have teased out some important issues here, and we must certainly return to them on Report but, in the mean time, I beg leave to withdraw the amendment.

Autumn Forecast

Debate between Lord Eatwell and Lord Sassoon

Monday 29th November 2010 Lords Chamber

[Lord Sassoon]

My Lords, forgive me but which of the questions of the noble Lord, Lord Eatwell, are we talking about?

[Lord Eatwell]

It was the point about assistance to Ireland—I believe that the relevant figure is £3.25 billion—being preceded by the words “in principle”; that it would be that sum in principle.

[Lord Sassoon]

My Lords, forgive me, I should have pointed out that the details of the package are still subject to final negotiation. I guess that the lawyers have to trawl over the press release, as it were, and my right honourable friend’s statement that the loan is not the loan until it is absolutely bolted down in the formal documentation. The terms of the loan are still subject to final negotiation alongside the IMF and eurozone packages.

Budget Responsibility and National Audit Bill [HL]

Debate between Lord Eatwell and Lord Sassoon

Monday 29th November 2010 Grand Committee

[Lord Newby]

Just as a point of clarification for the noble Lord, Lord Eatwell, Clause 1(7) states:

“The Charter (or the modified Charter) does not come into force until it has been approved by a resolution of the House of Commons”,

so it has at least vestigial parliamentary scrutiny.

[Lord Sassoon]

I shall explain the way I see it and deal with the things that may be relevant this afternoon. We are talking about the charter, which we have produced in draft to aid scrutiny of the Bill. I hope that people will think that that is helpful. There were, quite rightly, demands to see it, which is why we produced it a week ahead of the Committee stage. It will be formally laid in another place following Royal Assent to the Bill, so it necessarily remains in draft until that point. We will listen carefully and, if there are issues that touch on the charter that could in our judgment improve the drafting, we will take them on board.

The relevance of the charter is how it fits with the architecture relating to the responsibilities of the OBR. We also have to remember that certain things in the charter do not directly relate to the fiscal mandate but are background information to it. I take the point that we should not get too far into discussions of irrelevant things, but intergenerational fairness is part of the fiscal objective that is in there as background information to the fiscal mandate, which comes in the subsequent paragraphs and links directly to the responsibilities of the Office for Budget Responsibility. The noble Lord, Lord Eatwell, is correct that intergenerational fairness can take on different definitions, but here we are using the term in a fiscal context to mean that future generations should not be burdened by deficits or the cost of servicing debts accumulated to pay for consumption by current or previous generations.

[Lord Eatwell]

That was the point that I was trying to make in a speech that I made in the House the other day. If there is a deficit and you are paying interest on that deficit, it sounds like a burden, but you are paying it to the people who lent you the money and they are predominantly other British citizens, so all that you are doing is transferring part of national product from one lot of British citizens—the taxpayers—to another lot of British citizens, the lenders. You are not actually creating an intergenerational transfer. An intergenerational transfer can be made, as the noble Lord, Lord Higgins, pointed out quite accurately, by changing the volume of investment in any one year, which changes the growth rate of the economy and affects future income per head. A fiscal measure alone is not an intergenerational transfer.

[Lord Sassoon]

I am grateful to the noble Lord, Lord Eatwell, for his explanation of how intergenerational transfers work. I am not sure what difference it makes to the analysis but, for better or worse, it is not the case that substantially all of the debt—he did not use that term—is held by UK citizens or bodies. The burden of debt that we have is well spread among international holders as well.

We should not get too far side-tracked. Intergenerational fairness is an important point, but the objectives for fiscal policy are, as I say, the background in the charter. People can see the context in which the critical elements of the Treasury mandate are set out in paragraphs 3.2 and 3.3 of the draft charter. Those are the two elements that bite particularly on the mandate of the OBR. The full objectives for fiscal policy include supporting and improving the effectiveness of monetary policy, which relates to the independent operations of the Monetary Policy Committee of the Bank of England. We must remember how the architecture fits together.

Let me say a bit more about the background to the charter. Its purpose is to improve the transparency of the fiscal policy framework and, within that, to include the guidance on the role of the OBR within the broader framework. The charter is concerned with fiscal policy and includes the Treasury mandate for fiscal policy. It was important to have that document for people to see ahead of this discussion. The fiscal policy framework is part of the Government’s overall approach to economic policy. Indeed, given the fiscal situation that the Government inherited, the coalition made it clear on its formation that reducing the budget deficit and setting public finances on a sustainable path to build confidence and to create the conditions for economic recovery were the overriding priority.

The noble Lord’s first amendment would require that the charter be expanded to relate to overall economic policy. Amendments 2 and 3 concern the addition of economic policy objectives, which means that we need to be clear about them. They are set out in the paper The Path to Strong, Sustainable and Balanced Growth, which was published today. To achieve the objective of delivering growth that is consistent with values of freedom, fairness and responsibility and to improve the well-being of the British people, the Government must employ all their macroeconomic and microeconomic policy tools and frameworks. I mentioned that monetary policy is operated by the independent Monetary Policy Committee of the Bank of England. That provides one set of tools that play a role in meeting the Government’s economic policy objectives.

