Office for Budget Responsibility

Lord Higgins Excerpts

Wednesday 6th July 2011 Lords Chamber

[Lord Sassoon]

I would love to be able to tell noble Lords what was in the mind of Robert Peston or whoever was being quoted, because it certainly was not the Chancellor. It was somebody interpreting the mind of the Chancellor.

Of course, there are certain ways in which there is flexibility within the numbers, because the automatic stabilisers operate as the economy fluctuates. In that sense there is flexibility, but I have no idea otherwise what that particular commentator had in mind. It certainly had nothing to do with use of the reserve.

[Lord Higgins]

My Lords, has my noble friend noted that the recent report of the IMF on the UK economy suggests that the Chancellor’s plan A, as the noble Lord referred to it, is on the right course? However, is not the growth forecast referred to in the Question none the less pretty disappointing? Is this not a reflection to a considerable extent of the slow rate of growth in the money supply? Given that that is so, is there not a case for considering a further extension of quantitative easing?

[Lord Sassoon]

My Lords, I am grateful to my noble friend for pointing out the IMF’s recent assessment that endorses the deficit reduction plan, as has the Governor of the Bank of England and just about every other commentator I can think of. That is the plan to which we stick. The third Question this afternoon is on matters related to the Monetary Policy Committee and maybe it would be better to talk about monetary matters then.

Monetary Policy Committee

Lord Higgins Excerpts

Wednesday 6th July 2011 Lords Chamber

[Lord Sassoon]

I would always hesitate to hold up and criticise the characterisation of the Bank of England MPC’s target by the noble Lord, Lord Myners. However, as I have made clear, it has one primary target—to maintain price stability, with the target that I have already confirmed—and it is doing a fine job in extremely difficult circumstances, when oil prices are 40 per cent higher than they were at the end of last year and agricultural prices are 60 per cent higher than a year ago. Against that background the MPC is doing a fine job in very difficult conditions.

[Lord Higgins]

Having not got an answer on the first Question, I shall try again. Would my noble friend agree that much of the problem is that the present inflation is imported rather than domestically generated, and that needs to be taken into account in making these decisions? None the less, the MPC also has responsibility for growth. Given the low rate of growth, and the low rate of growth in money supply, is there not a further case for more quantitative easing?

[Lord Sassoon]

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

Greece: Default Contingency

Lord Higgins Excerpts

Monday 20th June 2011 Lords Chamber

[Lord Sassoon]

On the role of the EFSM, I would refer the noble Lord to the words of the French Finance Minister, Christine Lagarde, when recently interviewed on the BBC. She talked about the package for Greece being one of bilateral loans, and she saw the likelihood of any future support for Greece as a continuation of that bilateral arrangement. So there has been no question of using the EFSM in the context of Greece. As for the question on the Bank of England, I am certainly not going answer for what the Bank of England does or does not take in—nor would the noble Lord, Lord Myners, for one minute begin to think that I would start answering questions about the bank’s collateral policies. As to the capitalisation of the ECB, that is an entirely hypothetical question, as the noble Lord knows full well.

[Lord Higgins]

My Lords, is it not apparent that the Greek economy cannot become competitive in the foreseeable future at its present exchange rate? Greece will be condemned to an endless succession of deflation and bailout unless it leaves the euro. Is it therefore not extremely important that discussions by the British Government and in the European Community should take place on how to minimise any collateral damage should that come to pass?

[Lord Sassoon]

My Lords, I am not sure that I entirely accept my noble friend’s starting premise. The position is that Greece is a member of the eurozone, and the eurozone will continue to be the eurozone. We want to see the strengthening of fiscal and economic discipline within that zone. When the IMF put together and led the programme that Greece signed up to—which had elements of fiscal consolidation, structural fiscal reform and wider structural reform—it was done precisely in the context of Greece continuing to be a member of the eurozone, and that is the continuing position. The package has been put together and the new Government have some decisions to take. The IMF is coming up to its regular review before the next drawdown of the package, but that is entirely in the context of Greece being able to finance itself on an ongoing basis within the eurozone.

