European Banking Union: EUC Report
Lord Flight Excerpts(11 years, 3 months ago)
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Lord Flight
My Lords, perhaps I may take the House back to the European banking union proposals and start with my own tribute to the noble Lord, Lord Harrison, as an enormously courteous and conscientious chairman of our committee. At least for me, I allowed myself to go to Brussels, feeling slightly worried as to whether I might be contaminated by doing so. Two things struck me during the visit. The first was that President Van Rompuy is a much more impressive and determined person than I had perceived previously and, to my mind, he will have had considerable influence in persuading Germany at a crucial time that it was not a good idea to allow, encourage or force Greece to leave the euro. Secondly, I cannot resist teasing the noble Lord, Lord Kerr. While we were wandering around the buildings he said to me, “The trouble is that none of the young people in the Foreign Office want to come here any longer because they know we will not be members in five years’ time”. I thought that that was quite an interesting little judgment.
I want to make two further general points. The first is that while the single market sounds wonderful, what we really want, please, is single market free trade. I know from my own commercial career that a great deal of the single market serves the interests of the large players in their sectors and is highly uncompetitive. Wide access is a fair point, but to my mind the single market needs a really good dose of free trade if it is to achieve what it is supposed to achieve. Secondly, I want to make a point about the City of London and its business. It is becoming increasingly global and is not just an adjunct of Europe. The impression I am being given by various European operations in the City is that you would have to have an EU that was very protectionist and was even threatening to impose capital controls for it to be uncomfortable for people in London. If you had an EU which was doing that, I think that people would not want to put money there anyway. I am not complacent about the position of the City of London and I well remember many people warning that if the UK did not join the euro the City of London would collapse. But, of course, nothing like that actually happened.
On the European banking union, the first question to ask is: how important are these proposals, what are they about and what has given rise to them? I have to say that they do not address the real underlying problem, which is that of different levels of competitiveness, or the point made by my noble friend Lord Trimble, the risk of locking less competitive areas into permanent depression, which has happened in the deep south of America as well as in the south of Italy. The solution to that is not necessarily internal devaluation, when that is what I call gold standard austerity. In the big debate about what to do about the competitiveness issue, common banking supervision is somewhat peripheral.
To the extent that banking supervision is important and relevant, I thought it was supposed to be getting banks better regulated, with a view to the ECB managing the extent to which the ESM fund was used to bail out banks where necessary. Now it seems we are being told by Germany that that is not wanted and it has to be sovereign states that bail out their banks when they are in trouble and maybe the sovereign states will be helped by the ESM fund. That is entirely contrary to the principle of trying to separate the problem of the banks and the state rather than compounding the two problems. It is pretty important in terms of the underlying objective as to how this is going to be resolved.
I have two more points about supervision. First, I am not entirely clear how much of the banking system it is going to cover. It looks as if it will be only the large banks. There is a slight danger of moral hazard there. The German Landesbanken, the savings banks that control about €2,500 billion, seem not to be part of it, and lots of other smaller banks will be left to their local central banks. I make the point that I think others have made: Credit Anstalt, which started some rather nasty banking developments in the past, was a small bank. It is almost as important that small banks are regulated well as for large banks to be regulated well.
When it comes to deposit insurance, as Martin Wolf said when we interviewed him, Germany does not want to have to pay a penny more than it absolutely has to. I am rather doubtful that deposit insurance will develop if there is a free-riding risk. You may have similar principles as to how it operates but I think it extremely unlikely that you are going to get a system where each country in the eurozone is there to cover the risks of the others.
What about the UK and banking union? As we were considering the first point, I was struck by how considerably it reminded me of the Financial Services Bill, which we were debating here in Committee, and there was a quite extraordinary similarity between the proposals for the PRA as a sensible supervisor rather than regulator of the banking system and the proposals for what the ECB would be responsible for. Indeed, to whatever extent there was open discussion, it is absolutely clear to me that the two go hand in hand—nothing wrong with that at all—and that the Bank of England will be sensibly collaborating with the ECB, as it has for a long time, in trying to get the best of banking supervision both in London and on a pan-EU basis.
The point has been made, but it is important, about the extent to which the Government did a good deal in terms of the voting powers for the EBA. It is the EBA that lays down the rules so it is pretty important. I think it is probably reasonable. We have to have only four countries left that are not participating, which is fairly unlikely, and three have already indicated that they are unlikely to participate.
Others have made the point—in particular, the noble Lord, Lord Hamilton—about the lack of ECB accountability, which is crucial in a world of gold standard austerity. Rather cynically I make the point that when people in southern Europe find that the funds from Germany are not flowing in transfer payments in the way that is expected as the quid pro quo, that is going to become extremely difficult politically. The ECB will have to make a real effort to make itself accountable. Then you have the big issue as to whether it is going to be accountable to national parliaments or to the European Parliament. I think that citizens still look much more to their national parliaments.
I have not got a grain of criticism of the proposals, which seem pretty sensible in the main. I see them, in the future, rowing quite sensibly and practically—not negatively—in tandem with what we hope will be much better banking supervision by the Bank of England than we have had from the FSA. However, the real underlying purpose does not look as if it is being addressed. It should provide a mechanism for managing bailout funds from the ESM for the banking system but it does not look as if that is going to be on the agenda.
Lord Liddle
My Lords, I begin with two personal points. First, I declare an interest in that the think tank that I chair, Policy Network, has in the past received support from the City of London Corporation. Secondly, it is a pleasure to welcome the noble Lord, my brother-in-law, to the Front Bench opposite. Therefore, there will not be an excess of partisanship on this occasion on my part.
As always, it has been an interesting debate, not least because of the final contribution from my noble friend Lord Desai, which I am still trying to absorb. My noble friend Lord Harrison began the debate with an admirable summary of his report. As usual, one wishes that the country was governed by the committees of your Lordships’ House rather than by the prejudices of its Executive, because we would be much better governed. It is an admirable report.
An interesting, rather off-the-wall point was made by the noble Baroness, Lady Falkner. It is something on which I have long reflected: why is discussion of Europe such a male-dominated subject? That is not something that we should discuss at length today, but we have to take it very seriously if the pro-Europeans want any chance of winning a referendum, so thank you to the noble Baroness for raising that issue.
I want to make three points. First, on the state of the euro itself, I believe that adjustment is on the way. Things are a lot better than they were. The question is whether what is occurring is socially and politically sustainable. I do not think that it will be without more fiscal flexibility. Nor do I think that it will be sustainable without considerable debt write-offs, particularly after the German elections in September. There will have to be an element of a transfer union to make the position of the mezzogiorno of the south, which the noble Lord, Lord Trimble, mentioned, sustainable. That will require further steps towards banking union, particularly in the case of Spain, because there is such an obvious link between bank debts and the sovereign debt position.
My second point is on the Britain in Europe debate. Banking union is the fourth major institutional development since the euro crisis started from which the United Kingdom has stood aside. There was the European stability mechanism, the euro-plus pact, the fiscal compact and now the banking union, which was agreed in principle in June 2012, and which the British urged the eurozone to get on with. Indeed, I think George Osborne first recommended it as long ago as January 2011. He was very foresighted about that, but it is something from which we have chosen to stand aside.
If you read what this is about, while in the British debate it is presented as a measure to rescue the single currency, in the continental debate it is about the creation of what is called a financial market union. I think the noble Lord, Lord Kerr, pointed that out. In the British Government’s view, this is all part of a clear narrative in which the eurozone is integrating and we have to establish a new kind of settlement and relationship with the members outside it; that is the British Government's narrative. However, the real question is: to whom does this narrative apply, other than the United Kingdom? How many other euro-outs share this conception of the British narrative? I might ask the Government what their view of that is.
That is a crucial point, first, in informing a view about the sustainability of the safeguards that the Government obtained on the banking union in the December 2012 summit. Secondly, it is fundamental to whether David Cameron’s essential assertion in his speech yesterday—that the core of Europe is the single market—is right. For most members, however, will it actually be the single currency? This point is fundamental because it is a question of whether we are going along with the support of other euro-outs, to try to negotiate a balanced relationship between outs and ins, or whether we are just making a case for special treatment for Britain, which will be far more difficult to negotiate.
The third point I want to make is about the position of the City of London. These are not just intellectual exercises; we are talking about something that is fundamental to our national interests. I have long believed that the UK is overdependent on financial services and I support the whole concept of rebalancing the economy towards manufacturing. My noble friend Lord Mandelson’s comment was right; there has been too much financial engineering and not enough real engineering. I agree with all that. However, the City is a crucial national interest and the financial centre of the single market. I also agree with the noble Lord, Lord Flight, that it is global and very resilient but it has benefited a lot from the single market in Europe—particularly from the opening-up of the financial single market, a lot of which occurred under the previous Labour Government.
Of course, no one worried about this at the time because it was the era of light-touch regulation. No one worried about the financial imbalances that were building up between countries and the lack of cross-border regulation. Well, the banking crisis changed all that and the Government recognised the need for regulation at EU level. It was a good thing that the Conservative Government, including Chancellor Osborne, accepted when they came in what Chancellor Darling had already agreed to: the establishment of European regulatory agencies.
Lord Flight
Could I just make this point to the noble Lord? The investment management industry, in which I spent 40 years of my career, has still failed to penetrate the EU. There are a variety of cultural and other barriers, but a lot of American firms came over thinking that Europe was like America and that all they had to do was have offices. If one looks at how much money the London retail funds business has got from the EU, it is still pitifully small.
Lord Liddle
I agree that things vary from sector to sector but one of the reasons why so many foreign-based banks are in London is because it is the financial centre of the single market.
The point is that the banking crisis has changed the way that we thought about the City. It has made regulation absolutely essential. The euro crisis has made banking union essential in order to break the link between sovereign debt and the fact that nation states have had to underwrite their banks. It raises difficult issues for us in the UK. As long as we see ourselves as being outside the single currency, the centre of the European financial market will be remote from the core of the banking union. There is also the block vote problem: if regulation is concentrated through the ECB, we could be outvoted.
The UK made a disastrous attempt in 2011 to try to tackle this problem of what to do. This was at that year’s December summit, where a paper was circulated late at night without prior consultation with anyone. Full of complex detail, it had at the top the horrible word “unanimity”. Basically it was asking for unanimity on questions of financial services. Not only was this tactically maladroit, it was strategically misguided. If the sincere wish of the British Government is to deepen the single market in the European Union, we cannot go around demanding unanimity on a specific UK interest, because every other member state will demand unanimity on an interest specific to it.
That is why the proposals of, for instance, the Fresh Start group are extremely worrying. They do not demand unanimity but in cases of financial services they do demand use of the Luxembourg compromise and they talk about emergency brakes. If you believe in the single market, you cannot put forward such things in the European Union. I should like to hear from the Government that they have no intention of pressing for the Luxembourg compromise or emergency brakes in this area. This would be so damaging to Britain’s interests in pressing forward to the single market.
However, the Government achieved a notable success in December with the acceptance of the double majority principle. I agree with my noble friend Lord Davies of Stamford that, for protecting our position, this is a lot better than nothing. Yet I also agree with the noble Lord, Lord Kerr, who asks how robust this is and whether it will last.
First, this double majority applies only to the banking agency, which is about the implementing regulations, and not to ECOFIN, which draws up the legislation. So we do not have a special position there. Secondly, the noble Lord, Lord Hamilton, is right that the ECB will be the big player in this and the EBA a weakly staffed and resourced organisation. How do the Government intend to deal with that? Thirdly, there is the question of time limitation. How many euro-outs, which are actually banking union-ins, will there be? If there are a significant number of euro-outs who will be banking union-ins, how long do we think that this special double majority arrangement will last?
There are alternatives. I am not saying that this is what the Labour Party would propose but, as my noble friend Lord Davies said, we have not had from the Government a proper cost-benefit analysis of what the alternatives might be. Did they look at how, as a euro-out, we might be a member of the banking union and whether it could be made to work? Could we have built on the model of the European Systemic Risk Board, of which the president of the European Central Bank is chair and the Governor of the Bank of England is vice-chair? Could we have used that as an umbrella? The Government have a duty to look at all the possible alternatives here because this is an issue of such vital importance to the future of the City. The fear that a lot of us have is that for reasons of ideology and prejudice, the UK has opted for very much a second-best, possibly a third-best, solution that would be gravely damaging to our interests in the long run. I will be grateful to the Minister if he can deal with some of these points.