It may be helpful to remind the Committee that the Bank of England Act 1998 provides:

“In relation to monetary policy, the objectives of the Bank of England shall be … to maintain price stability, and … subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment”.

I know that comments have been made about that, but it is probably not right this afternoon to go into the question of how all this works. The point is that the Bank of England Act does not set out the Government’s economic policy objectives. That is not what we are trying to inject—nor should we—into the legislation that governs the operation of the Office for Budget Responsibility.

Financial stability policies are similarly crucial to delivering the overall economic policy objective. The Government have taken steps to reform the financial stability framework, providing the Bank of England with control of macroprudential regulation and oversight of microprudential regulation. Also, microeconomic policies create the conditions for growth and they, too, are essential. Fiscal policy represents another crucial set of tools that the Government use to achieve the overall policy objectives. The charter is the place where, for the first time, we have a transparent exposition of the framework. However, the charter is not itself the framework. It replaces the code for fiscal stability, which was part of the previous fiscal framework. Replacing that code was recommended by the Treasury Select Committee. The code did not contain economic objectives. Therefore, the charter remains a document relating to fiscal policy and should not be expanded to contain overall economic objectives.

--- Later in debate ---

[Lord Sassoon]

We should not prolong this for too long—although I am happy to. If I feel, having heard the arguments, that I should take the amendments away or that I should accept them, I will say that. I will try to tell noble Lords what I believe, but I do not believe that these amendments have any merit. If there are amendments that I believe have merit, I will endeavour to make that abundantly clear.

[Lord Eatwell]

My Lords, I realise that this is the first time that the Minister has had to face a Grand Committee and perhaps he will be better prepared next time we meet. However, as to these amendments, I have just four points to make in response to our debate.

The first is purely technical, in that the Bill as drafted is inconsistent. Clause 6(1)(a) states that the charter for budget responsibility may include guidance about the,

“assessment or analysis required to be prepared under subsection (3) or (4) of”,

Clause 4. However, subsection (3) of that clause refers to “fiscal and economic forecasts”. The charter is therefore required by Clause 6 to provide guidance on economic forecasts. The Bill is inconsistent if “economic” is not included in Clause 1. It is not at all clear what the Government really intend to do. It is only clarity that I seek here. As noble Lords have said, there is no great economic or political point behind all this. Actually, there is a good economic point, but there is no great political point. The amendment aims purely at making the Bill consistent.

My second point is that, in its consideration of fiscal policy, the OBR has to have some guidance as to the Government’s overall economic policy. Otherwise, it is not possible for the OBR to make a coherent assessment. If you do not believe me, just look at this document, the OBR’s Economic and Fiscal Outlook, which is exactly that. It is a very fine document, if I may say so. For example, the delayed rebalancing scenario and the weakening demand scenario are discussed in the document. Why is that? It is because the OBR is linking different economic performance to the consequences for fiscal performance. That is exactly what this document does.

I accept the point made by the noble Lord, Lord Turnbull, that we are not trying to set out some broad economic assessment committee, but, as another gloomy Cambridge economist, he should recognise that there is a clear interrelationship between economic and fiscal policy. The intention of these amendments was simply to capture that relationship. If this could be done in a better way and could make the Bill consistent, I would be very happy. If the Minister says, “We’ll think about this and see if we can achieve that in a better way”, so that this document does not trespass beyond the mandate given by the Bill to the OBR, I would be very happy.

I turn to Amendment 4. The Minister asked why the fiscal mandate should require an economic dimension. Here, there is a bit of economics involved, because there is a view among some economists that the economy has a normal rate of activity and a normal rate of employment to which it persistently returns having moved away from them because of some economic shock. It is clear that that is not the view of the economists who wrote this document, otherwise they would not have written such scenarios. It recalls the remark of the Nobel Prize-winning economist, Professor Robert Solow, that this view of policy was a vision in a dream. The fiscal mandate requires some economic dimension, because you could have different results depending on the nature of your economic policy—they are interlinked. That is all that I am trying to capture in my amendments—nothing more and nothing less.

I say in response to the noble Lord, Lord Oakeshott, that I do not think that the drafters of the charter know what “intergenerational fairness” means or what the economics of intergenerational transfers consist of. The noble Lord, Lord Higgins, got it exactly right: it is about changing the rate of investment in the economy. It has nothing to do with fiscal policy as such and it should not be in the charter. The suggestion of the noble Lord, Lord Oakeshott, that the word “intergenerational” be removed would provide some validity to a sentence that currently has none.

I am afraid that I must reflect the general opinion around the Grand Committee that these points have not been answered; indeed, I am not clear that they have been understood. Accordingly, I shall need to return to them on Report, by which time some more careful thinking about them will hopefully have been done.

