Autumn Statement

Lord Higgins Excerpts

Wednesday 3rd December 2014 Lords Chamber

[Lord Deighton]

As I explained to the noble Lord earlier, we have made a very detailed analysis of infrastructure spend, which is running on average at £47 billion per year. The majority of that, more than 60%, is financed by the private sector, which of course is a great sign of the success of this Government. Every scheme which has been announced has a clear funding plan attached to it. The real transformation that has taken place with this Government is that instead of having a plan for roads one year at a time—if there is a bit more money you can tell the Highways Agency to build a road; if there is no money, you tell it to stop, which results in a very inefficient road-building programme—we have given it a proper organisation, a proper strategy and a proper financing plan over the next six years.

[Lord Higgins (Con)]

My Lords, does my noble friend agree that it is very good news that we have now reached the point at which the deficit has been halved, and that the Government are determined to eliminate it completely? This raises broad macroeconomic issues that we can debate tomorrow. Does he also agree that this is an extraordinarily imaginative Autumn Statement? Perhaps I may take just one example, that of the Chancellor’s decision that hospice charities should no longer be subject to VAT. That is an example of the good things in the detail of the Statement which will be very much welcomed.

[Lord Deighton]

One of the things I have enjoyed about working with my right honourable friend the Chancellor is that, right through to the end of this Parliament, the Treasury is looking at new measures and trying to continue to implement the plan that has been laid out with such effectiveness. To be sticking to the target of getting the deficit down within the context of a very challenging economic environment, while being focused on structural issues and other important things that affect the economy and broader society, is indeed the sign of a good Statement.

Pensions

Lord Higgins Excerpts

Thursday 26th June 2014 Lords Chamber

[Lord Newby]

My Lords, the provisions relating to the guidance will be in the pension scheme Bill when it comes before your Lordships’ House. I am sure that there will be plenty of opportunity to debate those provisions at great length, to which we on this side look forward.

[Lord Higgins (Con)]

My Lords, is face-to-face guidance the same thing as individual guidance?

[Lord Newby]

The answer is that it may be or it may not be, depending on what people want to do. One can envisage there being cases at workplace level, where there is a workplace scheme, where it is sensible to start off, for example, by having a collective session followed up by individual guidance. The key thing which we want to underline is that individual guidance will be available. As I said earlier, however, not everybody will want to receive it in the same way.

Personal Service Companies (Select Committee Report)

Lord Higgins Excerpts

Tuesday 17th June 2014 Lords Chamber

[Lord Higgins (Con)]

My Lords, I join those who expressed appreciation for the chairman of our committee, my noble friend Lady Noakes, who was an outstanding chairman and succeeded in producing a report in a very short timescale. That report deals with an extremely complex and difficult subject, as the committee discovered from its inquiry, but my noble friend put forward the problems very clearly in her speech this afternoon.

The response—indeed, the whole process—has been remarkably fast. As my noble friend pointed out, the committee was set up in November. We are only in June but we have already taken evidence, produced our report, received a reply and now had a debate. That is probably a record for any Select Committee report. However, as was made clear by previous speakers, the problem is that the Government’s response is very inadequate indeed and does not solve the problems to which we drew attention.

We are concerned about the Government’s attitude to this matter, as was said in previous speeches. I regret having to draw the following comments to the attention of the House and, I hope, to the Liaison Committee, which is ultimately responsible for these matters. Our report states:

“We were surprised by the lack of co-operation from the Government. The Exchequer Secretary to the Treasury, who has responsibility for tax matters within Her Majesty’s Treasury (HMT), refused to attend an oral evidence session citing that our enquiry was concerned with HMRC’s application of the legislation. He also refused to allow Treasury officials to appear on the same grounds”.

That is a quite absurd explanation of why he did not attend. We could not conceivably have looked into the way in which the tax collection system operated without also considering the legislation. Although the first of those matters is the responsibility of HMRC, the second is clearly the responsibility of the Treasury.

We investigated and raised a number of Treasury issues with other witnesses but were unable to get a reply from the Treasury itself until this evening. I hope that my noble friend Lord Newby will be able to give us a better explanation of why the Treasury was so unco-operative in this matter, because it is of concern to the House. Having been chairman of the Liaison Committee in the other place, I am more familiar with the problems that one has in getting witnesses there and am less clear what the situation is in this House. However, this example raises serious questions about the way in which the Government respond to Select Committees. Like the noble Lord, Lord Myners, I would have found it inconceivable not to respond to a request to appear in front of a committee, and even more inconceivable to refuse to allow Treasury officials to do so. This is a very unsatisfactory situation.

There is no doubt at all that the IR35 issue, which we looked into in considerable depth, is extremely unpopular. Indeed, as has been pointed out, a whole industry has grown up to deal with the problems that it presents for those who are subject to it. While it is clear that people may incorporate a company for good reasons of limited liability and so on, there are also serious tax and national insurance implications. The Office of Tax Simplification suggested that perhaps IR35 should be abolished or at least put on hold. Contrary to what my noble friend on the Liberal Benches said, the committee did not take the view that it should be abolished and went along with the view that it should continue, but clearly a great deal has to be done to improve the present situation.

The Revenue is concerned that if it were abolished there would be mass migration from PAYE to personal service companies, and estimates a loss of revenue of £550 million. As my noble friend Lady Noakes pointed out, however, we have serious doubts about how valid that estimate is. While the Revenue has produced a slightly more sophisticated version in response to our report, it does not add anything significant to the earlier assurances that we were given on this subject.

The other matter that has been pointed out is that it seems clear that the Revenue is not pursuing individual IR35 cases with enormous enthusiasm. One of the other issues discussed was whether the merger of national insurance and income tax should take place. The response suggests, “We might do that eventually but not now”. I realise the complexities of such an operation; we should not hold our breath and suppose that that is suddenly going to take place.

More important is that implementation of the legislation by the Revenue has not been at all satisfactory. I was astonished to find that we have a self-assessment declaration form with a specific question on personal service companies that, it turns out, many people do not answer at all. Nothing seems to have happened as a result. We raised this question and received a response from the Government; it would seem that they are going to try to tighten this up. However, it is their attitude to the non-completion of the questionnaire that gives cause for concern.

The use of personal service companies is very widespread and produces, for those who operate them, considerable benefit to the economy of the country. That is not in dispute but there are, none the less, a number of issues here. Particular concern was expressed about the use of personal service companies in the BBC, for example, and in the public sector in particular. This needs to be dealt with seriously, and while the Government have taken some action, the committee was not satisfied that this problem had been solved—still less in parts of the public sector in which it appears that no action at all has been taken, even though it is the Government’s policy that personal service companies should not be used to mitigate tax and national insurance charges in the public sector. Something more needs to be done about that.