Public Service Pensions Bill
Lord Flight Excerpts(11 years, 3 months ago)
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Lord Eatwell
My Lords, I will speak also to Amendments 118ZA, 118B, 118C and 119A in this group, which in my name and that of my noble and learned friend Lord Davidson. Clause 20(1)(b) is about consultation and reporting in the context of the responsible authority proposing,
“to make scheme regulations containing retrospective provision which appears to the responsible authority to have significant adverse effects in relation to members of the scheme”.
We are particularly concerned that “significant” is not defined and could be open to interpretation. We do not want the responsible authorities to, let us say, be let off the hook when it comes to consulting on changes that might have an adverse effect on members, especially given that the provision relates to that continuous bugbear in this Bill, retrospective changes. In particular, the protections that are present in Clause 20 do not apply to adverse retrospective changes to any of the non-protected elements of public service schemes—they only kick in if the adverse effect is deemed significant. Amendment 116A would ensure that the protections in Clause 20 apply to any proposal to make an adverse retrospective change.
There are only three protected elements in Clause 20(5): the extent to which the scheme is a career average defined benefit scheme—the main purpose of the Bill—members’ contribution rates and benefit accrual rates. However, this means some very important elements of a pension scheme are not protected, most notably the definition of pensionable earnings, early retirement rights and ill-health benefits. If a responsible authority decides to make adverse retrospective changes to something as important as ill-health retirement benefits, or indeed to the definition of pensionable earnings, which will of course knock on to the final pension provision, it is unacceptable for such adverse retrospective changes to be excluded from the protections in Clause 20.
When this issue was addressed in another place the Minister complained that the effect of the amendment would be to make any,
“adverse change to member benefits subject to the additional protections in clause 20, regardless of how minor that change might be”.
He then said that,
“we believe that almost all retrospective changes will either be minor or technical in nature, or beneficial to members”.—[Official Report, Commons, Public Service Pensions Bill Committee, 20/11/12; col.407.]
That is a welcome belief but it is not knowledge: it is merely a belief. Having members’ protections over such things as ill health and pensionable earnings hanging on a belief is entirely unsatisfactory. Given that the Minister has already made concessions or, to put it better, positive statements about the way in which he will bring forward amendments to the insidious retrospective measures in the Bill, I ask him whether the measures on retrospection will also apply to this matter.
Amendment 118ZA in my name adds to the definition of the “protected period”, as it is called, to accommodate the different closure date of the local government pension scheme. Clause 16 closes the local government pension scheme on 1 April 2014, but all other schemes are closed on 5 April 2015, one year later. However, Clause 20 defines the protected period as one of 25 years beginning on 1 April 2015. This means that there is a window of a year in which the protections under Clause 20 will not apply to the local government pension scheme. This amendment would correct what seems to be a drafting error by ensuring that there is no such peculiar window in which the protected elements of the local government pension scheme are not, in fact, protected, as the Government clearly seem to intend, by Clause 20. By aligning the protected period for the local government pension scheme with the other schemes in the Bill, they will all come to an end and all be dealt with and covered at the same time.
The Minister in the other place was sympathetic to this argument. I am therefore somewhat surprised that the Minister here is not reflecting that sympathy by tabling an appropriate amendment to this oversight in the non-alignment of the two schemes.
Amendment 118B again refers to protection. As we have said, Clause 20 lists various protected elements of the scheme. This amendment would overcome some of the deficiencies that we have already indentified by adding the definition of pensionable earnings, ill-health benefits and retirement rights to the protected list. This overcomes the problem of their being subject to the significant adverse consequences of retrospection. This would be a simpler advantage to dealing with some of the issues to which I have referred.
The Minister in another place argued that his rejection of an amendment like this rested on wishing to maintain flexibility in the arrangements. I do not think that that is a very satisfactory argument. Flexibility is often an attractive characteristic of legislation, but not when it is achieved by undermining the pension rights of members of a pension scheme. Let us remember, these are some of the less well paid members of our community who serve us through a variety of public services. Achieving flexibility by reducing their rights does not seem to me to be a very respectable activity.
Retrospection again rears its ugly head as regards Amendment 118C. The amendment seeks to leave out Clause 20(6), which provides that all the “protected elements” under Clause 20 will not be so protected if a change is required by or as a consequence of a change in the employer cost cap. When we last discussed cost caps, we saw that the definition of the cost cap was entirely in the hands of the Treasury. Therefore, it would be quite possible to place the cost cap at such a position as would lead to a consequential loss of protection under Clause 20.
Once again, the Minister has made a lot of sympathetic noises about the perhaps unfortunate consequences that the current definition and specification of changes in the cost cap bring to this Bill. I hope that his earlier commitment to doing something about the cost cap will carry through to Clause 20 and the various protections that it provides.
Finally, given that we are continuing the same theme into Clause 21, Amendment 119A again refers to the incorporation of “significant” with respect to “adverse effects”. The point is that “significant adverse effects” are designed in the Bill to trigger the use of an affirmative resolution procedure for any changes to scheme regulations. In particular, Clause 21 provides:
“Scheme regulations are subject to the affirmative procedure”,
only,
“if … they amend primary legislation, or … contain”—
and here we go again—
“retrospective provision”,
which would,
“have significant adverse effects in relation to members of the scheme”.
Given the way that retrospection runs continuously through this Bill, creating major uncertainty among members of these schemes, the very least we can expect is that any adverse effects should be subject to an affirmative procedure.
Returning to Amendment 116A about the use of “significant” in defining “adverse effects”, I beg to move.
Lord Flight
My Lords, I rise to speak to Amendment 117A, which—if I may put it thus—heads somewhat in the other direction from the amendment in the name of the noble Lord, Lord Eatwell. As I understand it, Clause 20 says that for 25 years you will not be able to make any changes other than as a result of consultation and agreement among the various parties. The clause refers to the changes containing a provision which,
“changed the protected elements of the scheme”—
defined as where,
“the scheme is a career average revalued earnings scheme”,
in relation to contribution rates and to “benefit accrual rates”, or where the “responsible authority” proposes to make scheme regulations containing retrospective provision which appears to the “responsible authority” to have “significant adverse effects” in relation to members of that scheme. As I said, the protected period is defined as 25 years. My understanding is that although this clause may not cover every detail, it is in effect saying that other than by agreement, no changes can be made which come under the two defined areas for 25 years.
My amendment to reduce that period to 12 years was not entirely random: it was basically part of a previous amendment suggesting a post-2006 review by the OBR of fiduciary valuations. However, the fundamental point is that whatever Government are in power, they will be obliged to make major amendments. We started off with a cash-flow deficit of £15.4 billion by 2017. However, the ONS has advised that the longevity assumption is six years shorter than it ought to be, so that adds another £7.2 billion; and now that we have the government single pension proposals, the public sector pension schemes will not get the contracted-out NI contributions, which worsens the cash flow by about another £5 billion. So, we are going to have a cash-flow deficit per annum of approaching £30 billion.
If anyone thinks that that is sustainable in the present environment of deficits which are well above maintainable levels, they are not seeing reality. I repeat: whoever is in power in the next five years will be obliged to review the whole aspect of public sector pensions if the cash-flow deficits turn out to be at the sort of levels that now look likely. Limiting the protected period to 12 years is hopeful—not being able to change any of the key elements for 25 years is just unrealistic.
Public Service Pensions Bill
Lord Flight Excerpts(11 years, 3 months ago)
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Lord Flight
I thank the noble Lord for giving way. Perhaps I might suggest that the real cause of the trouble is the IFRS accounting standards that require companies to disclose pension liabilities discounted at government gilt yields. That, in turn, has made companies pay contributions to cover the resulting alleged deficits. As the noble Lord points out, that has led companies to close their final salary schemes and to the false rate of interest resulting from QE. However, the real problem has been the uncritical acceptance by Governments of both persuasions of what I believe to be profoundly wrong IFRS accounting standards.
Lord Whitty
I thank the noble Lord for that intervention. I had not expected to agree with him this afternoon, particularly on subsequent amendments, but I agree with him on that issue. It is important to recognise that the acceptance of those accountancy standards is causing the problem. That is why the noble Lord, Lord MacGregor, in the speech to which I referred, suggested that the Bank of England, government actuaries and the accounting profession sat down and looked at those assumptions. Slightly more tangentially, the Treasury Select Committee in another place has also touched on this point.
I am suggesting that the Government take the initiative whereby, once the Bill is passed by this House in whatever form, they set up a review looking at whether the present conventions and the way in which these public service pensions are assessed are correct—although there is a wider application—and whether we are getting a seriously misleading impression that has a detrimental effect. As the noble Lord said, there has been a devastating effect on large numbers of private sector providers.
The amendment would have no effect on the rest of the Bill but would give the Government a lever to look at the issue again and provide for expert assessment, which, given that the newly formed schemes are not coming in until 2014, could come into place before the first revaluation of those schemes. I hope that the Government will take this matter seriously and have a look at it. I certainly hope that the House and anyone involved in looking at public and private pension schemes will recognise that this is a serious problem. I beg to move.
Lord Flight
Lord Flight
My Lords, my five amendments to Clause 11 and one to Clause 20 are about fleshing out how the cost-control mechanism will work. I should like to make the point up front that I well understand the sense of the Government endeavouring to achieve broad agreements with the public sector trade unions in a territory which is thus long term. I pay tribute to the honest broker work done by the noble Lord, Lord Hutton, in examining the territory in such detail.
There is a third party in addition to public sector employees and the Government, which is self-evidently the taxpayer. With pay-as-you-go pensions, the theoretical actuarial deficit or surplus is essentially irrelevant—no doubt, the wrong rate of interest is used anyway in discounting the liabilities—as is, in a way, the percentage of GDP as a cost. As long as we have a pay-as-you-go system, what matters is the cash-flow deficit which other taxpayers have to cover. As I pointed out last week, it was quite surprising to see the OBR forecasting a cash deficit of £15.4 billion by 2016-17. Subsequent to that calculation, the OBR, in its report of 12 December, pointed out that expected longevity is six years longer than the assumptions made when the figures I have just quoted were produced. That implies at least an additional £7 billion of cash-flow shortage. As things stand, from 2016-17 onwards there will be a cash deficit of some £22 billion or £23 billion per annum to be financed by other taxpayers. That is not satisfactory and it certainly follows that there needs to be a cost cap that functions and can deal with all possible options if costs get further out of kilter.
As it stands, the Bill does not cover costs effectively. Most of the key points will be in subsequent regulations. Clause 11 provides a legal framework for the system of cost controls but with virtually no details. It appears to give the Treasury greater future flexibility and control if, for example, there is a change in the inflation index. It is unclear what will happen if no agreement is reached in the areas that are set out in Clause 11 to achieve agreement.
The details of the cost-cap mechanism are yet to be agreed. The Treasury has published a more detailed document, which establishes an employer cost cap in public service pension schemes. In a way it is that document that we should be discussing as it has more detail in it. The Treasury has also published an actuarial valuation of public service pension schemes. The actuarial valuation is of less fundamental importance. However, it is that which drives the cost-cap mechanism, so it is important in that context.
The Bill specifies that all schemes must set a cap expressed as a fixed percentage of pensionable pay but it does not define what the percentage might be. It is difficult for the legislation to be costed at present and it is somewhat inadequate to be reviewing the Bill without knowing the percentage caps that will be recommended. There are no details as to what will happen if there is no agreement to any required cost adjustments and there is no specific regard to the cash- flow deficit that is being achieved. The HM Treasury paper establishes an employer cost cap in principle. It sets out the mismatch between the contribution rate which employees pay and the rate controlled by the cap, but that, too, has not been addressed. The Treasury paper provides that the cap mechanism deals only with cost changes relating directly to active members and not to deferred or pensioner members or to cost increases arising from other forms of charge.
