Taxation: VAT on Retrofitting Buildings
Lord McFall of Alcluith Excerpts(10 years, 9 months ago)
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Lord Newby
Shale gas is a significant potential new source of energy. As the noble Lord will be aware, we announced a series of measures in the spending review that will facilitate the development of shale gas. We think that it can play an important part in our future energy mix. Of course, the development of it will generate a number of jobs.
Lord McFall of Alcluith
In the discussion the other day with representatives of the KfW Bank in Germany, at which the Minister was present, he will have heard them say that one of the most successful schemes the bank has been involved in is a scheme for energy saving and job creation in Germany. Does he not think that there is a lesson here for this country, at a time when the divide between north and south is getting greater, so that we can help rebalance the economy and provide jobs at a local level, thereby having the twin objectives of ensuring economic prosperity and providing insulation for homes for the future?
Lord Newby
I completely agree with the noble Lord. Of course, that is why we set up the Green Investment Bank, which is already proving its worth, not only in putting money into green projects on its own behalf but getting a significant multiple of private sector investment coming in to support that government pump-priming.
Financial Services (Banking Reform) Bill
Lord McFall of Alcluith Excerpts(10 years, 9 months ago)
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Lord McFall of Alcluith
My Lords, it is a pleasure to follow my fellow member of the Parliamentary Commission on Banking Standards, the noble Lord, Lord Lawson, who played an invaluable and steadfast role. I also congratulate the noble Baroness, Lady Kramer, the noble Lord, Lord Turnbull, and the most reverend Primate the Archbishop of Canterbury on the work that they have undertaken. As the noble Lord, Lord Lawson, has said, special thanks go to the chairman for keeping it all together and producing a unanimous report for us.
It is exactly a year ago this month that the Parliamentary Commission on Banking Standards was established. With more than170 hours in 80 evidence sessions in public, 74 hours in private, and more than 9,000 questions later, what have we found? Mindful that the remit was to look at culture and standards in the banking industry, we have found an industry where standards are abysmally low and the culture is rotten. Even in the seven months in which we took oral evidence, we saw two more major LIBOR scandals; an interest-rate swap scandal; the PPI mis-selling scandal, the bill for which has risen £15 billion to £17 billion; a major bank guilty of money-laundering in Latin America; and another fined $700 million for sanction-busting in Iran.
The question is: how do we fix such a system where the public trust in these institutions is at rock bottom? Despite the worthy attempts of the Parliamentary Commission on Banking Standards, we have no magic solution. Yes, we provided a profound analysis that illustrated both the structural and organisational fault lines, but I would suggest that we have produced a signpost report which points the way for the Government, the regulator, the industry and also civic society to take things forward. This will not be done overnight; it will take a generation. If we are to change culture, we need that change to be a behavioural change and, for that, individuals need to buy into it. It starts at the top and permeates the organisation, which will take a considerable period of time. We have seen boards, chairmen and chief executives deficient in this regard. The report laid bare the lack of individual responsibility at the top—I would suggest that we witnessed a “no see, no tell” approach, where the collective decision-making was a defused responsibility. The concept that “the buck stops here” was non-existent in the banking system. I have two brief examples of that. From UBS top management, four senior executives came before the commission; a star trader had lost thousands of billions of dollars in the Far East and, when we asked if they knew the star trader, they replied no. We asked when they found out and they said, “When we read it on the Bloomberg wires”. Collectively, they were probably getting about £100 million a year, but they knew neither who the people were within their organisation nor what those people were doing on their behalf.
The payment protection insurance scandal has, as I mentioned, cost £17 billion and is likely to go up to £30 billion. Mindful that the cost of the Olympics was £8.9 billion, we are talking about the cost of four Olympics being put on, with a mis-selling scandal taking place over 18 years. Yes, the standards were abysmally low, because of a lack of ethical principles at the top of the organisation. Why, we may ask, did that situation prevail for so long without adequate challenge from outside? Here we come to the regulator; it is full of worthy people but it was, I would suggest, captured, conned and cowed by the industry. Captured, because there was an incestuous relationship where the views of wider society were rarely heard and never heeded. When I was chairman of the Treasury Select Committee, it took me five or six years to get at least one consumer representative into the Financial Services Authority. With the procession from the Financial Services Authority to the private industry—and with the former chief executive going to Barclays as a compliance officer for 10 times his salary at the FSA—I suggest that we could be seeing a postgraduate institute of the FSA for people to get better jobs in the private sector. If we want to have an even system, where the balance of power is maintained, we are going about it the wrong way, because the regulator will always be weak.
The regulator was cowed, because this is a powerful industry that is used to getting its own way and is impervious to challenge. The PPI scandal illustrated that very well. I also said that the regulator was conned. Why conned? It is because the FSA executives said to me for years that the business model of institutions and organisations was not their responsibility. They did not know, or seemed to care little for, how much risk there was on the balance sheets of banks as a result of complex models. That complexity provided an illusion of control; people felt satisfied but they did not know what was going on. That very much applied to the regulator. They did not wake up to the importance of the selling of PPI, because they did not look at the profit and loss of the balance sheets. One cursory look would have shown that there was a big problem.
I am not advocating for more regulation, we do not need more regulation. What we do need is tougher regulation and change to the commercial law of the land regarding the responsibilities of directors, so that the heads of the banks are answerable for the actions of rogue subordinates. We need to give the regulator both authority and autonomy. I turn to the ring-fence and leverage, because the Parliamentary Commission on Banking Standards did its job adequately in those areas. What have the Government done? To date, I would suggest, they have pulled the rug from under the feet of the regulators. Let us look at ring-fence and what the Government are proposing. In fact, some of us, as the noble Lord, Lord Lawson, said, were advocates of full separation and anyone who listened to the testimony of Paul Volcker when he said to the commission that an executive or director of an holding company is responsible for the ring-fence as well, would know, as the noble Lord said, that it is very hard to have a ring-fence situation. In the name of compromise, however, we sat down and said that if the Government established the Vickers commission and Vickers came out with ring-fencing, we were mindful that the Government would be unsympathetic to anything else. That is why we called for the electrification of the ring-fence. If anyone gamed the system, the regulator could bring them into line quickly and threaten or impose separation.