[Lord Sassoon]

We have gone into territory in this discussion that is well beyond the consistency of the Bill. Consistency is important and we of course want to get it right. I see no difficulty in having consideration of an economic forecast, as provided for by Clause 4(3)(a), without there being a government statement in the charter on broader economic policy. I accept that there is a critical need for the OBR to make an economic forecast to underpin its assessment of the fiscal mandate, but I am still struggling to grasp the point on consistency.

--- Later in debate ---

[Lord Eatwell]

Perhaps I could help the Minister. Clause 6(1)(a) requires the charter for budget responsibility to give guidance on how to pair subsections (3) or (4) of Clause 4. Subsection (3)(a) of that clause refers to “fiscal and economic”. The charter must therefore include guidance on “economic”. At the moment, it does not.

[Lord Sassoon]

We are possibly getting this a little confused. Of course, in order to make an economic forecast, it may be appropriate for the charter to give, as it does in paragraph 4.10, guidance on economic forecasts, but that is very different from setting out in the charter the Government’s broad economic policy objectives. It is unnecessary, distracting and inappropriate for the charter to go into the broad economic policy objectives of the Government. However, I quite see that it is appropriate for the charter to go into questions that touch on economic forecasting. Indeed, it already does that, which is completely compatible with the terms of the Bill.

I will of course look again if it is a narrow consistency point. However, in trying to make a consistency point on what does not, from my reading of the Bill, need to be tidied up, the amendment opens up a much bigger swathe of territory, as I am sure the noble Lord is well aware, by including in Clause 1 broad questions of economic policy objectives. Yes, it is appropriate to talk about economic forecasting guidance in the charter—indeed, it is there—but its being there is much more specific and appropriate than opening up the charter to economic policy which, I would suggest, is simply not relevant. We will have a look again at the consistency question. My reading of it is that we do not have an issue there, but I will look at it again.

On the intergenerational question, I made the point that I am listening to what people say. I do not pretend for one minute to be an expert on the different interpretations and consequences of intergenerational fairness, but I will take back the suggestions that we have had on that from both sides of the Committee. Again, that is not something which, if there was any merit in changing the charter’s wording, needs any amendment to Clause 1 of the sort that we are discussing.

--- Later in debate ---

[Lord Eatwell]

The amendments raise in different ways an important issue in relation to the draft charter. The noble Lord, Lord Turnbull, drew attention to paragraph 3.7, which states:

“The Treasury will continue to maintain the necessary analytical and macroeconomic expertise to provide on-going advice to the Government”.

That sounds perfectly sensible. However, it goes to the heart of the rather grey area of what OBR independence means that the same paragraph should declare:

“The Government intends to adopt the OBR’s fiscal and economic forecasts as the official forecast for the Budget Report”.

Indeed, according to the draft charter:

“The OBR’s forecasts are essential inputs to the Government’s ongoing policy-making”.

And yet, the Government retain the right to disagree. I can see that the Government can maintain the right to disagree with anybody, especially with an independent body—which the OBR is supposed to be—but I do not then see how they can adopt the OBR’s fiscal and economic forecasts as the official forecast for the Budget report. They cannot adopt something with which they disagree as the official forecast; it just does not work. They cannot have it both ways; it is nonsensical.

It is obvious that the OBR will need to work closely with staff at the Treasury and other government departments in developing costings. That is why we should expect consistency between the OBR’s forecasts and those used by the Treasury—after all, they have worked together to bring them to fruition. They are the crucial decision variables. In his foreword to the forecast document that we discussed in the Chamber today, Robert Chote thanks government departments for providing the decision variables which have gone into it. The OBR is in essence a rather peculiar body. It is not really a non-departmental public body; it is a Treasury non-departmental public body which plays a crucial role in the development of policy. As paragraph 3.7 of the charter precisely states, it is the “official forecast”. I do not understand how the Government can disagree with the official forecast. They can disagree with the OBR, for example, when it takes a punt in describing some scenarios, as it does in the charter, but how can they disagree with the official forecast?

I cannot see why there is a need to require consistency between forecasts put forward by the Treasury and those put forward by the Bank of England. The noble Lord, Lord Turnbull, referred to competition between forecasts. I would take a rather different view and say that to require consistency would endow forecasts with spurious precision, whereas there are number of judgments in forecasts which are worth discussing in the context of the formation of economic policy.

The underlying point is that the OBR is distanced from official policy-making to a degree that was not possible in the past. That is an achievement of which this Government should be proud. But to describe the OBR as “independent” is an exaggeration. It is useful for propaganda purposes, but it is not credible to grown-ups, because it has to be involved in policy-making. There is a degree of independent methodology but not really of judgment, which is a different dimension. The Minister has to answer the following question: how can there be an official forecast with which the Government then disagree?

