Monetary Policy Committee

Lord Myners Excerpts

Wednesday 6th July 2011 Lords Chamber

[Lord Sassoon]

My Lords, it is part of the discipline of the way in which the Monetary Policy Committee operates that it is required to write letters to the Chancellor when inflation is outside the target range. The most recent exchange of letters was in May 2011, in which the Chancellor recognised the factors driving short-term inflation, including, particularly, the very high commodity prices. However, it is important to recognise that the MPC’s mandate enables it to look through short-term movements in prices towards a medium-term target.

[Lord Myners]

My Lords, as the Minister said, the Bank of England has two monetary policy objectives: to deliver the inflation target, currently set at 2 per cent, and to deliver growth—and to be accountable to the Treasury and Parliament for doing so. On which of those two objectives does the Minister think the governor and the Bank of England are doing best?

[Lord Sassoon]

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

Banking: Northern Rock

Lord Myners Excerpts

Thursday 30th June 2011 Lords Chamber

[Lord Sassoon]

My Lords, the overarching aim of any sales process, as well as getting a clear exit, is to obtain best value for the taxpayer. There are of course tensions between that objective and certain methods of sale, and that is precisely what the experts conducting the sale will assess.

[Lord Myners]

Will the Minister confirm that best value will not have been achieved if Northern Rock is sold for less than the assets of the bank shown in its accounts?

[Lord Sassoon]

No, I will not confirm that to the noble Lord. The best value will be obtained for the taxpayer by conducting an exemplary sales process that explores all the options out there for the bidders. In the light of a transparent and competitive process, the best value will be obtained.

Greece: Default Contingency

Lord Myners Excerpts

Monday 20th June 2011 Lords Chamber

[Lord Sassoon]

My Lords, I am not going to comment on what is going on in the markets and with individual banks at all, and I am sure that my noble friend would not expect me to. However, I would make the point, which was also made in the Statement, that UK banks have been able, in very tough market conditions, to improve their funding position very considerably over the past year and more. The overall situation of the interbank market is far better—although we should not take any of these things for granted—than it has been at points during the financial crisis. It is therefore important, as my noble friend reminds us, that confidence within the banking system enables there to be liquidity. As I say, we are in a much better position in that respect than we were during the financial crisis itself.

[Lord Myners]

My Lords, I start by congratulating the Minister on taking longer to answer questions than he did to repeat the Statement given by his honourable friend in the other place. One might suggest that the reason we have low interest rates and banks are not lending is more to do with the fact that the economy is moving back towards recession than for the reasons that the Minister gave. Let me ask three short questions that I think can be answered by short and quite factual answers. First, have the Government absolutely ruled out any use of the EFSM in support of Greece or any other European nation, over and above the commitments already made? Secondly, has the Bank of England accepted Greek sovereign credit as collateral for loans made by the Bank of England to the European Central Bank, and therefore for loans on which the Bank of England is exposed? Thirdly, are we as a country exposed to the need to recapitalise the ECB should Greece default on its sovereign debt?

[Lord Sassoon]

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

Economy: Government Policies

Lord Myners Excerpts

Thursday 24th March 2011 Lords Chamber

[Lord Risby]

My Lords, it is a great pleasure to follow on from my noble friend Lord Lyell. I add to the congratulations already offered to my noble friend Lord Lawson on securing this debate and on being a truly reforming Chancellor. I also congratulate warmly my two noble friends Lord Hussain and Lady Stedman-Scott on their excellent maiden speeches. I know that they will greatly enrich the proceedings of your Lordships' House in the years to come.

We appear today to be in something of a circular situation, with consumers feeling bruised and nervous, their confidence weak and, in consequence, banks being reluctant to lend, especially to smaller and start-up businesses. Yet, ironically, the overall cash position of corporate Britain is very high by historic standards. Unleashing this would undoubtedly spur on economic growth and confidence, and this was at the heart of what the Budget was all about.

A fundamental necessity for any new Government after the general election was to convince the markets that the deficit would be tackled, and this has worked. While the interest-level cost of our massive borrowing has decreased, it has risen in other countries, as we have heard, such as Spain and Portugal. What has happened in the past 24 hours to Portugal absolutely says it all. Given that we have the highest deficit in the industrialised world, we had to respond to the sovereign debt crisis, which was and is pervasive in southern Europe. We avoided that, and had we not done so, the consequences would have been simply cataclysmic. Interest rates would have risen. Even now, with restraint, our total debt will be £1.36 billion.

[Lord Myners]

Trillion.

[Lord Risby]

Trillion. It is simply wrong and absolutely immoral to bequeath to our children and grandchildren a debt burden of this order, which would have been even worse because of the profligacy of this generation in government.

However, at the heart of this most difficult legacy was the behaviour of banks, so disproportionately important to the UK economy. This was due substantially to a failure of proper regulation. I have heard it described as a product of light regulation. The FSA’s bureaucratic procedures and micromanagement meant that it did not focus on the big picture—for example, the borrowing and lending practices of Northern Rock. The tripartite system ensured that neither the Treasury nor the FSA nor the Bank of England took the necessary pre-emptive action to stop what so tragically ensued. It diminished in consequence our credibility and ability to influence the pattern of emerging European financial services regulation.

Nevertheless, given the massive importance of the financial services industry, it is crucial that previous failed arrangements are replaced. No regulatory system is perfect, but at least the Bank of England previously closely monitored financial institutions and will do so again. Without this, overall economic recovery will not happen. While Governments can assist with an appropriate tax and regulatory framework, it is the private sector that will ensure this, with innovation and new enterprise crucial to it.