The area that perhaps gave us most cause for concern was the following: it is clear that many personal service companies are set up not at the instigation of the individuals concerned but at the instigation of their clients. This is particularly so for those on low pay, and it seemed to us that there was most appalling ignorance among those people about what they might be losing as a result of their use of personal service companies. Again, this issue is important. The Government’s response on it was somewhat better in terms of the Low Pay Unit and so on. However, again the matter brings out a real difficulty.

I believe that our report has been useful. It has been produced at very considerable speed and raises some difficult issues. In effect, we have turned over a stone and what is underneath is fairly unpleasant. The question that arises is this: we need some sort of comeback. It is fine having a debate; the Minister will reply and so on. If we are going to set up these ad hoc, high-speed committees, and they produce reports that result in unsatisfactory responses, the case for reconstituting the committee—which is familiar with the issues in the first place—in order for it to look at what has happened as a result of its recommendations, is worth while. I hope that the Liaison Committee will consider whether some form of post-report scrutiny can be carried out by the original body.

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[Lord Higgins]

Where is the money to pay the fine coming from? Is this simply a transfer from one part of the Government to another? Is it an appropriate sanction? Should someone not be fired?

[Lord Newby]

Well, it is a transfer of money from one part of the Government to another, but this is hardly surprising since it is one part of the Government that has transgressed a rule set by another part of the Government. As for firing senior civil servants for not having kept this properly under review, I am rather tempted by the suggestion—but if it were a principle, we would rapidly find that there was a depletion of civil servants, not specifically in this area but from a whole raft of other areas where there may have been the odd transgression that was not stamped down on quickly enough.

The noble Lord, Lord Davidson, asked an extremely interesting question about the Scottish situation and the relationship between the UK and Scotland, and asked whether there had been discussions with the Scottish Administration on this issue. I am not absolutely sure but I am almost sure; I suspect that there have not been.

This debate has confirmed that personal service companies play a vital role in the UK economy. However, there are those who seek to exploit such arrangements to gain a tax advantage. Because of this, in our view there is still a clear need for IR35. However, there is still more to be done in improving its administration, and HMRC, in partnership with the IR35 Forum, is working very hard on this. We welcome the committee’s recommendations, which will help with this very important work.

Budget Statement

Lord Higgins Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Higgins (Con)]

My Lords, it is often said of my former constituency of Worthing that people go there to die and forget what they came for, and there is some considerable truth in that. Many people have come to Worthing to retire, and many of them have provided for their retirement by saving and have been extremely prudent. It has therefore been quite heartbreaking for them to find themselves in the situation that has existed for the past five years or so, and I do not understand how some of them have continued to exist, given the appallingly low rate of return which they have had on their savings.

We understand very well why it has been necessary to deal with the problems of economic management. You cannot take the fiscal measures you would like to take because of the deficit, and therefore you have to resort to monetary measures, so interest rates have been as low. But none the less we have tended to ignore the effect which these low interest rates have had both on pensioners and on savings. Therefore, I believe that this Budget is the Budget they have been waiting for. At long last, something is being done to help them. Some of the measures are quite direct: the abolition of the 10% rate on savings income and the introduction of a pension bond which will give a rate of return significantly higher than market rates.

The overall Budget is extremely imaginative. I was very surprised by one of the BBC commentators who said that it will be seen as a run-of-the-mill Budget. I think it will be a Budget that many people will remember as an extraordinarily imaginative Budget, given the fact that the Chancellor has virtually nothing to give away. He has taken steps, particularly in the annuities market, that will give people a great deal more freedom. In that respect, I shall make one point. There has been some suggestion that people in final salary schemes—the few schemes that survived Gordon Brown’s effect on final salary schemes—should switch into a defined contribution scheme and take advantage of the Budget. That would be wrong. They would do much better to stay where they are in the final salary scheme. On that side of things, the Chancellor has been very helpful.

There are other measures, for example the doubling of the investment allowance, which will certainly aid the recovery of the economy. I feel bound to say that, welcome though it is, much of the investment coming in is from overseas, and we still find ourselves in a situation where investment from domestic sources, despite the huge cash balances flushing around the economy at the moment, is not really coming. At all events, the investment allowances will help.

The coalition Government’s overwhelming priority—and I pay tribute to the fact that they have been unanimous on this—has been to reduce the deficit. As I have pointed out on previous occasions, saying we have cut it by a third means that we are still borrowing at two-thirds of the appalling rate of the previous Government, with a huge increase in underlying debt, which has been referred to by a number of other speakers. Although we have not made progress as fast as we would have liked, we are moving towards the deficit having been reduced by 50%. The target for abolishing the deficit has moved back but is, none the less, coming into sight.

What I really welcome is the statement made by my noble friend this afternoon, which I do not think anyone else has made from the ministerial Bench. He said that what we have to do is not to move towards reducing the deficit but towards a surplus, because that is the only way in which we will reduce the total actual debt, rather than the deficit, which will be inherited by our children.

Other aspects of the issue are relevant. The savings ratio, in particular, has been referred to. As was pointed out in the OBR report, it has fallen to 5% from 7.2% in 2012. To some extent, that change reflects increased borrowing and expenditure, which has led to part of the recovery over the past year or so. The savings ratio is beginning to go up again, but again the measures in the Budget will help to increase the savings ratio. That will be very important if we are to have the resources we need for further investment in the economy.

Some aspects of the present situation still remain puzzling and paradoxical, such as the way in which employment has stood up, and increased remarkably well, but productivity has not moved. Obviously, we must move to a situation in which productivity also goes up, as a number of noble Lords have referred to.

I will make one other point. I am still completely puzzled as to why the Treasury works off one economic forecast and the Bank of England off another—the latest OBR report even has a diagram that shows the way in which they diverge. Some unanimity of view on that in government would be appropriate. I worry that the monetary policy under Gordon Brown’s much praised measures, which I always had doubts about, is in the hands of the Bank of England and the fiscal side is in the hands of the Treasury. It is not the least bit clear—this came up in a Question from the noble Lord, Lord Barnett, the other day—who is responsible for co-ordinating the two, and that is important.

None the less, the measures that have been taken by the Bank of England are to be welcomed. We have found a situation in which QE has played a useful role. At long last the Bank got away from the Monetary Policy Committee’s obsession with interest rates rather than the price and supply of money, and is taking more action on that side of things.

In that context I will take up a point made by the noble Lord, Lord Myners, who I see is not in his place but who made a very good speech earlier. The idea that somehow we will have to sell off the gilt-edged securities which have been purchased by the Bank of England as part of QE is, it seems to me, quite absurd. There is no reason to suppose that the rates, terms and duration of the debt that we bought then will still be appropriate at the point where we sell it off. It would clearly be much more sensible simply to issue fresh debt which is appropriate in terms of its structure. It is important that we should move towards more co-ordination of fiscal and monetary policy.

Finally, there is a very good analysis of the output gap in the OBR report. We are moving gradually towards eliminating that gap, but it is extremely difficult to know what it is because we do not know how much productive capacity has been destroyed in the course of the crisis from which we are just emerging. None the less, I am sure that it is right gradually to move towards a point where the output gap is closed and we can go on to a sustainable long-term growth rate, rather than mopping up excess capacity.