In a sense, my amendments are not of huge significance but they endeavour to put a few more clothes on the arrangements. Amendment 67A would provide the principle that, if no agreement was reached once a cap was exceeded, the guidelines provided by the Treasury would need to be applied. Amendment 67B would provide for the cap to include increases in pension payments if cost cuts were required. As with the private sector in many circumstances, it would introduce an element of fairness whereby pensioners would share some of the pain if the funding had reached the stage where the deficit was so great that it had to be cut back.
Amendment 69A would require an affirmative Commons procedure if reductions in pensions in payment were proposed. Given the lack of detailed prescription, Amendment 70A would provide for how the cost cap should operate. It would require the Office for Budget Responsibility to publish periodic appraisals of employer cost-cap arrangements, quadrennially for unfunded pay-as-you-go schemes and triennially for funded local government schemes. It would also require the publication of the schemes’ valuation reports. The key is requiring the reporting of the annual cash-flow shortfall for the next five years, with comparisons between the Independent Public Service Pensions Commission’s projections for benefit payments as a percentage of GDP and the actual anticipated percentage of GDP. Obviously, the point here is that if GDP growth is a lot less than expected or hoped, which is proving to be the case, that will alter that figure. The GDP figure is important as projections are based on better GDP growth reducing the overall cost of public sector pensions as a percentage of GDP.
Amendment 71A would remove any government responsibility—that is, taxpayer responsibility—for financial support for any local government pension scheme. I hope that this is not necessary but there could be a potential financial liability for trustees—the Minister has a trustee role—if a local government scheme were in trouble.
The Bill does not refer to the ongoing constitution of local government pension schemes or specific regulation thereof. The Local Government Pension Scheme’s national standards boards feature in the consultation but have not been picked up in the Bill.
Finally, Amendment 118A adds “pensions in payment” as a protected element in relation to a scheme for which proposals for retrospective change may be made by the responsible authority. I have said that I think that is a fair point if such extreme measures are needed.
The bottom line is straightforward. If the cash-flow deficit becomes an unacceptable burden on other taxpayers, there are only four ways—or a mixture of four ways—in which it can be controlled. One is obviously through an increase in employee contributions, but the sort of increase required is, I think, too large for this to be practical as a sole solution. A second is reducing the accrual of pension rights, on which Clause 11 focuses. The next is reducing pensions in payment, to which two of my amendments relate, and the fourth is increasing the pension age. Although that is addressed elsewhere in the Bill, it is not specifically addressed as one of the ways of controlling costs. The Treasury paper on the employer cost cap does not make any specific reference to reducing pensions and it excludes any impact of cost increases from other sources.
I hope that the Minister will respond that my amendments are not necessary and that empowering the Treasury to do anything covers virtually everything. However, I am quite surprised that the deal that has been done comes before both Houses with the sort of cash-flow deficit that it has at a time when it seems obvious that public spending will in due course need to be cut significantly more than it has been or the public finances will be in a complete shambles. Adding £23 billion per annum to public expenditure through the cash subsidy of public sector pensions seems to be a pretty tall order. Although I understand the position and interests of members of public sector pension schemes, I repeat that I am surprised that we have not arrived at a proposal which is, in essence, cash neutral.
Lord Whitty
My Lords, I am afraid that I cannot really support the noble Lord, Lord Flight, in these measures. I point out to him that they are internally inconsistent and, indeed, contradictory. On the one hand, Amendment 71A effectively removes all responsibility from the Government in relation to any potential, unlikely though it may be, default on the Local Government Pension Scheme.
Lord Flight
That amendment is intended to remove any financial liability, not to remove any obligation to get it dealt with.
Lord Whitty
Just so, my Lords, but the legitimacy of the Government being able to lay down the detailed criteria which his other amendments and indeed many of the Government’s stipulations in the Bill provide in relation to the local government scheme relies on the fact that everybody assumes that the local government scheme has the Government as its underwriter of last resort and that therefore that underwriter has the right to intervene in what is otherwise the equivalent of a private scheme between private institutions; namely, local government and private trade unions. They are not central government creatures. They have certain statutory responsibilities but they are separate entities. Therefore, the legitimacy of the Treasury in any sense making directions, stipulations and interventions, as the Bill provides and as the noble Lord’s other amendments would consolidate or take further, depends, so far as concerns the local government scheme, on that implicit underwriting. It is hoped that it would never be called upon. Nevertheless, it is there in the background. The situation in relation to the other schemes is different, but Amendment 71A relates specifically to the local government scheme and I think that it is contradictory to everything else that the noble Lord was advocating and much of what the Minister is advocating.
Lord Newby
We look forward to that intellectual exercise. I think that I had just about dealt with Amendment 71A. Amendment 118A, to my mind, is grouped with Amendments 67B and 69A. They all relate to the same point about being able to constrain payments. All the considerations that apply to Amendment 67B and 69A apply to Amendment 118A as well.
Lord Flight
My Lords, the Minister has done a pretty effective job in removing the practicality of my amendment. I will just make the point about pensions in payment. I accept the argument that a contract is a contract, but for new people joining the public sector, a term of their employment could be that their pension right includes the possibility that, if their pension arrangements were in a mess, their pension could be reduced. In the case of an existing contract, I grant that it cannot be removed.
To the extent that it is possible, there ought to be broad similarity between what happens in the private sector and what happens in the public sector. Obviously, in the private sector, if a final salary scheme gets into a mess and the employer cannot finance the deficit, even though it goes to the Pension Protection Fund, people will not necessarily continue to get their full pensions with inflation increases and so forth. I think it is worth looking at seeking to design a scheme that is reasonably fair on both sides. I beg leave to withdraw the amendment.
Public Service Pensions Bill
Lord Flight Excerpts(11 years, 4 months ago)
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Baroness Noakes
Perhaps the noble Lord can wait. I will deal with part of the issue of accrued rights in a few moments. I said that the Bill should fight against this short-term cost as well as the longer-term cost because of the large and growing cash impact—which is a real impact that we can measure—set against the rather more esoteric longer-term modelled reduction expressed as a percentage of GDP. Given the assumptions embedded in there, those longer-term projections are not much more than conjecture.
Lord Flight
I thank my noble friend for giving way. The issue of funding the growing cash deficit is not necessarily about altering rights, but also about contributions for as long as there is a pay-as-you-go system.
Baroness Noakes
My noble friend is right. Nobody would pretend that the solutions are easy, but there are solutions other than altering accrued rights. The important aspect of needing to deal with the short-term cash costs brings us to the transitional provisions. I believe that the Government’s transitional provisions are nearly incomprehensible, certainly to those who have had to make the hard decisions about changing pension arrangements in the private sector. First, the Government adopted a classic short-term/long-term political fudge by giving protection to all those within 10 years of retirement. This is designed to buy off most of those who might work out how much it would cost them. Most private sector changes to pension arrangements come with transitional protections, but I have never come across a transitional protection extending to 10 years, as the Government have devised theirs.
Secondly the Government have adopted the definition of the noble Lord, Lord Hutton, of accrued rights and protected the final salary element of pensions for anyone who has accrued rights prior to the implementation of the changes. This is out of line with private sector practice where schemes are increasingly closing to further accrual, with indexation of accrued benefits rather than salary-based post-award dynamism. This makes a significant difference to the ultimate costs. All this adds up to a very disappointing Bill. At the very least, I hope that the Government will remain committed to resisting calls to dilute this Bill further.
I conclude by saying that I firmly believe that the total pay package for public sector workers should be comparable in the round with those available in the majority of the economy—namely, the private sector. This is fair. However, it is not fair for taxpayers to have to support the preservation of benefits in the public sector beyond those available to employees more generally, unless—and this is a big proviso—the value of those benefits is fully reflected in other elements of pay, generally in basic pay. I fully support the recommendation of the noble Lord, Lord Hutton, which stated that public service employers should,
“take greater account of public service pensions when constructing remuneration packages”.
I had hoped that this Bill would enshrine that requirement and its absence is yet another disappointment.
Lord Monks
My Lords, I declare an interest as a trustee director of NOW:Pensions, an offshoot of the giant Danish Pensions Institute ATP, which now seeks to make a success of auto-enrolment in this country.
The growth of occupational pensions was one of the outstanding, if rather unsung, features of 20th-century Britain. As the noble Baroness, Lady Noakes, said, there has been a relationship between the public and private sectors, in this case, with the public sector, along with some enlightened private companies, leading the way in pensions provision. Pensions spread after the Second World War, particularly in the 1960s, to white-collar workers in the private sector on a fairly general basis and then to more and more blue-collar workers in that same sector. Some missed out, including many women and part-time workers. It was not a universal progress. Some companies did not introduce this provision but many did. However, overall, there was substantial progress. Indeed, by the 1990s, the surpluses of pension funds were used to fund generous redundancy packages in both the public and private sectors and many employers took pensions holidays. However, all that seems a long time ago. As others have said, today, defined benefit schemes in the private sector are in full-scale retreat, are closed to new starters or are being wound up altogether.
This issue was looked at by the noble Lord, Lord Turner, and the noble Baroness, Lady Drake. We miss the noble Baroness who is not present as she is unwell. We all send her our best wishes for a quick recovery. Their report showed the paucity of provision in the private sector for many people. This matter is being addressed by the auto-enrolment programme to a degree: that is, the compulsory provision of pensions by all employers in due course with the auto-enrolment of employees in the scheme. We simply need this programme to work, and to work well, certainly much better than the stakeholder pension scheme which was the last attempt at dealing with the problem.
Why did we get into this mess? Gordon Brown was mentioned in dispatches by the noble Baroness, Lady Noakes, but there was a range of issues that are now fairly clear. Actuarial revaluations were done rather suddenly; longevity rates—a very welcome development —increased; new accountancy rules highlighted pension liabilities in company accounts and the Maxwell scandal triggered some tightening of the rules. Legal and tax changes certainly played their part. Apart from those introduced by the Labour Government, the noble Lord, Lord Lawson, made some changes which encouraged the sale of personal pensions—or should I say the mis-selling of personal pensions—on a pretty large scale. The noble Lord, Lord Lamont, also made some changes which encouraged pensions holidays by employers.
A further factor was the practice of top managers establishing their own top hat schemes, which, not surprisingly, seemed to lessen their commitment to maintaining the scheme of their employees.
Lord Flight
I thank the noble Lord for giving way. I would like to add two other factors. First, stock market performance has been weak for more than a decade—stock markets are generally lower than they were 10 years ago. Secondly, pensions became overburdened with obligations in the private sector, the costs mounting all the time. Financially, those have been two of the most important ingredients.
Lord Monks
I acknowledge that they were important, but it is just a pity that so many employers did not make provision for that when they took their pensions holidays. They did not put away for a rainy day—it certainly came, and it is still with us.
This brings me back to the relationship between the public and private schemes. There have been many like the noble Baroness, Lady Noakes, who have been suggesting that because the pensions provision in the private sector, although not collapsed, has seriously receded, we should see some equivalent steps taken in the public sector. I am very pleased to see that the Government’s view was significantly modified during a series of talks with the public sector unions, which were facilitated by the TUC general secretary, Brendan Barber, to whom the noble Lord, Lord Sharkey, has paid due tribute. Incidentally, Brendan retires at the end of the month, and I know the House will wish him well and record our appreciation for the job that he has done in many areas, not just in this one. I think those talks have been successful, particularly in the continuing commitment to defined benefit schemes across the public sector.
Then the talks move down to sectoral level, where the picture varies. Some agreements have been made, some talks are continuing, and we have some disputes in certain sectors. In the view of some of the public sector unions, the Bill uses legislation to make changes that were not acceptable in the negotiations. The reaction in the fire service, parts of the Civil Service and parts of the teaching profession bear this out at the present time. The inevitable reality for these groups of workers is that pensions are becoming more expensive and they could be unaffordable at the rates of contribution that are being charged for many staff. Retirement ages are increasing and the scope of the benefits is being cut. I hope that during Committee there will be an opportunity to look at the way these changes are going to affect particular groups of workers for whom it will be different according to, for example, the arduous nature of their job, as my noble friend Lord Davies mentioned at the start.