What have the Government done on paper? They have accepted that, but I suggest that to date they have neutered it. The noble Baroness has already mentioned the remarks of the chairman in the other place. How have they neutered it? They have done so by expecting the regulator to issue three preliminary notices to the offending bank, seeking permission from the Treasury on each occasion. What price the independence of the regulator in a situation such as that? The three permissions from the Treasury are followed by a five-year gap before there is any decision whatever on separation. I say to the Minister that that is an affront to the genuine efforts of the Parliamentary Commission on Banking Standards to seek a unanimous way forward. What we have now is not a ring-fence; I suggest that it is a hammock in which the executives can swing easily above the ground, while all the hassle takes place on the ground with the politicians and the regulators, and the executives look down from above, easy and relaxed. Therefore, the Government have to fundamentally change their opinion on that. I am going to be in the trenches with the noble Lord, Lord Lawson, in ensuring that the Government do the right thing on this issue.
The other area that we looked at was leverage. The noble Lord, Lord Lawson, said that the Bill as it stands remains defective in many key areas. There is no doubt that it is defective in the area of leverage. As the noble Lord said, we were of the opinion that the regulator should be in sole charge. However, the Government have rejected that out of hand. The noble Lord, Lord King, newly ennobled, was unequivocal when he said:
“Leverage is the one issue that matters above all others ... it’s precisely for that reason that the banks will resist most strongly the regulation of leverage and the politicians will compromise on precisely that”.
In the Financial Times today, the Business Secretary talks about those in the Bank of England as the “capital Taliban” because they are not listening. I agree with the leader in the Financial Times headed:
“Let the regulators show their teeth”.
The regulators have not shown their teeth so far, and if we allow the present situation to continue, we will undermine confidence in the entire system.
We all know that excessive leverage has been the trigger in every banking crisis in history. That is why Vickers recommended 4%, limiting gearing to 25:1. That is why we echoed Vickers, and it is why the interim Financial Policy Committee of the Bank of England asked for the power to vary leverage. However, the Government declared “no, no, no” three times, saying that they were wedded to Basel, despite the wise advice to the contrary. Robert Jenkins, a former member of the interim Financial Policy Committee, was very clear on the issue. He is no longer on the FPC because, I suggest, he challenged the Government too much, and he has now been dumped off it. However, he looked at Barclays, which we saw—and still see—as a poster child for excessive leverage.
The balance sheet of Barclays is roughly the size of the UK’s annual GDP. It funds £1.5 trillion of risk-taking, with 97.5% of debt and 2.5% of loss-absorbing equity. The noble Lord, Lord Lawson, mentioned hedge funds. The average hedge fund trades with three times leverage, but Barclays is operating with 45 times leverage—a gearing 15 times the average of any hedge fund. If Barclays’ assets eroded in value by a mere 1.5%, it would be leveraged 100 times over. I ask noble Lords: does that inspire confidence in building a sound, stable and sustainable system for a post-crisis environment? I think that the Government have to look again at that.
One last issue, which I advocated in the report, is the concept of the duty of care. It could be said that, despite all the scandals that there have been in banking, there has been only one big scandal, and that is that customers’ interests have been at the bottom of the pile. I suggest to the Government that if they implement this measure, it will be transformative for the industry because it will ensure that the buck does indeed stop with individuals at the top, and it will permeate the organisation. Therefore, my plea to the Government is that a duty of care needs to be a key element in the new banking standards rules.
During the many hours of questioning, I regularly asked senior bankers whether banks could change on their own. In response, they all said no. That is why the Government cannot stand aside and give the industry a free pass. To transform this industry, which is at such a low, the Government have to be an active participant. The parliamentary commission was the first of its kind for a century. The previous one, exactly 100 years ago, collapsed in a heap of partisan acrimony. This commission did not; it stayed together and was unanimous. At the end of the day, we do not want the Government letting the side down after a cross-party group has sat for a year and come out with a unanimous approach.
We resisted the temptation to be partisan and produced the report, so we have been faithful to the task that the Government gave us. However, if they ride roughshod over our efforts and recommendations, not only will that traduce the role of such a unique commission but it will fail to best serve the interests not only of the financial services sector but of the wider economy and of societal well-being in the long term.
Queen’s Speech
Lord McFall of Alcluith Excerpts(10 years, 12 months ago)
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Lord McFall of Alcluith
My Lords, today UK businesses have about £700 billion in cash on their balance sheets—money that is looking for places to invest but companies are lacking the confidence to do so. In addressing the growth strategy—which currently seems to be absent—the biggest task facing the Government is to instil confidence in people and companies. We have to recognise that there is a demand problem facing the country. That is why the austerity approach taken by the Government in the past few years has been wrong.
However, we need to ensure that confidence is based on reality. As a member of the Parliamentary Commission on Banking Standards, I am very much aware of the reality that in banking and finance the architecture has crumbled. We need not just to reform but to rebuild that from the floor up. We cannot afford to apply a sticking plaster to a system. Just how much the system has disintegrated was admitted by Adair Turner, the former chairman of the Financial Services Authority, in a remarkable interview a few weeks ago in the Sunday Telegraph. He said:
“I think we—as the authorities, central banks, regulators, those involved today—are the inheritors of a 50-year-long, large intellectual and policy mistake. We allowed the banking system to run with much too high levels of leverage, inadequate levels of capital, and we ignored the development of leverage in the financial system and in the real economy. And not only did we ignore it but we had a pretty overt intellectual philosophy that we could ignore it, because we knew the financial system was just a market like any other and whatever it did was bound to be for the good because that’s what markets are … I was surprised at the supervisory approach. I’d been on the board of a bank, I’d been involved in banks, I’d dealt with banks back in the 1980s and 1990s, and I, throughout that, had accepted the existing capital regime as a given, right? I had never gone back to basics and said, ‘Why do we allow banks to run with 30, 40, 50 times leverage?’. And neither had anybody else, funnily”.