Overall, the strategy is paying off. If I may mix a metaphor, while we are some way short of Winston Churchill’s “sunlit uplands”, none the less it is very important that the Government stand firm and stick to the course to which they have set. We are making progress and we must continue to be determined in dealing with the deficit, getting things on an even keel and rebalancing the economy in the way in which a number of noble friends and noble Members have suggested today.

Economy: Inflation

Lord Higgins Excerpts

Tuesday 11th March 2014 Lords Chamber

[Lord Newby]

My Lords, the GDP is going to be higher in the second half of this year than it was before the crash. We are going to have more people in work. These are the two key determinants of how the average household is going to feel. In the mean time, by taking actions such as freezing fuel duties and increasing the threshold for income tax, we have given some relief to tens of millions of individuals and we intend to maintain those policies.

[Lord Higgins (Con)]

My Lords, in respect of my noble friend Lord Lawson’s question, is it the Government’s view that forward guidance by the Governor of the Bank of England on interest rates was helpful or not?

[Lord Newby]

Yes, my Lords, the Government welcomed the decision by the current governor to issue forward guidance last August. We continue to support the concept of forward guidance.

Public Sector: Debt

Lord Higgins Excerpts

Thursday 23rd January 2014 Lords Chamber

[Lord Newby]

My Lords, the Government are trying to get under control a disastrous fiscal situation that we inherited from the previous Government. I am not quite sure whether the noble Lord is saying that we should cut expenditure more, but if he is, I would be grateful to hear his specific proposals.

[Lord Higgins (Con)]

Does my noble friend agree that, although the deficit has been reduced by one third or so, extra borrowing is still increasing at an alarming rate? The Chancellor is therefore absolutely right to make it clear that his intention is to eliminate the deficit completely, if we are not to burden future generations with the terrible task of dealing with the borrowing and also incurring higher interest rate costs. Does my noble friend further agree that it is high time the Opposition recognised the fact that reducing the deficit is the only possible way forward?

[Lord Newby]

I do agree with my noble friend. I am not sure that it is widely understood that cutting the deficit, which we are doing, will still mean that this Government will have borrowed an extra half a trillion pounds during the course of this Parliament. The party opposite has so far come forward simply with plans to increase that additional borrowing further. That would simply not be credible.

Financial Services (Banking Reform) Bill

Lord Higgins Excerpts

Monday 9th December 2013 Lords Chamber

[Lord Higgins (Con)]

My Lords, I thought the noble Lord, Lord Turnbull, was going to come in. I welcome these clauses, although these four new clauses add even greater length to the Bill in addition to the amendments that have been made. The rate at which this Bill has been growing has been quite extraordinary, and we shall have to wait and see how it ends up. I remain rather concerned at the way in which drafting has taken place. My noble friend might consider whether it would be appropriate to have some form of consolidation Act bringing together this and previous legislation. If the legislation is to be understood by bankers, or indeed by anyone, it will be necessary to correlate the various provisions which will exist after we have completed our debate. We have four new clauses at Third Reading, which is subject to tight rules.

I have merely one or two points. I am glad the ideas put forward by Mr Paul Volcker in the context of proprietary trading have been recognised as important. I have had many interesting exchanges with him, both as a Minister and as chairman of the Treasury Select Committee, and indeed in relation to the Claims Resolution Tribunal for Dormant Accounts in Switzerland, a quite different thing. He has been wise in all that he has said, but the problem is putting wise ideas into legislation.

As my noble friend has just said, if the Financial Times in the past few days is anything to go by the American legislation is going to be over 1,000 pages, while over here we are going to have a review and then a review of the review. This is going to take some time. Meanwhile the American legislation may be in place. What are we doing to co-ordinate the approach? This is an international matter. There are British banks operating in America and American banks that operate here. It would create considerable difficulties were the rules in one country to differ significantly from those in the other. A degree of international co-operation as soon as possible will be important if, as we all want, we are to ensure that proprietary trading does not carry both the risk to which my noble friend Lord Lawson referred and dangers in general to the banking system.

[Lord Phillips of Sudbury (LD)]

My Lords, I ask whether the independent review under Amendment 3 is on the same basis as the review carried out by the PRA under Amendment 2. Amendment 2 specifically refers to the risk factors that proprietary trading embraces, but there is no reference to that in Amendment 3 with regard to the independent review of proprietary trading. Is the second, independent review to be undertaken on a wider basis than the PRA review? Will it be able to look at some of the broader cultural aspects of proprietary trading by banks? I hope that question is not too late in the day for the Minister.

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[Lord Sharkey (LD)]

My Lords, I rise to move Amendment 21 and to speak to Amendment 20. I congratulate the Government on bringing forward their amendment to cap the total cost of payday loans. I am grateful to the Minister and to his officials for meeting me to discuss the issue and for providing us with copies of the letters between the Financial Secretary and the FCA.

Amendment 20 clearly has the right intent but it raises several important questions as do the letters between the Treasury and the FCA. Nowhere in the Government’s amendment or in their correspondence with the FCA is there any mention of the problem now discussed by the Minister of multiply sourced simultaneous loans. The Financial Secretary says in his letter to the FCA that the main aim of the cap is to ensure that PDL customers do not pay excessive charges for borrowing and to minimise the risk to those borrowers who struggle to repay and to protect them from spiralling costs, which make their debt problem worse. In short, far fewer payday loan customers should get into debt problems.

Simply imposing a cap, as I think the Minister was acknowledging, will not produce this result if borrowers can take out multiply sourced simultaneous loans. If borrowers can do this, any cap will be ineffective in controlling indebtedness. My amendment, as the Minister has said, proposes a ban on these multiply sourced loans, as is the case in Florida. I think I heard the Minister say that the FCA will consider the problem caused by multiply sourced simultaneous loans when he considers the mechanism of the cap. I see the Minister is nodding in agreement that that is the case.

My amendment also proposes a ban on rollovers, as the Minister has said. That is also the case in Florida. I remind noble Lords that in Florida no loan may be taken out until all previous loans have been settled in full and then only after a 24-hour cooling off period. Rollovers are banned in Florida because they are the chief way of luring borrowers into a spiral of increasing debt. Here in the United Kingdom, 28% of all payday loans are rolled over and 50% of payday loan revenue, according to the OFT, comes from these loans. The FCA does not appear to understand the problem with rollovers. In its October proposals it suggested that rollovers be limited to two. It provided no evidence to suggest that this would have the desired effect and it is pretty obvious, I think, that it would not. Five days ago, the financial services consumer panel recommended in evidence to the FCA that rollovers be limited to one. I think the case for rollovers being banned is very strong. Will the FCA explicitly consider banning rollovers and will it publish its cost benefit analysis—the one the Minister talked about—of the relative merits of banning rollovers and limiting them to one or two only?