Regulatory and Banking Reform

Lord Higgins Excerpts

Thursday 16th June 2011 Lords Chamber

[Lord Higgins]

My Lords, I welcome overall this Statement and the speech last night made by the Chancellor on related matters. In many ways, the Chancellor’s speech spelt out what he intended rather more clearly than was done in the Statement today. However, I am very glad that he is sticking to his plan A for the economy, which was so clearly endorsed by the IMF recently. In response to the question of whether it was time to adjust macroeconomic policies, it gave the clearest possible answer—no.

As to regulation, it must be right that the Chancellor is scrapping the tripartite agreement, which had such disastrous consequences. The position was not quite clear from my noble friend’s reading of the earlier Statement. My understanding is that what is being proposed is what the IMF calls a triple peak arrangement; that is, a new prudential regulator, a new financial conduct authority and a new macroprudential authority. Am I right in thinking that there are three bodies rather than two?

I turn to the other question in relation to regulation and to the question of ring-fencing. Personally, I would have preferred the more radical solution of complete separation. I realise the arguments about cost of capital, competition and so on but, after all, American banks did survive quite successfully for a long time under the Glass-Steagall arrangements. But when we come to the question of ring-fencing between the investment part of a bank and its retail part, I am not clear whether it is intended that the ring fence should have holes in it or whether there is to be a complete ban on capital flowing from one side of the ring fence to the other. There seems to be some discussion at the moment which suggests that the ring fence would not be as solid as perhaps some of us would wish it to be.

The other thing that is not clear about whether something is too big to fail is whether, following the establishment of the ring fence, the part of the bank concerned with investment banking, no matter how large, would be allowed to fail but the retail side would not. In other words, there would be an absolute guarantee that the retail part of a bank would be protected by the Government. If that is so, it raises very serious questions of moral hazard. The extent to which the retail banking section has not been devoid of the recent problems arising from risk-taking creates a real problem. Obviously, we will be much clearer about this when we see the White Paper and the pre-legislative scrutiny which takes place. But perhaps my noble friend would clarify precisely what is meant by ring-fencing in this context.

[Lord Sassoon]

My noble friend’s first question was about whether this is twin peaks, triple peaks or whatever. I have always found that a somewhat stale way to analyse the issue because over the past decade constant comparisons were being made between single peaks, twin peaks and so on, so I am reluctant to be drawn into characterising what we are now proposing as any number of peaks. All I can say is that it is emphatically not a triple-peak solution in that the macroprudential and the micro in the PRA are going to be in one body in the Bank of England. So although characterising it as twin peaks is closer to the models that have been analysed by academics and others over the last few years, it gets us back to language that I am not sure is entirely helpful. However, it is certainly not a triple-peak solution.

On the questions around separation and permeability of the ring-fence, the Government will be guided by the independent commission’s final report. But it is also important to recognise what the ICB’s interim report did and did not say. To put it simply, it certainly was not a division between retail and investment banking. The commission acknowledged that a balance has to be struck between imposing very high costs on an important sector and the degree of safety. The point of firewalling is not to eliminate all risk, but to minimise the risk and cost to the taxpayer should a bank fail. The ICB is now focused on these issues between now and September. The principal issues to be looked at by the Government and the Bank of England will be the powers to manage the collapse of any investment bank, were that to happen in the future. As I hope was clear from my honourable friend’s Statement, one of the principles in establishing the ring-fence is to make sure that the taxpayer is not exposed on either side of it. Therefore, getting rid of the risk of moral hazard is at the centre of the construct that we are looking to put in place.