[Lord Sassoon]

Let me start with the easy end of this. Some important points were raised, not least the crucial point raised by the noble Lord, Lord Eatwell. I am very grateful to the noble Lord, Lord Higgins, for trying to save postage—we do look at every bit of possible wastage around government. However, on the point that my noble friend Lady Noakes raised, the construct here is that in Clause 8(2) the OBR is required to lay its reports before Parliament, and that means directly. So it is probably worth the price of a postage stamp or somebody pressing an electronic button, or whatever one does these days, to ensure that, given that this is an independent body, it does not forget to send a courier round to the Treasury as well. That is probably a failsafe that we should have in there.

On the nub of the questions around the linkage of the forecast to the Treasury and the linkage between the forecasts of the OBR and the MPC, the noble Lord, Lord Turnbull, kindly drew our attention to paragraph 3.7 of the charter. That is the critical one. In the first sentence it says:

“The Government intends to adopt the OBR’s fiscal and economic forecasts as the official forecast for the Budget Report”.

That is the Government’s intention, but the charter continues by saying that the Government,

“retains the right to disagree with the OBR's forecasts”.

[Lord Eatwell]

Will the Minister clarify this for me? Is he saying that while the Government intend to accept the OBR’s forecast, they may actually reject it? Is that what he is saying here?

--- Later in debate ---

[Lord Eatwell]

Just to clarify, the point that I was trying to make was that the charter states that the OBR plays an important role in policy-making by providing forecasts and other estimates. In other words, those forecasts and estimates are part of the toolkit for making policy, but the OBR does not itself make policy decisions. That is what I meant to say.

[Lord Sassoon]

I am grateful that we have got that clearer. I should move on briefly to the question of whether it would be appropriate to align the forecasts of the OBR with those of the Monetary Policy Committee. Again, I am very much with the analysis of the noble Lord, Lord Turnbull, on this. It is worth mentioning what Robert Chote, the OBR chair, said on this subject. He made it clear during the hearings of the Treasury Select Committee that, as he sees it, the OBR and the Bank of England are independent bodies and each needs to make its own judgments for its own reasons. I completely agree, but he went on to say that he recognised that it would be valuable for the Bank of England and the OBR to have regular exchanges of views about areas of common interest. I expect that the OBR will exchange views with a range of organisations and individuals and, when introducing its document today, the OBR made it clear that in this first document it had met a range of organisations and individuals. In that context, of course, I would expect the OBR regularly to talk to the Bank of England, and each would be very interested in the other’s approach to these matters. However, it is critical that at the end of the day the OBR acts independently of the Monetary Policy Committee, of the Treasury and of all these other fine forecasting bodies.

These are important matters, and I hope that I have clarified the intention of the legislation in these areas. However, I believe, as do the majority of noble Lords who have spoken, that the OBR’s forecasts must ultimately be independent. Therefore, I ask my noble friend to withdraw his amendment.

Finance (No. 2) Bill

Debate between Lord Eatwell and Lord Sassoon

Monday 22nd November 2010 Lords Chamber

[Lord Sassoon]

For the time being, I refer the noble Lord to the first edition of the Oxford English Dictionary, volume 1, part 2, under “B”, which was printed some time in 1888. That is quite a good starting point. We shall return to that in answer to his Question in a few days’ time.

[Lord Eatwell]

We are having some fun, but this really is a very serious matter indeed. The Minister has used this expression time and time again as one of the key factors that justifies the economic stance taken by Her Majesty's Government. Is he saying that he cannot stand at the Dispatch Box right now and tell us what it means?

[Lord Sassoon]

My Lords, as I said, a Question has been tabled and I shall answer it then. I have already referred the House to the two meanings in the Oxford English Dictionary first edition of 1888, which I think explains it very well. We had a reference to PIMCO earlier in the debate from my noble friend Lord Ryder of Wensum. I refer the noble Lord to the comments of the founder of PIMCO a few months before the election when he talked about the toxic pile. He may or may not have been front-running a position, but when the largest bondholder in the world talks about UK debt in toxic terms, the point is well understood. The critical question that arises from all of this—

--- Later in debate ---

[Lord Eatwell]

On child benefit, I did not argue that it was not inappropriate for the burdens of deficit reduction to be widely shared; I argued that the Government’s policy will not work. It has not been thought through. It is incompatible with the structure of child benefit as it is paid today. Perhaps the Minister would like to take my example of a top-rate-paying taxpayer who, on the death of her husband, moves in with a daughter who is receiving child benefit. Is that grandmother going to be fined by the Chancellor or will her daughter lose her child benefit? I do not think that is very family friendly. Do you?

[Lord Sassoon]

I have explained the general and difficult principles within which we have had to operate. My right honourable friend has had to make difficult decisions on child benefit. The case study put forward by the noble Lord, Lord Eatwell, reminds me of the sort of things that were presented in a tax exam when I was struggling through my accountancy qualification. Of course there are complicated cases but, as I have explained, in the implementation of child benefit it has been important to avoid a complex system or one that required a fundamental rewrite of the existing PAYE and self-assessment systems.