The Treasury letter to the FCA raises other questions. The Financial Secretary states:

“The Government is also committed to ensuring that you can access the information you need to design the cap. The Government will bring forward secondary legislation to allow you to collect information to support your new duty as soon as possible”.

The Minister has tried to explain what some of this information might be, but I should be grateful for more clarification on exactly what the FCA is going to be looking for and also confirmation that the Government will publish a draft of the proposed secondary legislation well before bringing it to Parliament.

In his reply to the Financial Secretary’s letter, Martin Wheatley of the FCA says that it is possible for firms in other EEA member states to provide a payday loan service through the internet to UK consumers within the electronic commerce directive. He went on to say that this is not something that the FCA can mitigate. What does that mean? Does it mean that the FCA cannot cap such transactions and, if it does, what is the point of the Government’s Amendment 20? The Financial Secretary’s letter to the FCA makes reference, as the Minister has done, to data-sharing practices. It says:

“There are a number of regulatory interventions in the market which may help to create the right conditions to ensure the cap is effective. For example, the Government shares your concerns that data sharing practices may not be supporting good consumer outcomes”.

This all seems rather opaque and quite a long way from plain English. Does this mean that the Government want credit agencies and lenders to pool data? Does it explicitly include the consideration of establishing a real-time lending database? I should be grateful if the Minister could confirm to the House that the answer is yes in both cases.

The whole matter of a cap turns on effective implementation and the evidence suggests overwhelmingly that we need a real-time database of loans to do exactly that, but the level of the cap is also critical. Amendment 20 requires the FCA to secure,

“an appropriate degree of protection for borrowers against excessive charges”.

There is no attempt in the amendment or in the correspondence to define “excessive” or to give guidance about how a judgment of what is excessive is to be arrived at. This seems an important and, perhaps, critical defect in the amendment. Surely the FCA must be given some guidelines in defining excessive for the purpose of fulfilling its duty. For example, we already know that payday loan borrowers in Florida pay, at most, one-third of the costs that such borrowers pay here in the United Kingdom. Will the FCA consider this kind of disparity in its definition of “excessive”? Will the Government set out in writing and publish the guidelines that the FCA must follow, and the factors it must consider, in reaching a definition of what may count as “excessive”?

I turn briefly to subsection (1B) of the Government’s amendment. It states:

“Before the FCA publishes a draft of any rules … it must consult the Treasury”.

I accept that the FCA will consult widely and not just with the Treasury before it publishes these draft rules but I am concerned about what happens after the publication of such draft rules. The FCA’s performance to date is not an obvious guarantee that any such draft rules will be what is required under the Government’s amendment. For its October publication of the draft rules, which the Minister has referred to, the FCA considered all the available evidence and proposed to allow two rollovers but no cost cap of any kind. A month later, the Treasury considered the same evidence and decided that it was sufficient to require the imposition of a cap. In other words, the Treasury appears to believe that the FCA got it wrong, which does not inspire confidence in the judgment of the FCA.

For that reason, and for reasons of openness and transparency, I believe it is important that there is the opportunity and time allowed for detailed public comment on whatever draft proposals the FCA comes up with and, in particular, that Parliament is given the opportunity formally to scrutinise the FCA draft proposals. I should like to know whether the Government will commit to allowing that opportunity and that time for detailed public comment and for allowing Parliament that opportunity to scrutinise FCA draft proposals.

Finally, I should point out that nowhere in Amendment 20 or in the two letters that we have seen is there any mention of a limit on the amount of the loan or of a minimum or maximum term. Will the Government confirm that the FCA will explicitly consider both a limit on the amount and on the term of any payday loan? I repeat that I welcome the Government’s intention in bringing forward Amendment 20 and I look forward to hearing the Minister respond to the questions I have asked. I beg to move.

[Lord Higgins]

My Lords, I want to make two very brief points. The amendment refers to “charges” and to “high-cost credit”. However, the words “interest” or “the rate of interest” appear nowhere in the amendment. I would have thought that there was some case for explicitly including that in the Bill, because the use of the other, rather wider, expressions leaves too much scope for the situation to be fudged. I would be grateful if my noble friend would say something about that.

We have been talking very much about payday loans and their provision; but it has become apparent that a number of charges made overall by clearing banks sometimes can approach, if not exceed, the limits charged by payday loan providers. I would like my noble friend’s assurance that the organisation will take account of that also and, if necessary, deal with the problem of very high overall charges—particularly with regard to unauthorised overdraft charges, for example—made by clearing banks as well as by payday lenders.

[Lord Mitchell (Lab)]

My Lords, my head has been spinning in disbelief since the introduction of this Government’s amendments. Even two weeks ago the Prime Minister, the Chancellor and the Business Secretary were resolute in their opposition to any form of capping of interest rates offered by payday lending companies and other suppliers of short-term credit; yet here we are today, legislating for just such a cap. We are stating to the FCA that what was previously defined as a “may” now will become a “must”. That is a good outcome and I, for one, applaud the Government for this massive U-turn. It could not have been easy for them to eat their words, but politics is politics and if the heat has got too hot it is time to get out of the kitchen.

For nearly four years I have been working on a campaign to regulate payday lending. Of course, I knew about loan sharks and the terrible misery that they cause; but I had not really focused on the way this industry was developing. When I did, I was aghast. Here was a business that was enticing people into debt and playing on their vulnerabilities. Any way you cut it and any way you measure it, 6,000% interest is beyond morality and decency. I felt that it had to be regulated and that it was my duty to do so within this Parliament.

Last year we managed to persuade the Government to include an amendment to the Financial Services Act that gave the Financial Conduct Authority the power to regulate all aspects of payday lending and, in particular, to cap interest rates. We gave it the teeth, but sadly it did not bite. Indeed, it decided that it was not yet persuaded that these rates should be capped at all. One can only wonder: if 6,000% had not moved the FCA, would 10,000% or 100,000% do so?

A little-known fact is the extent of financial support that payday lending companies receive from the City. I have read that Barclays Bank lent Wonga over £250 million; when I investigated further I found that the number was very much higher. If you consider how much all the clearers and all the other financial institutions must be lending to the payday lending companies, the number must be many billions of pounds. The City purports to have washed its hands of this grubby sector, but in truth it participates by using payday lenders as surrogates.

I have this to say to Barclays and, in particular, to its chairman. If your mission really is to clear up the mess of the last 15 years, then please tell me: what is your bank doing, funding the payday lending industry? We have come a long way in these past four years and tonight will be a milestone. But we need to go further still. I address these comments to the FCA. Please ban all advertising for short-term loans targeted at children. It is bad enough that people have to borrow money from the payday lenders—but giving payday lenders carte blanche to use sophisticated advertising to encourage young children to persuade their parents to get into more debt has to be morally wrong.