Consumer Insurance (Disclosure and Representations) Bill [HL]

Lord Higgins Excerpts

Monday 13th June 2011 Grand Committee

[Lord Higgins]

My Lords, I begin by raising one or two questions of a procedural nature. I am not clear whether I am speaking in the gap. My understanding is that there is virtually no precedent for the procedure that we have adopted today other than for one previous Law Commission Bill. It is not the least bit clear whether this is a Second Reading. My understanding is that it is not. We are considering a Second Reading in Committee. If it is in Committee, any noble Lord is entitled to speak without being on a speakers list, but I understand that there is a speakers list. Perhaps at a later stage either the Lord Chairman or my noble friend, if he has advice from the Clerk, could make the position clear.

Further, in relation to the statement made by the Lord Chairman at the beginning, as I understand it a Second Reading will be moved in the Chamber in the normal way. I am not clear whether that will be debateable. Perhaps we can have some clarification on that. Presumably, there will then be Committee and Report stages later on. At the moment, there seems little precedent to clarify the position on any of this. However, on the assumption—it may be an heroic assumption—that I am speaking in the gap, perhaps I might raise one or two points.

I first congratulate my noble friend on the helpful way in which he has had private discussions ahead of this meeting. I also congratulate those who prepared the documentation for the Bill, particularly the Explanatory Notes, with the excellent and helpful diagram. There is confusion, as my noble friend Lady Noakes implied, between the situation with the Bill and European legislation. Of course, we do not have a single market in insurance in the European Community. Consequently, some parts seem to be dealt with by directives and some parts by national legislation. That takes me a little wide of the remarks that I want to make, but I congratulate my noble friend and, indeed, the Treasury on arranging to get this Bill into the programme. It certainly would not normally get in, given the pressure on parliamentary time.

The Bill is clearly very useful. It clarifies the position considerably, except in one respect. I discovered only this afternoon the massive tome that is the Law Commission and Scottish Law Commission report. At paragraph 10.29, it raises the question of whether courts should follow industry guidance and it says at paragraph 10.30 that there is confusion as to whether the courts follow industry guidance or not. Parliamentary counsel has drafted a provision saying:

“The insurer may not take advantage of any remedy provided for under this Schedule if, or to the extent that, it would be unreasonable to do so according to written guidance generally recognised by insurers providing the type of insurance in question”.

That seeks to reconcile the position between codes of practice and legislation, which in many ways this seeks to avoid. Anyway, when I look at Schedule 1, I cannot find that particular clause, which appears to have been drafted but not included. If it is not included, this point seems still to be left in some confusion.

I will be imposing on the tolerance of the Committee if I go on much longer. However, if this is going to be done in future—and there is a strong case for using this procedure on Bills of this kind—we need to be clear on what the procedure is.

--- Later in debate ---

[Lord Sassoon]

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

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

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

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

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

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

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

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

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

[Lord Higgins]

I am most grateful to the noble Lord. The trouble on these occasions is that the Hansard reporters tend to remove the relevant documents. I am most grateful for his clarification.

[Lord Sassoon]

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

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

On the definition of consumers and micro-businesses, we discussed informally last week what would happen with respect to the insurance of the foot of a ballet dancer or a footballer. Maybe we could call this the “David Beckham’s foot” question. The Explanatory Notes on Clause 1 define a consumer as,

“an ‘individual’ who is acting wholly or mainly for non-business purposes. Thus the consumer must be a natural person, rather than a legal person (such as a company or corporation). The definition expressly provides for mixed use contracts”—

for example, the insurance for a personal car that is sometimes used for business travel to be defined as a consumer insurance contract. It means that the Bill will not apply to individuals purchasing insurance that is mainly for purposes related to their trade, business or profession, which would clearly be the case in some of the examples that have been discussed.

Lastly, on the cost of insurance, HM Treasury has not made an estimate of the impact of the Bill on insurance premiums. However, we have estimated that the net impact will be savings for the industry—that is, when we take account of the initial training costs and the savings as a result of fewer FOS complaints among other factors. On the basis that the industry should have net savings from this Bill being enacted, there is absolutely no reason to believe that there should be any additional cost passed on to consumers. In relation to the overall cost of insurance, these are relatively small marginal costs but ones that would impact favourably—that is, downwards—on insurance costs.