This framework has been sorted out nationally, and that is reflected in the Bill. However, the Bill has some problems which I hope that we can address. There is some unnecessary detail in some areas including revaluation rates where it cuts across some of the packages agreed at sectoral level. There is an omission in some cases of a full commitment to the Fair Deal policy for workers contracted out of public services. Where is the recommendation of the noble Lord, Lord Hutton, for a review of the link between the state pension age and the normal pension age in public sector schemes? I think that the noble Lord, Lord Newby, expressed some assurances that had been made in the other place, which I hope will be put into effect when we get into the detail in this House.
The Local Government Pension Scheme is in many ways is a distinctive scheme, and I will want to pursue issues about its governance in Clauses 4 to 6. Again, some assurances have been given, and we will be testing in due course exactly what they will mean. One other technical area that could be important is scheme closure, which has the potential to trigger major changes in the local government scheme’s investment strategy. I hope that we can close down legal ambiguities in this area.
Some public sector workers will be paying more for their pensions and working longer before they are eligible to take them. For some individuals, that will be a bitter pill that will change their expectations of the future. However, I pay tribute to those in the talks who have softened some of the proposals by taking a diametrically opposite view to that of the noble Baroness, Lady Noakes. The pensions remain good, and we should continue to be proud of that. I hope they will provide an example to the private sector as they did in the early years of the 20th century about what its direction of travel should be.
I hope that the Government will take fresh note of the concerns that have been expressed in this debate and be ready to address them in Committee.
Lord Flight
My Lords, I begin by paying tribute to the work done by the noble Lord, Lord Hutton. I have worked in the pension investment management industry going back almost 40 years and, as a result, have been significantly involved in the pension sector. I want to talk about the 85% of public sector employees in schemes that are not funded, rather than the remaining 15% referred to by the noble Baroness, Lady Eaton, who are largely local government employees.
This Bill is not just about pensions; it is about sorting out the public finances and, we must admit, fairness in society. I remember that many years ago I asked my economics master why people in the public sector were paid approximately 10% less, level by level, than those in the private sector. He replied that they generally had better pension provision and better security of employment. There was therefore an overall fairness to the situation. It should be noted that today pay level, layer by layer, is now some 10% higher in the public sector than in the private sector and there is a question mark as to why there should also be considerably better pension provisioning.
The problem for decades has been that contributions have been set well below the subsequent financial cost of meeting the pension payments to today’s retired workers. Pay as you go masks the true cost of labour and pushes the problem into the future. The legacy of successive Governments’ inability to implement the necessary reforms is now increasingly manifesting itself as a rising tax burden on the majority of people working in the private sector whose pension provision, as others have pointed out, has been severely ravaged and reduced not just under the Labour Government but currently under the coalition Government also. Following the reforms, most employee contributions will still be less than 10% of incomes. The Chief Secretary to the Treasury made this point himself on 2 November 2011, in his Statement to the House of Commons, when describing the pensions that a teacher or a nurse could expect. He said:
“To earn the equivalent pension in the private sector… Both would require an annual contribution of around a third of salary”.—[Official Report, Commons, 2/11/11; col. 928.]
Focusing on the liability is, in a sense, a red herring; it is a nebulous concept too remote from individuals’ day-to-day experience. Consequently it does not impose any meaningful political pressure. What matters is cash flow, cash cost. Today there is a rapidly growing and highly visible cash flow shortfall between contributions and pensions in payment which is immediately unambiguous. A prerequisite of pay as you go is that over time what comes in broadly covers what goes out. It is this that should provide the political pressure point which needs addressing and where the reforms in the Bill do not address this problem.
The cash flow in 2005-06 was an innocuous £200 million; it has grown rapidly since. It was £3.2 billion in 2008-09; it is forecast to rise to £14.3 billion in 2015-16 and £15.4 billion in 2016-17. If you take the actual cash flow shortfall in this last period and add the contributions being made by employers into employees’ pension schemes, the total being paid by the tax payer amounts to £32.6 billion, representing the equivalent of £1,230 for every household in the country. That means that nearly £4 out of every £5 paid in pensions to former public sector employees comes from taxpayers. Particularly surprising is the increase in the forecast shortfall between the two OBR reports, because the 2012 report includes the proposed cost-saving reforms. It might have been expected that the forecast shortfall would start reducing after 2014, when the reforms are due to be implemented, but, unfortunately, the opposite is expected to happen.
We all know the various causes of the shortfall: improving longevity, with the latest analysis indicating that people will live some six years longer than expected; a growing headcount imbalance, with fewer workers per pensioner and schemes maturing—PAYG works only if scheme membership continues to grow; and now the reality of Madoff economics in our public sector pension arrangements. The wage freeze in the public sector limiting contributions has also had an impact, while pensions in payment remain indexed to CPI. The coalition's last-minute concession to the unions to ensure that all those within 10 years of retirement will suffer no detriment to their retirement income means that at a stroke this concession vaporised the prospect for at least the next decade of exerting any significant control on the widening cash-flow shortfall. Finally, the inclusion of the Royal Mail pension scheme between the last two Budget reports added, from 2012 to 2013, some £1.5 billion per year to the forecast shortfall.
The reforms increase employee contribution rates by an average of 3.2% of income and are expected to raise an additional £1.2 billion in 2012-13, rising to £2.9 billion in 2016-17. This additional income is included in the 2012 Budget report but, alas, is dwarfed by the scale of the relentless increase in pensions in payment. Staring at one is the point that, if public sector pensions are to remain defined benefit pensions, there is an onus on employees to pay adequately for that arrangement, particularly given what has happened in the private sector.
Defenders of the status quo point out that with a pay-as-you-go framework, contributions are intended to correspond to the economic cost of employees' accruals and not to meet concurrent pensions in payment. That may be so but, in the mean time, public sector workers will continue to enjoy certainty of income in retirement, based on career-average wages, until the day they die, mostly paid for by 80% of the workforce in the private sector, almost none of whom will have such security. Furthermore, over the next few years, it will be become impossible to ignore the alarm bell that is the burgeoning cash-flow shortfall between contributions and pensions in payment. If we are to leave the system in place, I believe that one way or the other the finances will need to operate so that the cash-flow shortfall is minimal.
The coalition Government have justified their reforms on the grounds that they achieve a 40% reduction in the total liability, going down from 2.2% to 1.3% of GDP by 2061-62. This 40% reduction is significant but it is half a century away, which is far too late to address public opinion in the next few years and, as others have pointed out, we have no idea what GDP will be 50 years hence. We are already falling well behind the assumed GDP growth rate and early deviations compound. The noble Lord, Lord Hutton, has made the point:
“What we've seen is how very quickly the assumptions which underpinned my assessments of the long-term sustainability of public service pensions have been shown to be too optimistic. That is going to affect the sustainability of public sector pensions in a negative way”.
It is time to consider a solution that will be lasting, affordable and fair. The coalition might start to prepare the public sector for a risk-sharing arrangement, such as an unfunded cash balance scheme, or, as the noble Baroness, Lady Noakes, argued, for looking at a wholly DC framework. Personally, I think the latter is almost too difficult, largely because of the issue of paying twice. If the unfunded pay-as-you-go DC schemes are to stay in place, it is not fair that they will end up costing ordinary taxpayers more and more.
Finally, the Government might look at what has happened in Ireland, admittedly faced with acute economic problems, but this is a difficult world. It is a world where our public finances are unsustainable, if they continue with present deficits, a world where increasingly across the nation people expect the solution to problems to be seen as fair between one group of citizens and another.
Lord Hutton of Furness
My Lords, it is always a great privilege to speak in your Lordships’ House. I think we all feel that privilege and responsibility very acutely if we also feel a sense of parental responsibility towards the legislation. I confess that I feel some parental responsibility for this Bill.
A little context might not go amiss. We should all remind ourselves how significant a part public service pensions play in our savings culture in the United Kingdom. Today, it has been estimated that about 12 million people have a direct stake in a public service pension scheme. That is one in five of the total UK population. They are hugely significant. About 85% of those who are employed directly in the public service contribute to one of those pension schemes. In other words, they are doing exactly what successive Governments, we in this House and those in another place have urged employees to do for a very long time, which is to do the right thing, to act responsibly and to prepare for the time when they may no longer be economically active. They are making a sacrifice now to enjoy the rewards when they retire.
All of those things are really good and we should try to hold on to them in this debate. Most people in the public sector are saving for their retirement. As many noble Lords who have spoken in the debate so far have confirmed, that is not the case in the private sector today. The contrast with the private sector is pretty stark. Probably only about one-third of the private sector workforce participates in an employer-sponsored scheme of any kind and those numbers are going down—they are not increasing. That is a huge problem and even with that context, many in the private sector who are contributing are not saving enough.
Successive Governments have been trying to address this formidable challenge and my noble friend Lord Turner has done sterling work for the country in proposing the reforms he did a few years ago. I hope that we are now beginning to head very much in the right direction. Given the importance of public service pension schemes, in this House we should try to do all that we can to ensure their long-term sustainability. We also need to ensure their adequacy. We face a huge demographic challenge. I do not think that the price that we should pay as a society for becoming older is that more and more old people retire in poverty. We face that risk right now and I do not think that we should compound it by ill-thought-through reforms to public service pensions.
I hope it is clear to your Lordships' House that the Bill will help us to achieve those important public policy goals. I welcome the new legislative framework that this measure will introduce. I hope it will provide the necessary underpinning to secure the long-term future for public service pensions, which is a very important objective. As we all know, no legislation is perfect; we have not yet devised that sort of procedure. I say to the Minister, for whom I have very high personal regard, that the Bill is certainly not a flawless piece of drafting. Many who have spoken in this debate have highlighted those areas where there is scope for improving the Bill in its later stages in your Lordships’ House.
However, today we are debating the principles of the Bill, and these I can strongly support. So far, no one has mentioned what these principles might be, so perhaps your Lordships will allow me to make a few important points that I think need to be made. I see these principles as, first, trying to find the right way to respond to the challenge of demographic change in a fair way, so that we strike a better balance between what employees pay and what taxpayers pay for these schemes. Secondly—this is a hugely important advance in the Bill—we need to ensure that the schemes themselves are fair to those saving within them; and that is absolutely not the case in the vast majority of public service pension schemes at the moment. Only the new Civil Service scheme is a career average scheme; the final salary schemes that make up the rest of the public service pension schemes are essentially unfair to the people we should be most concerned about—those in the public sector who earn the least. It is those people who earn the least in a final salary pension scheme who subsidise the pensions of those who earn the most. That is profoundly unfair, and this Bill will remove that unfairness from the public service schemes.
The Bill will also ensure that pension schemes are better governed in the future than they are now. This is not just a bit of process that we tend to get fixated by; it is a very important principle. Through better governance, there is a prospect that these schemes can command the confidence of both employees and employers alike.
Successive Governments have recognised the need for reform in this area if these pension schemes are to be sustained and supported for the long term. Costs have been rising dramatically in recent years, and it was clear in my report that that was set to continue for some time to come. The noble Baroness, Lady Noakes, and the noble Lord, Lord Flight, referred to these increased costs in their contributions. It is true that the increase in these costs has been borne largely by taxpayers, not scheme members, and I took a very strong view in my report that that was an unsustainable benchmark for the future.
However, it is very difficult to think about short-term measures that we can take to reduce the inevitable rise in costs, because that rise is driven by a number of factors. It is driven largely by scheme members’ accrued rights and by the increasing number of people retiring from these schemes. Unless we are prepared either to reduce those rights or to further increase contributions to those schemes, this is a cost that we will have to manage as best we can. After the 3% increase in contributions that the Government have required scheme members to make, I doubt that there is a way of controlling these costs through further contribution increases unless we are going to drive hundreds of thousands of people out of these schemes altogether. That would represent not an advantage to the taxpayer but very much a loss.
