Financial Services and Markets Bill

Lord Flight Excerpts

Committee stage
Monday 20th February 2023 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, again, I have a few niche amendments in this group. I have never been entirely comfortable with statutory panels. I understand their origins as wise men—undoubtedly, they were supposed to be men then—and that they formalise and take into the structures the voices of experienced people, but I am concerned that either they become about favoured sons or daughters or there is a potential to capture the people on the panels. Neither am I necessarily convinced that having them fragmented is all that sensible, because if you discuss things that may be relevant to big business in isolation from the public interest and smaller business, the big picture that is then put together is left to the regulator.

Those are the issues in my mind as I propose my amendments. I was not going to unpick the panels, but I suggest that every panel should have to have on it some representation of the public interest. That is probably already there on the Consumer Panel, but it is not on some of the others. Amendments 141 and 142 are to make sure that, even when you are dealing in a more specialised context, somebody is there putting the pieces together with regard to the bigger picture. I am not saying that they are supposed to keep intervening and doing the consumer bit when you are on the big business bit, but this is part of making sure that you are not too compartmentalised.

For a similar reason I have, in Amendment 143, proposed empowering Parliament to nominate one person to panels. This is part of Parliament representing the public interest. I am not saying that a parliamentarian should be on that panel, but it could choose to do that. In its wisdom, the European Parliament once chose to do that to me, and to some extent I wish that it had not, because it was a lot of work. When we started having these positions through appointment from the ECON committee, the Commission initially did not like it, then eventually it decided that it did rather like it because it helped to join up the processes and open up transparency and communication channels.

That is the point of suggesting that there be a parliamentary nominee. Again, it is just to make sure that we do not have sameness all the time, with the nominations coming from the same place. That is one way that it could be addressed. If others have other ideas to address the same problem, I am quite happy that those be incorporated, but those were the points of my Amendments 141 to 143. I think I am in common cause with the noble Lord, Lord Holmes, who does not want the panels to be the plaything, if you like, of the regulator, and with the noble Lord, Lord Lilley, who thinks that they are appointing their own examiners. I am trying to address the same problem. Whoever’s amendments we work with, the message again is that we need some change in this area.

[Lord Flight (Con)]

My Lords, the big change over the last decade has been the explosion in the number of people and the costs of those working in the regulatory context. I would have hoped that this debate and further consideration would look at what really adds very little to this Bill but costs a fortune in terms of people.

Financial Services and Markets Bill

Lord Flight Excerpts

Committee stage
Monday 6th February 2023 Grand Committee

[Lord Davies of Brixton (Lab)]

My Lords, like my noble friend Lord Hunt, I make a point in my amendment about the link between financial fraud—in practice this now broadly means “online scams”—and mental health. I made this point last Wednesday, in dodging between the Committee and the House, when I raised this issue in the context of the Online Safety Bill. The same issue arises under this Bill and should be dealt with.

There is no doubt that people who have problems with their mental health are, for a variety of reasons, more vulnerable to fraud than people generally. According to a recent survey, people with mental health problems are three times more likely to say that they have been the victim of an online scam than people generally. In reverse, scams are a threat to people with normal health that risk their mental health.

I will talk about this in a bit more detail during debate on the next group of amendments, but we must understand that the result of fraud, however perpetrated, is much misery, destroying people’s finances, in many cases their families and, in some cases, tragically, their lives, so the Bill should address the issue and face up to the need to provide adequate protection. Anyone can fall victim to a scam, but people with mental health problems are at particular risk and can suffer more as a result. We must do what we can, therefore, to improve scam protection and ensure that, when people fall victim to scams, they receive adequate support.

I must pay tribute to the great work being done on this area by the Money and Mental Health Policy Institute. It has drawn attention to the fact that although harm can arise in diverse areas—gambling, retail and scams—across them all, including financial services, there are recurring themes. There is the lack of friction in transactions, advertising of investment opportunities, and high-pressure techniques applied which can put people under pressure, particularly in online spaces.

The institute concludes that these concerns have, up to now, gone relatively unchecked and underexamined, with current regulation either lacking or poorly matched to the real environments in which people find themselves. Although the Online Safety Bill has an important role in this area, it needs to work with the regulations in this Bill to address the problems that cause so much misery.

[Lord Flight (Con)]

My Lords, might there be a case for the regulators to play a more active role in addressing fraud?

[Lord Thomas of Cwmgiedd (CB)]

My Lords, I want to make just four points on fraud, which damages the markets so greatly and damages individuals. The amendments reflect the four points. First, we need a strategy. I do not see how we can go forward any longer without one. I have two comments on strategy. First, the bodies to be consulted should include lawyers and accountants, not because there might be a bent lawyer or bent accountant in the fraud but because often it is their failure to see a flaw in the system that has caused the fraud. Therefore, they need to be part of those consulted. Secondly, five years is a long time for a new strategy. We need some form of accountability for the performance of the strategy in the meantime.