Oil Prices

Lord Higgins Excerpts

Wednesday 8th June 2011 Lords Chamber

[Lord Sassoon]

My Lords, I completely agree with the figures given by the noble Lord for the very considerable increases in commodity prices over the past year. Those are, of course, driven by global factors, but they impact very severely on consumers and businesses in this country. That much I agree with. He referred to low interest rates. This is absolutely critical. We have almost record low interest rates on our 10-year gilts at the moment—3.33 per cent, I think, last night. That is a recognition of the confidence that the Government have in the underlying fiscal policy but it also reinforces that the Government’s contribution is to make sure that we continue to have a prudent view on public finances and do not deviate from the course that we set for reducing the fiscal deficit that we inherited.

[Lord Higgins]

My Lords, is it not clear that the mechanism set up by Mr Gordon Brown for controlling inflation is not working and that the Monetary Policy Committee of the Bank of England is taking a number of other factors into account in addition to inflation? That being so, would it not be appropriate to revise and improve the remit given to the MPC rather than the Governor of the Bank of England having to write letter after letter after letter to the Chancellor of the Exchequer explaining why inflation is above target?

Public Expenditure: Reserve

Lord Higgins Excerpts

Monday 9th May 2011 Lords Chamber

[Lord Sassoon]

My Lords, first, in relation to this discussion about borrowing costs, I am pleased to say that as of last week the UK’s 10-year borrowing costs, the benchmark for our gilts, hit practically the lowest that they have ever done, while the margin we pay in relation to the German bund has hit its best position since the general election. We absolutely must do these things to make sure that our interest rates remain low. As to how the reserve operates, I am happy to copy to the noble Lord the published rules that the Treasury uses. However, they are for consideration only in exceptional circumstances and would not be linked to the sorts of factors that he sets out.

[Lord Higgins]

My Lords, did the European bailout of the Greek Government deplete this reserve and would any extension of that process deplete it?

[Lord Sassoon]

No, it did not and I will not talk about hypothetical situations.

Economy: Growth

Lord Higgins Excerpts

Thursday 31st March 2011 Lords Chamber

[Lord Higgins]

My Lords, it is a pleasure to follow the noble Lord, Lord Hollick, and I congratulate him on obtaining this debate. He certainly made a very thoughtful speech. It is interesting that he presented no alternative to the Government’s views; rather, he presented a series of ways in which the present policy could be enhanced. Each of the items that he mentioned deserves careful consideration.

As the noble Lord pointed out, we had an opportunity last week to consider cuts and the rate and extent of them. I remain firmly of the view that the Government are doing the absolute minimum required to get the economy back on an even keel, because, as the OBR report and the Red Book make very clear, even at the end of the five-year period, despite all the cuts and the tax increases, the actual amount of debt will have gone up rather than fallen. The longer one delays in taking action, the bigger the amount that you eventually have to pay off in total.

Perhaps I may make another point. As the noble Lord also rightly points out, the time available for debate today has been extended, but it is still down to four minutes per speaker. It is very difficult to deal with the points that he has made in a speech of four minutes. We should seriously consider whether a really extended debate in the Moses Room in which we could go into the OBR’s report in depth, because it is a very good report indeed and raises a number of issues, would not be more to the advantage of the House than time-limited debates on the Floor of the House.

I distinguished last week between two ways in which the expression “growth” may be used. It may be used to represent the fact that existing spare capacity is being used up more and therefore there is growth, or it may be used to represent increasing the underlying productive potential, which the noble Lord largely concentrated on. The course which the OBR is setting in gradually mopping up that excessive capacity—it anticipates that the end of the cycle will come in about 2016—is the right way to go. That is very similar, I feel bound to say, to what was attempted back in the early 1970s, although unfortunately that was wrecked by a massive increase in import prices. We are faced with the same problem. It was stigmatised as a dash for growth. I do not think what we are now proposing is that, nor do I think that it was then. What we have to do is get a steady increase in the amount of demand in the economy.