That includes Larry Summers, former Treasury Secretary of the United States, adviser to President Clinton and president of Harvard University—he is presently the Charles Eliot professor of economics at Harvard—who has said that everything that he has taught in economics has been called into question by the crisis. When the respected John Kay and Professor Charles Goodhart came to the Treasury Select Committee a few years ago, I asked them whether they understood risk, to which Charles Goodhart succinctly answered no. John Kay said, “I’ve been teaching risk for the past 25 years at Oxford University and what I did was throw my notes away, because nobody understands risk at the present time”.
Therefore, the situation in which we find ourselves is fragile. I suggest that if we do not go back to basics we will not solve the long-term problems that affect the financial services industry. The Prime Minister last week admitted in response to a question from the chief executive of Santander that the Government were confused and had mixed messages for the sector. As for briefings from the Treasury and the Chancellor, I have been taken aback to read in newspapers over the past few weeks that the Treasury is paving the way to sell the Government’s bailed-out bank stakes at a loss. The Times commentators, Sam Coates and Patrick Hosking, both of whom I know and are very respected, wrote recently that the Treasury wants to,
“lower public expectations over the amount that will be recovered from the sale”.
It hopes that the Parliamentary Commission on Banking Standards will conclude that the Labour Government paid too much for Royal Bank of Scotland and Lloyds in 2008.
From my point of view, there is not a chance of that happening, and it is simply not true. Alistair Darling made it clear in an article in the Financial Times last week that, on the eve the general election in 2010, the economy was growing and the Royal Bank of Scotland’s share price was 504p, which meant that the taxpayer was up £500 million on the deal. Three years later, with no growth, the taxpayer is down almost £20 billion. It is vital that we do not turn a paper loss into a real one with a hasty sell-off. The Business Secretary, Vince Cable, agrees with us on that very point. He said:
“I don’t see the need for any haste”,
as he called for the break-up of the Royal Bank of Scotland to boost competition. That is perhaps as a result of his membership of the Future of Banking Commission—on which he sat along with me and David Davis MP, who chaired it excellently—when we called for increased competition, maximum transparency and a new culture and ethos in the system where customers’ interests come first.
Three years into the life of this coalition, meaningful competition is a more distant prospect than it was in 2010. The events at Lloyds with Project Verde and the RBS sell-off to Santander, which has hit the dust, illustrate that the Government have neither leadership nor control of this situation despite being the dominant shareholder in these entities. We cannot leave the structure of the banking system to the vagaries of the market. Perhaps the time has come for us to abandon the pretence that UKFI is in control of events, in a situation where Lloyds has already spent more than £1 billion on Project Verde and Santander has withdrawn from the agreement with Royal Bank of Scotland after years of negotiation. We have seen everything turn to dust.
The Government need to demonstrate leadership by producing a blueprint of their own for a changed financial service. Perhaps, as the noble Baroness, Lady Kramer, who is an excellent member of the Parliamentary Commission on Banking Standards, mentioned earlier, that could be in conjunction with the regional partnership initiative of the noble Lord, Lord Heseltine. We have heard calls today for decentralisation from Westminster, for a rebalancing of the economy and for other parts of the country to share in prosperity.
However, if we do it in a hurry, it will be messed up. I suggest that the date of the next general election should not be the deciding factor in reforming the architecture of the banking system. This is a one-off opportunity. Mention has been made of the situation in Germany, where the privately owned Mittlestand companies are thriving because of their close regional relationship with the 3,000-plus independent banks, whose managers understand their businesses. Handelsbanken in the UK had a favourable press because of the same style of engagement at local level.
If we are serious about rebalancing the economy, developing SMEs and revitalising manufacture, this is the time. There has never been a better opportunity to use the leverage that we have. The politically myopic reactions to the situation from the spinners at the Treasury do no service whatever. Although the Parliamentary Commission on Banking Standards is doing excellent work, it is not the forum to produce a blueprint for the Royal Bank of Scotland and Lloyds. It can point the way forward, but the blueprint is for the Government. That is not our main focus. Our focus when we were established was clearly to look at culture and standards in the banking and financial services industry. RBS should not be a big element of our report, but we should recognise that there is an opportunity to do something there for the manufacturing and regional banking sector.
Also, we do not at present know what is on the banks’ balance sheets. Less than two weeks ago, the Financial Policy Committee said that British banks have a £25 billion shortfall in capital overall. The other day, the Local Authority Pension Fund Forum, representing 55 public pension funds, stated that the Royal Bank of Scotland has £10 billion of undisclosed loan losses on its balance sheet because it is using accounting standards that allow loss to be booked only after it is incurred, however likely a default may be, thereby underplaying the likely losses. We have been here before with accounting standards, when the banks, in their heyday, booked options and their own bonuses and expenses based on expected profits. A year of two later, however, the profits did not materialise. It is a sensitive and shaky situation.
Only the other week, I had discussions with HMRC after the noble Lord, Lord Lawson, and I, in a sub-committee of the Parliamentary Commission on Banking Standards, examined Barclays and the structured capital management vehicle, which the noble Lord accurately referred to as tax avoidance on an industrial scale. It is a black box. Following my discussions with HMRC, the head of the business unit wrote to me to say that HMRC has 92 issues with the big banks at the moment and £3.2 billion is under consideration in relation to tax avoidance schemes. Those matters have still to be determined. They will not be determined tomorrow or next month; it could take between seven and 10 years. The sum of £3.2 billion could have considerable impact on the prudential stability and health of banks. The banks have set aside £16 billion already for PPI mis-selling—perhaps that is a euphemism for fraud—and that figure is not final. The situation is fragile and illustrates the folly of making definitive judgment calls before a general election. We are presently clawing our way in the dark. Incentives are at the heart of the matter in banking.
