Small Business, Enterprise and Employment Bill

Lord Myners Excerpts

Tuesday 3rd March 2015 Lords Chamber

[Lord Cope of Berkeley]

My Lords, as the noble Lord, Lord Mitchell, has said, we have debated access to finance and all the various schemes, both government and private sector, on a number of occasions. I agree with him that there is an awful lot going on in this field. A lot of improvements have been made, by the Government’s efforts, these new forms of alternative finance and so on. I go along with the noble Lord, Lord Mitchell, on all that and on the difficulties of assessing quite what is happening and where the best developments are.

Where I get into trouble with Amendment 6 is the last little bit—proposed new subsection (4)—which says that, at the end of this review, when it is laid before Parliament:

“The Secretary of State may, by regulations, act on the findings of the review”.

That is an incredibly sweeping power, which I would be wholly reluctant to give the Government. I heard what the noble Lord, Lord Stevenson, said at the end of the debate on the previous amendment, but this is a very sweeping power indeed, about which I am very cautious.

[Lord Myners (Non-Afl)]

My Lords, I support the amendment of the noble Lord, Lord Mitchell, and will be very surprised if the Government do not see merit in it. The coalition Government have made very serious efforts to address the impact on the economy of a shortfall in credit availability. They have launched multiple schemes, as the noble Lord, Lord Mitchell, indicated. The previous Government, of which I was a member, did likewise, and we found it extremely difficult to stimulate sensible extensions of credit to support business. The coalition Government found that they finally got lending going largely through the mortgage market. Only time will tell whether that has long-term economic benefit.

The Government have encouraged us to leave relatively undisturbed the dominance of the major banks. The market share of our major banks would be sufficient in normal circumstances to have triggered a competition inquiry many years ago. The dominance of the major banks is reflected largely in the absence of any differentiation in their products and pricing, and their basic business model is the same. They do not compete aggressively for market share; they do so at the margin but, on the whole, they sit on large legacy books of existing relationships. We know that, statistically, one is more likely to divorce than to change one’s bank.

Therefore, the Government should be encouraged to promote new forms of lending and should see this as an important adjunct to their own policies to support the economy. In those circumstances, I should like to believe that the Government would see real merit in the amendment of the noble Lord, Lord Mitchell, thereby ensuring that we get clarity about how the banking and credit availability system is working. I do not think that Santander is a challenger bank; it is the old Abbey National. Aldermore, Virgin, Metro and Bank One are challenger banks, but not Santander. However, if progress is not made by these banks, that is precisely the circumstance in which the Government would want to reach to independent evidence to show this.

I do not quite share the anxiety of the Benches opposite about the sweeping powers implied by the final part of the amendment. I imagine that they could be exercised only within the powers of existing law. I hope that a Government who are committed to furthering and promoting competition and transparency will not put themselves into contortions to reject the amendment. If they do so, they will stir continued anxiety that sitting opposite are a Government of bankers, for the bankers, rather than for society and our broader economy.

[Lord Leigh of Hurley (Con)]

My Lords, as has been said, we have discussed finance for SMEs at length and it will continue to be a perennial topic. I welcome Clause 5. All the challenger banks—the noble Lord, Lord Myners, named some of them but I was thinking more of the crowdfunding-type organisations—are very excited about what is going to happen in the market. I have talked to some of the big four clearing banks and they are excited. Despite the fact that one might have thought that they would be nervous about the clause, which will almost force them to send their customers to challenger banks, they are keen and excited about, and welcome, this event.

On the surface, the amendment looks sensible, other than—I reinforce the point made by my noble friend Lord Cope—proposed subsection (4), which is open-ended. Business is nervous about this sort of provision. It is worried by some of the pronouncements that have been made by the Opposition. A Labour Party proposal that has not been raised in this House suggests that if a business chooses not to raise finance, or is not successful in raising it, but actually seeks to find a purchaser of more than half its equity, before such a transaction can be completed to a purchaser of the choice of the vendor, the vendor will be required to offer the business to all its employees on comparable terms. That was proposed in a recent speech by the leader of the Labour Party because he wants a John Lewis-type economy. While I understand that direction of travel, it is, of course, totally impractical and destructive to business life. That sort of policy might be brought in under subsection (4) of the amendment. That makes me nervous and is one of the reasons why I would not be happy about the proposed new clause.

Autumn Statement

Lord Myners Excerpts

Wednesday 3rd December 2014 Lords Chamber

[Lord Myners (Non-Afl)]

I think I am actually described as non-aligned, which means that I am sort of drifting in a certain direction.

I first congratulate the Government on not achieving their deficit reduction target because, in so doing, they have played their part in contributing to a recovery in economic activity. That has allowed greater prosperity eventually to reach broader sections of society, and a fairer society that is based on a growing economy.

I have two questions. The first relates to the taxation of the profits of the likes of Google. That strikes me as rather like the game of whack-a-mole that we play at summer fairs. Whatever they do, they find another way to get round it—often with the help of the noble Lord’s previous employer, Goldman Sachs. Would it not be more sensible for us to support a global initiative to tax the owners of companies rather than the companies? Frankly, the taxation of companies is a futile game because they are getting better and better at finding ways of avoiding it.

Secondly, there is little in the Statement about monetary policy, although an accommodating monetary policy has undoubtedly helped over the last five years. If the noble Lord was still an investment banker and he had a company as a client with a large debt on one side of the balance sheet and a large asset, in the form of cash, on the other, he would advise the company to cancel them out. Why do we not do that with the gilts that have been bought through QE and at a stroke reduce borrowing as a percentage of GDP? No harm would be done; there would be no fascist printing of money because these gilts were bought for fair value in the open market. I urge the Minister to go back to the Treasury and say that the moves it has introduced are just tinkering. That is what Governments do. It is not a row of beans when these Statements come. There is no real impact on the economy. The two moves I have suggested could have a material effect.