Despite appearances to the contrary, I am not against the payday loan industry. We need it, it is essential and it must be successful, but we want an industry that offers loans at fair rates and does not extort. I think that this amendment achieves just that.

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[Lord Newby]

My Lords, noble Lords have raised a number of issues and questions. I shall do my best to answer. The noble Baroness, Lady Oppenheim-Barnes, discussed the way in which the total cost of the loan, as opposed to the interest rate, is portrayed, and of course many people do not understand interest rates. The Government are discussing with the European Commission the relative prominence of the total cost of the loan. This discussion is taking place in the context of the Commission’s review of the consumer credit directive, so I hope we are well on top of that.

My noble friend Lord Sharkey asked a raft of questions. I hope that I managed to write them all down. He asked whether the FCA understood the particular problems of multiply sourced simultaneous loans. I can assure him that that is within its remit. My noble friend talked about rollovers and asked whether the FCA would look at one or none as part of this review. I can give him that assurance. He asked whether he could see a draft regulation in a timely manner. We will try to do that. Of course, if we are going to consult on draft regulations, things such as the odd 90 days here and there make a lot of difference. Our ability to consult properly at any point in this process requires us to follow something like the timetable that I set out earlier. He asked whether data sharing is being considered as part of the FCA’s remit. I can assure him that the FCA is looking at that.

My noble friend asked for a definition of “excessive” and why it was not in the Bill. The FCA will be looking at existing definitions of excessive, including that in Florida. Different people in different places who cap payday loans have different definitions of excessive. There is no single definition that is uniquely right. It has to be taken in the context of all the other factors and the overall design of the scheme. The FCA will be looking at international definitions as part of that work.

My noble friend asked whether there will be an opportunity and time in Parliament for debate on the publication of the draft rules. That partly goes to the speed with which we do that. If, as I set out, the FCA publishes a consultation paper by the end of May, it will be perfectly possible for Parliament to debate it. There are a number of ways in which that could be done. In your Lordships’ House, it is now very easy for individual Members to get a debate on an issue within a very few weeks, even if no other formal debate was allowed. I would be very happy to raise that issue in the usual channels. Finally, my noble friend asked whether the FCA will consider the limit to cover both the amount and the term of the loan. I can give him that assurance.

The noble Lord, Lord Higgins, asked why we do not refer to interest in the Bill. The provision covers every aspect of the cost of a payday loan, of which interest is only one part. The definition in the Bill subsumes interest.

[Lord Higgins]

Would it not be better none the less at line 9 of the amendment to say “against excessive rates of interest and charges” as the rate of interest is quantifiable whereas charges are much more amorphous?

[Lord Newby]

Charges are also quantifiable. The aim, as we have set out very clearly, is to cover all components of the total cost of the loan.

The noble Lord, Lord Higgins, asked about the high charges that high street banks sometimes impose. Issues there can be investigated by the FCA and no doubt it may well wish to do so.

The noble Lord, Lord Mitchell, asked a number of questions. I first congratulate him and my noble friend Lord Sharkey on the persistence with which they have pursued this issue, bringing before the House evidence of what is really happening in the market and helping everyone involved in the process to gain a better understanding of the scale of the problem. I can confirm that the government amendment does what it says in that the FCA will not have any option but to make rules. It has to do it. The “must” is a real “must”. In terms of the powers that the Treasury will have, the purpose here is to ensure that the Treasury has an input into the consultation and development of the policy by the FCA. However, we have been very clear that the primary responsibility must rest with one body and that the appropriate body is the FCA. I will come back to the noble Lord’s point on timing in a moment.

The noble Baroness, Lady Cohen, said that she wished that credit unions could be more like payday loan companies. I think many noble Lords would share that view but, sadly, they have some way to go before they get into that position.

Autumn Statement

Lord Higgins Excerpts

Thursday 5th December 2013 Lords Chamber

[Lord Higgins (Con)]

My Lords, I very much welcome many aspects of the very imaginative Autumn Statement. Regretfully, I have to deplore once again the fact that many aspects of it were leaked in advance. I would have thought that the Treasury would have learnt the lesson from a previous Budget experience that this is not a good way of handling public relations—and is very discourteous indeed to Parliament. Parliament has the right to hear these matters first.

The good news, certainly, as my noble friend has just said, is that the economy is recovering faster than expected. Perhaps I might comment on why this has happened. There are, I think, two particular aspects. The first is that the deficit has not been cut as fast as we hoped and that consequently, the economy has picked up a little more, because of the effect on aggregate demand. None the less, I welcome the fact that the Chancellor has now set out a very firm timetable for getting down not only the underlying cyclical deficit but also the structural deficit. This is something to be welcomed. Up to now, we have rejoiced in the fact that we have cut the deficit by a third, but we are still continuing to borrow at two-thirds of the appalling rate that we inherited from the previous Government. It is very important that my noble friend agrees that that should be tackled.

The second reason, which gives more cause for concern, is the substantial reduction in saving—apparently the biggest fall in saving for 40 years. People have been using their savings, which has accelerated the growth of the economy, which may lead to concern. Given his particular responsibility for infrastructure, does my noble friend agree that it is absolutely crucial that we get savings up? The finance has to be provided for the infrastructure that the Government envisage.

In that context, I will ask one particular point. We seem to have got away from financing infrastructure in the usual way: that is, by allowing capital to be provided by whoever is launching the operation and then working it up in the usual way. Instead of that, we have been allowing monopolistic enterprises in particular to increase the prices on existing consumers. That has been the way in which we have been financing, for example, the railways and energy. Will he look particularly at whether this is the right way to proceed—because we are also then depending very largely on foreign investment rather than our own domestic savings and ownership?

[Lord Deighton]

I thank my noble friend for those incisive observations. He is absolutely right to say that the deficit was reduced in a measured fashion, which is part of the reason why the economy has been able to recover so quickly. He is also absolutely right that there is still a structural deficit, so we cannot simply allow for the natural recovery through the economic cycle to take care of our borrowing problem; we must continue to drive savings through the system. On the fall in consumer savings, again, my noble friend is absolutely right that it is a sign of a healthy economy to have a strong savings rate. On consumer behaviour, it is not surprising that, after a few years of belt-tightening, there has been a desire to begin spending again.

On the overall economy, as I mentioned, the recovery in business investment is the single most important change in the recovery of the economy over the next year. We anticipate that the recovery in consumer demand will give business the confidence it needs to increase its level of investment, which is what should sustain the recovery.

On infrastructure, my noble friend is correct. Essentially, there are two ways to finance it: directly from taxpayers or indirectly through the private sector and into the utilities, which then recover the investment through consumers paying. Of course, that is governed by independent regulators, who set the prices in those industries. It is absolutely part of our national infrastructure plan continually to assess the balance between the interests of the investing institutions and consumers’ affordability over the longer term.

Financial Services (Banking Reform) Bill

Lord Higgins Excerpts

Wednesday 27th November 2013 Lords Chamber

[Lord Phillips of Sudbury]

Yes.