At the end of the day, we need that leadership from the Government. A quick disposal of shares on political grounds will negate the golden opportunity for the Government to effect real change. I submit that the customers’ interest, both personal and economic, requires a responsible, mature approach to the disposal. When I was chairman, the Treasury Select Committee was clear that we wanted the taxpayers’ interest to be paramount. The Public Accounts Committee has followed that up and said in its report of 2012:
“The taxpayer has invested £66 billion in RBS and Lloyds shares and it seems that their ‘temporary public ownership’ will last for some time if getting value for our investment remains the most important objective for Government … We are concerned that a short-term decision to sell might undermine long-term realisation of value for the taxpayer. The Treasury, with UK Financial Investments Ltd, should set out a strategy for its share sales, and how it will prioritise the government’s various objectives so that the taxpayer’s interests are protected in any eventual sale”.
Hope and confidence are at the centre of that. If we expect to take taxpayers along with us, we need to have that mature and fundamental look at the system.
EU: Budget Report
Lord McFall of Alcluith Excerpts(11 years ago)
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Lord McFall of Alcluith
My Lords, in his manifesto defining the Mais lecture of February 2010, the Chancellor, just before he assumed office, announced a new macroeconomic and financial policy. He asserted that economic theory and, indeed, evidence suggested that tight fiscal policy would lead to recovery. He embraced the notion of austerity politics, and the imprimatur of both the Chancellor and the Prime Minister was very firmly on that phrase, “austerity politics”.
Three years later, what do we find? We find unemployment increasing, with youth unemployment of 1 million, which is unacceptably high, child poverty levels ballooning, and almost zero growth. Notwithstanding today’s announcement, even if we include that and accept that in the past 18 months we have seen growth of 0.4%, that works out at a miserable 0.066% growth per quarter—in other words, a percentage of growth equivalent to 66 out of 10,000, or virtually none at all.
When the Chancellor came into office, as others have said, he inherited an economy that was growing by 2.6%, from the third quarter of 2009 to the third quarter of 2010. Since that date, total growth has been 0.8%, solely down to the effect of the Olympics. As my noble friend has said, the markets have now turned against the Chancellor. The comments of Bill Gross of PIMCO, which has the biggest bond fund of $300 trillion, made it very clear that the austerity policy does not lead to growth in the short term. As he asserted, the Government need to spend money. He also said that it was a mistake to assume that the bond markets want severe fiscal belt-tightening.
Given that the Chancellor and the Prime Minister have sacrificed growth on the altar of despair for the past three years, we now need an urgent injection of confidence. Austerity was never going to work because when you are in politics, if you assert austerity and are devoid of hope, the people rightly assert that you are not on their side. Today, there needs to be a case for optimism.
Along with other Peers, the other evening I saw Ken Loach’s film, “The Spirit of ’45” about the period after the Second World War. At that time there were appalling economic and human circumstances. Debt as a percentage of GDP was 250%, compared to the 70% it is today as a result of the financial crisis, yet with that debt dreams were turned into reality for many millions of impoverished individuals. Can the Government today not embrace a modicum of the hope and spirit of 1945 and ensure that we offer people something in the future?
On the eve of the financial crisis in 2007, national public debt was 36%, the lowest ratio to GDP in the past 300 years, as was asserted by Martin Wolf in the Financial Times this week. When we look at the public spending figures under the Labour Government from 1997 to 2010, we find that it was 39.7% of GDP. Let us go back to 1979 to 1997 under the Conservative Government, when public spending was on average 43.3% of GDP. So it was 39.7% for the Labour Government and 43.3% for the Conservative Government. Those are powerful statistics that destroy the myth that spending by the Labour Government was out of control.
Now, when interest rates and the cost of government borrowing is at rock bottom, is the time to invest in infrastructure so that we get a 21st century that is fit for purpose. For the past four or so years, along with others, I have been advocating the establishment of a business investment bank. It would fill the current equity gap with longer repayment periods for viable businesses and help SMEs, which are starved of lending because of the private sector money famine. Wherever we go, SMEs tell us that they have this huge problem.
We have to look to the future. We should be looking at replicating the fantastic initiative of the Labour Government in 1969 when they set up the Open University, of which I am a proud graduate. We should be looking at a successor to that with a 21st-century UK digital university underpinned by superfast broadband and smart grids. It would cost one-third of the money that will be spent on HS2. Wiring everyone up would in the long term help social inclusion and income equality. We have to think big on that. Why do we not have an objective of ensuring that all university learning is put on the net? What would that mean? It would mean that every individual could walk through the digital gates of the finest universities from the privacy of their own home and hearth.
The future never has a big enough constituency. Those fighting for present gain almost always win out. At a time when the social contract in society is broken and when millions of people will have no gain for the foreseeable future and have considerable pain, there is a need to restart and rebuild that confidence by ensuring that we do not miss out in the future. As Heraclitus said, change is the only reality, and we know that in politics change is the law of life. The late US President John F Kennedy said that those who look only to the past or present are certain to miss the future. I suggest that by ditching the cruel hoax of austerity politics—austerity is a hoax because it has been proved that it does not work, and cruel because it hurts those who are already hurt most— we can make a start to ensure that we as a country and as individuals do not miss out in the future.
Lord Davies of Oldham
My Lords, this has been a most interesting debate and the Minister has a major task in replying to it. He has to address himself to the minutiae of parliamentary procedure and to the most philosophical aspects of the current policies of the Government.
On the question of procedure, I cannot understand why we did not have a speakers list for this debate. I agree with the noble Baroness, Lady Noakes, on this matter. I also understand why she does not see why these Motions are necessary anyway as far as Europe is concerned. My noble friend Lord Barnett did not doubt that the Motions might be necessary but on the whole found them so offensive that he would not vote for them if there was any question of a Division, which there is not going to be. This indicates that there are anxieties on all sides about the framework for this debate.
What is fundamental is the concern about where the economy is at the present time and what we are reporting to Europe about the state of the British economy. It is quite clear that every target that the Chancellor set himself in 2010 has been missed and that the timetable for recovery has already been elongated by several years. As my noble friend Lord Barnett indicated, it is now expected that it will be at least 2018 before the deficit will have been reduced.