My second point is the object, the principle or the duty—however you put it—of the regulators looking into fraud. This seems critical, and there are two primary reasons for this. First, there is the prevention of fraud. I have too often been told after a fraud has come to knowledge and things are being done about it by those in the market, “Oh, the return was too good to be true. Him? We would not have touched him with a bargepole.” Regulators ought to be able to pick that up, and the duty on them ought to emphasise that responsibility.

Secondly, if fraud occurs—and it is bound to—the expertise of the regulators is needed to guide the way in which prosecutions take place. These days, because virtually everything is documented, you cannot move money. In the old days you could take a suitcase of cash somewhere, but you cannot do that any more. You need someone who can interpret what is usually the defence, “Yes, I did this but I wasn’t dishonest”. The skill and expertise of those in the market who can point to and make clear why it was so obviously dishonest are critical.

Thirdly, dealing with fraud is expensive. If you are accused of fraud, you have nothing to lose by spending all you have in defending yourself. If you fail, that was the end anyway, so you might as well have tried to save your money. If you are successful, you generally get most of it back. In a sense, there is an imbalance. Therefore, I warmly support the amendment saying that the Treasury should hand over the cash. There is no conflict of interest there, because the decision on the level of fine is made by the court. That is a good idea.

Fourthly and finally, the idea of criminalisation is essential. It is often nice to be able to pay tribute to the wisdom of His Majesty’s Treasury. One of the most effective tools in its armoury in relation to sanctions has been criminalisation, because that is what frightens people. Therefore, criminalising the failure to act would be a welcome step, and is something that I hope His Majesty’s Treasury, with all its wisdom, will see the force of.

--- Later in debate ---

[Baroness Penn (Con)]

I have heard the point and I acknowledge the principle that this amendment seeks to explore in terms of those incentives, but I point to the NCA’s budget and the regulators’ budgets. We seek to ensure that enforcement agencies have the proper money available to them to take enforcement activity. I also point out that, while the funds currently go into general expenditure, that funding is spent on other public services, so it does not go unspent elsewhere.

[Lord Flight (Con)]

This point seems absolutely central to me. Unless police forces have either a strong negative or a strong positive incentive, they are not going to be bothered, if you like, to prosecute serious fraud crime. I do not know what the Government’s preference is, but it has to be one way or the other.

[Baroness Penn (Con)]

I have listened very carefully to the debate, and I see the point that noble Lords are making. This operates in other areas of government—there is the Proceeds of Crime Act and how that operates—but I slightly counter leaning too heavily into the fact that the police would have no incentive to investigate serious organised crime unless the costs of the investigation and the prosecution are reimbursed to them. Their fundamental role is to investigate and prosecute crime. I understand that there is a complex landscape when it comes to investigating and prosecuting fraud, and that is something that the Government have tried to tackle with the establishment of the economic crime command at the NCA—but it is ongoing work for us. The challenge before me today is that the funding that comes from these fines currently goes to the consolidated fund and is spent elsewhere on public services, so any change of this nature would have implications that go—

--- Later in debate ---

[Baroness Kramer (LD)]

I think the Minister said that the legislation, as it finally went through, gave the FCA the option of either a duty of care or something else. Did that imply that it could be much weaker than a duty of care—and did anybody signing up to it understand that?—or was there a sense that it might be done in a different way but would be equally as strong and effective as a duty of care?

[Lord Flight (Con)]

The other fundamental point is that it is not the law; it is a sort of quasi-law that does not have the same power as law.

[Baroness Penn (Con)]

If I may, I will come on to address the noble Baroness’s point and the questions from the noble Baroness, Lady Tyler, on why the FCA took the approach it did in selecting the consumer duty approach rather than a duty of care. It is the FCA’s view that it provides not a weaker response but a stronger one; I will set that out in more detail.

The consumer duty sets a higher and clearer standard of care that firms owe their customers than now, and includes a new principle requiring firms to act to deliver good outcomes for customers. It is a package of measures comprising an overarching principle, cross-cutting rules and four “outcome rules”. It is also accompanied by extensive guidance, as noble Lords have noted, to provide clarity for firms on what is expected from them.