I come back to the fundamental point underlying all this which is that growth prospects remain on track and, in answer to a related question from the noble Lord, Lord Desai, borrowing remains on track. I will give an update in parallel with the autumn forecast next week, in the normal course. However, in terms of the funding to date, the programme is ahead of the pro-rata schedule, so the Debt Management Office has raised £127.4 billion to date, which accounts for 77.2 per cent of the remit that it was given at the time of the Budget. That is slightly ahead of the pro-rata run rate. The DMO has carried out that mandate on very fine terms. If the remit needs to be changed in any way, that will come next week, in the normal course.

I thought there might be some points to address to my noble friend Lord Ryder of Wensum, but his advice was addressed to the Monetary Policy Committee. I listened with interest to what he had to say and note that in some of the things he has said in this area in the past he has proved prescient. I am sure that the Monetary Policy Committee is listening to his thoughts.

I turn to tax policy making. I was grateful to the noble Lord, Lord Eatwell, for welcoming the steps we have taken and to my noble friend Lord Newby. In answer to their questions, the Government welcome the contribution of the Economic Affairs Committee. If the new timetable gives the Select Committee time to look at the draft legislation, as it should, we would welcome any comments that it has on it. That will add the greater scrutiny and transparency that we wish to see. I take my noble friend’s point about fuller Explanatory Notes and will look to see whether there is any more that we can do on that.

On the question about whether it was right in around 2003 or 2004 to move responsibility for tax policy making wholly into the Treasury, from what I observe of how that operated then and now, there have been considerable gains from the physical collocation of a large part of HMRC’s headquarters and the Treasury. I certainly observe that HM Treasury’s tax policy making is absolutely informed, as it must be, by what HMRC brings to the table, even if the formal responsibility is not what it was originally.

On one final point, my noble friend Lord Trenchard talked about the number of European-related clauses. To get the record straight, in another place, the litany of such clauses was slightly erroneous because, on my list, Clause 14 on film tax relief has no European link, whereas Clause 4 on seafarers’ earnings has a European link. The list is a series of technical adjustments, whether it is the important question of the length of cigarettes to reflect an EU directive aiming at counteravoidance or technical adjustments related to VAT directives. These things are relatively technical and it is important to make sure that we align the details of our regime with what is changing in Europe.

I am afraid that I may have disappointed my noble friend Lord Newby, who commended me charitably for my brief opening, but I will not detain noble Lords any longer other than to say that we have had an interesting debate today. We have not talked in any detail about the clauses of the Bill, which I take to mean that the Bill—in the way that it removes some of the discrepancies that plague our tax system—is welcomed on all sides of the House. I commend this Bill to the House.

Health: Private Medical Insurance

Debate between Lord Eatwell and Lord Sassoon

Monday 15th November 2010 Lords Chamber

[Lord Sassoon]

I thank my noble friend for raising that point. Of course I am happy to convey to the FSA the points that have been raised this afternoon.

[Lord Eatwell]

My Lords, the noble Lord has taken a remarkably complacent view in his answers about the position of policyholders. Surely the FSA’s responsibility to ensure that financial institutions treat their customers fairly requires that this matter be investigated and that better information be given to policyholders about the limitations of their cover.

[Lord Sassoon]

My Lords, I think I have responded to the noble Lord’s points in the answers that I have given to a number of questions.

Budget Responsibility and National Audit Bill [HL]

Debate between Lord Eatwell and Lord Sassoon

Monday 8th November 2010 Lords Chamber

[Lord Sassoon]

My Lords, I have made it completely clear that there is no question of my making any criticism of officials. I am making criticisms of the previous structure in which Ministers were able—whether from wishful thinking or, as I say, from more sinister motives—to decide on the forecasts. That is why we need an independent body. I am conscious of the game that is played here—that I have to sit down after about 18 or 20 minutes. I will do my best to answer as many of the points as I can but if noble Lords want to interject, of course I will listen to them but I may not get through as much as I otherwise would and will have to write to noble Lords afterwards.

In answer to the question from my noble friend Lord Higgins and others about the desirability of having a draft of the charter for the House to see—absolutely, that is what I intend should happen. We are working to that end. Related to that in terms of what happens next, the OBR will publish forecasts before the end of the month which will bring its forecasts up to date to reflect the decisions announced in the comprehensive spending review.

As we think that this is the challenge that has been set, the Bill absolutely takes away the responsibility for determining the forecast from Ministers and gives it to independent experts. It needs to be a new independent body, rather than a case of just asking one of the fine existing forecasting houses. At the critical times of the year when the forecasts need to be produced, particularly at the time of the Budget, it is essential—as has been explained in different ways by the noble Lords, Lord Turnbull and Lord Burns—to have a close relationship. We need to have an independent body of the sort that we have designed, rather than just taking consensus forecasts after the event. I think that the House would be rightly outraged if we did not at the time of the Budget immediately have forecasts available.