[Lord Deighton]

I will be delighted to use my expertise as a poacher turned gamekeeper to help structure the profits diversion tax in a way that actually works. The noble Lord is quite right; it will only work ultimately if we capture this on a global basis. That, of course, is the work that is going on. The noble Lord will not be surprised to know that I will not be making any comments on monetary policy, which is a matter for the Bank.

Personal Service Companies (Select Committee Report)

Lord Myners Excerpts

Tuesday 17th June 2014 Lords Chamber

[Lord Myners (Non-Afl)]

My Lords, I speak as a member of the Personal Service Companies Select Committee. It was a privilege to sit on the committee, not least because of the excellent leadership provided to the committee by the noble Baroness, Lady Noakes. The noble Baroness’s efficiency is already apparent in her summary today, which has left very little that is new for the rest of us to contribute. I therefore seek simply to underline one or two points made by her.

The work of the committee spoke powerfully of the contribution that your Lordships’ House can make in applying closer scrutiny to a complex and difficult area that is subject to the pressures of social and economic change, the way in which employers seek to employ and the ways in which those who seek employment offer themselves to the labour market.

There has been a substantial growth in the use of personal service companies and umbrella companies for employment. The committee, I believe, has done a first-class job in analysing areas where it was quite clear that from a public policy perspective neither HMT nor HMRC had a clear policy objective. There seemed to be a lack of consistency in the answers that we were given, masked behind a degree of contentment that was ill judged and hardly appropriate in the circumstances as they were revealed by the committee.

The noble Baroness, Lady Noakes, said that she was disappointed that the Exchequer Secretary to the Treasury declined to be interviewed by the committee. I would go further than that. When I served as a Minister in the Treasury, I regarded it as absolutely beyond question that if I were invited to account to Parliament, I should do so. The reasons given by the Exchequer Secretary, Mr Gauke, for not doing so were, quite frankly, not acceptable. The issues that we are looking at were not ones of HMRC implementation; they were a much broader policy issue.

There are prima facie reasons to believe that there is substantial tax leakage at the upper end through personal service companies, while at the lower end of payment there may well be social harm as a result of people forgoing, unknowingly or under duress, some of their employment rights. It was quite frankly unacceptable for the Treasury Minister not to accept either of the invitations from the committee to give evidence—and, moreover, to say that his officials should not give evidence.

Perhaps in that context it is not altogether surprising that we have had a very flimsy response from the Treasury to the work of the Select Committee, one that quite frankly shows a disservice to the hard work that was put in by the members of the committee, our advisers and the clerks. I sincerely hope that when the Minister sums up at the end of this debate, he will be able to give us more substance in his reply than we have received from the Government to date.

It is quite clear to us that IR35 causes many problems. I want to say that it is not working, but it is not entirely clear what it is designed to do. The HMRC officials who gave evidence to us seemed far from clear about how it worked in practice, or were unable to substantiate the figures that they gave us, and they seemed excessively reliant on the IR35 Forum, which seems to be somewhat unbalanced in its constitution, comprising as it does many people who have an interest in the economic activity known as IR35.

I hope that the Minister will go back to the Treasury and say, “We should not be as dismissive as we have been about this report”. Some fundamental and important questions are raised in it about the operation of an area of the labour market that is increasing in its substance and significance. Yet the message that we have from the Treasury is that it really does not want to take this matter seriously at all. I, for one, find it very difficult to understand why the Treasury has adopted that position, so I urge the noble Lord, Lord Newby, to convey to his colleagues in the Treasury that this is a report of substance that raises a number of important questions that deserve close attention from government.

Finally, as a former chairman of the Low Pay Commission, I would like to emphasise the important role that it could play in reviewing the operation of personal service companies and umbrella companies in the employment of the lower paid. There is, again, very strong reason to believe that people are pressurised into accepting employment through one of these arrangements without fully knowing or understanding the implication of their loss of employment rights. Those rights constitute part of a package of reward for work, which is not limited to the hourly rate, although that may be the most important element. Therefore, it falls entirely legitimately within the framework of the Low Pay Commission’s role and within the competence of that commission and its officials.

I very much hope that the Minister in his summing up will give noble Lords a clearer message on whether the Government are going to put this matter in the hands of the Low Pay Commission or whether we have to conclude, regretfully, that HMT just cannot be bothered to get to grips with this issue, regardless of the cost in lost tax revenue or the potential damage to employment rights of the low paid.

Budget Statement

Lord Myners Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Myners (Non-Afl)]

My Lords, we spoke briefly before this debate started about the role of the Civil Service. The Minister probably sits in the same office in the Treasury that I once occupied, and I can imagine the process running up to the Treasury. Indeed, the noble Lord might even have had to go through the indignity that I went through of having to be photographed holding a blank document, this being the cover of the Budget document even before it had come back from the printer, while looking over the Chancellor’s shoulder and pointing at it, saying, “What wonderful proposals we have here”.

The Civil Service is extremely good at helping Ministers put a gloss on an indifferent story. It does it through statistics. The Minister referred to the growth in small business lending in the past 12 months. If he looked at the level of lending to small businesses in the past decade, or the past 20 or 30 years, he would note that it is still extremely low. There are carefully selected data. The Minister told us that output growth is at its strongest—indeed, it is the strongest of all the world’s developing nations. However, it is also a level of growth and achievement that is still lower than the pre-cyclical peak. We are the only economy still to be producing less than we produced in 2008. The Minister refers to reducing our dependence on debt but the OBR forecasts a further decline in the savings ratio.