At the very beginning, the Minister stated that one of his items would bring confidence. As in all economic debates about the position of the economy and the balance of payments, confidence is of great importance. The Chancellor chose one measurement of it, Britain’s AAA credit rating. We saw Moody’s going first and now Fitch has stripped away the AAA credit rating. What is reflected in that is a degree—if the Chancellor was right to put so much importance on them—of erosion of confidence. My noble friend Lord Barnett said that the reason for that is pessimism about growth. That issue was reflected, particularly on this side of the House, in every aspect of the debate.
My noble friend Lord Hollick identified another area in which confidence is being eroded. The intellectual support for the Chancellor’s policy put forward by Reinhart and Rogoff has been destroyed by the indications of the research and the propositions are inherently faulty. That intellectual prop having gone, what is in its place? My noble friend Lord Layard identified these issues with the greatest clarity. What there is is a commitment to a right-wing ideology that does not need too much in the way of intellectual support. After all, we have been through these issues before under Conservative Governments. It is about the creation of the virtues of the smaller state. In the Government’s drive towards creating the smaller state, which my noble friend Lord Layard identified has little to do with whether economic growth can be produced or whether we can tackle the fundamental issues of the economy, the price is being paid not by millionaires who are being cushioned by taxation relief but in increasing unemployment and low wages for those who are in employment. It is already recognised that wages will have dropped by 2.4% this last year. That is the cost to the people in work. Meanwhile, the Government have some figure of the number of jobs being created by the private sector. We know what a lot of these jobs are: they are concealed unemployment. They are part-time jobs that give no opportunity for people to work longer hours; part-time jobs on low pay in which people are still struggling—although in work—to make ends meet. Those people are paying the price for this Government’s policies.
Banking: Regulation
Lord McFall of Alcluith Excerpts(11 years, 5 months ago)
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Lord Newby
My Lords, I absolutely agree. That is why we have been in the forefront of bringing forward plans under which banking problems can be resolved and why, under the Banking Reform Bill, we are looking at having a ring-fence around retail banks so that we do not have the problems that we have had in the past. This will go ahead, whatever happens internationally. I hope very much that there will be international action, but action that is based very much on the British model and with British leadership.
Lord McFall of Alcluith
My Lords, Glass-Steagall, which governed the global prudential system, was more than 30 pages, Basel II increased that tenfold to 350 pages and Basel III is now 600 pages. Does this not tell us that the system is governed by complexity and opacity and that the desire to game it increases? Is there not a case for simplifying the system and having leverage play a greater role in the regulatory framework? The need for structural change, irrespective of what is happening elsewhere in the world, is urgent in the UK and we should get on with it.
Lord Newby
Yes, my Lords, I agree. Basel is indeed that number of pages, while I think that the Dodd-Frank Act in the States is more than 2,000 pages and is so complicated that there are real questions about whether the institutions will ever be able to implement it. Getting back to what I was saying about banking reform here, one of the key reasons for having a ring-fence is to have a simpler structure under which the retail bank is segregated from the more complicated and casino elements of the system. We think that that will bring benefits for consumers as well as bringing greater stability to the system as a whole.
Financial Services Bill
Lord McFall of Alcluith Excerpts(11 years, 5 months ago)
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Lord Barnett
In Florida, they have to register this. If it was in Canada, the new Governor of the Bank of England would have a still better idea. It may be that he still does because he seems a very bright fellow and he will know what happens in Florida. Perhaps, some time in the not too distant future, we will have something like what my noble friend Lord Mitchell quoted because that seems to me, as a non-lawyer, to be a sensible way forward. I hope that we can move that way in future. For now, it only remains for me, too, to congratulate all concerned in this matter and wish the new amendment well in the future.
Lord McFall of Alcluith
My Lords, I congratulate the noble Lord, Lord Mitchell, the Government and others in the House on passing this Act because in terms of consumer protection in Acts, the wheels turn very slowly. The Consumer Credit Act 1974 was only superseded because of a lot of effort by quite a number of us in the other place in getting another Consumer Credit Act in 2006, 32 years later. At a time when we have the internet and technology has increased enormously, that means that the imbalance between the consumer and the industry gets even steeper, so I welcome this amendment today and the efforts that have been put into it.
In particular, I congratulate the Minister, the noble Lord, Lord Sassoon, as he departs the Front Bench. He deserves our hearty congratulations because for years we have listened to the plea, “Let the market work”. What happens when we let the market work, to be euphemistic, is that innovation takes over and innovation, as the Minister says, equates to sharp practices. Once we pass this in the House today, it will be going out into the cold light of day and I can tell everyone in the House that innovation will take place and we therefore have to be on our guard.
This is but a first step but it is a huge first step. In line with the comments made by other Peers, I ask the Minister for clarification on these points. First, will the new clause cover all costs and charges levied by payday lenders or borrowers? Secondly, when will it come into force? A number of us are worried that we could be waiting for a long time before it is brought in and that, in the interim, the sharp practices will continue. Lastly, how do the Government envisage the cap being set and does the Minister have in mind at what level he expects that cap to be set? It is important to give some direction to the FCA in today’s debate. My last word to the Minister is to offer my congratulations as a new life beckons in front of him, which I hope is just as prosperous.
Baroness Howe of Idlicote
My Lords, I had not intended to say anything today, because I was pleased with the amendment. The more I listened to the explanation, however, the more enthusiastic I became about it. So I wanted to add my thanks to the noble Lord, Lord Mitchell, for all that he has done here, as well as to the noble Lord, Lord Sassoon, and everybody else who has been involved in the redrafting. I am sure it will not solve all the problems. I would also like to ask when it will come into force; I imagine that it will not be all that far ahead. Nevertheless, as has been said, it is an extremely important and valuable step in the right direction.