I want to see, and I think that this may commend itself to the House, a cool look at just what the consequences are beyond the merely financial—you can scarcely use “merely” in terms of the numbers concerned. In Committee, I tried to remember a quote from John Maynard Keynes in 1936, when this type of trade was trivial when compared with today. He stated in his great book, The General Theory of Employment, Interest and Money:

“When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done”.

How pre-eminently true that is. The noble Lord, Lord Turner of Ecchinswell, made the bold but timeless statement when he was head of the FSA that a great deal—I am not sure that he did not say the majority—of what the City now does is socially useless, because, sadly, only a tiny proportion of these gaming trades has any commercial purpose whatever. They are pure gambling. It is not that they are buying forward raw supplies for some manufacturer to even out the ebb and flow of world prices in whatever commodity or mineral it is—nothing to do with it; it is pure, unalloyed gambling.

[Lord Higgins (Con)]

My Lords, I am trying to follow my noble friend’s argument. Precisely what contract is he describing as a gaming contract?

[Lord Phillips of Sudbury]

I will do my best to explain. Let us consider Merrill Lynch. It cornered, it is estimated, 50% to 80% of the world’s copper in a series of purchases last year, I think it was. That was pure gaming. It was not to satisfy any of its customer needs; it saw potentially vast gains in moving into the world copper market and simply buying it up. Can you imagine: 50% to 80% of all the world’s copper was purchased? That was pure gaming. In fact, I think that it went wrong and was part of the collapse, but I would not lay my life on that.

These are extremely difficult issues. The cultural and ethical aspects are deep. The vast majority of people engaged in such trading are decent, good people. They are not all crooks, but the system in which they are trapped is one which, first, was at the root of the disastrous financial and banking collapse from which we are still suffering—and there is a long way yet to go. Also, we should be interested in the wider outfall. The noble Lord, Lord Lawson, coined a rather vivid phrase last night about the cultural contamination that can go on when one part of a system loses all contact with any ethical underpinning.

Let us consider what is happening in our nation at large, and the extent to which gaming is now spreading rapidly. This week, I heard of one medium-sized town that has more than 70 betting shops. In my town, they have spread like a disease. I am the first to accept that it will be a difficult set of issues to address, but taking a cool, calm look at the wider effects of what is going on in the City of London must surely be for the public benefit.

My noble friend may argue that we have review overload and that the City must be allowed to settle down and not have any further big inquiries. We have had all sorts of them, have we not? That would be a profound mistake, because, often, the more difficult the inquiry, the more important the potential outcome. This proposal has no pre-judgment. Some of my remarks in opening the debate on the amendment, and some of my assumptions, may, in the light of a deep, extended inquiry that looks at all aspects of these difficult matters, be proved wrong. As I emphasise, it would be an open-eyed inquiry.

I refer to the Kay inquiry, which was published in July 2012. Many noble Lords will remember it. John Kay undertook an interesting and important inquiry. He stated that,

“trust and confidence are not generally created by trading between anonymous agents attempting to make short term gains at each other’s expense. Trust and confidence, or their absence, are the product of the prevailing culture”.

I want a better hold on what the prevailing culture is and what part in it is played by the City of London, which is central to our economic future and our thriving.

I hope that there will be support for this proposal. Even if the Government do not like some of the detail, I hope that they will take the nub of it away and, conceivably, come back at Third Reading with their own amendment. Such a review will speak to the prevailing values of Britain today and to the spirit of our times. In a profoundly and dangerously materialistic society, surely nothing could be more material to us all than to seek to get beneath these complex and technical facts and issues, in order to understand the wider underlying effects. I beg to move.

--- Later in debate ---

[Lord Deighton]

I was just getting to that. The Government believe that there is a superior approach to strengthening the law in this area by clarifying the requirements on regulators to meet auditors enough times to accomplish their objectives. I think we agree that the periodicity should not be the constraint, although perhaps we could deal with that by a requirement to disclose the frequency of meetings with certain types of firm to ensure accountability. Such an approach would, in the view of the Government, be superior and retain proportionality and the judgment-based approach while increasing accountability. If the noble Lord will withdraw his amendment I will be willing to return to it at Third Reading, subject to further consideration of these issues.

[Lord Higgins]

Before my noble friend sits down, can we be absolutely clear what he is saying? He is saying that he is going to come forward with an amendment at Third Reading to put this measure on a statutory basis, but leave the frequency point on one side. Is that what he is saying? If not, we should reach a decision on this.

[Lord Deighton]

That is what I am saying, yes.

Financial Services (Banking Reform) Bill

Lord Higgins Excerpts

Wednesday 23rd October 2013 Lords Chamber

[Lord Phillips of Sudbury]

My Lords, I, too, support the amendment. I moved Amendment 91B at the close of our second day in Committee, which overlapped to a considerable extent with this amendment. In my amendment, I also talked about looking at the cultural as well as economic effects of this mass of gambling, as it is, within the financial markets. I hope that the Government will smile upon this; it may be that if it comes back on Report I will try to amalgamate my amendment and this one.

[Lord Higgins (Con)]

My Lords, I also support my noble friend’s amendment, but with some qualifications and a request for some clarification. The amendment simply refers to “proprietary trading by banks”; that does not distinguish between one part of a ring-fenced bank and another. The arguments on this issue are so clear that we should take a perfectly clear view that there ought to be no proprietary trading whatever by any ring-fenced bank.

There is also no real need to wait three years for such an inquiry. My noble friend referred to the Volcker rule in America; not all of us in this Chamber have Paul Volcker as a personal friend, but I have great respect for him. He is absolutely right that this should not be carrying on in the United States. Although it may be that there has been a decrease for the moment, over a period of three years the situation might change somewhat. Therefore, we could take a clearer view on this between now and Report than is set out in the amendment. As my noble friend has pointed out, this is effectively the banks’ carrying out risky trading on their own behalf—in the past, not infrequently, it was risky trading on their own behalf with clients’ money—and this, again, is a crucial point. Perhaps we should clarify that aspect of the matter, but I have not the slightest doubt that this is a move in the right direction and I hope that we can make rapid progress on it.

[Lord Turnbull]

I reassure the noble Lord, Lord Higgins, that it is certainly not intended, while this activity might remain within a banking group, that it should be done, under the plan, by a ring-fenced bank. One of the reasons why we took the view that we should wait and see is that the dividing line between a proprietary trade and a trade on behalf of a customer is not straightforward, which is why it is very difficult in the US. For example, if I lend the noble Lord money he may seek some kind of hedge which I would provide. That might mean that my position as the bank is no longer what I really want it to be. As a bank, I would look around to see what my colleagues have done during the course of the day, and we would then add up all the positions that we have taken. We may well find that that position is not where we really want to be, so on the following day the bank goes out and undertakes a trade which gets it back to the degree of hedged position that it wants. Was that a proprietary trade or was it a trade that was a consequence of serving a customer? That is why this is actually very difficult and why we are wise to wait and see whether workable definitions could be found of what constitutes real proprietary trading and of what constitutes trading in response to a customer. This measured amendment enables us to do precisely that.

