Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2013
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Lord Newby
That the draft orders laid before the House on 25 June be approved.
Relevant documents: 6th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 17 July.
Financial Services (Banking Reform) Bill
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Lord Newby
My Lords, I thank all noble Lords who have spoken in the debate this evening, particularly members of the Parliamentary Commission on Banking Standards—not so much for their contributions tonight, excellent though they were, but for the phenomenal amount of work they did on the commission. For months on end it was impossible to discuss anything with my noble friend Lady Kramer because she was either in a meeting, just going to one or in the middle of reading great piles of stuff. I know they did a huge amount of work. I share the views expressed by my noble friend Lord Lawson and others about the extraordinary leadership that Andrew Tyrie gave in driving that process forward.
I believe the Bill has been marked by a readiness on the Government’s part to listen and respond to a wide range of views. The Government have already made a series of amendments to the Bill in response to the recommendations of the PCBS and have shown willing to keep listening and to fine-tune their provisions as the debate on these issues continued to unfold. We will make further changes to the Bill in this House in response to the constructive debates in another place and here, in particular on the firm-specific electrification power. We will also introduce amendments to implement the recommendations of the PCBS’s final report on culture and standards.
The debate today has confirmed the broad consensus and strength of feeling across the House about the great significance of the measures contained in this Bill and those shortly to be added to it. In the time available now, I cannot deal with every issue that noble Lords raised. Indeed, some issues went significantly further than the Bill itself. Of course, we will return to all these issues in Committee. Many of the principal issues mentioned by a number of noble Lords were first raised by the noble Lord, Lord Eatwell. I will deal with them in the same order that he did.
There has been a lot of discussion about whether this is a watering-down as opposed to an enabling Bill in terms of what it contains. There are many further, detailed provisions to be made to implement the changes and we have taken the view that these are not all most suitably dealt with in primary legislation. That is why there is a lot of material to be done in secondary legislation. A lot of the detailed rules will be made by the PRA. I hope that we are able during the course of debates to explain how we see some of those being implemented in detail but the principle of having much of the regulation done by secondary legislation was agreed by the parliamentary commission.
The noble Lord, Lord Barnett, asked where we disagreed with the commission. I recommend that he looks at our response to its first report, which we issued on 4 February, and our response to its other four reports, which we issued earlier this month. In the second of those, a table at the back lists each of the recommendations and the text earlier on explains our response to it. Both those responses are available on the Treasury website.
Lord Lawson of Blaby
I accept in principle that there is a lot which will need to be in secondary legislation. Nevertheless, it would be helpful if the proposed secondary legislation could be provided in draft so that we know exactly what the Government have in mind and can form a view accordingly.
Lord Newby
Of course, my Lords. Much of the secondary legislation was published earlier this month. I would like to suggest—both in terms of the secondary legislation and the amendments and how we reconcile the text in the Bill with earlier legislation—that we contact noble Lords between now and the end of the Session explaining our timetable for producing material, if we have not already done so. If we have produced material, we will let noble Lords have it at that point. Specifically, the noble Lords, Lord Higgins and Lord Tunnicliffe, referred to reconciling the Bill with the existing FiSMA. We will make a Keeling schedule available before the end of the Session showing the effects of the amendments in the Bill.
Baroness Kramer
I thank the Minister for giving way. The commission recommended some form of ad hoc committee to try to look at secondary legislation. The problem with secondary legislation is that you vote it up or down, so you cannot actually amend it. Given that it carries so much of the weight of the purpose of this Bill, is there a way in which there could be a more constructive discussion of its contents so that it could come finally and formally in an amended form after that discussion has taken place?
Lord Eatwell
Before the Minister stands up, can I firmly second what the noble Baroness, Lady Kramer, has said? It would be enormously valuable if there were an ad hoc committee which could consider the secondary legislation, write a suitable report and thus inform the House’s debate.
Lord Newby
My Lords, there is an issue about the timing of an ad hoc committee which produces a report to inform your Lordships’ debate. Agreement has been reached with the usual channels that we start Committee stage very soon after we come back and I am not sure that such an ad hoc committee would help. I will talk to colleagues in the Treasury and in another place to see how best we can facilitate proper discussion of secondary legislation, because, obviously, as everybody agrees, much of the meat is in the secondary legislation.
Can I reassure the noble Lord, Lord Barnett, that the banks had no part to play in drafting the Bill? It was produced by parliamentary counsel in the normal way. I should have said that draft secondary legislation was published on 17 July.
There was much discussion about standards and culture. The right reverend Prelate the Bishop of Birmingham talked about banks discussing doing what is right and about personal virtue. I agree with him that a wind of change is blowing through the banks and I am not as gloomy as a number of noble Lords have been about the extent to which the culture within banks may change. I would not put it any higher than that. I think there has been a big change in Barclays, and that is not a legislative change, it is because of the change of leadership and a change in culture.