The FCA developed the consumer duty following extensive consultation with a wide range of stakeholders, including consumer representatives. Noble Lords may be aware that, in its consumer duty consultations, the FCA specifically sought views on whether the new principle should instead require firms to act in customers’ best interests. On balance, the FCA concluded that requiring firms to act to deliver “good outcomes” was the most appropriate approach. The FCA explained that “good outcomes” best reflects the outcomes-focused nature of the consumer duty and underlines that firms should not focus simply on processes but on the impact of their actions on consumers. The FCA also noted concerns raised by some stakeholders that “best interests” language could be confused with a fiduciary duty or a policy that required the best outcome to be achieved for each consumer, potentially resulting in unintended consequences concerning the availability of products and services to some consumers.

I hope noble Lords are therefore assured that the FCA carefully considered the wording of its consumer duty in the manner proposed by Amendment 76 and concluded that a different approach would deliver better outcomes. As the UK’s independent conduct regulator for financial services, it is responsible for developing its rules independently of the Government.

The noble Baroness, Lady Kramer, asked about the potential for the consumer duty to operate in the context of past problems. She highlighted the mis-selling of PPI and interest rate hedging products. As I said, the consumer duty sets clearer and higher standards for firms to follow, and that means clearer and higher standards for the FCA to supervise and enforce, which will enable the FCA to act more quickly and assertively where it identifies poor practice. However, within this system, even the best regulators doing everything right will not be able to, and cannot be expected to, ensure a zero-failure regime.

In respect of the two specific cases of PPI and interest rate hedging products, the Government have always been clear that mis-selling financial products is unacceptable. That is why we supported unequivocally the FCA’s work on PPI to ensure that consumers who were mis-sold PPI receive appropriate redress, and the review process into the mis-selling of interest rate hedging products, which saw over £2.2 billion of redress being paid out to almost 14,000 businesses.

Financial Inclusion in England

Lord Flight Excerpts

Wednesday 30th November 2022 Lords Chamber

[Baroness Penn (Con)]

The noble Lord is right to point to the range of Bills before Parliament that will address this issue. We will not be able to address fraud and scams through financial services regulation alone. For example, many fraudsters access people through online platforms, so we need to look at that approach too. Those Bills will contain measures to tackle this, and the Government are also committed to bringing forward a fraud strategy that will bring together work from regulators, government and law enforcement to get a grip on this issue.

[Lord Flight (Con)]

My Lords, financial involvement is important because it represents people being willing to invest in British businesses and help them to grow. Unfortunately, the volume of direct citizen investment has fallen rather than increased in recent years. I am afraid that the increase in dividend tax and other investment expenses will also discourage this. Can the Government think about methods of encouraging people to invest in this country?

[Baroness Penn (Con)]

We absolutely want citizens to invest more and we have products, for example to help those on lower incomes form saving habits. We also want institutional investors to invest more in this country, which is why we are taking action on things such as Solvency II.

Autumn Statement 2022

Lord Flight Excerpts

Tuesday 29th November 2022 Lords Chamber

[Lord Flight (Con)]

My Lords, I declare my interests as chairman of the EIS and SEIS associations. Since these bodies were set up, they have channelled some £30 billion to SMEs.

I congratulate the Chancellor and his team on their sensible Budget. To some extent it is a repeat of the Osborne Budget, but rather better organised. It cannot address adequately the problem of excessive property prices, now accompanied by materially higher mortgage rates. We will also see unemployment rise and more businesses failing. However, my judgment is that the economy will withstand the worst of the inflationary problems of this era.

The Autumn Budget proposals set out to reduce total outlays by some £55 billion, roughly half to be achieved from cutting public spending and half by increasing taxes. The Chancellor also organised to spend up to an extra £150 billion on energy, if this is necessary to restrain energy price rises. The UK has performed relatively well over the last year in increasing onshore and offshore wind and solar energy supplies. A new nuclear plant is also to be built at Sizewell B. We need secure, clean and affordable energy. The Government are mistaken in not supporting fracking, where the UK is estimated to have 100 years of fracking gas supplies.

The most important immediate objective of the Budget was to stabilise our financial position and sterling. We need our fiscal and monetary policies to work together to give the world confidence in our currency and the Government, and particularly in our ability to repay our debts. Sadly, Liz Truss’s policies frightened the world as to whether we would be able to repay our debts from her tax cuts and higher spending. Confidence was restored just in time with Liz’s resignation. Since then, sterling has strengthened against the dollar and interest rates have reduced. The Government can also give primary attention to reducing inflation.

The Government have made it clear that their priority will be to look after the most vulnerable, who will need some increase in wages and some help with rents. It is a principle of Conservative policy to protect the most vulnerable. The main cause of UK inflation is energy costs—Russia and Putin driving up gas and electricity prices. The IMF estimates that, as a result, approximately a third of the world economy is now in recession.