[Lord Deighton]

My Lords, the ICB considered in detail the case for a ban on proprietary trading in the UK, but decided in favour of ring-fencing. The PCBS heard evidence from a wide range of sources that prop trading does not appear to play a large role in the UK at the moment—as my noble friend Lord Lawson pointed out—nor did it play a significant role in the financial crisis. The noble Lord, Lord Turnbull, has already addressed the question of my noble friend Lord Higgins, but it should of course be noted that the ring-fenced banks will be banned from proprietary trading as well as from market-making and other forms of trading activity that would expose them to risks from global financial markets. Therefore, from a prudential perspective, much of the risk posed by prop trading can be addressed by a suitably robust ring-fence which is, of course, the thrust of our legislation. This was the point made by the PRA in response to questions from the PCBS.

It is also worth noting that the evidence heard by the PCBS also suggests that prop trading is not necessarily the sole avenue for the cultural contamination of banks. For example, the PCBS highlighted in its excellent report the serious failings in culture and standards at HBOS, a bank which did not engage in any prop trading at all. Indeed, it is perfectly possible to run an integrated securities business with full integrity in a way that manages any potential conflicts of interest quite satisfactorily, so they do not necessarily follow. It is far from clear, therefore, that prop trading is the real problem facing the UK financial system, or that structural solutions address cultural problems. In light of that, and of observations about the practical difficulties of a ban on prop trading, as it is being attempted in the US through the Volcker rule, the PCBS did not recommend a ban on prop trading.

It is not wholly clear what further evidence would support a different conclusion to that reached by the PCBS in its own assessment, so it is unclear what a further review into proprietary trading within such a short period of the PCBS’s own report would add. Still less is there a need for such a review to be followed immediately by an independent review of the same question. Of course, we have no issue with reviews as a matter of principle: we are just not sure that, in this case, legislating for one in advance really does much for us.

As the findings of the PCBS do not suggest that prop trading presents a serious prudential risk at this time, I do not think we need to legislate for the regulator to carry out a further review. The absolutely valid point made by my noble friend Lord Lawson was that this could change in the future. That is what we are trying to address. Should that happen, the PRA has made it clear that it already has the powers it needs to bear down on prop trading where it endangers the safety and soundness of a firm or where the risk incurred is not consistent with the publicly stated risk appetite of a bank.

Moreover, monitoring and reviewing all risks to a bank constitutes an essential part of the PRA’s work. The PRA’s approach is to insist that firms adopt and follow a risk appetite that is consistent with the PRA’s statutory objective to promote the safety and soundness of firms that it regulates. This will include regular monitoring and review of all risks, not limited just to those associated with prop trading. Therefore, to require the PRA by legislation to undertake such a review seems unnecessary. Should we legislate for a review of how reference rates are set, for example? Should we legislate for a review of mis-selling practices? Why, therefore, should we do it for prop trading? It is not apparent to me what problem a review would solve. While I think that reviews can play a useful role, in this case we are not sure that it is justified in advance.

We need to give the regulator the space to allocate its resources in a way that is appropriate and proportionate when considering all the different risks to the UK financial system, not only focusing on one particular risk. Our more widely framed reporting requirements allow for this. For all of these reasons, I do not think that a review on the particular issue of prop trading is necessary. The regulators are already subject to extensive reporting requirements. I expect the PRA to make the Treasury, and Parliament, aware of any emerging risks it identifies, whether through prop trading or anything else. The deputy governor for financial stability has already written to the chair of the Treasury Committee, offering to discuss arrangements for reporting. I therefore ask the noble Lord to withdraw his amendment.

[Lord Higgins]

My Lords, the Minister says that we do not want to have the regulator wasting resources. However, if we ban an activity, it would not waste resources. I am also not absolutely clear—I thought I was—that we are going to say that proprietary trading by a ring-fenced bank is absolutely banned. If that is so, ought we not to make it absolutely clear in the Bill?

On the point made by the noble Lord, Lord Turnbull, we have to distinguish between proprietary trading and other activities such as hedging as there may be a case for the bank operating on behalf of its clients by hedging for a foreign exchange risk or whatever. However, that is not at all the same as what is normally meant, certainly by Paul Volcker, whereby banks use a client’s money to take on particularly risky investments which have nothing to do with the client.

[Lord Deighton]

I was trying to be clear but I shall reinforce my comments. I think this issue was covered on the first day in Committee when we dealt with the details of ring-fencing. It is clear that proprietary trading for ring-fenced banks is not allowed; it is an excluded activity, as defined. As my noble friend implies, there are some exceptions to that which are predominantly related to a bank’s own hedging activities to deal with its own surplus liquidity. My noble friend’s phrasing was accurate and the issue is included in the Bill.

--- Later in debate ---

[Lord Higgins]

My Lords, we have had a fascinating debate within a debate between the noble Viscount and my noble friend Lord Lawson. I merely make one or two points. It seems to me that there is a case for a remuneration code. In a way we could let the amendment end after subsections (1) and (2) and leave it to the FCA and PRA to take a view. It raises the question of whether, after they have done so, the code they come up with ought then to be considered further in this House. I leave that on one side.

As far as culture is concerned, what my former constituents regard as unfortunate is the whole culture of bonuses. I think that they take very strongly the view that the people concerned should be paid a rate for the job and then get on with it. Rather than specify, as this amendment does, that a proportion must be in the form of remuneration which is variable, I think they would rather the opposite—or at any rate, that the proportion which is variable should be limited.

There are, of course, very real practical problems concerning remuneration in a company which is clearly going on the rocks, when one needs to recruit someone to sort it out. That is a particular case. More generally, we could usefully consider the points made by the noble Lord, Lord Turnbull. The argument for his attitude, if I understand it correctly, on variable remuneration is, “If it is variable, we can claw it back at some later stage”, but that may be a long while after the actual events have taken place. There is also the problem of companies being not just too big to fail but, as has been said on previous occasions, too big to manage. Part of that problem is that we are looking at remuneration for banks which are in that situation. What has become clear in recent events is that people have been paid very large sums when the organisation they are asking to manage is not capable of being managed at the size that it is. Be that as it may, there is a case for a remuneration code, but we should probably leave it to the bodies concerned, which are suggested in this amendment.

[Lord Newby (LD)]

My Lords, we have had an extremely wide-ranging debate on many aspects of bankers’ remuneration. I remind the House of the two specific amendments in front of us. The first imposes a duty on regulators to prepare an additional code on remuneration in relation to senior managers of banks, while the second proposes additional powers for regulators to claw back deferred remuneration of employees of banks that require state aid.