Ministers will retain the responsibility for making policy and for the OBR to shine a light on the state of the public finances resulting from those policy decisions. I can therefore confirm that it is the intention that the OBR should remain outside politics and should not, for example, be asked to cost alternative policies, wherever they come from, including from opposition parties.

We have heard a wide range of questions about the design of the OBR. On independence, without dwelling on it, I do not think that the comparisons in any way with the NAO are right. These bodies have very different objectives and come from very different starting points. In answer to other points, the fact that they are put in the Bill together is a result of the fact that the NAO provisions are sufficiently important that we should bring them forward at the earliest possible date. As noble Lords will understand, legislative time is hard to come by. So, in terms of the trade-off between two Bills and finding a slot to bring forward important provisions of the NAO, we have taken the decision to put the two sets of provisions in the same Bill. However, that does not mean to imply in any way that we believe that there is a comparison to be made between the provisions for the two very different bodies.

I take to heart the words of the noble Lord, Lord Burns, who said that complete separation would not be appropriate and pointed to the quality of the people as being particularly critical to the way in which independence works. The OBR’s independence will be judged on the quality of its analysis and on the ongoing scrutiny by the public and by Parliament. Our provisions have been informed by the NAO report published on 22 June which examined the forecast prepared by the interim Office for Budget Responsibility for the emergency Budget. It set out a number of indicators of independence which have informed the design of the Bill. These are set out in Clause 5(1), which talks about “complete discretion”; Clause 6(2), which talks about independence and the method of analysis; Clause 9, which talks about the “right of access” and assistance to “Government information”; and paragraph 8 of Schedule 1, which talks about staff being appointed by the OBR. The latter point was made a number of times. There are other matters not strictly in the Bill—“physical location”, for example, which has already been addressed by the OBR, and questions of funding, which can be raised directly with the Treasury Select Committee.

It was asked whether it could be argued that the OBR is independent when it is clearly working for the Government in its remit. I would describe the words “complete discretion” as the critical key here, and refer to the Bill preventing the Treasury from specifying the methods of the OBR’s analysis.

There was then a question about why the word “independence” did not appear in the Bill. Not only does the term “complete discretion” encapsulate what is intended by independence in this case but the same wording is used to empower the Comptroller and Auditor-General and the NAO, and nobody questions their independence.

[Lord Eatwell]

My Lords, before the noble Lord leaves the issue of independence, I wonder whether he can help me. Clause 5(2) states very clearly:

“The Office must perform that duty objectively, transparently and impartially”.

Everyone must applaud that wording. But then Clause 6(1) states clearly:

“The Charter for Budget Responsibility may include guidance to the Office about how it should perform its duty under section 4, including (in particular) guidance about … what subsections (2) and (3) of section 5 entail”.

So, is there to be guidance about what impartiality entails?

[Lord Sassoon]

My Lords, rather than discuss the primacy of the wording in Clause 5(2) in the abstract, it will be easier to return to these matters when we see the draft wording. I can, however, assure the noble Lord that the words in Clause 5(2), to which he rightly draws attention, are the keystone here.

--- Later in debate ---

[Lord Sassoon]

My Lords, I am conscious of the time and of the conventions of this House. I have explained at some length—but clearly not with sufficient clarity for the noble Lord, Lord Myners—that guidance will be given. That does not override in any way or compromise the three critical tests set out in Clause 5. I do not for one minute think that it should be necessary to get into questions of interpretation in the courts or anywhere else.

[Lord Eatwell]

At the end of my speech I made a formal offer of co-operation on behalf of the Official Opposition. I would be grateful if the Minister would respond to that offer.

[Lord Sassoon]

My Lords, in my next sentence I was about to say that I will of course respond to the challenge from the noble Lord, Lord Eatwell, which was repeated by the noble Lord, Lord Tunnicliffe. I am sorry to disappoint the noble Lord, Lord Eatwell, if he thought that I was building up to a grand conclusion where I would propose to withdraw the clauses in Part 1.

We have had an interesting debate. I will reflect on a number of points and I have endeavoured to answer as many as possible. Nevertheless, the tone of the debate from the majority of speakers this afternoon confirms to me that we are absolutely on the right track, generally, and that we should press ahead. There has already been considerable scrutiny of and discussion about the OBR over the past few months. I look forward to the continued scrutiny by noble Lords as the Bill wends its way through subsequent stages, and I ask the House to give the Bill a Second Reading.

Bill read a second time and committed to a Grand Committee.

Banking: Bonuses

Debate between Lord Eatwell and Lord Sassoon

Monday 1st November 2010 Lords Chamber

[Lord Sassoon]

My Lords, I have said that we have already taken action and are continuing to consider other possible actions in this area.

[Lord Eatwell]

My Lords, I was intrigued by the Minister’s identification of remuneration with risk taking. Are not bonuses usually paid to bankers for taking risks with other people’s money?