Next comes tax policy. I hope that the Government are committed to avoiding tax increases that damage economic growth. The Government expect tax as a percentage of GDP to rise by 1% over the coming five years. I hope that a better performance of the UK economy than is forecast will provide the needed funding. It is unfortunate that the Government have reduced the income level at which the 45p tax rate will apply. After the costs of mortgages and children, there is little left over from income levels of £125,000, especially if there are more children involved. It will be interesting to note how much revenue the higher tax on unearned income delivers.

My reaction is to invest in venture capital funds, which deliver tax-free dividends. The biggest source of extra tax revenues will come from the new 45% levy on electricity generators, which is expected to raise £14 billion in tax next year.

The Government’s policy is for public spending to rise by 1% less than the economy. Schools are set to receive an increase in spending of £2.5 billion per annum. The big issue is to sort out the NHS, which is scheduled to receive £2.7 billion extra per annum for the next two years for social care funding.

For the UK Government, the key ingredients for economic growth are energy, infrastructure and innovation. This will entail changing our use of EU regulations where required. Also of importance are increasing digital technology and life sciences, an increase in green investment and financial services. Solvency II should be capable of unlocking £600 billion of industrial growth funds over the next decades.

The key remaining requirement is to get those who have withdrawn from the workforce following the pandemic back to work. The increase in pension credits should deliver around £1,470 per couple. What is needed in tax to make it attractive to return to work? The increase in working-age adults is 630,000; there is a case for continuing to pay at least part of universal credit to those in part-time work. Its removal if a recipient takes on part-time employment has proved a major disincentive to taking up part-time employment.

Budget: Saving for Retirement

Lord Flight Excerpts

Thursday 16th March 2017 Lords Chamber

[Baroness Neville-Rolfe]

I certainly do not take such a gloomy view of the products. The NS&I investment bond, which we started on, gives a rate of 2.2% for three years. That is significantly higher than the market average of 1.38%. Savers know that they can trust products offered by NS&I. Obviously, rates of return on savings products have come down and that has to be reflected, but the £7 billion of additional government financing will be at a cost of £295 million compared to borrowing through gilts.

[Lord Flight (Con)]

My Lords, while ISAs have their place, does the Minister not agree that pension schemes are the more attractive—and, tax-wise, the more generous—vehicles for people to save for their retirement? Does she also agree that many people have perhaps been mistaken in cashing in their pensions and incurring tax liabilities, when it would have been better for them to leave them to accrue for the ultimate stage of retirement?

[Baroness Neville-Rolfe]

I agree with my noble friend. The Government are at pains to make sure that our communications draw attention to the value of pensions on automatic enrolment, because of course the employer makes a contribution as well as the employee, and this has been a very important reform. However, ISAs, which now have an allowance of £20,000 from next month, and the lifetime ISA, which is particularly helpful to younger people and the self-employed, also have a place. We want to encourage people to save and I am glad that we are doing so.

Budget Statement

Lord Flight Excerpts

Tuesday 14th March 2017 Lords Chamber

[Lord Flight (Con)]

My Lords, I congratulate the right reverend Prelate the Bishop of Chester on his speech, much of which I agree with.

I think that the Chancellor is a good and decent man, and when I read his Budget it all sounded pretty reasonable on a first read, if a little dull, but in no time there had been a political explosion. We all know what the issue was—class 4 NI—but, stepping back, what then struck me was that, over the past two years, there has been a whole chain of tax attacks on SMEs and the self-employed, and that was one of the reasons why the media got so excited this time around.

I imagine that there is within the Treasury—whether it is Matthew Taylor’s review or a body in HMRC—a body that, because there is such pressure to develop tax revenues, is looking for areas that it thinks could take some more taxation. The problem is that this is very much in conflict with the whole Thatcherite philosophy of the self-employed getting fewer benefits, no sick pay, no holiday pay and no minimum wage but equally paying much less tax—the whole idea of a more self-reliant people. You cannot have that and then start taxing them on the same basis as employed people.

As I said, it has not just been the class 4 NICs this year; we have got digital tax returns coming up, with the most extraordinary requirement for the self-employed that they do their accounts four times a year and submit different tax returns four times a year. There will be extra costs for them and for the Revenue. That will hit 5 million people in total. To my mind, I cannot see the point of it, and there will be a lot of ill feeling about it.

We have heard a lot about business rates. Although there has been help this year and last year, in London, where property values have gone up so much, local stores are typically finding an increase in rates of some £20,000 per annum. There is also the issue of dividends. A lot of self-employed people with companies could take some of their remuneration from the company in the form of a tax-free dividend rather than taxable pay, so I can see the sharp-eyed Treasury saying, “We’d better tighten up on that one”. Last year, there was the big tax attack on small buy-to-let landlords, which reduced the interest charge they could levy against their revenue, and stamp duty was put up by 3%. To my mind, that was unwise. In fact, the country should be grateful for small buy-to-let landlords for making available premises for people to rent, which have otherwise been in short supply.