The previous Government introduced higher pension ages for new entrants and cap-and-share arrangements to try to share risk more equitably between taxpayers and employees. I welcome all of those reforms. They were necessary and the right thing to do. However, in my two reports of 2010 and 2011, I set out in some detail why I thought that these important reforms had not gone far enough. Your Lordships will be delighted to know that I do not intend to rehearse these arguments in any detail today. It was quite clear from the debate after the publication of my report that not everyone shared my analysis. That is a feature of our democracy and I have no problem with that. However, I did try to set out the facts as I saw them and to try to draw the right conclusions from them. For me, they pointed very strongly to the need for further reform.
I am glad that we have found a way to sustain defined benefits schemes into the foreseeable future—I regard that as a very big gain—and I am delighted that the Government did not take a slash-and-burn approach to solving this problem. That would have served only to impoverish future generations and would almost certainly have led to higher welfare costs. That would have been entirely the wrong thing to do. It would have undermined the personal responsibility that we have to encourage in the UK among all those in the workforce, whether in the private or public sector, to save for their retirement. I am glad that that is not the Government’s intention.
It was very clear from this debate and from other debates that people are beginning to recognise that public service pensions are far from being the gold-plated employee benefit that some people have claimed. I hope that today we can dispense with that myth. On the whole, public service pensions provide, on average, fairly modest retirement incomes. However, without reform there would be a danger of these costs eventually spiralling out of control. That would put at risk what I think is really important in this debate, which is the necessary public support to sustain these pensions over the long term. So again, I think that the Government have very much taken the right path in bringing this Bill forward.
That is all well and good. The principles are sound and robust and will withstand criticism from inside and outside the House. However, it is probably necessary, too, to refer to where I think the Bill needs further work. It is not a simple piece of legislation. There are a number of areas where I hope it can be improved during its progress through your Lordships’ House. One thing on which I reached a very firm view during the course of my commission, and particularly afterwards in the public debate that ensued, is that if we have any prospect of building support for pension reform, and if it is to command a strong consensus, it absolutely must be built on a solid foundation of trust and confidence in the nature of the changes and, equally, in the way that those changes will be implemented and delivered. I accept that this is what Ministers have sought to do in the clauses of the Bill, but it is here that I have the greatest concerns over the current drafting.
I have three concerns that I want to raise this afternoon. I have already stressed the importance of good governance and how central that is to building confidence and support for these schemes going forward. I welcome the establishment of the new pension boards. That was the instrumental part of my filed set of recommendations and it is absolutely the right thing to do. I am convinced, in particular, of the need for employee representation on these boards. This is not spelt out on the face of the Bill but it needs to be. We should remind ourselves that in private sector schemes there is a legal requirement for a third of the trustees to be employee nominations, and there is a very strong case for something similar for the pension boards that the Bill will set up. This is not a bit of window dressing; it is absolutely fundamental to good governance and the building of strong support for these schemes. Again, I have reason to believe that this is very much what the Government are thinking about, and I hope that somehow they can convert their intentions into the Bill, because that will do the Bill a lot of good and give it a strong tail wind. I think that would be important.
Many in this debate have raised the position of accrued rights and how they are to be protected. That was absolutely part of my recommendations. In my report I recommended that the Bill should contain a definition of what these rights are. We tend to assume that we know what they are. They are not spelt out anywhere in the Bill. We do not have a definition for the purpose of the public sector pension schemes of what an accrued right is. We all probably think we know that, but I think that if we were all asked what it was, we would all come up with a completely different set of understandings. For those in private sector defined benefit schemes, there is a statutory definition of these accrued rights in the 1995 legislation, and there would be some benefit if the Bill were to take a similar path.
The issue of how accrued rights are to be protected is important, too. We will not build confidence and long-term sustainability in these schemes if there is any sense that what you have paid for can somehow be taken away from you. That, I am afraid, is a possible interpretation that could be placed on Clause 3. So I do not believe that the Bill in its present form is quite good enough. The danger of retrospective changes to accrued rights would strike very much at the heart and soul of building support for the savings culture, and we should not allow that to pass unchecked.
Lord Flight
If the noble Lord thinks that the growing cash-flow deficit cannot be solved by increasing contributions and should not be solved by changing benefits, how is he going to solve it?
Lord Hutton
One of the great things about no longer being in government is that I can point to the government Front Bench—to people who can answer that question. I do not want to put words into the Minister’s mouth or the Government’s mouth, but they have set out their stall as to how they can manage and contain these costs. There is going to be an increase in costs—there is no doubt about that—but through higher contributions and changes to the indexation rules for public sector schemes, they have set out their strategy for managing that pressure on public spending. That is the Government’s concern. I think the noble Lord has more of a concern with his own Front Bench in this regard than with anything that I have proposed.
However, I accept that it is a big challenge. These are difficult things to wrestle with. To be fair to the Government, they have set their sights on ensuring an adequate level of pension benefits from these schemes and I support that principle. I do not think that there is an answer to the demographic challenge we face in simply stripping away further benefit entitlement from retirees in the public sector. The combined effect of both the changes that the Government, whom I was proud to serve, and now the changes that this Government have made has been to reduce the value of these pensions by about 25%. That is a substantial change. If we were to go very much further we would undermine the principle point and purpose of those pensions, which is to give people adequate income when they retire.
The noble Baroness, Lady Noakes, referred to a lack of public support for these schemes but I wonder whether that is so. I have never found anyone in the country who begrudged a soldier, sailor or airman a proper defined benefit pension. I never met anyone who did not think that police, firefighters and others did not deserve one. There is one job that is probably more important than anything else in our society. We entrust those who teach our children with a very great deal of responsibility and I for one do not begrudge teachers a defined benefit pension.
In relation to retrospectivity, the Government have a serious problem. We have to be mindful if there are to be DB schemes in the public sector. We know that there are fewer in the private sector, but those 2.6 million people in the private sector who still have access to a defined benefit scheme know for certain, because of the current law, that their accrued rights cannot be changed unless they give their consent to that change. The same rules should apply in the public sector. I do not believe that we can have a different set of rules in relation to accrued rights for people in public sector schemes.
Many people have spoken in this debate—this is my final concern—about how this Bill affects the Local Government Pension Scheme. It is fundamentally different in its characteristics because it is not just about contributions for employers and employees; it is about assets and the investment income that is produced. My concern about the Bill and Clause 16 in particular, with its reference to closure, is that it implies some sort of segregation between the Local Government Pension Scheme as it now is and as it will be post-2014. That could run the risk of a whole set of additional costs and complexities creeping in and we should try to avoid that.
Again, I know from studying proceedings in the other place that Ministers have made it clear that that is not their intention. As a good rule of thumb, if it is not the Government's intention, they should have that on the face of the Bill, because once this Bill reaches Royal Assent, which it will, how are pension advisers to reconcile the difference between what the Bill says and what a Minister may or may not have said in Committee in this House or the other place? That is a difficult set of challenges. If the purpose of this Bill fundamentally is to create a simpler, straightforward legal framework, we will have absolutely failed if we end up with a contradiction between what the Bill says and what ministerial intentions are.
That is all I want to say about the Bill. I am looking forward to working with the Minister and colleagues on both sides of the House in improving its detailed clauses as we make further progress with it.
Financial Services Bill
Lord Flight Excerpts(11 years, 5 months ago)
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Lord Eatwell
My Lords, I am very grateful to the noble Lord for having clarified some obscurities in the Bill that arose from the use of the generic term “the Bank” to refer sometimes to the court and sometimes to the executive. However, the noble Lord has just said something which has disturbed me. He said that, for clarification, when the term “Bank” is used, this does not necessarily mean the executive; it may mean the court. It seemed to me that he was acknowledging that an uncertainty remained. Perhaps I misheard. I should be very happy if I did, because the sort of clarification that he has set out is very welcome.
Lord Flight
My Lords, there is one area in this territory on which I would appreciate some clarity. The principle of returning the oversight of banks to the central Bank, which I think has been widely supported, has, to my mind, always been about the concept that the central Bank ought to be in regular contact with banks, that it ought to know what is going on and that it ought to be able to head off practices that are clearly potentially damaging to the banking system. However, I am not clear how the staff of the Bank and the staff of the PRA will interact. One would have thought that quite often it would be the staff of the Bank who were having regular dialogue with banks and learning what was going on and what might be going wrong, but it is the PRA—to some extent a sort of cuckoo plopped into the middle of the Bank of England—that essentially has the legal tasks. Therefore, we have clarification of the definitions of “Bank” and “court” but below what I call the executive level I am still not entirely clear where the staff of the Bank or the staff of the PRA will be carrying out supervisory activities.
Lord Sassoon
My Lords, in response to the question raised by the noble Lord, Lord Eatwell, as I said at the beginning of my remarks, the Court of Directors is the governing body of the Bank, so ultimately it is for the court to decide who takes what decisions and which decisions should be for the Bank. In the legislation, “the Bank” certainly does not mean the Bank executive; it means the Bank of England. Therefore, it is always for the Court of Directors, just as it is for the governing body of any corporate institution, to decide who takes what decisions and, if the governing body does not delegate them, it takes them itself. We are making clear through these amendments that there is a certain small category of decisions—one of which was identified by the noble Lord, Lord Eatwell—that is of such importance that it is appropriate to put down for the avoidance of doubt in the legislation that it is the court not the executive that takes those decisions. That is what those amendments do.
Autumn Statement
Lord Flight Excerpts(11 years, 5 months ago)
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Lord Sassoon
I believe that I can confirm both points. The allocation will be for the Welsh Administration in the normal way. I believe that the noble Lord’s understanding on the second point is correct. If it is not, I will correct that understanding.
Lord Flight
My Lords, I add my own appreciation of the Minister’s work and success. He has always shown patience, attention to detail, wit and great courtesy and I, too, wish him success and fulfilment in whatever he does next.
The national plan has identified £200 billion of infrastructure investment in transport and communications and about another £200 billion for the energy sector. The financing of that is fairly readily available. For the sovereign wealth funds of the world, it is an attractive investment. I was amazed to find that even the Agricultural Bank of China is setting up in London and is dead keen to put up loan finance. Indeed, it is putting up the loan finance for the improvements to the main road between Edinburgh and Glasgow.
There are also pension funds—who wants to buy gilts at present yields when you might get 4%, 5% or 6% on an infrastructure project? The funding is there, but when I asked the Financial Secretary to the Treasury how much was likely to happen over the next three years, he could not give an answer. There are still delays caused by the way that the planning system works and because of environmental requirements. Now is just the time when this country needs to make those infrastructure investments and get a move on with them. Will the Government look at further measures that they can take to delay these bureaucratic constraints on the infrastructure investment getting going?
Lord Sassoon
I could spend the rest of the three minutes and a lot longer on this but I will be brief. Again, I am grateful to my noble friend for his remarks.
On how the infrastructure is funded, there is still a need for a large debt component in many of the projects, and the debt markets continue to be very difficult. My noble friend is completely right about the appetite of the sovereign wealth funds and I will be going to the Gulf again to visit a number of them next week. But the debt component remains difficult.
As to whether the investment is flowing through, total private and public investment in infrastructure is now running at £33 billion per year compared to an average of £29 billion per year under the previous Government—even with all the investment in social infrastructure that went on. While there is more to be done, that is an important number.
There are other areas, yes, where we need to make more progress. I draw my noble friend’s attention to the policy decisions on energy over the last week, which should now enable the energy markets and investors to invest in a broad sweep of nuclear, renewable and gas assets.
Financial Services Bill
Lord Flight Excerpts(11 years, 5 months ago)
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Lord Flight
My Lords, first, I congratulate the noble Lord, Lord Mitchell, on raising this issue and, as a result, getting something done about it, and on his research in the territory. Also, I greatly welcome the Minister’s response and I look forward to government proposals that address the problem.
I shall make one or two focused points. The right reverend Prelate the Bishop of Durham made the point that we used to have anti-usury laws. We used to have a money-lending licence. When I started my career, there were rules about the maximum rate of interest that you could charge. All that had been in place going back more than 100 years. I assume that it all disappeared with the big bang, but it is a failure of regulation that the problem has been growing and getting worse with technology, but no regulator, as far as I am aware, has been suggesting to this Government or the previous Government that it needed addressing.