The noble Lord, Lord Razzall, talked about inflation being back to forecast at 1.85%. He is correct in that, but it is 1.8% above a figure of 12 months ago, which was in itself 8% higher than inflation and prices would have been had we managed to achieve the 2% target throughout the period that the Government have been in office. This is just playing with statistics. The issues about cost of living and the squeezed middle arise because of the failure to keep inflation under control during the early years of this Government, when it consistently, over a period of 49 months, ran at a higher level than the 2% forecast.

There are some things in the Budget which I find commendable, such as the increase in capital allowances. I ask the Minister why it has taken such a long time to do this but it is entirely sensible, as is the increase in resource to the Department for Business, Innovation and Skills for export-led activity, albeit that it is an extraordinarily modest amount of money. Nevertheless, an extra £3 million advanced to UKTI can only be helpful.

Looked at from a macro perspective, the Budget has little economic consequence. It is a pre-election Budget. It is the last Budget we will have before the election that is likely to have any impact on voters’ expectations and general sense of confidence and well-being.

How is the Chancellor doing against his primary goal of eliminating the deficit? First of all, it was a pretty poor goal to set. The Minister, as a former partner of that eminent finance house, Goldman Sachs, will recognise the fundamental flaw in looking at only one side of the balance sheet, and yet that is what the Chancellor does. He does not have regard to public investment and he treats revenue and capital expenditure as the same. That has been the practice of Governments over many years and it leads to a failure to realise that there are extraordinarily attractive opportunities for public investment, particularly when interest rates are low and when public capital creation as a percentage of GDP is running at levels lower than at any time in the past 25 years.

The Minister deals regularly with financial institutions, seeking to persuade them to invest in infrastructure. I doubt very much whether he will say this but I suspect that, in his heart, he thinks that this is a wasted exercise. Quite frankly, the amount of money he has got into new investment, as opposed to buying investments made under previous Governments, is very small and the amount of risk transfer is almost zero. Why are the Government not spending more at a time when they are able to borrow at zero rates of interest for important capital projects? I am not talking about borrowing to support revenue projects. There is a need to get welfare expenditure under control. It was never the intention that people could make it a lifestyle option to live off the taxpayer through benefits. There is a need to get a grip on that and the Government are doing so. However, to conflate that with the issue of capital expenditure is clearly wrong.

I mentioned earlier obfuscation on statistics. The Chancellor said that he has reduced the deficit to 5.5% of GDP, compared to it being 11% when he came into office, claiming that he has halved the deficit. This is a sleight of hand, as any self-respecting economist would know. Even at our current levels, our deficit will be higher this year than the deficits in Greece, Italy and Ireland.

The OBR discloses the sleight of hand. If the deficit is adjusted for the cyclical recovery which has taken place, government borrowing figures are worse than they were 12 months ago. I do not think we heard the Chancellor say that in explicit terms when he spoke in the other place, nor have we heard anything close to that from the Minister.

The recovery, inasmuch as we have one, is built on candy floss. The upswing is cyclical in its source. This is not a recovery based on investment or exports. This is no march of the makers, as we were promised by the Chancellor. The labour market is tightening and capacity gaps are closing, yet business is sitting on huge cash balances. However, business chooses not to invest in new capital capacity because demand is being met at the moment by low-cost, low-productivity labour. It is simply easier for a business to meet any short-term increase in demand by employing more people on zero-hours contracts than to invest in important manufacturing capacity. The blame for that lies with the Government for not building the right environment for confident capital investment, and not least the Conservatives in government for the uncertainty they have unleashed over our future relationship with Europe.

The Minister talked about trends in productivity. Let me tell him that, since the end of the Second World War, labour productivity in this country has increased by 2.2% per annum. This is not significantly lower than our competitor nations. Our problem is not productivity of labour, but productivity of capital. However, labour productivity has not increased at all since 2007. Declining labour and capital productivity do not augur well for the future, and the impact is already with us in the declining share of world trade currently taken by the United Kingdom. I believe that this lack of confidence explains why SMEs are not borrowing. I wrestled with this when I was a Minister: was it that the banks were not willing to lend or was it that SMEs did not want to borrow? I have concluded that it is much more the latter than the former.

We have the wrong sort of growth, in the same way my doctor tells me that I have the wrong sort of cholesterol. We have growth that is based on a consumer boom that has been unleashed by low rates of interest and encouraged by a profligate and reckless Government who are stoking a boom in house prices and disregarding the inevitable consequences, while doing absolutely nothing to close the gap between the number of new family homes we need and the number being built.

Private sector debt as a percentage of GDP is rising, while government debt has doubled in the period that this Government have been in office. Debt will have risen to twice the level it previously stood at after 350 years of government: so much for their sound management of the nation’s finances.

I should like to close with a brief comment about quantitative easing. I was in office when QE was introduced, but I do not think any of us envisaged that it would last this long. A new deputy governor has been appointed at the Bank of England to look specifically at QE. Will the Minister give consideration to whether we should not seriously examine the possibility of off-setting the gilt-edged securities owned by the Government through the QE asset purchase programme against the gilts that were issued? Perhaps he would like to respond to me in writing on this. The first thing you do when you find that a company is in difficulties is say, “Pay off your debts with your surplus cash”. Why are the Government not doing this? It would reduce debt as a percentage of GDP at a stroke. The impact on inflation is likely to be low and could probably be handled through sterilisation activities in the money markets. This has not been publicly debated or raised as a possibility but, given the existence of surplus capacity in the economy and restrained inflationary pressure, I cannot see any significant reason why the Government should not look seriously at it as a possibility. The alternative, of seeking to sell the QE-purchased gilts back into the market while continuing to fund a deficit of 5.5% of GDP, is unthinkable.