[Lord Sassoon]

My Lords, that is precisely why we want to make sure that there is a better alignment between the way that remuneration is paid and the mitigation of risk that should be there. It is precisely to get a better alignment with the risks that are incurred that we are supporting the measures that are being taken globally—limiting the amount of bonus taken up front in cash and deferring a significant proportion of bonuses in line with the proposals of the G20.

Public Expenditure: Value for Money

Debate between Lord Eatwell and Lord Sassoon

Tuesday 26th October 2010 Lords Chamber

[Lord Sassoon]

My Lords, shortly after coming into office we cancelled £6 billion of in-year expenditure. That is the sort of rigorous approach that we will take, not only to inherited expenditure but to the management of all new contracts.

[Lord Eatwell]

My Lords, is the Minister’s commitment to value for money and fairness not truly incredible when the Government are cheerfully imposing larger penalties on families with children than they are on the banks?

[Lord Sassoon]

My Lords, we have introduced a fairness premium worth over £7.2 billion to support the poorest children in this spending review, and I think that that speaks for itself.

Housing: Shared Ownership

Debate between Lord Eatwell and Lord Sassoon

Monday 25th October 2010 Lords Chamber

[Lord Sassoon]

My Lords, I am wary of straying too far from financial regulation into housing policy areas but I will ask my ministerial colleagues in the Department for Communities and Local Government to write to my noble friend on that point.

[Lord Eatwell]

My Lords, is the Minister aware that in the source book referred to by the noble Baroness, Lady Gardner, there is a clear premise that building societies—mutuals—are significantly less risky than banks because, as the source book itself says, of their,

“lower exposure to wholesale funding and complex financial instruments”.?

If they are less risky, is it not time to reduce the punitive levy on building societies for the Financial Services Compensation Scheme—a levy which is reducing the funds available for lending to house buyers?

[Lord Sassoon]

One of the beauties of the current system and our future system of financial regulation is that decisions about the relative riskiness of different classes of financial assets are emphatically not for government but for the financial regulator, which in due course will be the Bank of England. So while I can ask the Financial Services Authority to write to the noble Lord, I am certainly not going to second-guess its judgments.

Taxation: Avoidance

Debate between Lord Eatwell and Lord Sassoon

Wednesday 20th October 2010 Lords Chamber

[Lord Eatwell]

My Lords, is the Minister aware that the figure that he has given for reducing tax avoidance and evasion is roughly the same as that which is being taken out of the welfare budget in the current spending review? Why do the Government not collect the taxes and stop hitting the poor?

[Lord Sassoon]

I am a little at a loss to understand why the noble Lord is questioning why we are putting extra money into HMRC to recover this enormous sum of £7 billion annually by the end of the spending review period when that was not done by the previous Government.

Taxation: Income Tax

Debate between Lord Eatwell and Lord Sassoon

Monday 11th October 2010 Lords Chamber

[Lord Sassoon]

The amount of tax which is now due under this reconciliation exercise is some £2 billion from 1.4 million taxpayers, although, as I said, all amounts under £300 individually, which is for about 900,000 taxpayers, will be written off.

[Lord Eatwell]

My Lords, the House will agree that underlying the interesting question from the noble Lord, Lord Higgins, is the notion that HMRC should be fair. It seems to be very unfair that the rate of interest charged on unpaid balances is six times greater than the rate of interest provided on repayments when the Revenue for some reason or other has made a mistake. Does the noble Lord believe that HMRC should be fair? Given the extensive misuse of that word on the Benches opposite, will he define for us what fairness in taxation means?

[Lord Sassoon]

My Lords, the previous Government brought in the current interest rate regime within the past year, and after extensive consultation, on the basis that late payments are calculated at 2.5 per cent over the bank rate and repayments are 1 per cent less than the bank rate, subject to a minimum of 0.5 per cent. This regime is similar to that of other countries ranging from Australia to the United States. Indeed, of the six or eight countries surveyed, Japan is the only one that does not apply differential rates to payments and repayments. So, in that sense, the system does reflect a due degree of fairness.

Office for Budget Responsibility

Debate between Lord Eatwell and Lord Sassoon

Tuesday 6th July 2010 Lords Chamber

[Lord Sassoon]

On an interim basis, the OBR has been housed within the Treasury to save costs and to give it early and easy access to Treasury models. Part of the advice that Sir Alan Budd gives will be about the location and other governance arrangements for the OBR on a full-time basis.

[Lord Eatwell]

My Lords, if the Treasury was always aware that Sir Alan was going to leave in the summer, why has his replacement not been announced right away? Will the Minister give us the essence of the disagreement that has led to this resignation? Is it not substantially to do with the issue of independence, which my noble friend raised in his Question?