I declare an interest in this regard because I am deputy chairman of the Small Business Bureau. The renewed emphasis on smaller businesses is extremely important, as the weight of regulatory and tax pressure is for them inevitably disproportionate. Planning laws have been too restrictive and have benefited larger businesses such as supermarkets. They have also had the effect of distorting house prices. Therefore, I greatly welcome George Osborne’s recognition of this, and the reform of Business Link to assist budding entrepreneurs is welcome, too.

Of significant potential is the renewed government-supported export drive, which specifically includes small businesses. It is gratifying that the strategy outlined in your Lordships' House by my noble friend Lord Green includes financial support and advice to SMEs. The structure of export promotion in this country has been ill focused, with regions even competing with each other at international trade fairs. Our trade promotion activities compared with those of our rivals have been inadequate, and the strategy which has been outlined brings fresh coherence to a huge marketing opportunity abroad. The new enterprise finance guarantee scheme, a new working capital scheme, a new bond support arrangement and credit insurance are specifically targeted at SMEs and in that regard are particularly welcome.

This focus on acorn companies is long overdue. They account for half of all private sector output and 60 per cent of private sector jobs. Freeing them from new domestic regulation, limiting audit and reporting burdens, the small business rate relief and fresh access arrangements to increase finance to them, matched with easier planning consents, will help promote entrepreneurial activity. The increase in the SME rate of research and development tax credit is additional good news.

History has shown us that, in politics, defeat often produces a kind of introspection. It has certainly manifested itself since the last general election. It is as if the Opposition were not responsible at all for the economic crisis which engulfed us. In the context of the economy today, to have one policy, which is simply to say that reduction of the deficit should be slower, is frankly no policy at all. If there is a coherent alternative strategy, I hope that we shall hear it today.

[Lord Myners]

My Lords, I join other Members of the House in congratulating the noble Baroness, Lady Stedman-Scott, and the noble Lord, Lord Hussain, on their maiden speeches, and the noble Lord, Lord Lawson, on his timely securing of this debate. I pay tribute to the noble Lord as one of the three great post-war Chancellors of the Exchequer that this country has had in office.

Yesterday’s Budget, on which the noble Lord, Lord Lawson, said we were likely to focus in speaking to this debate, was characterised as a Budget for growth. However, rather sadly, the text did not follow the headline, because we had a story of declining growth—the third downward adjustment in growth forecasts for the current year in the space of 10 months. The only things that went up were the things we did not want to go up. Unemployment is going up by another 140,000; inflation is going up, including the important GDP deflator; and the deficit is going up.

On the growth front, the world is enjoying stronger growth. In all our major competitor countries, growth estimates have increased over the past three months. In the UK, we are going in the reverse direction. Even the long-term forecasts from the OBR on growth were due to a sleight of hand. The OBR has a simplistic model: if growth is not delivered this year, it adds it into future years, so it will always track back to a long-term trend growth of 2.25 per cent. There is asymmetrical risk in the OBR forecast. Put simply, the risk of us doing better than the OBR has forecast is, first, low; and, secondly, of little consequence. The risk of us doing a lot worse is high and could be devastating.

This was less a Budget for growth than a Budget which clings to growth assumptions to support the logic of the thinking behind the Budget. I do not see the party opposite as being one of “crazed fanatics”, as mentioned by the noble Lord, Lord Lawson. There is a logic to what the Government are doing—I do not deny that—but the Budget and the Government strategy is driven by ideology and is resting on some crude misunderstandings of economics. The challenge for this side of the House is to set out the facts and articulate clear and credible alternatives. We have not always done that.

Let us look to the facts. During the period 1997-2010 the UK achieved the second highest growth rate per capita in the G8 countries, surpassed only by Canada. That is a fact of achievement under the previous Government. The deficit in 2007, before the global financial crisis, was less than 3 per cent and borrowing as a percentage of GDP was in the bottom quartile for the G8 countries. In 2007, George Osborne endorsed the Government’s spending plans. Indeed, he said he would replicate the quantum of government spending. That is the backdrop to an economy which was then confronted by a global crisis. Its impact on us was emphasised—the Prime Minister was wrong to say that we were less exposed to the global and financial sector downturn than other economies; we were hit hard—because of our dependence on financial services. We were hit not on expenditure—it was not an increase in expenditure; the cyclical adjusters went up—but on taxation. That is a temporary phenomenon; once the economy recovers, taxation recovers.

In 2010, the economy was recovering: we had had two quarters of successive economic growth, the deficit was coming down—it was £20 billion lower than forecast—growth was re-established and unemployment was coming down. That has all been placed at risk by the economic strategy of this Government—a strategy that is based on a misreading of the economy; a misreading of the impact of their own talk of austerity, which is forcing down economic confidence, as we see from the nationwide index and other indices of business and consumer confidence; and a misreading of basic economics and finance.

I shall cite three examples. First, it is simply wrong to remove demand from the economy when we have significant excess capacity. The role of the public sector is to provide demand in those moments when the export sector or the private sector is not providing the demand. Secondly, there was no panic in the area of funding—quite the opposite. We were funding at record low rates, with maturities which, due to the wisdom of previous Chancellors of the Exchequer, were the longest of the G8 countries.

We must remember that a deficit in itself is not wrong; it is the purpose for which it is used. To have a deficit to run benefit payments over a long period of time is an inter-generational transfer which is difficult to justify. To have a deficit for capital investment—to build roads, hospitals, schools and infrastructure—is a good thing. That is where the ideology of the Government, which is centred on small government, is wrong because it is not supporting investment in infrastructure.