We have also had something that has not attracted much attention, which is the abolition of the lower VAT system for small businesses. They could pay a reduced rate of VAT provided they did not claim expenses. This actually benefited the Revenue. That is now being forced out, if you like, rather than phased out.

As regards sourcing equity finance for SMEs, as a result of EU requirements we have had a great tightening up of the availability of EIS-qualifying finance—here I declare my interest as chairman of the EIS Association. In essence, the pre-clearance mechanism is now taking a lot longer because it has all become hugely more complicated and some areas no longer qualify. For small amounts of money, it is pretty impractical.

The big issue is that the Revenue sees the danger of many more people transferring to a self-employed basis. It is already generally cheaper for companies to take on self-employed people for particular tasks rather than to hire full-time employees, and that will increase with the increase in the minimum wage. The Revenue does not much like the self-employed—it views them as tax avoiders—and it certainly does not understand the political situation, where they are very much seen as the bedrock of Thatcherite Conservative support.

As we all know, the reason behind this is that the public finances have not been put in order. While this year and next year are much the same as forecast, I cannot understand why, as the noble Lord, Lord Shipley, pointed out, between now and 2020 the forecast deficit rises from the £38 billion that was forecast last year to £141 billion this year—an increase of more than £100 billion. What on earth is happening? What is causing this? Did the previous Chancellor somehow get his sums wrong when he was forecasting £38 billion? I would be extremely grateful if the Minister could explain the reason for that extraordinary £100 billion increase.

I believe that we have to come to terms with the fact that the scope to increase taxes is sorely limited, in terms of both whether it will deliver more revenue and whether we have the political ability to do it. Indeed, Chancellor Merkel, of all people, has warned that the trajectory for welfare spending is not sustainable and we need to change the way that we finance quite a lot of our benefits.

Queen’s Speech

Lord Flight Excerpts

Wednesday 25th May 2016 Lords Chamber

[Lord Flight (Con)]

My Lords, I add my congratulations to the right reverend Prelate on her warm and human maiden speech.

I welcome in the Queen’s Speech the digital technology and pensions Bills and I hope that they will underpin what is needed in the two key areas that I will say a little about. First, the Government need to focus more on the need for and advantages of supporting UK digital ID for financial services, especially for areas such as pensions and in order to save people a huge amount of wasted effort in having to repeat AML requirements. Digital ID would benefit consumers by making it easier to manage their savings and investments; it would improve competitiveness by removing physical barriers to switching; and it has the potential to provide the whole foundation for the digitalisation of UK financial services.

The initial focus of ID digitalisation is to establish a secure store of basic client information to satisfy “know your client” and AMLC requirements. This is being led by the savings industry body TISA, and I declare an interest as a long-standing adviser to it. I ask the Government to take a greater interest and get a little more involved. There has been liaison with BIS, the Treasury and the Cabinet Office so far.

This leads to me to the second territory: savings and pensions. First, I repeat my hobby-horse point: what has been particularly wrong with the UK economy for 30 years, if not longer, is too low a rate of savings, which has led to investment and productivity being low. We now have a savings rate hovering around 3%, whereas I suggest that for an economy such as ours that it should average closer to 10%. We are, like it or not, in Macmillan’s famous phrase, “selling the family silver”. Half the buildings in the City of London are now foreign owned; most of the central West End is foreign owned. We will soon run out of things to sell. This is because overconsumption, along with inadequate saving, has produced a cumulative current account deficit of some £700 billion over the last 15 years, which has effectively been financed by selling assets.

Further to a Question earlier today, I am sure the Minister will agree that the size of the external current account deficit will depend on the government spending surplus or deficit and the savings rate. In a practical way, inadequate savings now mean that people are inadequately financed for their old age. I regard it as a disgrace that this country, which 25 or 30 years ago was the leader in pension provision in the whole of the western world—much better than anywhere else—has somehow, under Governments of both parties, become one of the worst. That has been a function of a whole lot of mistakes, but it is definitely correct to identify overcomplication as one—Andrew Haldane’s comments were extremely appropriate. The very complexity of pension funds is one reason why ISAs have prospered reasonably well.

I support the auto-enrolment measures and NEST, although the contributions are insufficient to provide an adequate income in old age. I would like to see much greater simplification, for example by restricting the tax credit to 20% for everybody but also by lifting the constraints on how much you can contribute and what your pension pot can be. At present, many of the better-off are simply ceasing to save because they have reached the tax limits on their pots. The other point I would make is that there is a growing unfairness between those who are fortunate enough to be in receipt of public sector pensions, which are still final salary in the main, and those in the private sector who have seen their pensions reduced to wholly inadequate levels.