Lord McFall of Alcluith
My Lords, I do not want to push my luck too much with the Minister, but he says that the rules will come in as and when the FCA decides, and that is 2014. We have a bit of time before then. Given that there is urgency regarding the adoption of this clause and all-party agreement about it, it would be good if he could elaborate on those comments so that he sends a message from here today to the industry and the regulators that this is a matter of urgency and that Parliament wishes to see early action on this matter. We do not want to wait until mid-2014. Just to add icing to the cake, will he please elaborate?
Lord Sassoon
My Lords, I am sure that the industry has got the message loud and clear from this House that more needs to be done. Of course, it need not wait until April 2014; there are plenty of other things that can be done in the mean time if appropriate.
Financial Services Bill
Lord McFall of Alcluith Excerpts(11 years, 5 months ago)
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“Continuous Payment Authorities: debtor’s rights
(1) This section applies where a debtor has granted to a creditor a continuous payment authority for payment of any debt arising under a regulated agreement.
(2) Prior to the debtor granting the continuous payment authority, a creditor must give the debtor a statement of the debtor’s rights in relation to the continuous payment authority.
(3) A debtor may at any time cancel or vary a continuous payment authority.
(4) A cancellation or variation of a continuous payment authority must be signed by the debtor and bear the date of the signature.
(5) A bank is obliged to comply with immediate effect to a cancellation or variation of a continuous payment authority signed by the debtor.
(6) A debtor must inform the creditor within 24 hours of signing the cancellation or variation that the continuous payment authority has been cancelled or varied.
(7) In this section “continuous payment authority” means an instruction or mandate given by a debtor to a bank to pay a fixed or variable sum to a creditor.”
Lord McFall of Alcluith
This proposed new clause seeks to make the law on continuous payment authorities, sometimes referred to as CPAs, clearer and more weighted in favour of the debtor. As noble Lords know, these are harsh times for many working families under pressure from rising food and fuel costs and living in fear at the prospect of job loss and insecurity. They know only too well how difficult it is to stretch a wage from month to month, week to week, and even day to day. It is no wonder, then, that frequently these hard-pressed families and wage earners find that their money is simply not enough to stretch to all their needs from payday to payday, and that many of them have recourse to what are euphemistically called short-term lenders, more popularly known as payday lenders.
Consumer Focus research published in May this year showed that many banks’ customer service advisers were unclear about the rules concerning continuous payment authorities and could be giving customers incorrect advice as a result. A continuous payment authority is a type of regular, automatic payment arrangement set up by using a debit or credit card. It is like a direct debit. Under a CPA, consumers give a supplier or retailer permission to take payments on their cards. However, unlike direct debit, there is no written communication between the individual and the bank. Although CPAs are used by many businesses, including insurance companies, magazine companies and gyms, my concern is about how they are used by payday lenders. CPAs are sometimes known as recurring payments and are often used in the short term or payday loan market. Many payday loan companies use CPAs to retrieve loan payments from customers. This involves the debtor giving the company his or her card details and authorising the lender to take regular payments from the account.
Various reports suggest that customers are generally not aware of the right to withdraw from CPA schemes. For example, a report in the Guardian of 2 May this year stated:
“Consumer Focus raised particular concerns about continuous payments to payday lenders set up on the accounts of people with debt problems … cash-strapped consumers are having an even tougher time paying priority bills such as their rent, mortgage or heating costs due to some payday lenders ‘dipping’ into their account”.
The Consumer Focus research raised particular concerns about continuous payments to payday lenders set up on accounts of people who already have debt problems and recommended that clear and accurate information be provided to these customers from banks and loan companies, particularly regarding the right to cancel.
All that is fair enough and I know that the Department for Business, Innovation and Skills and the OFT have been doing work on this. Indeed, the Office of Fair Trading issued a warning to payday lenders on 20 November by opening formal investigations into several payday lenders over aggressive debt collection practices. It published a progress report last week as part of its compliance review of the payday lending sector and highlighted concerns about the adequacy of checks made by some lenders as to whether loans will be affordable for borrowers, the proportion of loans which are not repaid in time, the frequency with which some lenders roll over or refinance loans, the lack of forbearance shown by some lenders when borrowers get into financial difficulty, and debt collection practices. It also published revised debt collection guidance last week, focusing on continuous payment authorities. Under the heading “Deceptive and/or unfair methods”, paragraph 3.7 of the guidance states:
“Dealings with debtors and others are not to be deceitful and/or unfair”.
The OFT then gives examples of unfair or improper practices. I realised that the concept of misusing a continuous payment authority covers no fewer than five pages in the OFT report. Some of the examples made me fearful for the people who enter into these loans and give a CPA authority to their lender.
I shall give the House a number of examples of bad practice to be avoided, as mentioned in the OFT report. The report states:
“Using the CPA other than as set out in the credit agreement or without the informed consent of the debtor”.
It also refers to debiting a higher or lesser amount than agreed and debiting an account before or after the due date. The report also states:
“Using the CPA in a manner which is unreasonable or disproportionate or excessive in failing to have proper regard to the possibility that a debtor is in financial difficulties”.
The last example includes seeking payment before income or other funds may be reasonably expected to have reached an account, seeking payment where there is reason to believe that there are insufficient funds, or using the CPA after the debtor has informed the creditor that he or she is in financial difficulties and cannot afford to repay.
Further, the OFT identifies as a problem:
“Failing to document the CPA appropriately or to explain it adequately before entering into the credit agreement”.
Sometimes a credit agreement is not complete because relevant terms are missing; or it is written in unclear, unintelligible language; or it is confusing, unfair and misleading. The OFT guidance expects the agreement to identify that the CPA can be cancelled by the debtor or that alternative repayment options may be available.
It is all very well to issue guidance and I sincerely hope that guidance will be followed. However, my reading of this report convinces me that much more than guidance is required in this case. Such blatantly unfair treatment of consumers should not be restricted to a matter of guidance. This proposed new clause ensures that debtors are informed about their rights and that only the debtor may cancel or vary a CPA. Furthermore, the debtor’s bank is obliged to comply with the debtor’s instructions. We ought to legislate to protect debtors in straitened times.