Spending Review

Lord Myners Excerpts

Wednesday 26th June 2013 Lords Chamber

[Lord Deighton]

We do not have any proposals to adjust the Barnett formula in this Parliament. As I understand it, the Welsh resource budget will be approximately £13.6 billion, and we will publish our response shortly to the Silk commission on the further devolution of taxation and borrowing.

[Lord Myners]

My Lords, the Minister has said a number of things that I think are significantly challengeable. First, his maths in response to the noble Lord, Lord Forsyth, are clearly substantially deficient and lead one to ask how much a Treasury Minister really knows about the state of government finances.

Secondly, the Minister said that debt as a percentage of GDP will be below pre-crisis levels by the end of this Parliament. I would like to see the evidence on which the Minister makes that statement. Clearly, it is not consistent with the OBR’s forecast.

My question, however, is about the relationship between monetary policy and fiscal policy. The Government have consistently talked about an accommodative monetary policy linked to a tighter fiscal policy. They now own £325 billion of their own debt through the QE programme. Why do they not simply cancel the debt that they have bought for fair value in the markets from banks and pension funds with the proceeds that they have in the QE portfolio on the asset purchase scheme?

Why do the Government not recognise that they can manage a pretty low inflation risk through using sterilisation techniques in the money markets and adjusting reserve ratios, and acknowledge that, despite QE, monetary growth is not increasing and inflation risk is low? That would be a simple answer that would at a stroke reduce debt as a percentage of GDP by 30%.

[Lord Deighton]

The question of how we unwind QE is a matter for the Monetary Policy Committee. It is not for me to give advice here.

Financial Services Bill

Lord Myners Excerpts

Wednesday 5th December 2012 Lords Chamber

[Lord Eatwell]

My Lords, perhaps I may simply elaborate a little on the question posed by the noble Baroness, Lady Kramer. Given that there is not to be a transfer of obligations between platforms, and given that the collapse of a platform could impose significant systemic risk on the economy with a large number of unclear positions, are we to understand that the lender of last resort will be required to stand behind a collapsed platform?

[Lord Myners]

Perhaps I may also ask a question following that of the noble Baroness, Lady Kramer. The concept of interoperability is very important in the clearing of derivatives, so that corporates in particular can offset a position with one platform where they have a credit with another platform where they have a deficit. Will the Minister clarify that that involves a degree of mutualisation in the event of a failure of a platform because the failure of that platform will transfer to other platforms?

[Lord Newby]

My Lords, I am extremely grateful for the warm welcome that these amendments have received from across the House. I will deal with some of the specific questions that have been raised. The noble Baroness, Lady Cohen, asked about my vision for the way in which this provision would be used and how I saw the co-operation between the Bank, HM Treasury, the FCA and the PRA.

It may be marginally less than a vision but the situation would be that there is no requirement for the Bank to consult HMT or the other regulators before using the additional power of direction. This is because the additional power of direction is a supervisory tool and, as such, should not require the express permission of HMT before it is used. As I am sure noble Lords would agree, it is not necessary for regulators to consult with HMT before acting on day-to-day supervisory measures. It is also consistent with the similarly broad powers that the FSA currently has to vary permissions in the banking sector.

As for how the Bank intends to use its powers, as I said in my speech, it expects to publish a supervisory approach document in the coming week. Its purpose will be to give further information on how the powers of direction will fit within its wider supervisory powers over recognised clearing houses.

My noble friend Lady Kramer asked a number of questions about where the liabilities would lie and she set out her understanding of where they were. I can confirm that her view of where the powers lie is correct. As a final question, she asked about a backstop power and whether public funds were the backstop. That, of course, is the de facto position today. With this provision, we are seeking to put in place arrangements and resolution arrangements that would greatly reduce the likelihood of public funds being called upon by demonstrating in advance how these issues would be dealt with. I realise that that is a contentious statement because a number of noble Lords will no doubt think that it is extremely difficult to achieve that. Whether it is easy or difficult, that is what we are seeking to achieve by these powers and what the Bank will be trying to achieve.

The noble and learned Lord, Lord Fraser of Carmyllie, asked about going concerns or not-going concerns. The clause refers to a clearing house. It does not matter if the clearing house is no longer a regulated going concern, as I suspect he expected me to say.

The noble Lord, Lord Eatwell, followed up on what the noble Baroness, Lady Kramer, said. Perhaps the only additional comment I should make is that these powers now go beyond any resolution powers of which we are aware elsewhere in the EU, and they are part of our drive to ensure that London is the safest place—in the EU, at least, if not globally—to do financial services business.

The noble Lord, Lord Myners, asked me an extremely interesting question, which was also extremely technical. I hope he will not mind if I write to him about it. I beg to move.

Autumn Statement

Lord Myners Excerpts

Wednesday 5th December 2012 Lords Chamber

[Lord Sassoon]

My Lords, I am very grateful to my noble friend for her generous remarks and for her support since she has been her party’s spokesperson on the economy. The two parties are joined at the hip when it comes to the key economic work and all the other work of the Government. Importantly, she reminds us of a critical part of the Autumn Statement: raising the tax threshold to the benefit of 25 million people. That is very important.

On credit and access to credit, I draw the attention of the House and my noble friend to the comments of the OBR today. Its judgment is that the funding for lending scheme will lower rates for credit but increase availability. I very much share my noble friend’s concern to see a more competitive banking landscape emerge. In that context, it is interesting to note that the funding for lending facility is being taken up and having a disproportionate effect on some of the new challenger banks. I hope that that continues and that they continue to be able to increase their lending responsibly off the back of that scheme.