Finally, there is the wider economy. I congratulate the Chancellor on having got this economy going, even though all those brilliant IMF economists who are now saying we must not leave the EU said then that he was completely messing up his economic policies. In fact, he got it right. But it is apparent that his plans to phase out the deficit are being hit fairly badly by a lower rate of economic growth than was projected. Rather sadly, we are still borrowing £72 billion this year; there has to be a more aggressive focus on putting the public finances on to a better basis.

I regard it as pretty horrific that this year, welfare will be about £270 billion—including some of the payments that go under other channels—health £145 billion and education £102 billion. That is 70% of total public spending, forgetting defence and other key areas. We are now spending £39 billion a year on debt interest. I do not believe that the sort of unlimited growth that has been occurring over the last 15 years in this area is going to be practical in the future. Some form of constraint will be unavoidable, to my mind, partly because the scope to raise taxes without damaging the economy is also pretty limited. So we need to get rid of constraints on areas that cannot be looked at for savings, and we will have to take a tougher attitude to reducing the budget deficit.

Economy: Balance of Payments and Industrial Productivity

Lord Flight Excerpts

Thursday 10th December 2015 Lords Chamber

[Lord O’Neill of Gatley]

My Lords, in answering some of these questions, I have to resist the temptation to be a bit of an economics data nerd. First, as I think I pointed out in this House recently, our trade performance has stabilised in recent years. The biggest contribution to the deterioration in our current account balance comes from the so-called invisibles balance, particularly lower returns on our investments overseas.

[Lord Flight (Con)]

My Lords, it is appropriate that the noble Lord, Lord Harrison, should raise the issue of the current account deficit. Many people seem to have forgotten about it. Over the past 15 years it has amounted to some £700 billion and it has been financed by selling the family silver. Even some 50% of buildings in the City of London are now foreign-owned. Would the Minister agree that the issue is essentially macroeconomic? What is needed is a higher savings rate and a higher investment rate. Both have been too low for a long time.

[Lord O’Neill of Gatley]

My Lords, my noble friend is technically correct that the balance of payments current account reflects the difference between our national savings and our national investment performance—one is the reverse side of the other. The best way to improve it is by reducing our domestic savings rate but remaining as attractive as we are to overseas investments.

Finance Bill

Lord Flight Excerpts

Tuesday 10th November 2015 Lords Chamber

[Lord Flight (Con)]

My Lords, it seems a long time since the second Budget was announced. This second Finance Bill has had rather limited media coverage. I agree wholeheartedly with the comments of my noble friend Lord Cavendish about the need for infrastructure investment and about the success, going back into our history, of financing models that have involved both public and private sector. Crossrail has been, in our time, a brilliant example of that, and is on time and on cost.

Credit must go to the Chancellor for having got things dramatically right and having got this economy recovering better than any other in the world. All those clever left-wing economists told him he had got it wrong, and the IMF rapped his knuckles and so forth. He in essence followed a sensible, balanced path. He was substantially Keynesian and did not overdo trying to cut the deficit. However, he also took measures that helped the real economy to expand.

As I have said before, there has been a wonderful entrepreneurial explosion in the past five years. We have 5 million new companies, we are leading the world in a lot of tech areas, and it has been an age of greater entrepreneurial activity than I can remember ever in my lifetime. As we all know, it is producing more than 13 million jobs in the economy.

I also think that, although things are not all resolved, the balance of putting the public finances right is about right over the next five years. I was rereading a book on Disraeli the other day, noting that, as late as 1868, debt service on the borrowings that had financed the Peninsular Wars at the beginning of the 19th century were still the biggest item of public expenditure. If you overborrow, you end up burdening future generations with too much debt to service.

If people stand back and look at the whole area of welfare spending, they will see that something is very clearly wrong. Alistair Darling has been the most honest politician to point out what is wrong. Total welfare spending now is running at close to £300 billion a year because you have the basic of £231 billion, to which you have to add personal social spending of £30 billion. Housing claims benefit is now approximately another £30 billion. I am not even clear whether working tax credits, now up from their original £2 billion to £30 billion per annum, are still treated as a net-off from income tax revenues, which was the accounting fix that Gordon Brown put in, or whether they are within the total.

At least a third of public expenditure now goes on different forms of welfare spending. The point Alistair Darling had the honesty to make was that, with income tax credits, what was intended to boost incomes was simply serving to drive down and hold down wages. We have a system similar to that which we had in the early 19th century, when what was called outdoor relief was paid. It led to overemployment, poor productivity and underinvestment. When it ended, there was a great burst in wages, the new industries came up and people moved to the new areas.