[Lord Sassoon]

I thank the noble Lord for his questions, but I thought that I had addressed the main point already. There has been no disagreement. Nothing has happened. It has always been the case that Sir Alan Budd planned to leave in the summer and that is exactly what he is going to do. My right honourable friend the Chancellor is enormously grateful for the important work that he has done to get the office up and running. As for appointments, it would have been strange to appoint somebody before Sir Alan Budd had even announced his departure. The appointment process for his successor will take full account of the need for continuity.

Wealth

Debate between Lord Eatwell and Lord Sassoon

Monday 5th July 2010 Lords Chamber

[Lord Sassoon]

My Lords, I completely agree with my noble friend. The policy of this Government is to increase wealth across the wealth distribution for everybody.

[Lord Eatwell]

My Lords, does the Minister agree that one of the most important political ideas of the past 50 years is that of a property-owning democracy? Conservative thinkers must get due credit for the development of that idea. Why, then, have the Government abolished child trust funds, the first measure in the history of this country to give every child a stake in the wealth of the nation?

[Lord Sassoon]

My Lords, there are simply some measures that, in the present fiscal position, are unaffordable. The child trust fund, regrettably, falls into that category. However, to ensure that children at greatest risk are protected, we have introduced above-indexation rises in child tax credit. If noble Lords look at the new tables set out in the Budget document on pages 64 to 70, they will see that the effect is progressive across all income bands.

Health: Private Insurance

Debate between Lord Eatwell and Lord Sassoon

Wednesday 30th June 2010 Lords Chamber

[Lord Sassoon]

My Lords, I am grateful to my noble friend Lord Newby. On the basis of the published information from the Financial Ombudsman Service for the latest available year, 2009-10, there were 2,026 complaints relating to health and medical insurance companies, which was an 8 per cent increase on the previous year. About one-third of those cases were found in favour of the complainant, overturning the original decision of the company concerned.

[Lord Eatwell]

My Lords, I believe that the noble Lord, Lord Crisp, has raised a very important issue. It is a very disturbing aspect of private health insurance that the providers of long-term cover often have the ability to vary the premium late in coverage, subject to what they euphemistically call contingencies. Is the noble Lord aware that such variations are supposedly subject to the FSA’s statement on fairness of terms in consumer contracts? I say supposedly because the statement offers only principles of fairness and no clear rules. Will the noble Lord adopt the position of the Prime Minister in his G20 Statement on Monday and encourage the introduction of clear rules in the regulation of this sensitive issue?

Office for Budget Responsibility

Debate between Lord Eatwell and Lord Sassoon

Monday 14th June 2010 Lords Chamber

[Lord Sassoon]

I am grateful to the noble Lord, Lord Barnett. He enables me to confirm the nature of the independence of the OBR. To call into question the independence of Sir Alan Budd and his committee—as he went on to say, that is not the most important thing, so perhaps I should pass over it and move on.

I also rather resent, on behalf of the Treasury officials with whom I work every day, the thought either that they were in some way party to some conspiracy before or that they are not capable of doing work, then or now, of the highest quality. The difference now is that the OBR has set out critical fan charts to show central forecasts and probability distributions around those forecasts. Noble Lords may tut-tut, but this is a practice that has been adopted by the Bank of England in its forecasts for many years.

[Lord Eatwell]

And they were wrong.

[Lord Sassoon]

The forecasts are transparent; people have been able to see how it has formed its views on all its forecasts. As for Treasury Ministers in the past, they have plucked numbers out and it has been non-transparent. Here we have a degree of transparency by which you can hold the Treasury to account, going forward. The noble Lord also asked whether the five-year forecasts will be amended very regularly. Certainly, the OBR will be publishing in conjunction with the Budget again, and, as it said in its document and terms of reference, it will be publishing its forecasts regularly.

Individual Savings Accounts

Debate between Lord Eatwell and Lord Sassoon

Wednesday 9th June 2010 Lords Chamber

[Lord Sassoon]

First, I regret that I cannot say why the previous Government made no progress on their promised consultation. As I have said before, the new Government, who have not been in office for very long, are considering this question and we will set out their approach in due course. In the mean time, I stress that we welcome the views of interested parties. I should also stress that we are looking at a whole range of issues related to SME financing, which I agree is an extraordinarily important matter. The range of issues relates as much to bank lending and keeping the flow of credit going as it does to raising equity.

[Lord Eatwell]

My Lords, I begin by welcoming the noble Lord to the Front Bench and saying how much I am looking forward to our discussions in the coming months. Given that holding AIM shares is a standard device for the avoidance of inheritance tax, do the Government plan to change inheritance tax legislation to ensure that AIM ISAs do not provide a double tax advantage?

[Lord Sassoon]

I am grateful to the noble Lord for his welcoming remarks, and for pointing out the advantages that AIM shares carry. That allows me to make the point, for those who would like to see AIM shares included in ISAs, that the consequential could be that AIM shares, if one follows through his logic, would lose some other benefits, principally that of inheritance tax relief benefit.