[Lord Myners]

My Lords, perhaps I may add my personal congratulations to the Minister. He has always brought great skill, tact, humour and optimism to his role on the Front Bench. It is a shame that that optimism has not seen the prize delivered because today’s economic Statement is a lamentable one. Against the two principal, navigating stars that the Chancellor of the Exchequer set—the fiscal mandate and a supplementary objective—he has missed, and missed by a country mile. On the first, he has been required to push austerity even further into the next Parliament and, on the second one, he makes only a modest reduction in debt as a percentage of GDP in the year 2017-18, but it is still 3% higher than in the current year. The policy of austerity-led expansion is clearly not working. An extra 1% of GDP growth during the lifetime of this Parliament would have reduced by five percentage points the proportion of debt to GDP. Growth is the key to reducing the deficit.

There are things in the Chancellor’s Statement that I find very commendable, particularly the extension of the dual carriageway of the A30 in my beloved Cornwall. Whether the right honourable Michael Gove will appreciate the use of the word “dualling” as a verb in the Chancellor’s Statement is questionable and I wonder whether Mr Gove would appreciate the arithmetic error in the Chancellor’s Statement on the increase in the inheritance tax nil band.

The Chancellor makes some very good points about attacking tax havens. So my question relates to suggesting to the Minister that, when we chair the G8, we should seriously consider saying that no G8 bank can operate in an offshore centre with a subsidiary or a branch. If, in the future, the banks of the Channel Islands—Guernsey and Jersey—were domestic banks rather than branches of subsidiaries of the world’s leading banks, most of the attraction of using despicable offshore tax havens would fall away.

[Lord Sassoon]

My Lords, that seemed to be a speech rather than a question. However, I am grateful for some of what the noble Lord, Lord Myners, had to say and I shall miss sparring with him. I remain an optimist. In less than three years since the previous election, the private sector in this country has created 1.8 million new jobs, which is twice what the OBR projected, and the OBR’s projection today for the period up to 2018 is that 2.4 million further new private sector jobs will be created at a time when it estimates that public sector employment will be reduced by 1.1 million. Times are difficult, but I remain optimistic about the underlying strength and vibrancy of the private sector in this economy.

As to the observations of the noble Lord, Lord Myners, about offshore centres, some of the issues that he raises are certainly on the agenda, but it is inappropriate to talk about offshore centres and others. The key thing is to make sure that the so-called offshore centres are brought up to the standards of the best. Some of them have made huge strides; others need to. I take his points.

Property: Commonhold

Lord Myners Excerpts

Monday 19th November 2012 Lords Chamber

[Lord Newby]

Our experience is that everyone wants some Treasury cash but, sadly, they cannot all have it. It may be of some comfort to the noble Lord to know that in the past quarter, housing starts were up 18% over the previous quarter. In terms of social housing, housing association starts were up almost one-quarter.

[Lord Myners]

My Lords, will the Minister explain the circumstances in which it would be cheaper for the taxpayer for infrastructure to be financed with the use of a Treasury guarantee than for that same expenditure to be funded directly by the Treasury?

[Lord Newby]

My Lords, the noble Lord is making a classic error to assume that there is an endless pot of Treasury money for use in infrastructure expenditure. As he knows only too well, guarantees do not feature as public expenditure unless they are called in. Our expectation is that the 70 expressions of interest we have had so far under the Infrastructure (Financial Assistance) Act are all extremely viable schemes and that the guarantees will not be needed.

Financial Services Bill

Lord Myners Excerpts

Tuesday 6th November 2012 Lords Chamber

[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.

[Lord Myners]

My Lords, I support my noble friend’s amendment. The decisions on the aggregation of power within the Bank of England are now set. The Government are clear in their determination to achieve that.

In my view, no one form of regulatory architecture can be assuredly more successful than others. Looking around the world at what happened with the global financial crisis, we saw many different structures of regulatory architecture come under strain. Some point to the twin peaks system associated with Canada as evidence that the Government’s current thinking in this area is consistent with a model that appeared to work better there than in other jurisdictions. However, if one wishes to understand why Canada did not experience the same harsh consequences of the global financial crisis, as in the United States, Europe and the United Kingdom, one finds the answer in matters other than regulatory architecture—including the nature of the economy and control of lending and leverage—which are inherent in the Canadian system and distinct from those followed elsewhere.

If we are going to aggregate this power in the hands of the Bank of England, we have to ask ourselves questions about checks and balances because we learnt from the failure of individual UK banks and institutions that, in almost all cases, there was an overly dominant individual in charge of the organisation that failed. That is the big lesson, which the FSA has not picked up completely in its reports on the collapse of RBS and HBOS. However, it is a clear lesson, whether it is Sir Fred Goodwin at Royal Bank of Scotland or Mr Adam Applegarth at Northern Rock; and similarly Mr Crawshaw at Bradford & Bingley and Mr Cummings, Mr Hornby and others at HBOS.

Are we creating an architecture here in which we are putting too much power in the hands of one person? I think we are. I was a member of the court for four years and have seen how it and the Bank operate. One must be careful not to extrapolate from the behaviours of the existing incumbents of senior positions in the Bank and members of the court into the future, but a very clear lesson to me was that the court just could not be effective at corporate governance, as both the noble Baroness, Lady Noakes, and the noble Lord, Lord Hodgson, referred to earlier. The court cannot be effective in that way. When I was a member in 2007, three members of the court sought to escalate matters to the Treasury about the Bank’s management of liquidity and of risk. It simply was not possible for my two colleagues and me to register with the Treasury or anyone else, in any meaningful way, our concerns about the Bank’s failure to understand the risks that were accumulating in the system.