We abolished imprisonment for debt in the Debtors Act 1860. However, debt itself can create a prison and the misuse of power by creditors can be as hard a punishment as being jailed for debt. I hope the Government will accept this amendment, realising that the balance of power between debtor and creditor must be redressed in favour of the customer. I beg to move.
Lord Newby
My Lords, I do not believe that there is a guarantee. I think that the vast bulk of people who use this system will fall into the category that the noble and learned Lord asked about. However, I will check and will write to him if there is any further information that I can give him to explain those points more fully.
Lord McFall of Alcluith
My Lords, CPAs are different from direct debits, as I made clear. Given the legislative complacency in the consumer credit field, I am very unhappy with the notion of guidance. I think that we sent out a message from the Lords today on an earlier amendment, and it was good to have cross-party consensus on that. There are glaring injustices and it is very important that we reinforce that message in the House today. I should therefore like to test the opinion of the House.
Financial Services Bill
Lord McFall of Alcluith Excerpts(11 years, 6 months ago)
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Baroness Noakes
My Lords, I am grateful to the Government for the amendments that they have tabled, commencing with Amendment 32, in regard to the PRA practitioner panel. However, as the noble Baroness, Lady Hayter, said, that is not the solution that the industry wanted and it is a rather narrow solution. Therefore, I have considerable sympathy with what the noble Baroness said in relation to the need for the PRA to listen to a broad spectrum of views, including that of the consumer panel. In particular, I am more attracted to her Amendment 37ZB, which would require the PRA to have some sort of dialogue with each of the panels which are being set up for the FCA: that is, the practitioner panel, the smaller business practitioner panel, the consumer panel and the markets practitioner panel. Each will have their own particular issues which would be usefully communicated to the PRA in certain circumstances.
Notwithstanding the fact that there will now be a practitioner panel for the PRA, I continue to have concerns that the PRA’s concept of consultation is a narrow one when it should be a broad one based on regular dialogue and feedback loops with the industry. Therefore, I have very great sympathy with what the noble Baroness, Lady Hayter, has said.
Lord McFall of Alcluith
My Lords, I support the amendment and the proposition of the noble Baroness, Lady Noakes. If we look at the history of prudential regulation and consumer interest, we find that prudential regulation has trumped conduct of business for a number of years. I suggest that the PRA will be a more enhanced body than the FCA and therefore will win out all the time. Therefore, what the noble Baroness is saying about a broader range of opinion is extremely important. We need to look at the history of the representation of consumers in the financial services industry over a number of years. I lobbied the FSA for years to get a consumer representative on board. It came back to me very excited one day and said, “We have someone on board”. However, one out of 12 or one out of 13 is inadequate. It is very important that we redress the asymmetry of knowledge that is at the centre of selling because we have to restore trust and confidence in the industry, and to do that we have to balance the needs of the industry with those of the consumer. Therefore, I could not agree more with the need to have broader representation. That would put the status of the PRA at one with that of the FCA so that they served the interests of the industry and the consumer.
Lord Newby
My Lords, the Government obviously recognise that consumers have an interest in the outcome of the PRA’s actions and decisions. In particular, consumers will be beneficiaries of a safer and more stable financial system. However, the PRA will not focus on consumer protection as an end in itself. That will be the job of the FCA.
New Section 3D in the Bill requires the PRA and the FCA to co-ordinate their functions in areas of common regulatory interest where one may have relevant expertise or a material adverse impact on the objectives of the other. This means that while it is right that the PRA must focus on its safety and soundness objective, where its actions may impact adversely on consumer protection it will need to listen to the FCA, which obviously has the lead consumer protection objective. As the regulator with expertise and analytical capacity in relation to consumer protection, it is right that the FCA should consider stakeholder perspectives, including the views of the consumer panel, come to a balanced view and then communicate this view to the PRA. I do not think that it would be sensible to require the PRA, which will not have detailed expertise in general consumer issues, to consider separate consumer representations and potentially develop an alternative rival consumer view about the best way to deliver consumer protection.
For these reasons, I cannot support the amendment. I hope the noble Baroness will be satisfied that the system will enable all consumer concerns to be represented to the PRA, but that that will be done through the principal channel of the consumer panel that the FCA is to establish.
Financial Services Bill
Lord McFall of Alcluith Excerpts(11 years, 6 months ago)
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Lord McFall of Alcluith
My Lords, I agree with my noble friend on this issue. Anyone with experience of the Court of the Bank of England would say that its impact has been less than useful over past years. Given the powers that we have given to this Governor for an eight-year period, it is important that the sentiments expressed in the other place as regards accountability are satisfied, because, paradoxically, if that is not the case, it will make the role of the Governor even more political and members of the court will come under pressure.
I had personal knowledge of this during the height of the financial crisis. My concern at that time was to ensure both the political and the financial stability of the situation. It is therefore important that that is adhered to. There needs to be, as the Treasury Committee said, proper records of the court’s proceedings. If transparency is not available, the accountability element will not be pursued. The Government are making a big mistake by establishing what is, in effect—although some people may disagree—a multinational corporation with one person at its head, with little corporate governance best practice.
There needs to be a stage at which the Government can listen to Parliament on this, make the Bank truly accountable to Parliament and ensure the best outcome for the country. We have the Financial Policy Committee and the Prudential Regulation Authority, but there is no doubt that there will be conflicts of interest there. There will be one individual responsible, while the Government and Parliament are spectators and bit players. That should not be the case, and the Government really need to think very clearly and seriously about this issue.
Baroness Noakes
My Lords, as a former member of the court, I feel slightly under attack this afternoon, but I was long gone before the financial crisis. In the context of the previous amendment, my noble friend Lord Flight pointed out that the important way to express accountability is on an ongoing basis, not at the point of appointment. The most important thing, going forward, is whether or not the new oversight committee will do its job and who will make sure that it is held to account. It seems to me that it should be the Treasury Select Committee in another place and it is not something for which we need to legislate. The Treasury Select Committee is well apprised of the need to ensure that there are proper accountability mechanisms to act as a counterweight against significant additional powers for the Governor of the Bank of England; and that there are proper checks and balances within the Bank of England and then from the Bank to Parliament.