Now we have a ridiculous system in which someone is better off working 16 hours a week on low pay, with the top-up tax credits, than working 40 hours a week on average pay. The whole formula in these areas needs addressing radically. I would go even further: the German model of dealing with welfare, which is assessed individually, ends up being much more sensible than our arrangements, which often help those who would be much better off if they worked a full, normal working week, and often do not help those who do need more help.

I repeat: it is well overdue for politicians of all parties to realise that income tax credits have been an economic disaster for this country, with exactly the same unsatisfactory effects as the system had 200 years ago. Of course, you must have a relatively high minimum wage if you are to have income tax credits, or employers tend to exploit it by not paying people sufficiently. Now, it is all well and good; £7.20 will go up to £9 by 2020, but that is particularly damaging in parts of the country where the cost of living is much lower, especially the housing costs. Those parts are landed with too high a minimum wage, so losing the economic advantage that they would otherwise have in getting businesses to move towards them. Then you say that perhaps you should have different minimum wages for different parts of the country, but imagine the complexity of trying to administer that. We have yet to see how measures will be worked out. I am certain that the Conservative Government wish to be fair to people, but it is a mistake for people not to perceive that income tax credits have caused a lot of the problems of our times.

I have some criticisms of this Bill. To me, there is too much stealth tax in it, and I feel that Gordon Brown would have been rather proud of it. Indeed, it rather smacks of quite a lot of the type of thing that he used to get up to. Hidden within it, the middle classes, whom I still stand up for, are having their tax bills increased by something approaching £20 billion, but in a way that the Government hope they will not realise, such as in the change on dividend income. No one really knows how dividends are taxed anyway—but that tax will add about £8 billion or £9 billion a year to the bills of ordinary people’s pension funds. I support corporation tax being reduced to 18% by 2020; I accept that to some extent it is a headline tax, but at least that attracts businesses to being based here. But the extra 8% tax on banks makes little sense, to my mind. Banks need another £355 billion of capital over the next few years to be safe against financial risk in future. They have been subject to fines of something like $300 billion, and now there are higher taxes. All that means, again, is that pension fund shareholders will end up having to put up more money; they are the people the Government are really taxing by the 8% profits tax.

The increase in insurance premiums from 6% to 9.5% will hit about 20 million home owners and car owners on their various insurance policies, with a cost in the order of another £2 billion per annum. I wonder why the Chancellor did not stick to the pledge that he gave—which was so popular and led Gordon Brown to put off having an election—when he said that he would simply raise the IHT threshold to £1 million. But no, we have some extremely complicated arrangement, whereby it works for some but, if your estate is worth above a certain level, you do not qualify. Would it have been easier for him to have stuck to his promise, which was extremely popular?

On pensions, I think the lifetime limit is foolish. This country needs a higher level of saving and investment, which is a function of that; we need to stop having to sell the family silver the whole time because our current account deficit is so large, yet we are discouraging the better-off from saving. It is fair that people should all have the same 20% tax credit, but we are getting a pension law loaded to discourage those earning higher incomes from saving more in their pensions.

Then there is something that is not the fault of the Government but, I am afraid, that of the EU Trade Commissioner. I have spoken of the EIS system and the VCT arrangements before—and I declare my interests as chair of the EIS Association. EIS has raised more than £12 billion of high-risk equity investment for small companies, and in 2010 the Government agreed arrangements with Europe that led to big increases in the amount of money that it raised. For reasons I cannot understand, complicated rules have now been forced on the UK by the EU Competition Commissioner that will limit the amount of money available, especially to SMEs that have cut their teeth, been going two or three years, and then need some more money to expand. I cannot see how the EU concept of state aid relates in any way to what the Government of this country choose to do in offering incentives to people to invest in local SMEs. Why does the EU have the right to stick its finger into this and—perhaps not make a mess of it, because there is still good scope—but—damage what has worked extremely well?

Even on buy to let there is a misunderstanding. Before pensions, people used to buy one or two houses, if they could, and let them out. That was their source of income in old age. Those were the people who owned and financed a lot of the Victorian terraces all over south Wales, as well as London. The generation now in their 40s has often gone down the route of buying houses to let rather than using pension schemes—for rather good reasons, because as an asset, houses have performed better. The only tax incentive for that has been the ability to off-set interest. I am not sure how wise these measures will be. Without buy to let, lots of people would have had nowhere to live in the past few years. I certainly do not agree with retrospective taxation. We can change the tax laws for new purchases, but it is unwise to change tax arrangements retrospectively. I can just see what will happen: a time will come when inflation and interest rates rise, and the housing market goes down. Then there will be problems.