Many of the measures announced yesterday were sound—it is not my job to emphasise them—but there were a raft of inadequate headline grabbers: the double tracking of railways in the Cotswolds and an enterprise zone in Sheffield—I wonder how the Prime Minister and Deputy Prime Minister thought up those two; the filling of pot holes; a new home subsidy which will simply drive up the price of houses; and the non- doms hit again. That is a very bad thing for the economy; it is something that we did which I deeply regret. I also deeply regret the 50p tax rate. These measures are anti-growth and wrong for innovation and economic prosperity.

The new enterprise zones will simply move activity from one area to another, although I will be arguing the case that Cornwall should be one of them. If the gift is there, one might as well reach out for it. Interestingly, the 11 zones announced today are all in urban areas. I hope we will find some rural areas among the other 10 to be announced.

Where are the growth builders in this Budget? Infrastructure investment—cut; education—cut; workforce expansion—to be reduced. I welcome the simplification of the tax system but we need stable and predictable taxation. Yesterday we were hit by a sudden increase in oil tax. Last night the Chief Secretary guaranteed that the oil tax would not be passed on to customers; can the Minister give a similar guarantee that the bank levy will not be passed on to customers? I believe that it will be because the bank sector is not openly competitive enough. I am sure that the banks are now regretting deeply all the time they spent on project Merlin because, clearly, the Government’s word was not worth it in terms of what they expected to get out of it.

I hope that we also look to monetary policy. I am deeply concerned about the doubling of inflation. I am aware of the time; I am closing and there is no need for the Minister to gesticulate because I am sure that on this occasion he can cope with my questions. I am deeply concerned about inflation and it is a great shame that the Bank of England is losing its credibility because it is unable to do the right thing to combat inflation.

Independent Commission on Banking

Lord Myners Excerpts

Monday 28th February 2011 Lords Chamber

[Lord Sassoon]

I certainly agree with my noble friend that there were two areas that the Government needed to address urgently resulting from the failure of the previous system of regulation and the over-leveraging of our banks. The first one on which we have brought forward proposals is the system of regulation, although I completely agree with my noble friend that that is not sufficient, which is why we set up the independent commission to look into the structure of banking. I am certainly not going to pre-empt either the conclusions that it comes to in its final report or the Government’s response, but I am greatly encouraged by the papers that it put out and by the recent lecture by Sir John Vickers, which indicate that the commission is tackling all the major issues and stimulating a vigorous debate.

[Lord Myners]

My Lords, in light of the agreement on Project Merlin, do the Government now regard bank bonus practices and numbers as acceptable?

[Lord Sassoon]

My Lords, this afternoon we are talking about the Independent Commission on Banking. Questions of pay structures have not been set by the Government as part of the commission’s remit and it is sticking to a series of other questions.

Monetary Policy Committee

Lord Myners Excerpts

Wednesday 16th February 2011 Lords Chamber

[Lord Sassoon]

My Lords, again, I do not want to be drawn into either economic debate with the noble Lord, Lord Peston, or commentary on the governor. The governor indicates that the rise in VAT was one factor behind the rise in inflation, but I should point out that the rise in VAT to which he was referring was the one under the previous Government and not the present rise to 20 per cent. However, I take the noble Lord’s point about the nature of one-off rises such as that.

[Lord Myners]

My Lords, the Minister has now introduced the new protocol of answering my questions one week later, but I suppose that that is better than the previous policy of not answering them at all. Is not the reality that the Government’s fiscal policy is pushing the UK back towards recession—a direction which no other major economy in the world is currently following—and that the only thing supporting demand at the moment is very low interest rates? Business welcomes that, although savers are less enthusiastic. However, we are taking big risks on inflation as a consequence of the policy which the Bank of England is having to adopt in order to counterbalance the fiscal policy of this Government.

[Lord Sassoon]

Absolutely not, my Lords. The direction of the Government’s fiscal policy and the stability of that policy is one of the fundamental certainties which enable the Monetary Policy Committee of the Bank of England to set a firm course for monetary policy. The worst thing we could do to make the MPC’s task harder would be in any way to create uncertainty in government fiscal policy. Therefore, what my right honourable friend is doing in getting the deficit under control with very clear and early measures enables the MPC to do its work in relation to the inflation target.

Budget Responsibility and National Audit Bill [HL]

Lord Myners Excerpts

Monday 7th February 2011 Lords Chamber

[Lord Eatwell]

I am indeed. It is appropriate to thank people, when a Bill has gone through in this co-operative manner, for what has been achieved.

I know that the Government think that this side of the House has taken a somewhat belt-and-braces approach to the independence of the OBR; I am sure that Sir Humphrey, or perhaps Sir Nicholas, does. However, it can do no harm to the OBR’s reputation to have a belt in place when the braces fail.

It is the Government’s responsibility now to ensure that this important experiment in economic governance is a success. We on this side wish Mr Chote and his team well.

[Lord Myners]

My Lords, my words are very much in the same direction as my noble friend’s. This has been a superb example of the House working well. We had long and detailed discussions in Committee. The Minister listened attentively and reserved his position, but came back with constructive amendments, and at all stages he kept fully informed everyone who is interested in the Bill by writing to us and keeping us up to date. It is a better Bill as a consequence of the House working effectively in the way that it did.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I thank the noble Lords, Lord Eatwell and Lord Myners, for those remarks. I add my thanks to the Bill team, who did a cracking job, and to the Opposition for the constructive spirit in which we saw the Bill through.

Investment Bank Special Administration Regulations 2011

Lord Myners Excerpts

Thursday 3rd February 2011 Lords Chamber

[Lord Myners]

My Lords, I support both the Investment Bank Special Administration Regulations 2011 and the Investment Bank (Amendment of Definition) Order 2011. The policy objective is to create a special administrative regime in the form of an administration procedure. The aim is to provide administrators with clarity and direction to resolve the firm without needing to approach the court on a frequent basis. These adjustments to current insolvency law will make the process less expensive and less disruptive for an investment firm, its clients and creditors and the market.