As regards the underlying productive potential, certainly we need to have more investment but we also need more saving. The reality is that those who have saved prudently, particularly those on low fixed incomes such as my former constituents in Worthing, find that their savings have been seriously attacked. It is very difficult to think why anyone should save at the moment, given that it is virtually impossible to get a real rate of return on savings. Therefore, as far as the productive potential is concerned and the Keynesian relationship between saving and investment, I would very much hope that the Government will now take further steps to increase the level of saving and give some real incentive for savers in the sense of an actively positive rate of return.

I find that I am already out of time and I have a speech for about the next two hours. Alas, I shall resist that temptation. None the less, the noble Lord has got the debate off on a very sound footing and I look forward to hearing what follows.

Economy: Government Policies

Lord Higgins Excerpts

Thursday 24th March 2011 Lords Chamber

[Lord Higgins]

My Lords, I join those who congratulated my noble friend Lord Lawson on obtaining this debate, and particularly on his sense of timing. As he rightly says, we are able to debate in the context of the Budget, which we do not normally have the chance to do the day after the Budget has been delivered. I welcome what my noble friend Lord Lawson described as the “lollipops”. Given the context of a neutral Budget, the Chancellor has been very imaginative in that respect, particularly with regard to the proposals for charitable giving in relation to inheritance tax. That will be of great importance, particularly to the arts.

I also welcome very much the fact that we have suddenly reverted to a Red Book after years of glossy magazines—the printing of which costs huge sums of money—produced by the previous Government. I also welcome the analysis of the Office for Budget Responsibility. When we debated this with my noble friend on the Front Bench, no one mentioned that the OBR would need the full details of the Budget in advance of its being delivered. The traditional view in the Treasury was always that the overall picture ought to be confined to Treasury Ministers, the Permanent Secretary and, if he was lucky, the Prime Minister. There is no doubt that this arrangement increases the risk of leaks, which may of course be market-sensitive. None the less, the innovation of having these forecasts is a considerable advantage.

This debate is largely concerned with economic growth. There is dreadful confusion over what we mean by economic growth. We must make a distinction between a situation where there is excess capacity in the economy, as there is now as a result of recent crises, and the Government utilising that capacity, which in turn produces economic growth—a matter for demand management—and economic growth in the sense that we seek to increase the underlying productive potential of the economy. It is very important to keep the two separate. I have to say that the Red Book constantly confuses them. As far as the second situation—the underlying growth in potential for the economy—is concerned, the Chancellor has introduced several measures that will be very helpful.

I will say something about the other aspect: the extent to which the demand management of the economy enables us to utilise some of the resources that are being wasted at present. It is important to put this into context. I am particularly concerned about the lack of co-ordination between fiscal and monetary policy. Mr Gordon Brown did several things that we now see very clearly were mistakes, such as—certainly—his tax on pensions, which wrecked the previous system of defined benefit schemes in the private sector. Then there was the tripartite agreement, which everyone now agrees was a mistake.

His giving independence to the Bank of England has, on the whole, been reviewed as a good thing, but I have never taken the view that what he introduced was a good thing. It was not the case that he gave control over monetary policy to the Bank of England. He gave control of interest policy to the Bank of England and relied then on a single interest rate in the Bank of England, which was clearly inadequate as there are many different interest rates. The effect has been that until quite recently, with the introduction of so-called quantitative easing, the Bank of England has been concerned not with monetary policy, in the sense of the supply of money, but only with interest rate policy.

I am concerned by the Red Book’s executive summary. Under the heading “A Strong and Stable Economy”, it states:

“monetary policy will ensure price stability, and thereby support the wider economic stability”.