Are we creating a structure now in which that could not happen again in the future? I do not think we are. We are not clear as to the role of the court. We give it some responsibilities but very little power to influence the responsibilities that we give it. We must ask important questions about the constitution and membership of the court to ensure that, in future, it is not simply a ceremonial body that is, on the whole, discouraged by the governor from asking questions, but something that at least approaches the independent challenge that one would expect—

[Lord Hodgson of Astley Abbotts]

My Lords—

[Lord Myners]

I will give way in a moment to the noble Lord, Lord Hodgson, who has had his opportunity. We must look to create a body that is capable of appropriately challenging the current governor and governors in the future. I am not sure that this is necessarily seriously advanced by the language we are using here. Perhaps I will anticipate the point on which the noble Lord, Lord Hodgson, wishes to intervene by saying that he is quite correct about perhaps dancing on the head of a pin when it comes to whether these are questions about supervisory roles or oversight. However, it is absolutely critical that we ensure, in this Bill, that the court is able to appropriately challenge and check the authority that this Bill places in the hands of the governor. We have learnt painfully in recent years about the consequences of coping with a dysfunctionality between the governor and members of the court. I give way to the noble Lord if he still wants to come in.

[Lord Hodgson of Astley Abbotts]

The noble Lord was quite right. I understood the force of his polemic and the seriousness of the point he was making but could not see how that is in any way addressed by adding the word “overseeing” to “keeping under review”, which seems to me, as he indicated, to be a distinction without a difference.

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[Lord Myners]

The words proposed by my noble friend take us a little further in the right direction. I would like to go a great deal further but am more than happy to support my noble friend’s amendment.

[Lord Blackwell]

My Lords, despite the cogent words of the noble Lord, Lord Myners, I share the confusion on this side of the House about what these amendments are intended to do. Everyone agrees that it is vital that there should be strong oversight of the governor and the executives of the Bank by the non-executive directors and that we have proper accountability and scrutiny. But what is proposed here is a court that will have a clear and very sizeable majority of non-executive directors. The amendments proposed by my noble friend earlier made it clear that all the members of that court would be directors, and would be directors in common, sharing responsibility for the decisions of the Bank. However the non-executive directors would be in a majority, and if those non-executive directors disagreed with what the executives proposed, they could make that clear in the court and they would have the majority to hold sway.

According to these amendments, the court, involving all directors, would be able only to propose policies and then a sub-committee of the board of only the non-executives would then go away and approve them. That seems to turn corporate governance on its head. Either we have a supervisory board of non-executives, which is a totally different structure, or we accept that the Court of Directors is indeed the Court of Directors and should, with all its members, accept responsibility. What we have here is a very sensible proposal for an oversight committee of non-executive directors that will play its role in allowing non-executive directors to review and scrutinise offline, but to report to the full court, as is normal in any governance process. All directors must share equal responsibility in the end for the decisions of that organisation.

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[Lord Sassoon]

My Lords, I am grateful for this debate. The noble Lord, Lord Eatwell, started by welcoming the creation of the oversight committee as an important step, but then went a leap too far in getting rather confused about what, in his terms, “modern corporate governance” really means. As so many noble Lords have explained, it means that ultimately the governing body as a whole—the board of directors, the Court of the Bank of England—has to take the key decisions. As the noble Lord, Lord McFall of Alcluith, said, the principal role of the oversight committee is for learning lessons. I completely agree with him, and will go on to explain that the role of the oversight committee, as constructed in the Bill before these amendments, is completely in line with what the Treasury Select Committee envisaged.

My noble friends have explained all these things much more clearly than I could. The noble Lord, Lord Nickson, modestly said that he is out of date. I do not believe that he is out of date at all. He and the noble Lord, Lord Kerr of Kinlochard, who has great current experience of corporate governance in one of the UK’s largest multinationals, have got this right. I had been puzzled—I wondered whether I had missed something in all this—but I am grateful that the House shares my concerns.

To address the specifics, Amendment 3A would shift the oversight committee’s functions from a more backward-looking, reviewing role—the lesson-learning role that the noble Lord, Lord McFall, referred to—to a real-time overseeing role, which would involve scrutinising and perhaps second-guessing the Bank’s policy decisions while they are being taken. As my noble friends and other noble Lords have made clear, if that role is taken at the board level, it is taken by the board as a whole. I do not believe that this proposed new role would be at all appropriate.

As I have said, we can look to what the Treasury Select Committee in another place said when it recommended the introduction of ex-post reviews of the Bank’s policy performance. This is worth quoting at some length, from the committee’s 21st report of the Session, Accountability of the Bank of England:

“The Governor stressed to us that ‘the decisions that the PRA, FPC and MPC make on policy are not decisions that the Court needs to second guess’. We agree. The Bank’s governing body should place more emphasis on oversight and ex-post scrutiny. This does not require or authorise it to become involved in second guessing immediate policy decisions. But there is a need to analyse and learn lessons from the actions of the Bank on a routine and consistent basis, drawing on expertise from within the Bank. Ex-post review of the Bank’s decisions would, we believe, be in the interests of good governance of the Bank”.

The report went on to recommend that ex-post reviews of the Bank’s performance be carried out,

“not less than a year after the period to be reviewed”

in order to avoid,

“second guessing at the time of the policy decision”.

The current wording describes one of the functions of the oversight committee as,

“keeping under review the Bank’s performance”,

which is entirely consistent with the Treasury Select Committee’s recommendations and strikes the right balance between ensuring effective retrospective scrutiny of the Bank’s policy decisions and avoiding a situation where the non-executive members of the court would be second-guessing the policy decisions taken by the Bank’s expert policy committees and Bank executives. Of course, in this context my noble friend Lord Blackwell is quite right to point out that when these decisions are for the court as a whole, the non-executives are, as one would expect in any good modern corporate governance structure, in a majority.