The Government have consulted widely and the response has been broadly supportive. It is important that we express our thanks to those who sit on the investment banking liaison panel for the time they have spent working on complex legislation and regulation to ensure that they achieve the Government’s purpose.

The regulations and the order are being made, of course, under the enabling powers in Sections 233 and 234 of the Banking Act 2009, which I had the honour to take through the House. This arose as a consequence of the insolvency of Lehman Brothers, when unanticipated complexities emerged in resolving that investment bank, particularly in connection with client money.

The Financial Services Authority has taken significant steps to improve the supervision of client money and to address a number of areas where there were shortcomings and deficiencies. In particular, it has put a very strong team under excellent leadership in place to be responsible for the supervision of client money. These regulations are important to maintaining public confidence in the stability of UK financial markets and the integrity of institutions and firms operating in these markets.

I have two questions for the Minister. When Lehman Brothers collapsed, one of the difficulties we experienced was that Lehman was holding money in client accounts which were appropriately designated as client accounts and, accordingly, should have been kept separate from the assets of Lehman Brothers when it came to administration. However, Lehman had placed this money on deposit with a separately incorporated Lehman bank in Germany. The German authorities, after the collapse of Lehman Brothers, passed legislation to say that client money held on the accounts of this German banking subsidiary, when placed by an affiliated Lehman body, would not be deemed to be client money under German law. Is the Minister aware of whether any progress has been made on that point? Has this been raised at ministerial level recently with the German Government? It seems to strike at the very heart of the concept of the segregation of client assets which is intended to make sure that those clients are protected from any failure on the part of the institution with which they thought they had an agency rather than a principal relationship.

My second question relates to omnibus accounts. Will the Minister reflect on whether omnibus accounts are in themselves a source of hazard, and whether the practice of using omnibus accounts is one that the regulators should review in favour of looking at the case for requiring all accounts to be designated? Certainly in my experience, omnibus accounts undoubtedly increase confusion over the ownership of assets and the execution of certain fiduciary responsibility including, in particular, the voting rights of shares in UK companies at shareholder meetings.

Finally, I also express my support for the measures that the Government are taking in respect of the continuity of service arrangements, another problem that emerged with Lehman. The House should support the measures that the Government are bringing forward.

In closing I wish to mention a very crude term that is currently being used: banker bashing. Many members of the Government are engaged in banker bashing. The Secretary of State for Business and the Chief Secretary to the Treasury have made wholly uncomplimentary remarks about banks. Last night I was watching BBC “Newsnight” and was surprised to find the Mayor of London making uncharitable comments about banks. It is quite a volte-face, although it really takes him back to where he originally started.

It is important that we recognise that we have very many talented people working in investment banking in this country. I have had the privilege of working with them—they are in very many cases the best in the world, and they do not work only for our own banks. I would happily hear names like Royal Bank of Scotland. It is very easy to regard that as a bank associated with failure, but there are extraordinarily good people working there. Likewise, many people here in London work for firms such as Morgan Stanley and Citicorp, or for our own pre-eminent investment bank, BarCap. We need to maintain context here. Of course some of these problems continue to be self-inflicted by the banks, and I wish the Government well in their talks under Project Merlin, which are intended to bring some sense to bank bonus decisions. However, we need to keep in mind that investment banking, and banking in general, are a source of incredible competitive and comparative advantage for the UK economy. These regulations are entirely consistent with providing the support for a reputable, solid and prudent banking sector of the sort that we should seek to encourage in this country.

[Baroness Falkner of Margravine]

In his defence of the banking industry, with which I broadly agree, will the noble Lord accept that the idea behind the Government asking bankers to be more responsible and to have a social conscience is not to imply that individual bankers are not worthy of their role and status in the industry, which is very important to us, but is directed at certain levels of remuneration? Irrespective of how talented an individual is, no single individual can add the kind of value-added that we have started to see in terms of remuneration and the bonus pool.

[Lord Myners]

I had almost concluded my speech but the noble Baroness’s intervention has provided me with an opportunity to carry on and say more. There are very talented people working in UK banking and some of them are among the world’s very best. They earn their remuneration. Sir Philip Hampton, the chairman of Royal Bank of Scotland, referred to a gangmaster culture in some of the banks. I put down a Question for the Minister on this subject, to which he gave his standard Answer on bank bonuses which I can now recite. Regardless of the Question I ask, I get the same Answer. Perhaps it will change at some point, but I am beginning to lose any great hope that the Minister will seek to answer the Questions that I ask him on these subjects.

[The Archbishop of York]

The noble Lord, Lord Myners, normally speaks with great sense and clarity on matters of money, but the question is not that banking is not an honourable profession. People who work in the banks are people of good will and good respect, and they do a very good job. The first question is about bonuses. People in this country find the bonus culture indefensible. The second question is about the gambling casinos around banking. Will they get rid of those gambling casinos? Many people say they do not like them. The question that the noble Lord asked the Minister about Lehman Brothers and deposit accounts in Germany illustrated the point. Some people say that that is not the honourable business of banking. Anybody who is having a go at banking is saying not that banking is not an honourable profession or that bankers are not very able people doing a good job but that these bonuses and the gambling casinos taint the entire profession of banking.