It is in part for that reason that I have reservations about letting the regulator just get on with running it. There need to be written in law caps on the maximum rate of interest. They could be related to the rate of inflation, to deal with that obvious problem. I do not trust the regulator to get to grips with the problem by itself.
My next point is that it illustrates the shame that we go on turning generation after generation out of schools who are financially illiterate, who do not understand what they are taking on. I remember talking to a young lady at university and asking how she was going to fund herself. She said that she had so much by way of a student loan and the rest on a credit card. I said, “How on earth are you going to pay back the credit card?”. She said, “Oh, do you have to do that?”. It is astonishing that people simply do not understand finance. Until we get financial literacy into the national curriculum, people will go on being ignorant and unable to look after themselves adequately.
It is a moral issue. I object to usury. I am sure that if my noble friend Lady Thatcher were in the Chamber, she would speak more strongly than anyone in objection to usury. We dealt with it in the past; let us get on with dealing with it again.
Baroness Coussins
My Lords, I add my support to the amendment introduced by the noble Lord, Lord Mitchell. I declare an interest as president of the Money Advice Trust, which is a charity that helps people across the UK to manage their debts. It does that by offering free advice through the National Debtline and by supporting advisers in the free advice sector.
So far this year, the National Debtline has taken more than 15,000 calls already from people struggling to repay payday loans. In the whole of 2011, it took 10,000 calls for help with payday loans, so that represents a staggering growth rate. Indeed, over the past two years, there has been an increase of 268% in the number of callers asking for help on payday loans. A telephone survey conducted by National Debtline also showed that the OFT guidance is not being followed, notably the part that states that creditors should make a reasonable assessment of whether a borrower can afford to meet repayments in a sustainable manner. The same survey showed that 66% of clients said that their lender had not conducted an affordability assessment.
This is not the right time to go into detail about what the FCA rules should be, but I suggest that they should certainly include a mandatory breathing space, with a freeze on interest and charges, if people are experiencing financial difficulty and have notified their payday lender that they are seeking support from a debt advice agency. In practice, by contrast, there is evidence of letters and requests to cancel CPAs or to freeze interest and charges being ignored, and debt advice agencies bypassed. The recent Citizens Advice conference highlighted examples where payday lenders had routinely refused to engage with advice agencies, had not answered letters, had refused to freeze charges and had not stopped CPAs even when requested to do so. I have sat in as an observer on calls to the National Debtline and witnessed the distress of people in debt as a result of payday loans. The powers for the FSA being sought by this amendment would be a small but very important contribution to the prevention of yet more unaffordable debt that ruins lives.
Lord Flight
“Bank account transferability
(1) If an individual customer gives notice in writing to a bank at which he holds a personal current account (Bank A) that he wishes to transfer the balance standing to the credit of that account (Account A) to a personal current account established or to be established at another bank (Bank B) and thereafter to close Account A—
(a) Bank A shall without charge within a period of 10 working days pass to Bank B a copy of all material that it holds in relation to the customer as a result of having performed checks on his identity, the source of his funds or otherwise with regard to its regulatory obligations to counter financial crime;(b) Bank B shall without charge, save where it has grounds for suspicion, accept the material provided under paragraph (a) in lieu of performing fresh checks on the identity of the customer, the source of his funds or otherwise in relation to its regulatory obligations to counter financial crime.(2) In this section a bank shall mean any person authorised under this Act and holding permission for deposit taking granted by the PRA.”
Lord Flight
My Lords, I think that there is broad agreement across the House that an ingredient part of a more stable banking system is that we should have healthy competition and, indeed, that a number of the problems that have developed over the past few years have been the result of a banking system that was not competitive enough, that was described as oligopolistic or cartelised. One important issue in terms of banking competition is the ease with which individuals can move their bank accounts.
I moved an amendment in Committee that largely covered all the practical things about transferring direct debits and standing orders. As many will be aware, the Payments Council has spent a lot of money on sorting that out and next September will implement its proposals to address the mechanistic aspects of changing a bank account.
My amendment in Committee raised the possibility of the Bill being used to enforce that. It is being done on a voluntary basis, and I am aware that most banks have signed up to the Payments Council arrangements. The one aspect that is not covered is the grandfathering of anti-money laundering information. I declare an interest as a senior non-executive director of Metrobank. Metrobank has pioneered removing a lot of the unnecessary—indeed, uncompetitive—measures that banks have typically used, such as requiring you to have your passport signed by a lawyer and to produce an original bill. Metrobank is able to get all the information it needs from your driving licence, so it can open an account pretty quickly. However, that cannot cover all circumstances, and as any existing bank has to have done all the necessary “know your customer” and anti-money laundering checking, it seems only sensible if, when an individual moves an account, the existing bank is obliged to pass on—to grandfather, to hand over—that anti-money laundering information to make it easier for individuals to move their accounts. Amendment 116B provides for banks to do that without charge.
I would obviously be lucky to get the Government’s agreement to include that in the Bill, but in thinking how it might be dealt with practically, this is an issue where the FCA, if not the PRA, could reasonably direct the banking system. One way or other, anti-money laundering is being used as a deliberate barrier to competition, a deliberate discouragement to people to move from one bank to another if they are unhappy with their existing bank’s service. That needs addressing and I hope that the Minister may have some clever idea as to how the point can be grasped.
Viscount Trenchard
My Lords, I support the amendment moved by my noble friend Lord Flight. Since the disappearance of the traditional bank manager from the high street, customers have increased difficulty in communicating with their banks at all, let alone to request a transfer to another bank.
What particularly irks me is that when you seek to engage with the successor to a bank manager by telephone—or when you respond to a text message requiring you to telephone the bank—you first have to go through a long process of answering questions put to you by a machine to establish your identity. If you successfully pass such questions, you may eventually be able to speak to a human being, who will then proceed to put you through an identical process of security checking. I wonder why you cannot be put straight through to a human being, rather than wasting time on your telephone, usually on an 0845 number or something like that, answering questions put to you by a computer, because it does not make any difference. When you speak to the person, the person requires you to do the security again. It is then very often the wrong person and you are transferred to another department and you have to go through the process again, probably in duplicate, first with a computer and then with another human being. Therefore, you have to allow at least 30 minutes if you are going to attempt to engage with a bank to do something that ought to take five minutes.
I welcome my noble friend’s amendment. It should be made much easier to transfer your bank account to another bank. For a long time the mobile telephone companies resisted a similar facility to change supplier; I understand that it is now much easier to change from one company to another. I see no reason why it should not be so in the case of banks.
However, in order to permit the customer to do this, banks should be required to provide forms for this purpose on request—and the request should be able to be given in writing or orally—making clear what information is needed. Otherwise, people writing in may not give the correct address or branch of the bank, and the banks will have reason not to act on the request. So the forms should be standardised and make clear what information should be given.
At the same time, the individual should be required to grant permission to bank A that it may release on behalf of the customer what my noble friend calls the anti-money laundering information—the material that it holds in that connection—because otherwise bank A will surely be prevented from releasing such information to a third party under data protection legislation. It would be necessary to agree a prescribed time limit for the transfer of such information, because in the case of somebody who has banked with a certain bank for 40 or 50 years, material that bank may hold dating many years back may be irrelevant to bank B. Does my noble friend have any comment on that?
Lord Sassoon
My Lords, I am very tempted to get a few things off my chest as well about some personal experiences of the sort that we have all had, but the horse may well have long gone if I do. However, I am sure that the banks and the Payment Council are indeed listening. My noble friend has again raised an important point. Let me address two things: first, what we can or cannot do through legislation in this area and, secondly, what to do in practical terms given that I think my noble friend was accepting that it was unlikely that the Government would accept this amendment, which indeed we will not and cannot. I will explain why but let me go on to say how, prompted by his useful thoughts on this subject, I propose to take things further forward.
The essential reason why this amendment does not work comes back to the money-laundering regulations that implement the EU’s third money-laundering directive. Rightly or wrongly, it is just a fact of life that it is not compatible with the directive to require the new bank to rely on the checks carried out by the old bank in all cases. Neither is it compatible with the directive to provide that the new bank is not legally liable where it relies on checks carried out by the old bank, because under the directive each bank is responsible for ensuring that adequate checks have been carried out on all its customers.
I know my noble friend may say that moving the information across does not necessarily take one all the way down that path, but this is getting pretty close to encouraging the banks to do something that is not compatible with the directive by suggesting pretty strongly, if not requiring it, that they rely on the checks of the old bank. We must remember that switching can be between two accounts that are already open and we should distinguish, as I am sure my noble friend does, between switching and account opening. They are not the same thing because we could be talking about switching between existing accounts that an individual has opened.
Having said that I cannot accept the amendment, I shall talk about what I am trying to push forward. I was very struck by the example of Metro Bank and driving licences, because I was not aware of it. I have asked my officials to conduct an exercise with the banks to find out who is doing what, and I have already discovered that Metro Bank is not unique and one or two others are using driving licences.
I, as the Treasury, cannot tell banks how to do their “know your customer” due diligence, and neither can the FSA. However, I am initiating a dialogue with the banks to encourage them to think constructively that a driving licence is already good enough for a number of banks, and plainly it could make things a lot easier for their banks. Because the majority of banks have done it in different ways for a number of years, at the very least I want to ensure, either directly with the banks or through the BBA, that they revisit the practices of the past few years and consider whether there is something more that they can do.
My noble friend Lord Flight has served a very useful purpose in raising this topic during the passage of the Bill, and I intend to continue to press the banks to think harder about the burdens that they are putting on their new and existing customers in relation to the responsibilities that the banks themselves have under the money-laundering regulations. I hope that with that explanation my noble friend might consider withdrawing his amendment.
Lord Flight
My Lords, I thank the Minister for his supportive response and my noble friends Lord Trenchard and Lady Kramer for their support. I am delighted to hear that my noble friend Lady Kramer will be pursuing this aspect as part of the banking review; I make the simple point that it is obvious that it should be easy to move accounts. I also thank the noble Baroness, Lady Hayter, for her support.
I would not say that I was surprised but I am interested to note that the Minister cited yet another example of protectionist practices in the EU. To the extent that what he described is there to stop the transfer of such information or to make it unacceptable, it is clearly a barrier to trade. Anyone in the financial services industry who thinks that the single market means a free and competitive one has another thought coming, because the practical barriers to trade and financial services in the EU are substantial at a retail level. I am not sure if the Minister is right, however, because the law as it stands is that it is up to each bank to do what it wants to or feels is necessary and adequate to comply with its “know your customer” due diligence, and I would have thought that if the new bank got all this information it could make it a decision that it thought was sufficient.
I say to my noble friend Lord Trenchard that my amendment provided 10 working days for the information to be transferred once you had given notice that you were going to move your account.
Viscount Trenchard
I am sorry, I did not explain my question clearly. It was how old the information should be that must be transferred—10, 20, 30 years or what?
Lord Flight
The answer is that it is the current information that the existing bank has which satisfies its “know your customer” credentials. Maybe there could be a time period of two years or something, but it is the current information that is relevant.
On the basis of the Minister’s reply I am happy to withdraw the amendment, but I would like to think that somehow, through the banking committee, the FSA and the work that the Treasury is doing, a sort of code of practice among banks could be accepted and evolved. Just as the mechanistic aspects of moving bank accounts are being signed up to on a voluntary basis by the banks at the initiation of the Payments Council, I hope that practice in this area to go along with it might be brought into a code of conduct by banks. I beg leave to withdraw the amendment.
Financial Services Bill
Lord Flight Excerpts(11 years, 5 months ago)
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Lord Flight
“137S Limitation
Neither regulator may make rules that require any person to review, take action with regard to, pay compensation for or otherwise effect redress in relation to any transaction, sale, provision of advice, exercise of discretion or other act or omission where an action based on that event would fall outside the time limits prescribed under the Limitation Act 1980.”
Lord Flight
My Lords, I raised the issue of the 15-year longstop in Committee. The Minister gave me some comfort that the Treasury was looking at this.