I am a little puzzled by Amendments 3B, 3G, 3H and 3K, which seek to make the non-executives of the court solely responsible for determining the Bank’s financial stability strategy. Again, this is completely at odds, as the House has been told, with the way in which model corporate governance operates. Surely the reason for making the governing body as a whole, in this case the court of directors, responsible for the strategy is because it is that body, and in particular the executive members of that body, who will be accountable for delivering the strategy. Like other noble Lords, I struggle to see how the process that is proposed in these amendments could possibly work in practice. The oversight committee is made up of the non-executive directors of the court and those non-executives make up the majority of the court, as my noble friend has suggested.

On the role of the non-executives, I am sure that the noble Lord, Lord Myners, is right when he says he could not get the Treasury to take concerns seriously back in 2007, but I cannot answer for what happened in the Treasury under the previous Administration. All I can say is that if any member of the court of the Bank, whether executive or non-executive, came to the Treasury now, we would take their concerns extremely seriously.

I do not want to belabour the point, but I am not sure whether the noble Lord, Lord Eatwell, is envisaging situations in which the non-executive directors, coming from a court meeting in which they agreed the financial stability strategy, then go into an oversight committee meeting where they decide perhaps that the strategy agreed by the whole court was wrong in some way. We need to distinguish here clearly, as have many noble Lords, between the differing responsibilities of the court and of the non-executives on the court. The court, as the Bank’s governing body, is responsible for setting the Bank’s overall strategy, including its strategy for financial stability. It is the responsibility of the executives of the Bank, with the support of the court, to deliver that strategy. It is the responsibility of the oversight committee to hold the executive to account for how it delivers on the strategy by keeping its performance under review and, again in the words of the noble Lord, Lord McFall, for learning the lessons. This split of responsibilities in the Bill is appropriate and consistent with modern corporate governance.

Finally, Amendment 6C would add policies to the existing requirement in subsection (4) of new Section 9B that the oversight committee keep the procedures of the FPC under review. I can assure the noble Lord, Lord Eatwell, that this amendment is entirely unnecessary. The oversight committee is already responsible for keeping the policy and performance of the FPC under review. Subsection (2)(a) of new Section 3A of the 1998 Act, as inserted by Clause 3 of this Bill, clearly states that the oversight committee is responsible for keeping under review the Bank’s performance in relation to all of its objectives and strategy, including the objectives of the Financial Policy Committee. With the benefit of this useful debate, I hope that the noble Lord will see fit to withdraw his amendment.

[Lord Myners]

I want to be helpful and pick up one point about the references that have been made by several Peers to models of good corporate governance. The noble Lord, Lord Flight, with considerable experience and great standing in business in the City, has already pointed out one respect in which the court cannot be compared with a conventional board of directors: its ability in the end to remove the executive if it has lost confidence in it.

The point that I raised about our experience in 2007 is another distinct difference from corporate governance; namely, there is no shareholder to whom the non-executives can appeal. What happened in 2007 was that three members of the court had meetings with Treasury officials to raise their concerns about the absence of full challenge and the dominant influence of a single voice in the court. They expressed those views to Treasury officials, who shrugged their shoulders and said that there really was not much that they could do. The governor is ultimately appointed by Her Majesty and members of the court are elected to do their work, and there is nothing that the shareholder—effectively the Treasury—can do. That is another area where we must be very careful not to assume that we are just picking up the corporate model and inserting it into the Bank. The Bank is different by virtue of the very limited powers placed on the court and the absence of a shareholder.

Finally, I question whether the Minister’s constant references to good corporate practice would be reflected in the role of a board in overseeing ex post facto what a company does. My experience of sitting on boards is that boards are very much involved in reviewing the formulation and implementation of strategy on a constant basis, not in carrying out post-implementation exercises. Your Lordships’ House should be careful to recognise that there are limits to the complete applicability of corporate practice to the particular circumstances of the Bank of England, the court and the governor.

[Lord Sassoon]

My Lords, I know that the custom of this House on Report is that noble Lords do not make second substantive speeches, so the noble Lord will understand if I do not respond to his points—otherwise we will not make much progress. However, I will clarify one point in answer to the question asked by my noble friend Lord Flight about the removal of the governor and the suggestion by the noble Lord, Lord Myners, that the governor cannot be removed. This is of course wrong, as I am sure the noble Lord, Lord Myners, knows. If he would like to refresh his memory of the Bank of England Act 1998, paragraph 8 of Schedule 1 sets out precisely the conditions under which the governor can be removed.

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[Lord Hodgson of Astley Abbotts]

My Lords, I am slightly concerned at the proposed obligation to conduct an annual review. The role of directors is constantly to keep a strategy under review and to see whether it is still relevant. However, to impose this would impose a burden. A proper strategy review is an extremely expensive and far-reaching undertaking. It would be far better to have a backstop of a three-year requirement and rely on the good judgment and good sense of the directors, in particular the non-executives, to call for more frequent reviews as and when they are needed. It is inconceivable that we would go through the sorts of events that we have been through since 2008 and that non-executives would sit and say, “We do not need to look at the strategy”. It is part of their role to do that and we should rely on their judgment, not on process, with a backstop of the three years, as proposed.

[Lord Myners]

My Lords, I will pick up on a term in the final sentence of the contribution of the noble Lord, Lord Hodgson. He referred to relying on the judgment of the non-executives. Many issues around the court will depend on the quality of the people appointed, and how they conduct themselves. A slightly less than perfect structure, superbly implemented, is likely to give a better outcome than a perfect structure that is poorly implemented. The Minister on a number of occasions referred to best corporate practice. Can he envisage any situation in which a corporate board performing effectively would not carry out an annual review of strategy? Every board of which I have been a member has had an annual strategy session to look again at past strategy and in many cases endorse or modify it in the light of circumstances. Regardless of what we say here, court directors seized by their legal responsibilities would almost certainly want to carry out an annual review. Does the Minister agree with that observation?