[Lord Myners]

I can only say that there are failures of agency functions here. The shareholders are not holding the boards to account, and the boards are not asking the right questions or building depth of talent. It may be that the Minister, with his great experience in this area, can share with us his thoughts about why banking has this problem of high bonuses. My father was a fisherman, and there was not a big bonus culture in fishing. There is no bonus culture in making ball bearings, in engineering or in the hospitality industry. I think the answer possibly lies with the work that the Independent Commission on Banking is doing. The Minister always treats anything I say positively with considerable scepticism and caution, but I repeat my strong endorsement of the creation of the Independent Commission on Banking. It may well raise some interesting perspectives on the points that have been made. I close by simply saying that I fully support the administrative orders being tabled today.

[Baroness Maddock]

My Lords, I strongly support many of the things that the noble Lord, Lord Myners, said in support of these orders, particularly the measures that allow for clients’ assets to be recovered more readily. I have three questions.

Not only will administrators be able to prioritise the three objectives outlined in the instrument as they see fit, but they will also be able to continue to administer their organisations with a guarantee that suppliers must provide their services for up to a period of 28 days without pay. Have the Government fully identified the potential costs to suppliers who have to continue to provide their services for this period?

Secondly, I understand that the regulations allow suppliers to gain a court order to exempt them from this duty if they can prove hardship. Again, can the Government expand a little on the definition of hardship?

Lastly, on the bar date by which time claims for assets must be made, will the Government consider setting out what they think might be a reasonable amount of time to allow for claimants to properly state their case?

Having posed those questions, in summary I support these regulations and hope that the Government will give proper attention to the suppliers who must provide their services without pay and, of course, those clients who seek to recover their assets.

--- Later in debate ---

[Lord Sassoon]

My Lords, this has been an interesting debate, perhaps a little more interesting because of one or two of the little side conversations that got going, and certainly more interesting than the perhaps slightly dry but very important regulations had led me to expect. I am grateful not only for all the contributions made but for the general support for the proposed regulations. The past few years have shown that investment banks can fail and can cause huge disruption, not just to investors but to the wider economy. That is why the Government are putting in place this new regime.

I said at the beginning that the regime is being developed with the input of industry experts. I should like to echo the thanks of the noble Lord, Lord Myners, for the input and help that we have had. These have been complex instruments to develop. I am also happy to acknowledge the process that has resulted in these regulations today was one that the noble Lord himself kicked off when he was in the Government. It has taken a couple of years to get the regulations right and to achieve a regime that I believe is fit for purpose.

In addition, in accordance with Section 236 of the Banking Act, the regime will be reviewed within two years of the regulations coming into force. That review will consider how far the regulations are achieving the objectives set out in Section 233 of the Banking Act and whether the regulations should continue to have effect. A copy of that report will be laid before Parliament. That goes some way to answering the questions of the noble Lord, Lord Davies of Oldham, about future-proofing, continuity and the connection to the wider regime. These are important questions, but they have been taken account of within the regime that the Banking Act sets up.

On the specific question on the future of the Financial Services Authority, I would not presume, until your Lordships’ House had passed the necessary legislation that will come forward, to talk too much about what happens after the Financial Services Authority comes to the end of its life. However, in that legislation, we will take full account of all the functions, including those under these instruments, which the FSA currently covers.

The noble Lord, Lord Myners, asked about the situation with Germany. In particular, in response to that situation, the FSA has consulted on introducing a 20 per cent cap on intra-group deposits of client money so that the scope for exposure to overseas regimes that may have some bar on the return of money is significantly reduced. Of course, as I have already indicated, we work as a Government to ensure that resolution regimes, in so far as is possible, can be made consistent on both a European and global basis.

[Lord Myners]

The capping of exposures may be a good thing in itself, but what happened here was that, after the collapse of Lehman brothers, the Germans effectively said, “These are no longer client assets. They will be deemed to be the assets of Lehman Brothers International”. That is the core of the matter. It strikes me as quite extraordinary that a fellow European nation should have done this. To date, we have not been successful in unwinding what could only be regarded as a hostile action to the concept of client money. I welcome what has already been done, but I urge the Minister to take an interest in this and to see whether, perhaps with the FSA, we could give one more push on this subject.

[Lord Sassoon]

My Lords, the noble Lord, Lord Myners, knows very well the difficult background to this, as well as the fact that the German situation is, in the first instance, a matter for the courts. It is therefore difficult to go into it in much detail. That is where it principally lies, rather than being a government to government matter. As I have explained, the sensible response to cover the generality of these situations is to ensure that investment banks do not in future overexpose the intra-group excessively. That is why they have introduced the 20 per cent restriction. We will wait to see how this matter is resolved in the courts and what further lessons, if any, that leads to.

The noble Lord then asked a second question about sources of moral hazard in omnibus accounts. Again, the Financial Services Authority has certainly focused attention on this area. It has committed to enhancing the client assets source book, where regulatory failures in the general area of protection of clients’ assets were very much exposed by the Lehman Brothers case. It is not the case that omnibus accounts are, in themselves, a source of hazard, as long as there is proper segregation of clients’ money, which is the critical issue here.

As has been said, today is not the time to get into the questions that came up at the end of the speech of the noble Lord, Lord Myners, about bonuses, the importance of the City and so on. We will definitely come back to these things. I am grateful for the noble Lord’s confirmation that he supports the Independent Commission on Banking. I very much hope that it will shed light—as Sir John Vickers’s recent speech indicates it will—on all these issues. The noble Lord also referred to Project Merlin, which we are working on very hard to ensure that banks pay out bonuses that are less than they otherwise would have been and lend more than they otherwise would have done.

[Lord Myners]

I make one last intervention on this. Can the Minister tell us simply how the Government will find out what bonuses otherwise would have been and how much money would have been lent in the absence of Merlin? It seems that the Minister yesterday, in using the terms “demonstrable” and “verifiable”, overreached himself in suggesting that there was a way in which the outcome of Merlin could be proved. Can the Minister, in very simple, straightforward terms, explain how he will prove these issues on bonuses and credit extension?