I have always thought it unreasonable in principle that financial advisers should be picked on as a group not subject to the statute of limitations. A second-hand car dealer is subject to the statute of limitations, as are all sorts of other people who might sell people other products. It is particularly important right now because with RDR, there will be a large number of smaller financial advisers going out of business and wanting to close down their businesses. As long as the statute of limitations does not apply, those businesses have an open-ended possible liability.
A survey was done a while back by the Association of Professional Financial Advisers, which found that 75% of consumers thought there should be a limit applying to financial advisers. Interestingly, as many as 23% felt that all liabilities should cease once someone ceased to be a client of an adviser.
I am hopeful that the Minister may have something a little more explicit to tell the House today but my strong request is that this matter should be addressed now. If it is, it will make what is going to happen next year in terms of the impact of RDR a great deal more manageable. I beg to move.
Lord Phillips of Sudbury
Can I now intervene, as I intended to, before the noble Lord, Lord Flight, sits down?
Lord Phillips of Sudbury
I thank my noble friend. I withdraw the sedentary remark. The noble Lord is experienced in these affairs, so can he assure the House that the situation will not arise where somebody with no financial sophistication whatever enters into arrangements with one of the agents about whom he is talking—for example, in respect of a pension—only to find 15 years later that there has been a gross failure of propriety?
Lord Flight
I do not entirely understand the circumstances that the noble Lord envisages. Someone may have been advised to take out a pension with one of the life companies through their financial adviser. It is possible that the individual’s circumstances, the law or the economic circumstances will change and that, with hindsight, the individual might have taken out a different sort of pension. At the end of the day, the life company is the provider of the pension and it is that company with which the individual will be dealing in their retirement. I think that a 15-year period is fair for a financial adviser, as it is for any other occupation in which an individual is engaged.
Lord Phillips of Sudbury
Very often a person taking out a pension, in particular, is wholly dependent upon the advice of the financial adviser.
Baroness Garden of Frognal
I remind my noble friend that on Report one may speak only once to any amendment.
Lord Flight
My Lords, the biggest contributors to messing up pensions over the past 15 years or so—making them so complicated—have been Governments. I was looking into my own pension arrangements and found that I could not understand them.
Baroness Garden of Frognal
I think that the rule applies also to the mover of the amendment.
Lord Peston
Perhaps I could just ask my question now, please. When the noble Lord, Lord Flight, talked about financial advisers, was he talking only about people who advise and receive a payment for their advice, or does his amendment cover those who give advice without payment?
Lord Flight
I think that I was interrupted right the way through, as a matter of fact.
Lord Eatwell
My Lords, the government Front Bench should calm down and allow us to conduct this discussion broadly under Report mechanisms but in a way which takes us forward on what, as my noble friend has said, is an enormously complicated Bill.
I am afraid that I think the proposal of the noble Lord, Lord Flight, is unfortunate and I cannot support it. It is unreasonable to provide this sort of protection to financial advisers, who should take full and appropriate care in the advice that they give. If they have taken full and appropriate care, they will be able to defend themselves at a later stage against the problem that the noble Lord, Lord Phillips, raised a few minutes ago, but I think it inappropriate that they should not be sensitive to potential comeback for advice which is inappropriate and misconceived.
Lord Newby
My Lords, when we debated this issue in Committee, my noble friend Lord Sassoon made it clear that this was an important issue for the regulator to review. The FSA has now committed to consider whether to investigate the case for a longstop as part of its business planning for 2014-15.
The amendment deals with the Limitation Act. It is important to be clear about both the nature of the issue and why I do not think that requiring the regulators to apply the Limitation Act when making rules provides the solution.
First, it is important to be clear that time limits apply for consumers bringing complaints to the FOS. These are: six years from the event that the consumer is complaining about, or, if later, three years after the consumer became aware, or ought to have become reasonably aware, that they had cause for complaint. The question which we are now debating is whether there should be a further absolute or overriding limit, possibly of 15 years. This is an extremely important question for the regulator to review and it is clear that it needs to take into account the particular features of financial services and financial service products in doing so.
When the FSA considered the issue previously, it noted that the long-term nature of some financial services products means that it can take many years for consumers to be made aware that they may have suffered detriment. An example from recent years includes inappropriate pension advice to switch from one investment or one type of pension to another. Consumers did not necessarily realise that this advice was inappropriate until many years later and as they approached retirement. This kind of advice was the subject of the FSA’s pensions review covering the period 1988 to 1994, and concerns about advice given in this period came to light only some years later. Advice from this period is still the subject of consumer complaints now.
It is important to realise that many of the matters that the FCA or PRA, or indeed the FOS, which is also relevant here, will be dealing with will not be subject to the Limitation Act at all. The Act applies to certain causes of action in private law, such as actions for breach of contract or negligence, but the FOS is required to determine cases by reference to what is,
“fair and reasonable in all the circumstances of the case”.
In some cases, there will be no private law course of action and so nothing for the Limitation Act to apply to.
It is also worth remembering that the Limitation Act is very context-specific legislation. Time limits vary considerably according to the nature of the claim; for example, the time limit for libel is one year whereas for negligence it is six years. The time limit also varies on the facts of the case. For example, it is extended in certain cases involving fraud or where the claimant has a disability. Even the 15-year, longstop period that applies in cases of negligence has exceptions—for example, for claims involving personal injury. Therefore, it would be particularly inappropriate as a guide for the FCA in its rule-making powers. It would be next to impossible for the FCA to know how the Limitation Act would apply to all the cases that could be subject to any proposed rule. Far from bringing the financial services into line with other sectors, we would, in our view, be failing to acknowledge that in financial services, as in other sectors, there are many claims to which the Limitation Act does not apply.
Having said that, the regulator will look again at the case for a longstop. In view of my arguments and this commitment by the regulator, I hope that my noble friend will feel able to withdraw his amendment.
Lord Flight
My Lords, the key point here is that, in setting the rules for the Financial Ombudsman Service, the FSA decided that no reasonable limit would be provided and that complaints should be brought for an unlimited period of time. This is effectively where the financial adviser industry does not, therefore, have the protection of the statute of limitations.
This area needs to be looked at urgently. I repeat that looking at it in Section 204 is not urgent enough because, assuming that the RDR reforms are not changed, a large number of financial advisers will be going out of business in 2013. For their clients, the best hope is that it will be possible to sell those businesses on to somebody else, but obviously none of them can be sold if there is an unknown exposure to complaints down the line. For better or worse, it is well known that the industry feels extremely upset about the fact that it is picked on in this particular way.
I can see that I will not be able to persuade the Government to do anything immediately and that what we have is at least better than nothing. However, I repeat my exhortation that the Government should consider working with the FSA for a greater urgency in this matter so as it might be addressed coincidently with the RDR. I beg leave to withdraw the amendment.
Financial Services Bill
Lord Flight Excerpts(11 years, 5 months ago)
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Lord Flight
My Lords, Amendment 93A to some extent overlaps with Amendments 92B and 92C, tabled by the noble Baroness, Lady Cohen. However, its thrust is slightly different. It has the support of ICE Clear Europe, which I believe has raised its concerns directly with the Minister. The starting point is that, given the systemic importance of clearing houses, it is self-evidently appropriate for the Bank to have powers to direct them in certain circumstances.
The powers granted to the Bank of England by Section 296A of FiSMA are extremely wide and broad—arguably too wide and broad—and could be counterproductive to achieving financial stability. My case is that Section 296A should be subject to specific, transparent and predictable trigger conditions. My amendment seeks to address the issue by setting out the trigger conditions and scope for action and intervention by the Bank of England under Section 296A. Other amendments have been tabled that address the issue in a different way. Amendments 92B and 92C in particular are there to achieve clarity and certainty, with less concern about the absolute extent of the Bank of England’s powers.
The key principle of the trigger conditions and scope that my amendment proposes is that Section 296A should be used only in the event that without such direction the clearing house would fail or would be likely to fail. Secondly, a particular concern is that the Bank of England could use the broad powers granted by Section 296A to direct a viable clearing house to take on business that could be severely damaging to its interests. Section 296A should not be used in this way. Directions should relate only to the existing business of a clearing house. Finally, Section 296A should be used only in consultation with relevant bodies, including the clearing house itself. The noble Baroness, Lady Cohen, made the same point.
If the principles set out in Amendment 93A were adopted, they would allow the Government’s objective to be achieved. They would tailor the regime to circumstances in which the Bank of England would need to intervene in the market to maintain financial stability, and they would reflect the appropriate interests of the clearing houses.
Lord Sassoon
My Lords, the Government note the concerns expressed about the additional powers of direction to be conferred on the Bank of England. Some of these concerns are reflected in Amendments 92B and 92C, tabled by the noble Baroness, Lady Cohen of Pimlico. These amendments seek to impose more stringent conditions on the Bank of England’s ability to exercise the Section 296A power. I will say at the outset that in response, the Government are minded to bring forward amendments at Third Reading to address some of the concerns raised by the industry.
Before bringing forward amendments at Third Reading, I will reflect further on the debate we have had today. However, I am happy to confirm that the Government are considering amendments to raise the threshold of the trigger for the power of direction to a “necessary” rather than a “desirable” test; to more clearly set out how the power is to be used, including specifying procedures with which the Bank should comply prior to issuing a direction, whether on a routine or an expedited basis; and, finally, to set out in statute the assurance that I have already given the House that the additional power of direction cannot be used to compel a clearing house to accept the business of a competitor.
I will now address the amendments in this group. Amendment 92A, tabled by my noble friend Lord Sharkey, seeks to introduce a requirement for clearing houses to draw up and maintain recovery plans. The appropriate place for a requirement for clearing houses to prepare recovery plans would be in Part III of the recognition requirement regulations made under Section 286 of FiSMA, not in primary legislation.
The Government have already outlined their intention to build on the positive developments around loss allocation arrangements that are being introduced by some clearing houses of their own volition, and will also consult on proposals to make changes to the recognition requirement regulations, which are the operating conditions under which clearing houses are licensed to operate in the UK. The changes would have the effect of requiring all UK clearing houses to have in place loss allocation rules. As part of the consultation exercise, the Government will also seek views on proposals to change the recognition requirement regulations to make mandatory the preparation and maintenance of recovery plans by clearing houses. We are on the case and certainly are not waiting for EU legislation. However, we believe that the recognition requirement regulations are the appropriate place for these conditions, and we will take action to that end.
Amendment 93A, tabled by my noble friend Lord Flight, would impose further preconditions on the exercise of the power, would limit the scope of any direction given under the power and would apply various provisions of the special resolution regime provided for in Part 1 of the Banking Act 2009 to any direction given. It would not be appropriate for the Bank of England to wait until the financial position of a clearing house had deteriorated to the extent that it posed a serious threat to financial stability or failed to meet its recognition requirements before exercising the additional power of direction. The additional power of direction is a supervisory power, not a resolution power. It will allow the Bank of England to manage the considerable risks that may be posed by the actions of a clearing house which do not constitute a breach of its recognition requirements or its obligations under FiSMA 2000. If Amendment 93A were agreed, the Bank of England might be unable to give a direction that would safeguard the solvency of a clearing house, forcing the use of resolution powers as a last resort in order to minimise the impact of the failure of the clearing house on wider financial stability.
It would also be inappropriate to limit the scope of any direction that the Bank of England might give in the way suggested by Amendment 93A. The additional power of direction is intentionally wide-ranging. The Government feel that this is essential in order to build in sufficient flexibility to enable the Bank to manage and respond to new and unusual risks that may require regulatory action that goes beyond the purposes specified in Amendment 93A. The Government also believe that requiring a court order to be obtained before any direction could be given by the Bank could undermine successful regulatory intervention in instances where there was a need to act with alacrity in the event of a crisis. The court may not necessarily be well placed to make judgments on whether action is necessary having regard to the relevant public interest criteria.