[Lord Sassoon]

My Lords, I certainly agree with the construction of my noble friends Lord Phillips of Sudbury and Lord Hodgson of Astley Abbotts. I think that essentially they are agreeing with the noble Lord, Lord Myners, that boards will take sensible views on these matters, and that we do not need to require the court to review the Bank’s stability strategy on an annual basis because a perfectly sensible arrangement will emerge that will to some extent involve a strategy that is set for a longer period than a year. Clearly, to some extent, a strategy needs to look out further—as the noble Lord, Lord Myners, agreed. Equally, of course a board will look to see how a strategy is going on a more frequent basis.

I have not changed my view since Committee on the lack of need for the provision proposed in the amendment. The interventions in this discussion reinforced my view. The legislation does not set out how regularly the Bank’s strategy should be reviewed. In practice the court has revised the financial stability strategy on an annual basis. That is understandable, given the sheer volume of legislative and other changes that there have been in the system of financial regulation in the past three years. On the other hand, as the noble Lord, Lord Myners, agreed, a strategy needs also to be a longer-term, forward-looking document. We do not need to hardwire in an annual review and suggest in any way that we require a short-term, business-plan view to be taken rather than a genuine strategy. That is why new Section 9A will require the court in future to revise the strategy at least every three years—so that it is a longer-term document—but there will also be flexibility for the court to revise the strategy earlier. I continue to believe that a three-year timeframe is the correct requirement for the Bill. It leaves plenty of flexibility.

I will add that I am conscious that in talking about this matter I use “court” and “Bank” to mean different things. I did not want to prolong the earlier debate, but I did not say then that court equals Bank. I am sure that the noble Lord, Lord Eatwell, did not believe that to be the case, or that I suggested it. What I suggested in the earlier context was that there were certain critical issues on which the court would take a decision. The matter that we talked about—the public interest test in connection with publishing reports—was one. Here is a clear example of a case where we are talking about the court setting a strategy for the Bank. There will be many more examples as we go through the Bill of cases where “court” and “Bank” mean different things. We need to look at each instance as it comes up. With that slight digression, I hope that the noble Lord has been comforted by this further discussion of the strategy timeframe issue.

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So I do not advocate my alternative, Amendment 5, and note that even with the modest change in my Amendment 4 the FPC would number 10, or 11 if you include the Treasury, and would thus be outside the cognitive limit referred to in Sir David Walker’s report. If the Government cannot face telling the Bank it cannot have two extra people on the FPC, the solution is available to them by adding one, as in Amendment 5, although the Government would have to recognise that this solution would be sub-optimal. I beg to move.

[Lord Myners]

My Lords, I support the amendment in the name of the noble Baronesses, Lady Noakes, Lady Wheatcroft and Lady Kramer. I, too, have been struck by the potency of the Walker report appendix on group effectiveness, drafted by the Tavistock Institute. My experience leads me to conclude that the larger the group, the less effective it becomes. The R-squared is actually extraordinarily high and making the FPC any larger would not be the right solution, although it would be better than doing nothing.

Amendment 4 is, in my judgment, significantly superior to Amendment 5 and I think the noble Baroness, Lady Noakes, has, as she so often does, put her finger on the issue. It is almost certainly the governor who is insisting on having this right to appoint additional people to the committee. The past culture of the Bank is that it speaks with a single voice and that voice expresses the opinion of the governor. The more people around the committee table who therefore speak with that single voice, the better it is from the perspective of the executive. From the perspective of a functioning committee, that is almost certainly not an optimal outcome. In fact, if the Tavistock Institute had been invited to comment on the existence of a cabal or blocking group within a committee, I am sure it would have been even more powerful in its views about its appropriate constitution.

The central thrust of everything we are doing in helping the Government get this legislation through Parliament is to try to ensure that we have as many checks and balances in place as is appropriate. One of them must be a check on the strength of the voice of the executive of the Bank on these committees and, while both of the amendments put forward by the noble Baroness, Lady Noakes, will achieve that, Amendment 4 is preferable to Amendment 5.

[Baroness Wheatcroft]

My Lords, Amendment 4 will achieve an improvement in the balance of the FPC and I support the other amendments in this group, tidying-up amendments which would bring the number of extra appointees from the Bank down to one instead of two. It is obviously better to have a balance, if we can, between the Bank team and the outsiders—as they will undoubtedly feel that they are to start with.

We have heard about groupthink. There obviously has been a fair amount of groupthink at the Bank in the past, although it is worth remembering that on the Monetary Policy Committee the Governor of the Bank of England has been outvoted on several occasions, so it is possible for people to disagree with the governor and for the committee to go against him. However, on the basis that a balance would be better, bringing down the level of Bank people represented on the FPC would be an improvement.

Economy: Deficit Reduction

Lord Myners Excerpts

Monday 15th October 2012 Lords Chamber

[Lord Sassoon]

My Lords, I do not know whether the noble Lord, Lord Peston, and his noble friend Lord Barnett have been comparing notes, but the noble Lord, Lord Barnett, was quoting the IMF approvingly at me only a minute or two ago. On this point, only a week ago, on 9 October, a senior official of the IMF said that at this stage:

“The policy mix in the UK, which consists of adjusting fiscal policy, reducing deficits, at the same time supporting the economy with a very accommodative monetary policy is the right way to go”.

[Lord Myners]

My Lords—

[Lord Ryder of Wensum]

My Lords, can my noble friend please tell the House about the last time that the IMF forecasts for the British economy were accurate?