[Lord Sassoon]

My Lords, when we have a Project Merlin outcome to announce, the noble Lord will no doubt have every opportunity to cross-question me on these matters. I also note, just in case noble Lords missed it, that the noble Lord committed himself to that being his final intervention. He is certainly well below his batting average for interventions in my closing remarks but we will see whether he holds to it. I shall try not to provoke him. The only further thing that I wanted to say in response to the noble Lord was that, despite what I just said about banking and unfinished business on bonuses, I very much echo what he said about the importance of the City. Extraordinarily skilled work is done by many experts across the financial and business services in the City, and the City adds great value to the UK economy; we should not forget that.

I will respond to a couple of the points raised by my noble friend Lady Maddock. The supplier proposal adapts existing provisions in insolvency law, specifically within the Insolvency Act 1986. We are trying to ensure that, in the case of investment banks, those critical suppliers without whom the resolution of the investment bank cannot take place—the positions cannot be closed out—continue to supply. When we talk about 28 days, it is important that the supply is paid for but it is a question of whether it is paid for within the 28 days. The supplier can stop supplying if any charges in respect of the supply remain unpaid for more than 28 days, if the administrator consents to the termination, or if the supplier has the permission of the court. In that context, the definition of hardship will be left to the judgment of the court.

As regards the bar date, the critical protection is that sufficient time has to be allowed for publicity to be given to the fact that the investment bank has gone into special administration. There has to be sufficient time for affected clients to calculate and submit their claims and for practical difficulties in establishing claims to be sorted out. Therefore, I believe that there are sufficient protections in the regime.

The noble Lord, Lord Davies of Oldham, asked me a number of questions. I hope that I have dealt with the future-proofing and questions around the Financial Services Authority. Consumer protection will be fully taken into account in the architecture that we will propose to replace the Financial Services Authority. Central counterparties and the regulation of over-the-counter derivatives is an area which falls within the general heading that I addressed: namely, that we must work to achieve international and global solutions. I see some nodding and shaking of the head from the Benches opposite. That indicates that these things are not easy. We need to have a regime in place that is safe and appropriate for the markets in the UK, but equally we need to ensure that we have something consistent within the EU and the G20 framework as mechanisms which could provide safe solutions that might work against free investment flows. We have to ensure that this is not one of those issues where protectionism comes to the fore under the cloak of providing safe solutions. I absolutely take the point that the settlement of transactions is ongoing business in which the Government take an active part.

As regards how living wills fit with this new regime, recovery and resolution plans are again a core part of both our and the G20 authorities’ response to the “too big to fail” problem and will be required of all systemically important financial institutions. That is the critical definition in that context. It is not a question of an arbitrary definition that splits investment banks from other banks in the way that the noble Lord suggested might be the case.

On the protection of client assets, it is worth remembering that the FSA has set up a new client asset unit, which is a centre of excellence and expertise within the FSA, in further recognition of the important issues raised by the lessons learnt from Lehman. That further stresses the fact that although these instruments being put in place today are critical, they are in many respects only a part of a wider construct.

The first point that the noble Lord raised, but the last one which I should address, concerns the definition of fairness. The relevant provision is based on existing provisions in the Insolvency Act 1986 and the Financial Services and Markets Act 2000. “Fair” is the modern term for the previously used “just and equitable”. While I do not profess to be an expert on these matters, I am assured that the term “fair”—its use is based on a lot of case law defining “just and equitable”—is well defined under court rulings and will be well understood by those administering the special administration regime.

That has been a long response to a short but important debate.

National Insurance Contributions Bill

Lord Myners Excerpts

Wednesday 2nd February 2011 Lords Chamber

[Lord Myners]

My Lords, it is always a pleasure to speak after the noble Lord, Lord Bilimoria. I have a tendency at times to stray away from the core subject in hand, but that can be judged only in relative terms, so I hope that your Lordships will judge me to be focused. The noble Lord, Lord Newby, correctly said that this is not an excuse for a general discussion about the economy, although I am sure that the House would welcome such an opportunity in due course. My noble friend Lord McKenzie of Luton has expressed the view that the Government’s position on NIC is one that the Labour Party will not oppose in substance although we will challenge it in detail, especially when the Bill is in Committee.

The key challenge for the economy is growth and addressing the deficit. There is no doubt that the deficit needs to be addressed but that must be set in context. In 2007-08 the deficit was 2 per cent of GDP; it was only the global banking crisis that forced it up with its impact on tax receipts and increased public expenditure through the fiscal adjustment process. We are clear that the deficit needs to be addressed, and the difference between the Government and the Opposition is a matter of quantum and pace in terms of deficit reduction.

The noble Lord, Lord Newby, challenged us to ask what would happen if the deficit had not been addressed, and pointed to the credit rating agencies and their attitude to Japan. I think that those agencies are somewhat in disrepute and I would not be terribly taken by their views. Simply, the deficit was well funded and continues to be well funded. We have a 14-year average debt maturity for gilts and were funding at the time of the general election the lowest long-term rate of interest for more than 40 years. The Minister used to tell the House about how interest rates had come down, which was a sign of the world’s financial markets endorsing the Government’s policies. He has been rather more silent of late as interest rates have gone up. The UK gilt-edge market has been the worst performing major fixed-income market in the world in the past eight months. We do not hear very much from the Minister on that. It is happening because markets are becoming increasingly worried about inflation and the prospect of the economy being pushed back into recession.

The noble Lord, Lord Bilimoria, said that the last quarter of 2010 saw negative GDP of 5 per cent. It was not 5 per cent but 0.5 per cent but the fact remains that we were alone among the world’s major economies in experiencing a negative figure. We have to watch how the UK economy develops compared with other economies that seem to be coming out of the global recession. The Government will not be forgiven if their own policies force us back into recession.