It is quite apparent, and has been for a considerable time, that the way that the Bank of England is handling these matters is not producing price stability. We are way above the target range. Therefore we need, at the very least, to revise the Bank of England’s terms of reference if we are to avoid that.

Secondly, I want to take up a particularly important point at the heart of the present political debate—whether the measures being taken to reduce the deficit are happening too fast. The leader of the Opposition in the House of Commons stressed this point very heavily indeed. He thought that the policy was too fast and too tough. One has only to look at the final page of the Red Book and the penultimate table, which includes the current forecast and takes into account all the Chancellor’s Budget proposals, to see that although it is true that cyclically adjusted net borrowing will reduce in percentage terms, that is the effect of the cycle. It is the effect of what I referred to earlier—taking measures that will enable you to mop up the productive capacity which at present is being wasted. However, in the March forecast and the absolute figures at the bottom line of the table, it is absolutely clear that net debt goes on increasing, despite the measures that the Chancellor has taken and despite the effect that the OBR thinks the cuts will have over the period until 2014-15.

Therefore, what the Chancellor is doing is the absolute minimum required to deal with the deficit. If one were to delay those measures as the Labour Party proposes—although we have no clear idea of what it is really proposing in that respect—we would find ourselves in a crucial situation that continues to deteriorate. If we were to delay more, the deficit would go on increasing for a very long time. It does that even on the Chancellor’s proposals. However, it would be far worse—and absolutely disastrous internationally in economic terms, as noble Lords have said—if we were not to go ahead on the basis that the Chancellor has outlined.

Banking

Lord Higgins Excerpts

Wednesday 9th February 2011 Lords Chamber

[Lord Higgins]

My Lords, the Minister repeated a very complicated and extensive Statement on what the Government propose to do. One thing is clear: they are right to get rid of the tripartite agreement that was so disastrous under the previous Government. It would seem that the Government are now adopting a very balanced view. They have a very difficult task in maximising revenue from the City while at the same time not driving people abroad who would otherwise contribute an enormous amount to the British economy.

When the previous Statement was made, I expressed concern that in the discussions that the Government were having, they confused the situation by appearing to say, “We will be soft on bonuses, provided you lend”. In the event, it is clear that the Government are being extremely tough on bonuses and have reached a separate agreement on increasing the amount of lending, which is so important.

The public anger on this matter is very much related to the expression “bonus”. In the public mind is the simple thought that any amount extra that is paid ought to reflect performance. However, what has been so clear in the banking sector is that bonuses continue to be paid on a huge scale while performance has been lamentable. Can my noble friend say to what extent the restrictions that are now being placed on bonuses will ensure that they reflect the performance of the various individuals and banks concerned? The idea of a pool of bonuses among the banks when their performance has been very poor is, I think, a serious problem. The bonuses for individuals seem to be related hardly at all to performance.

Finally, I welcome the fact that much tougher action has been taken with regard to the banks which have been rescued by the taxpayer and that the remuneration committees and, in particular, UK Financial Investments Ltd will make sure that in future these matters are looked at on a commercial basis while ensuring that bonuses are not excessive.

[Lord Sassoon]

I am grateful to my noble friend Lord Higgins for pointing out that at the heart of the failure of the system and the mess that this Government have had to pick up and sort out was the failure of the tripartite system of regulation, which of course we are sweeping away. Seeing the noble Lord, Lord McFall of Alcluith, opposite reminds me that he very perceptively characterised it as a Rolls-Royce system when it sat on the shelf but an old banger when it got on the ground. I wish that I had his turn of phrase, but the tripartite system was indeed at the heart of it.

As to bonuses and their linkage to performance, that is absolutely at the heart of what the Government have agreed with the banks today. I think that the critical new element is the linkage between the performance of the banks on meeting SME lending targets and the pay of the chief executive and the other senior executives who are directly responsible for that line of business. Therefore, it is a crucial point. It is well made by my noble friend and it is at the heart of this agreement.