The statutory requirement on regulators to prepare another remuneration code aims to implement a set of remuneration reforms similar to those recommended by the Parliamentary Commission on Banking Standards. I will explain why the existing remuneration code, current rule-making powers and further regulatory action in response to the parliamentary commission provide a clear basis for the implementation of these proposed reforms.

The existing remuneration code addresses the commission’s objectives for regulating remuneration in a way that combines a concrete legal basis with a rigorous system for application. The remuneration code is made under the rule-making powers given to the regulators in the Financial Services and Markets Act 2000, including Section 137H, which extends the provision which may be included in remuneration rules. Any breaches of the regulator’s rules, including breaches of the remuneration code, can be punished with serious sanctions. The code reflects the Financial Stability Board’s principles and standards for sound compensation practices, and European legislation under CRD IV. So this is a code established under statute and therefore might not in any way be thought to be ephemeral.

The content of the existing code already goes a long way to addressing the content proposed in the amendment and, where that is not the case, the regulators have indicated their intention to consult further on any necessary changes. So, for using profits to calculate pay, the existing code states that firms must assess current and future risks, and the need for consistency with the timing and likelihood of the future revenues. This clearly requires firms to calculate profit-based remuneration carefully with regard to risks to the bank. On the balancing of risk and reward, the code makes extensive reference to the close relationship that remuneration and risk considerations must have. Reward calculation based on profit and non-financial metrics must encourage effective risk management and not constitute a risk itself.

On pay deferral, the code specifically requires that at least 60% of variable remuneration above £500,000 or to a director of a significantly-sized firm is deferred over a period of not less than three to five years. On top of the existing requirement, the regulators have said in their response to the PCBS that they will consider adding to their code requirements on deferral. In this area, the existing code is already rigorous and set to become even more so. Regarding the issue of variable pay for non-executive directors, the PRA has stated clearly in its response to the PCBS that there is currently a presumption that this practice should not take place and that this will continue to be the case.

The FCA is conducting a thematic review of sales-related incentives and assessing what action would most effectively prevent those presenting conduct and stability risks. This could include further high-level remuneration principles for staff not subject to the full remuneration code. Additionally, the PRA and FCA have stated that they will update the remuneration code following consultation next year. This review will take into account the PCBS recommendations, including those on a greater use of instruments such as bail-in bonds to tackle the practice of compensating recruits on change of employment and greater and more granular disclosure by remuneration committees in banks’ annual reports.

Therefore, to specify in primary legislation exactly what the code should cover on top of the rigorous current approach seems unnecessarily rigid. The exact content of the code will need to be updated from time to time, including in the light of international best practice. Ensuring that the regulators have the necessary powers and authority to undertake such changes in a timely manner is crucial—and that is already achieved in FiSMA. Overprescribing in primary legislation risks adding an unwieldy layer to what is already an effective process.

I believe we have already given the regulators the necessary powers to apply rules to manage financial stability risk and promote responsible behaviour in banks. The existing code is based on internationally agreed principles and is responsive enough to incorporate new provisions when called for. Indeed, nowhere is this clearer than in how the PRA and FCA revisions of the code, and the FCA thematic review, will take account of the parliamentary commission’s recommendations.

On the subject of the clawback of deferred remuneration at banks in receipt of state aid, I should begin by being clear that the Government perhaps more than that of any other country, recognise the consequences of bailing out financial institutions. We have been clear that individuals must be held accountable for misconduct and that there should be no rewards for failure. The Government agree that there should be specific powers available for the regulator in relation to remuneration at banks where they require state assistance. The ability to reduce or revoke deferred remuneration when a bank requires state aid would further strengthen accountability and complement the extensive reforms which the Government have undertaken to remove the implicit taxpayer guarantee.

However, regulators already have the power to require the cancellation of deferred remuneration and loss of office payments where a bank requires state-aid support under their existing powers. In the PRA code, specific provision is made for the reduction of deferred remuneration where a bank suffers subsequent poor performance. Additionally, the reforms introduced under the EU capital requirements directive IV have reinforced existing rules on pay at banks in receipt of state support so that: bonuses are strictly limited where inconsistent with the maintenance of a sound capital base and timely exit from government support; regulators will be able to require banks to restructure remuneration in a way that is aligned with sound risk management and long-term growth; and directors should not receive a bonus unless justified.

The Government sought to build on these measures to strengthen further the accountability of individuals who are responsible for an institution which requires government intervention by requesting the PRA to consider the PCBS recommendations on this issue. In response, the PRA has stated that following consultations next year revisions to its code will strengthen and broaden the circumstances in which unvested awards can be reduced and vested awards clawed back. The PRA is also considering to whom these rules should apply and whether further powers are desirable in this regard.

However, extending these powers to cover the removal of pension benefits which have not yet become payable, but which the individual concerned has a contractual right to receive, is difficult. That would restrict the rights of the individual concerned under the European Convention on Human Rights to the “peaceful enjoyment” of his or her possessions. The Government do not consider that this would be appropriate. The PRA will consult further on these issues early next year, including on the details of how the powers should be drafted and the population of staff to whom it should apply.

The noble Lord, Lord Turnbull, specifically asked to whom the remuneration code applies. The code currently applies—and will continue to apply—to around 2,700 firms, including all banks, building societies and capital adequacy directive investment firms. That includes broker-dealers and asset managers—such as most hedge fund managers and all USIT investment firms—as well as some firms which engage in corporate finance, venture capital and the provision of financial advice, brokers, multilateral trading facilities and others. In terms of who is covered within those firms, the code defines “Remuneration Code Staff” to include,

“senior management, risk takers, staff engaged in control functions and any employee receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers, whose professional activities have a material impact on the firm’s risk profile”.

Some of the principles in the code must be applied to the whole firm, including those on guaranteed variable remuneration and the more general principles around risk management et cetera.

The right reverend Prelate talked about the culture in the banking sector and changes that he is seeing in Birmingham, which he hopes are the start of a process. I think we would all agree that that is desirable. In some of the big banks at least, there has undoubtedly been a noticeable change in culture in recent months and years. The right reverend Prelate and a number of other noble Lords talked about the overall level of remuneration. That is a matter for the bank’s shareholders but the Government and my colleague in another place, Vince Cable, have strengthened the powers of shareholders to require boards to explain and get approval for what they plan to do on remuneration. That has considerably increased transparency and, I hope, might have a moderating influence.

The noble Lord, Lord McFall, asked whether the regulator would have access to Barclays management information, to know how it makes its money. I think we talked a bit about this in an earlier debate. The PRA has access under Section 165 of FiSMA to require banks to provide it with all the information or documents that it reasonably requires for its function. That is a very broad power and would cover the information referred to.

The nub of our argument, as the noble Lord, Lord Turnbull, rightly pointed out in his opening speech, is that we have a code. It is operating with increased rigour and will be amended next year to take account in detail of what the parliamentary commission has said. That being the case, we do not need any further provision.