My questions on the Bill are matters of detail. The holiday refers to an anticipated participation by 400,000 employers defined as being outside the “excluded regions” in Clause 4(5) and falling within the definitions in Clauses 5 and 6. Can the Minister be a little more helpful by explaining how the estimate of 400,000 has been arrived at? Can he clarify whether the cost is on the basis that the 800,000 jobs would not have been created at all or are they significantly jobs that would have been created regardless of whether the measure was adopted? My feeling is that the £940 million may be the cost but it is an overestimation of the benefit of the policy that the Government are promoting as a counterbalance against the general impact of employment on the NIC charge.

The noble Lord, Lord Bilimoria, is right about it being a tax on jobs, but it is worth keeping in mind that the OBR estimates that the impact on jobs of the VAT increase is three times as great as the estimated impact of the increase in NIC. Although it looks to be specifically related to employment, other taxes have an even more adverse impact on employment activities.

Have the figures of £940 million, 400,000 employers and 800,000 employees been audited by the OBR? Can the Minister, either now or in writing after Second Reading, tell us whether there is any evidence that this is already having an impact on employment creation? The Bill is retrospective in its impact back to June 2010, so we should have eight months’ experience already. We should see an increase in employment creation in the non-excluded regions compared with the excluded regions. I would be interested to know whether we are talking about really new jobs being created—as opposed to those which, in the natural cycle of things, would have been created—and whether there is evidence that the policy is having the desired impact.

The excluded regions worry me. I am very pleased to see that Cornwall is eligible. Cornwall has very high unemployment and, as your Lordships know, I will always speak up in this House for my home county. However, I find it odd that Torbay and Harrogate should qualify for this aid, but Southampton, Bethnal Green and Corby do not. That is the problem with something as crude as the regional definitions that we employ here.

What would the cost have been had the excluded regions not been excluded? If the Government can calculate the figure on a regional basis—I am very sceptical about how much reliance we can place on these data—for job creation in a changing environment for a certain type of employer, a certain size of enterprise, newly created and in certain regions but not all regions of the economy, they should also be able to tell us what the additional cost would have been had the excluded regions also been eligible. Then we could look at the trade-offs. Would it have been justified not to have excluded regions? Would it have been better to have a lower tax advantage or a lower threshold for the number of employees? There are a number of ways in which one could have effectively divided up the benefit proposed under the legislation.

My noble friend Lord McKenzie of Luton spoke very insightfully on the issues of regional exemptions. That said, whatever we can do for the regions is valuable, because the abolition of the RDAs is having a tragic impact on the regions. The LEPs are clearly not going to substitute for the RDAs. I welcome that support for regional economic activity.

Why are charities not included? There are 5,000 new charities established in this country every year—there may be even more with the big society. I would like the Minister to think carefully about whether newly established charities could also be eligible for the exemption. That would seem entirely consistent with the Government's position on a number of issues and would be most welcomed by those in the charitable sector, who find themselves under huge pressure as a result of changes in other taxation and general cutbacks on public expenditure.

Finally, Clause 10 deals with anti-avoidance. I welcome that. There has been much confusion between avoidance and evasion. Dr Cable and Mr Danny Alexander have often talked in terms of them being one and the same. Clearly, they are not. Anti-avoidance regulations are appropriate, and I support the Government’s intention to introduce general anti-avoidance requirements on the part of banks.

Setting things in proportion, whatever avoidance might be going on here by someone creating a business in one of the regions employing not more than 10 people, that is hardly undermining the integrity of public finance. Where avoidance is most pronounced, as the Minister will know, is in the financial sector. I ask him to confirm that the Government are as committed to pursuing avoidance strategies on the part of banks and financial institutions as they are on the part of small employers in the regions.

Let me put a very specific question to the Minister. In the past, banks and financial institutions have been very creative at avoiding NIC. One of the things they have done is to pay bonuses in gold bullion and other forms. Can the Minister confirm that the Government will be vigilant in ensuring that such strategies are not able to operate in future and that no business of which he has ever been part, employed by or worked for has ever involved itself in paying bonuses in gold bullion or non-transferable instruments?

--- Later in debate ---

[Lord Sassoon]

My Lords, I think it is a wider definition, so if a charity in those areas was carrying on activities that went beyond trading, my understanding is that the charity would qualify. The noble Lord, Lord Barnett, makes a point that perhaps the latitude for charities is wider than I am painting it. However, the critical point here—perhaps I am using “trading” too loosely—is that we are talking about creating new employment. If a new charity is carrying on a business that creates employment, it will qualify.

[Lord Myners]

The Minister said that the Government estimate very few non-trading charities will be established during the holiday period. Can the Minister let us know how many charities the Government expect to be established during this period? They have clearly done the work; otherwise, he would not have given the answer that he did.

--- Later in debate ---

[Lord Sassoon]

As I have tried to explain, the issue here is that we have to take broad areas of the country to make this workable. Otherwise, the scheme would be effectively unmanageable in the way that we want it. Some remarks have already been made about the cost of administering the scheme, and while of course there are boroughs in London that are very significantly deprived—and the noble Lord, Lord Myners, has raised questions about other parts of the country—we have had to work the design of the scheme around regional units. Therefore, as I have tried to explain and as my noble friend Lord Newby eloquently explained, the relatively benign employment conditions in London mean that we have had to take regions including London as a whole.