Finally, it would not be feasible to apply the provisions of the special resolution regime provided for in Part 1 of the Banking Act 2009 to this power of direction. The additional supervisory power of direction provided for by Section 296A is separate and distinct from the stabilisation powers, exercisable in respect of UK clearing houses, provided for by Amendment 193G. In contrast to the power of direction, which is a supervisory tool, the stabilisation powers are resolution tools that would be deployed to minimise the impact of the failure of a clearing house on wider financial stability. Given that alternative, specific resolution powers exist, it would be unreasonable for the Bank of England to use the power of direction to effect “partial property transfers”. Such an action would be contrary to the constraints under which the Bank operates as a public authority.
With those explanations and assurances about what we intend to come forward with at Third Reading, I hope that my noble friend will feel able to withdraw his amendment.
Lord Flight
My Lords, Amendment 97A seeks to require each of the two regulators to establish an independent committee to determine whether to publish a warning notice relating to any individual whom it plans to discipline and to whom that individual may then make representations. The RDC, as we know, has no statutory basis so cannot usefully be referred to, hence the formulation of the last paragraph of my Amendment 97A. This amendment does not preclude a regulator publishing a warning notice against an individual for market abuse or for acting without individual approval when required, matters which I think are different in nature and would distract from the key principle at stake if they were not thus excluded.
It seems to me that government Amendments 97ZA and 97ZB achieve that which I sought to argue for both in Committee and today—that is, a fair process of taking a decision and a fair process of deciding to publish. Via a somewhat tortuous route, the Government seem to have it exactly right for the FCA. The RDC will be the body taking the fair tribunal and then taking the decision on the warning notice. What is still lacking is what will happen at the PRA. There is no indication whether it is considering using the RDC or having any sort of sensible judicial body. If it does, then it will apparently be bound by Amendments 97ZA and 97ZB, if enacted. I would therefore hope that the Minister can give the House some comfort that the PRA is intending to mirror broadly the intended arrangements for the FCA; Amendments 97ZA and 97ZB seem to achieve what is wanted for both regulators. It is appropriate that for both regulatory bodies there should be a fair due process, both out of principle and fairness; we should not forget the other stakeholders, the pension funds that hold the shares of institutions that may be badly damaged by the reputational damage of a warning notice.
Lord Hodgson of Astley Abbotts
My Lords, I wonder if my noble friend could deal with one aspect of his explanation of government Amendment 94A. It may be that I misunderstood what he said. Is this to be a general removal of power—that is, a backstop—or is it going to be available in individual cases? It is not clear from his explanation whether it will be gone for ever or if an individual case could say to the Treasury, “We are going to be unfairly treated. Please step in”. At the moment, the former is a very blunt instrument and a lot of eggs could be broken before you get back to a more satisfactory situation if you felt that the regulator was using the power unwisely, unfairly and disproportionately. Could he explain the point when he comes to wind up the debate?
Financial Services Bill
Lord Flight Excerpts(11 years, 5 months ago)
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Lord Flight
My Lords, I rise to ask the Minister some questions about the transfer of the regulation of the providers of credit to the FCA. I had understood that it was the Government’s current intention to repeal as much as possible of the CCA and replace the relevant clauses with a new rulebook written under FiSMA and that the Government have been proposing to finalise this new rulebook by March 2014 to be implemented the following month. The Minister will be aware that a lot of the industry feels that this will be physically impossible given the necessity of wholesale change to the credit industry’s computer systems and the need to retrain staff. It is also questionable whether the new rulebook will be ready by March 2014, as none of the main features of the new regime has yet been agreed—and some may not have been discussed.
The Minister will be aware that much of the industry accounting for some 65% of UK credit is urging the Government to take advantage of the flexibility in the Bill by keeping much of the existing CCA in place in April 2014. The FCA will be able to enforce the CCA using its new powers which exceed those of the Office of Fair Trading. This would allow time for the design of a generally proportionate new regime. If such an approach is not taken, tens of billions of pounds of existing credit currently available to ordinary consumers in the high street and elsewhere could be at serious risk.
Lord Flight
Lord Flight
My Lords, Amendments 75A to 75G and Amendment 77 relate to Clause 10 and Amendment 77B relates to Clause 13. The amendments to proposed new Section 55 seek to remove the need for the PRA to consult the FCA over authorising a bank or in relation to other regulatory actions, such as variation and cancellation of permission, and imposition of requirements. The effect of the amendment to Clause 13 is that the FCA would have no role in approving an application to act as a bank director.
I raised a similar area of principle at Second Reading. I remain of the view that the double doing of applications for banks and bank directors by the PRA and the FCA is unnecessary and adds to the costs and hassle for new banks trying to emerge and compete. The PRA process for bank applications is more than sufficient. The matters that the FCA deals with, such as good conduct in relation to citizens and consumers, are essentially ongoing rather than being about having a good banking plan and appropriate directors, appropriate capital and appropriate systems in order to be able to start a banking business. I have also recently encountered a situation whereby the new yet-to-be FCA organisation made inquiries of a senior director that related to PRA, not FCA, territory.
The amendments are also in part probing amendments because it is not clearly understood by the industry how the new arrangements are intended to operate. At one level, my understanding is that an application for a banking licence and bank directors will be dealt with by the PRA, which will merely refer to the FCA to see whether it wants to raise any issue. However, in other circumstances, there seem to be two different processes to go through. Therefore, if the Government are not willing to accept my point of principle, which is that it would be much better to leave the approval of banks and bank directors purely to the PRA, it would be helpful for the Minister to set out today exactly how the new dual system is intended to operate in practice. I beg to move.
Lord Sassoon
My Lords, Amendments 75A to 75G, tabled by my noble friend Lord Flight, would remove the requirement for the FCA to consent to authorisation decisions taken by the PRA relating to banks and other deposit-takers, including the decision to grant or remove permission. We discussed a similar group of amendments in Committee.
As I previously said, authorisation is a vital tool for the authorities to set and enforce standards for regulated firms efficiently. It is much more costly to address issues within firms following authorisation than it is to do so during the authorisation process. Such costs will fall on regulated firms and, eventually, consumers. Of course, it is far preferable for the FCA to be able to identify and address potential threats to consumer protection or integrity as part of the authorisation process and to prevent consumer detriment or improper behaviour before it happens.
The FCA will have a significant role in the authorisation process—for example, in assessing the range of products being proposed by the applicant, its systems and controls, its processes for treating customers fairly, including dealing with complaints, ensuring the business is not being used for a purpose connected with financial crime, and promoting effective competition in the interests of consumers. It is surely right that all these matters should be carried out up front. To take one clear example, it must be right that the FCA should carry out its anti-money laundering checks as part of the authorisation process. In addition, it is surely right that the FCA should be able to object to an application if it is not satisfied that a firm can comply with its threshold conditions.
Similar points apply in relation to Amendment 77B, which would establish that the FCA should have no role in approval of any person who is to be a director of a deposit-taker. This would mean, for example, that the FCA has no role in approving a director of customer services or a director with responsibility for regulatory compliance.
Let me cut to the chase, because my noble friend made it clear that he is probing around how the system will work. There will be one application, not two. This is the crucial point that people have not fully grasped. I believe that I have said this before in our debates but I say it again clearly. My noble friend is right to say that we want to minimise the inconvenience of the process. There will be a single administrative process for approval of firms and of persons to perform significant-influence functions. It would not be appropriate now for me to go through the detail of how the PRA and FCA will do it, but the key issue for this House and the Government in setting the framework is that there has to be one application. That is what sets the tone of the necessary and appropriate co-operation to make the process as seamless as possible.
On the basis of that further assurance, I ask my noble friend to withdraw the amendment.
Lord Flight
My Lords, it is highly important that it should be absolutely clear that there will be one application and, as I understand it, that means that an application to establish a bank will be dealt with by the PRA, which will then have its own arrangements to deal with the FCA for FCA matters. What really matters in establishing a bank is whether there is enough capital, whether the management and the directors are suitable and whether the business plan is sensible. The bits that the FCA is concerned with are much less relevant up-front and more relevant as the business develops, so the PRA really should be in the driving seat for approving banks.
I would also make the point that I made in a slightly different context the other day. A team from the BIS made an appointment to come and see me to ask whether, in my view, the process of applying for licences for new banks and approval of new directors was anti-competitive. I was pleased to find that the BIS was very focused on that aspect, even if the Treasury was not quite as focused. I am pleased to have the assurance of the Minister that effectively it will be one process with the PRA and the FCA liaising and, on that basis, I beg leave to withdraw my amendment.
Lord Flight
“( ) For section 73 substitute—
“73 General duty of the FCA
In discharging its functions under this Part, the FCA should, so far is compatible with its strategic and operational objectives, have regard to the international character of capital markets and the desirability of maintaining the competitive position of the United King dom.””
Lord Flight
My Lords, Amendments 78A and 79A are supported by the Listing Authority Advisory Committee to the FSA, which is an external committee appointed by the FSA. The amendments have the objective of permitting the FCA going forward as the listing authority to have regard to the international character of capital markets and the desirability of maintaining the competitive position of the UK in international capital markets.
The advisory committee is concerned that without the amendment the FCA, when regulating, will not have the power to consider UK competitiveness in international capital markets and could in fact be challenged for doing so unless the issue is specifically covered. Under current legislation, the listing authority is separately set out in FiSMA, while most legislation under FiSMA is about the regulation of those conducting various forms of standard financial services businesses. The listing function is a very different role, though; it is about setting the rules for and regulating listed companies as the issuers of securities, both debt and equity, where issuers obviously have choices as to the markets in which they opt to access capital. Hong Kong in particular has become an even more important financial capital than London, which also faces great competition from New York.
At present, under Section 73 of FiSMA, the FSA is obliged to have regard to market competitiveness and the UK’s position in carrying out this function. These two amendments would leave the listings authority’s role and function substantially aligned with the rest of the FCA but would reflect the fact that this part of the FCA’s function is about regulating listed companies, not the financial services industry. It is different and should have competitiveness not as an objective but simply as a matter to which the FCA should have regard.
This may sound a slightly obscure point but the chairman of the Listing Authority Advisory Committee is concerned that unless this particular, slightly different responsibility of the FCA going forward is given at least the steer to have regard to international competitiveness, it will not be covered by the wider parts of the Bill requiring the FCA to have competitiveness as an objective. I hope that the Minister will be able to give comfort that the wider competitive objective covers the particular listing authority context of the FCA. If not, I hope the Government might consider this somewhat offbeat territory. I beg to move.
Lord Northbrook
I support my noble friend Lord Flight’s amendment. It is important that in this area the FCA should have regard to the international character of capital markets and the desirability of maintaining the competitive position of the United Kingdom.
Lord Sassoon
My Lords, Amendments 77A and 79A would reinstate an existing “have regard” that applies to the FSA in its capacity as UK listing authority as a “have regard” applying to the FCA’s listing work. This “have regard” is a requirement to take account of the international character of capital markets and of UK competitiveness. I can assure my noble friend that these amendments are not needed. As we discussed in Committee, the FCA and the PRA will be bound to have regard to the regulatory principle that any burden they impose should be proportionate to the benefits that flow from it. The proportionality principle will apply where a requirement would have an effect on UK competitiveness that would be a burden, and the same need to ensure that the burden was proportionate to the benefits would apply.
In addition, last week we debated and agreed to make an amendment to the Bill to add a new regulatory principle giving the regulators the duty to have regard to the desirability of sustainable UK economic growth. My noble friend was good enough to welcome that amendment, which I assure him will also encompass international competitiveness in the appropriate way in relation to listing as well as more generally. I think that that answers the direct question he posed to me. My noble friend refers to the London Stock Exchange and my understanding is that, although it was rightly concerned about the removal of the listing authority competitiveness “have regard”, it has welcomed the new regulatory principle. I hope therefore that my noble friend will agree to withdraw his amendment.
Lord Flight
My Lords, I thank the Minister for the comfort on this point. I am aware that the London Stock Exchange has raised this issue and I hope that what he has said will also provide comfort to the Listing Authority Advisory Committee. The only grey area for me is that I am still not entirely clear whether the general burden upon the FCA with regard to competitiveness automatically covers its role as the listing authority. The Listing Authority Advisory Committee seems to think it does not. However, I note that the point has been generally picked up and therefore beg leave to withdraw.