That touches on something I mentioned earlier. While the economy is expanding, it is crucial to get our savings rate up so that our investment rate can rise and our external finances come into balance. If anything, what is in the Finance Bill is not at all conducive to saving; in fact it is negative towards saving.

I congratulate the noble Lord, Lord O’Neill, on the discreet way in which he described this measure, but I think it is disgraceful to give HMRC the power to raid people’s bank accounts for sums of more than £1,000. Why should not the Government, like any citizen, have to rely on the power of the courts to go after money owing to them? To me, that is a totalitarian measure of the kind that we have fought against for almost 1,000 years. It shows the Government in a very poor light if they put that sort of thing on the statute book.

I am critical of a lot of the Finance Bill, speaking as a capitalist and as representing, in a sense, the middle classes of this country. But I am full of praise for the Chancellor for the way he has so successfully managed the economy.

Economy

Lord Flight Excerpts

Thursday 10th September 2015 Lords Chamber

[Lord Flight (Con)]

My Lords, I regret that I do not have time to make my intended comments on the wider economy as I wish to focus on the importance of entrepreneurship and the problems now presented by the new EU state aid rules for the provision of risk equity finance for SMEs. It is vital to maintain and encourage the growth of entrepreneurship and new businesses, much of which is based on new technology. That is what provides for a dynamic economy. I declare my interest as chairman of the Enterprise Investment Scheme Association.

By way of background, Britain has been easily the best country in which to start new businesses. It is much easier here than in many other EU countries, and there has been great success, with 1.5 million new companies over the last two and a half years. Universities are collaborating with business to exploit inventions and developments. But SMEs need risk capital as well as bank finance, and the EIS scheme here has been a great success. It has raised £13 billion since it started and the amounts raised over the last three years have virtually trebled. This has been largely the result of the reforms which the Government brought in in 2011, widening the parameters for companies to qualify for both EIS and VCT finance. The crucial thing here was that it meant that small businesses which were starting to expand and cut their teeth could thus get the necessary equity finance.

I was therefore horrified by the changes to the state aid rules that the EU Commission is forcing on the UK. These changes will reduce and, in some cases, cut off the flow of risk equity funding. So far the Government are seeking to make the best of things and argue that the changes have gone beyond the state aid rules. However, I do not think that the Commission is listening to the widespread complaints and concerns of the venture capital industry. The changes discriminate against UK private sector incentives for providing risk equity under state aid. Many continental European companies are substantially financed by state aid—for example, biotech in Germany. However, that happens in the form of grants, which have no restrictions on companies acquiring other companies or being acquired. Such restrictions are now being imposed on the UK. The brief of the noble Lord, Lord Hill, to increase capital market funding for SMEs will be made much more difficult. Indeed, I had urged him to promote the EIS scheme across the EU, as France has done extremely successfully in the last two years.

A major objection is that there is no apparent economic or commercial logic to the new rules. There are several problems. The rules will disqualify companies that have existed for more than seven years, cutting out for no reason the ability to redevelop and drive forward such businesses with necessary equity funding. We have had a limit of £10 million per annum for combined EIS and VCT investment, and it has worked satisfactorily. The limit is now to be reduced to £12 million over the life of the company, and on a retrospective basis, which will cut off funding particularly for SMEs that are expanding. It will also not always be easy to check all the historic state aid funding that has been received, which brings with it the danger of disqualification. The new rules relating to subsidiaries and the seven-year rule are unclear. When a qualifying company has a subsidiary that is over seven years old but is not old itself, and when the EIS funding it has raised is not for its subsidiary, will the seven-year rule disqualify it because its subsidiary is over seven years old?

The new rules maintain the requirement for major monitoring and record-keeping, especially in relation to any subsidiary. The requirements to monitor staff composition in knowledge-based companies is unrealistic, if not impossible. The bias against investment in intangibles is wrong in today’s world, where much capital investment is in the form of intangible knowledge-based assets rather than old-fashioned physical capital. The rules banning the use of EIS and VCT finance for buying companies or acquiring a business by way of purchasing their plant, machinery and good will have no economic logic and stop the valuable economic benefits of such businesses being rescued, keeping their skills and keeping the jobs. The rules are not clear, as they permit purchases of assets such as plant and machinery as required. Where is the line drawn between buying a trade and buying its plant and machinery?

The Commission has also made it clear that it will monitor the UK closely and if it believes that UK law for VCT and EIS investment is outside its interpretation of the new state aid rules, it will override UK law and demand recovery of the tax incentives. Should that happen, it will be a major turn-off. The Commission is overstepping its reach here and is unfairly discriminating against the UK. The new rules will slow the flow of this funding to equity businesses, and there is considerable resentment in the industry.