Lord McFall of Alcluith
I support my noble friend’s amendment. It is important to emphasise oversight because we are setting up a more complex body than the one we had before; we are going from a tripartite body to a quadripartite body. There are many interstitial areas and oversight is even more important in those areas.
As I mentioned earlier, there will be many conflicts between the FPC and the PRA. On the relationship between the Prudential Regulatory Authority and the Financial Conduct Authority, will prudential regulation trump conduct of business, which has happened in the past? Will the FCA feel inferior to the PRA as the FSA felt inferior to the Bank of England?
As to the culture, we can have all the rules we like but, within a plethora of rules, there can be a monoculture which reports to the top and a diverse range of opinions do not get listened to. There are many lessons to be learnt there. An oversight committee is very important in order to look at that and ensure that the Bank of England is indeed exercising the best corporate governance and best practice.
Lord Hodgson of Astley Abbotts
My Lords, like my noble friend Lady Noakes I have some difficulty in understanding the thrust of these amendments. I see the issue of the nomenclature, which may be unfortunate, but I have to say, as a director of a company, that keeping under review and overseeing are almost one in the same. I do not see the difference between those two functions. It is absolutely clear that keeping under review and oversight are running on similar tracks.
The dangers behind the noble Lord’s amendments are that we are starting to find a way of dividing responsibilities. We are moving from clear lines of responsibility to a situation where a sub-committee of the board, as appears in the Bill, is starting to dictate the pace of the board itself. That is an unworthy, unnecessary and potentially dangerous development.
Financial Services Bill
Lord McFall of Alcluith Excerpts(11 years, 6 months ago)
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Lord Kennedy of Southwark
My Lords, in moving this amendment I am seeking to get a proportionate framework in place that is good for consumers, but which is also good for the financial institutions complained about and the responsible claims management companies that take up complaints on behalf of consumers. That will move us all on from the unsatisfactory situation we find ourselves in at the moment.
A number of CMCs do not adhere to best practice and the consumer has little redress. My amendment would improve that situation for them with the drawing up of claimant representative rules, which are long overdue. Between April 2011 and March 2012, CMCs operating in the PPI sector generated 74% of consumer complaints overall. Of these, the majority related to some 15-20 CMCs. The source for these figures is the Ministry of Justice claims management regulation unit, so they are government figures.
I am very clear that in the mis-selling of PPI, the banks and other financial institutions behaved very badly. It is right that consumers have proper redress and compensation for their loss. I agree with my noble friend Lady Hayter that the banks could have done much more much sooner to deal with these issues.
However, the bombarding of financial institutions with claims from people who have never had any sort of relationship with the financial institution is bad practice. It is a fishing expedition that wastes the time and the money of the institution, and it clogs up the system for people who have a legitimate claim, making them wait even longer for redress.
Why is this done? Because there are huge sums of money to be made in fees. Who has not had an unwanted text message or phone call? While there are regulations already in place and mechanisms to deal with these breaches, we all know that they are not enforced and it is the consumer that suffers. An example of this is the Hinckley and Rugby Building Society, which revealed that 97% of the PPI-related complaints it has received in the three months to September 2012 were from people who are not members of, or have any relationship whatever with, the society. While that figure is lower for banks, there is still a huge number of pointless vexatious claims. Last year 69% of all PPI cases went to the ombudsman via CMCs. A small number of CMCs which are not playing by the rules are making an unfortunate situation even worse. They are not acting in the consumers’ interests. My amendment is an attempt to find a positive way forward, good for consumers, good for the financial institutions and good for the responsible claims management companies.
I hope that the noble Lord can give us a full response so that we can understand where the Government are on this matter. While I have no intention of pressing this to a vote, I hope that the noble Lord will agree to my meeting the relevant Minister outside the Chamber as I want to use this process to improve the lot for consumers, and the time has come for the Government to act.
Lord McFall of Alcluith
My Lords, I support my noble friend Lord Kennedy in his proposal, not least because, on my way down on the train today, I received a call from 0843 5600827. They wished to talk to me about my PPI claim of £3,350. Notwithstanding that, I received a text message saying that “time is running out”. I have never taken out a PPI policy.
This is an example of the instability which the industry is suffering at the moment because of this situation. I did chair a committee with consumer and industry representatives two months ago, in order for them to approach the MoJ to try to sort this issue out. Given these demands that have been made on the industry, the £8 billion that has been put aside for PPI mis-selling will surely increase. Let us not forget that we have interest rate swaps. On one of the sub-committees of the Parliamentary Commission on Banking Standards, of which I am a member along with the noble Lord, Lord Lawson, I asked an expert on interest rate swaps about the £8 billion. He said that that mis-selling could dwarf the £8 billion for PPI.
So this issue is current and will have a destabilising effect on the industry for the next few years, and also on consumers’ confidence. I do not think that the Government can escape their responsibilities on that by saying that this is not really a financial services matter, but for the MoJ. It is most certainly having an impact on financial services at the moment. Therefore, as a matter of urgency, the Government should take note of my noble friend Lord Kennedy’s amendment so that they can look at this issue in the cold light of day, outwith this Chamber, and get an adequate and decent solution, both for the industry and for the consumers who are suffering.
Baroness Kramer
My Lords, I suspect that everyone in this House has been plagued by the various attempts by the claims industry to get us to pass over all kinds of personal details. That worries me. Anecdotally, I have heard reports of people who responded positively to one of these messages and handed over their credit card details. They then found themselves being charged without realising that they were getting themselves into that situation. We have talked to various institutions, many of which say that half the claims presented to them are from people who have never had any relationship with them whatever. It was entirely a fishing expedition. At a time when we want our banks to focus on appropriate lending to individuals and small businesses, which they are all struggling to do effectively, to have the complete distraction and cost associated with keeping this abusive industry afloat is surely unacceptable to all of us.