On the estimates of cost, I can reassure the noble Lord, Lord Myners. I do not talk about the Office for Budget Responsibility as an auditing body, although he might like me to do so. That is not what it does. The OBR has independently reviewed all the key figures and looked at the £940 million, the 800,000 employees and the 400,000 employers. I assure the noble Lord that, whatever term he likes to use, the OBR has put that through its machine—

[Lord Myners]

I have to intervene at this point. As the Minister knows full well, it was the Chancellor of the Exchequer who used the term auditing to describe the work of the OBR in connection with public expenditure.

[Lord Sassoon]

My Lords, we are talking about the estimates here of the effect of the national insurance holiday. They have been put through the OBR’s estimable machinery in the normal way that the OBR does. As to the basis for the figure of 800,000 jobs, the detail of how that estimate was made and the data sources used were set out in the policy costings document published alongside the June Budget. I believe that the basis on which it was done was entirely transparent.

There was also a question whether the £940 million might be an overestimate of the benefit. It is a number that represents money that these new employers would otherwise have paid, so it genuinely reduces their labour costs and benefits them by that amount.

Lastly, I address the question about monitoring the holiday. My noble friend Lord Newby and the noble Lord, Lord McKenzie, asked about this, and the noble Lord, Lord Myners, may have touched on it. There will be monitoring and updates will be published after the end of the tax year on the operation of the scheme, including information at regional level. The Government envisage that the report will cover, from a regional and national perspective, the number of businesses applying and applications rejected, as well as the number of employees for whom a benefit is received and the amount claimed. This report will require information supplied by employers following the end of the tax year, and the first report will be published when the necessary information has been received, processed and checked to ensure that there is appropriate quality assurance. The Government aim to have these collated data and provisional findings published as soon as they become available, so it will be a comprehensive report on how the scheme is going.

--- Later in debate ---

[Lord Myners]

Surely, the Minister will have data because applications have to be made and therefore will already have been made for an eight-month period. The Minister should be able to give us those data. I hope that, in writing to us after Second Reading, he will provide Members who have spoken in this debate with that information.

[Lord Sassoon]

My Lords, the scheme can be sensibly judged only when we get the full package of data on a national and regional basis that is broken down by the number of employees in the way that I have described. That will be published very transparently when there is a first basis of data on which to judge properly the impact of the scheme.

I want to address one last, important point from the noble Lord, Lord Martin of Springburn, about apprenticeships. Those have not been addressed otherwise in this debate but are of course relevant to the broader approach of the Government. His point is slightly detached from the main purpose of the Bill, but it gives me an opportunity to remind noble Lords that, in 2011-12, the Government will be providing £799 million for apprenticeships for 16 to 19 year-olds, which is an increase from the £780 million in 2010-11, and will fund 230,000 apprenticeship places for that age group. I trust that the noble Lord will recognise that this Government absolutely take on board the importance of apprenticeships. I could give the data if he wants, but I will not prolong the discussion now about the considerable amount of money that is also going into adult apprenticeships.

[Lord Sassoon]

Indeed, I think that in 2011-12 the sum for adult apprenticeships will be over £600 million. That accounts for something of the order of 430,000 apprenticeships, so the point is well made.

I am conscious of the time. I hope that I have been able to reassure noble Lords on the majority of the questions that they have raised on both parts of the Bill. I am grateful to the noble Lords, Lord McKenzie of Luton and Lord Davies of Oldham, for making it completely clear that the Opposition do not oppose this Bill. I am also grateful for having had the opportunity to explain the Government’s position on the issues in the Bill. The Bill enables the reduction of taxation on labour nationally, with extra support in targeted areas, and I ask the House to give the Bill a Second Reading.

[Lord Myners]

There was one final point which I raised about anti-avoidance in the larger corporate sector, through mechanisms such as paying bonuses by gold bullion and by other non-distributable or non-marketable instruments. Does the Minister endorse my view that such strategies are morally unacceptable? Will the Government use all efforts to ensure that such avoidance by large financial institutions receives as much attention as is apparently being focused here on avoidance by small employers in the regions?

Monetary Policy Committee

Lord Myners Excerpts

Monday 31st January 2011 Lords Chamber

Asked By

[Lord Myners]

To ask Her Majesty’s Government what assessment they have made of the impact of the Monetary Policy Committee missing its monthly inflation target repeatedly over the last 10 years.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, the UK’s monetary policy framework gives operational responsibility for maintaining price stability to the independent Monetary Policy Committee of the Bank of England. Although the rate of inflation has increased over the past months, the committee’s view is that inflation is likely to fall back to target during 2012, as the impact of temporary factors wanes, but the timing and extent of that decline in inflation are uncertain due to the margin of spare capacity in the economy.

[Lord Myners]

My Lords, in the final quarter of last year, we saw a reduction in GDP of 0.5 per cent, which is the thickening of a trend back towards recession, a trend that the UK alone is experiencing. Economic output is now at the same level as in the first quarter of 2008, and output is running 8 per cent below trend growth rates. Real incomes are being squeezed. The Governor of the Bank of England has forecast that they will be back to the level of 2005. House prices are falling and unemployment is rising. I put it to the Minister—

[Noble Lords]

Oh!

[Lord Myners]

Members on the other side do not like these economic facts and it is not surprising that they react as they do. I put it to the Minister that the Bank of England is having to take risks on inflation because of the severe cuts in economic activity consequent upon the Government’s reckless fiscal policy.

[Lord Sassoon]

My Lords, that was a nice long lecture. I think there was a question at the end of it. It is precisely because the Government took resolute and early action to restore the fiscal position to one that pulls us back from the brink of the disaster which the previous Government left us with that the Bank of England can conduct monetary policy on a prudent basis and, as I said in my earlier Answer, all forecasters that I know of are forecasting that inflation is likely to come back towards the target range.