In response to the commission, the Government propose to bring forward a number of amendments which specifically deal with standards and culture. These include a new senior persons regime for senior bank staff; introducing a new criminal offence of reckless misconduct; reversing the burden of proof, so that bank bosses are held accountable for breaches of regulatory requirements within their areas of responsibility; and giving the regulators new powers to make rules to provide enforceable standards of conduct for all bank staff.
Virtually every noble Lord who spoke has talked about the need to increase the degree of competition in the banking sector. I absolutely agree with the noble Lord, Lord Flight, that this is, if anything, the fundamental issue now facing the sector. I congratulate him and Metro Bank on its third birthday, and I congratulate him on the work that he is doing to increase competition in a very practical way.
Clearly, there is no simple way of getting to the state that most noble Lords would like, which is having a plethora of new banks providing effective competition to the existing big banks. What we have done, however, is to make it a lot easier for new banks to enter the market. In July last year, the Chancellor commissioned an FSA review of barriers to entry and expansion in the banking sector and the result of that review, in answer to the noble Lord, Lord Northbrook, is that for new banks we could see capital requirements fall by up to 80% over what was previously required. This is a big change and one of the many components that will be needed to transform the competitive landscape.
The noble Lord, Lord Eatwell, said that he was concerned about whether branches of EEA banks in the UK could arbitrage the ring-fence. EU passporting law makes branches subject to regulation and supervision in the home state, so UK branches of EU banks would not be subject to UK regulation or to ring-fencing, as the noble Lord said. The presence of EEA banks in the UK market at the moment is very small and we believe that domestic banks enjoy a strong home advantage, so there is not likely to be significant arbitrage. However, EU law has within it provisions to ensure that institutions cannot simply move to avoid regulation. We and the regulators will of course be keeping that issue very much under review.
A number of noble Lords talked about leverage—what an appropriate ratio should be, and where the power to set ratios should lie. There is a certain confusion about where powers lie at the moment. Although I am sure that we will discuss this at greater length later on, I would point out that the Government’s proposal, based on the Basel process, is that we would have a statutory minimum leverage level across the piece. However, the regulators already have the power to set a different leverage ratio for individual institutions, as we have already seen in the way that they have looked at Barclays and Nationwide—and completely without any political interference. That power will obviously continue.
The noble Lord, Lord Eatwell, drew a comparison between the 3% leverage ratio here and the 6% ratio in the US. We do not believe that these are even remotely comparable. Indeed, Mark Carney described comparing the two as being like comparing apples and oranges. I am sorry that I do not have time to explain in great detail why we believe that to be the case.
Electrification was possibly the issue that took most of your Lordships’ time. There are two issues here, given that we have agreed that in respect of an individual bank we will take powers in the Bill to enable that bank to be wholly separated. In respect of that, there has been considerable criticism of the provisions in the Bill on the basis that they provide too low a voltage, as the noble Lord, Lord Lawson, possibly said. We will be bringing forward amendments before Committee which seek to provide an appropriately increased level of voltage. I hope that they will commend themselves to your Lordships’ House.
In terms of total separation and a reversion to Glass-Steagall, our view is very straightforward. If ring-fencing were to prove ineffective, the only proper and democratic way to introduce full separation would be to return to Parliament with new primary legislation. However, given that it is a separate policy—not the same policy with a bit tacked on—we do not believe that the proposals in the Bill will be a failure. It would not be sensible to legislate for a failure that we do not think will happen; if we did that with every bit of legislation, the statute book would be many times its current length.
The noble Baroness, Lady Kramer, asked whether the Government had gone further than the PCBS on competition. It is a small thing, but we have recommended that the PRA and FCA review barriers to entry in a shorter time—the commission said two years; we have said 18 months—and that they publish annual statistics on the authorisation process so that we can see how things are going. The noble Baroness asked about game-changers in retail banking. The truth is that there will be no game-changer, but a series of small steps. The one step that will help is the seven-day switching service, which will be introduced in September and to which a number of noble Lords referred.
The noble Baroness also asked who will buy bail-in bonds. The Government have consulted on that; feedback suggested that there should be demand for bail-in debt instruments of the type that the ICB said banks should issue. Therefore we do not share her concern that there will be no effective demand for that.
The noble Lord, Lord Lawson, made a very eloquent argument for breaking up RBS into the good bank and bad bank. He knows that there will be a government response to that suggestion in the near future. He asked also about proprietary trading and believes that that is a bad idea. We believe that the ring-fencing method is superior to the Volcker-type rule in respect of prop trading and do not see a compelling case for a ban on prop trading in addition to the ring-fence. I can confirm that a difficulty in which an investment bank found itself would not threaten a high street bank. In terms of where funds can flow, it is a one-way valve: there would be no possibility of funding going from a ring-fenced bank back to an investment bank.
The noble Lord, Lord Flight, asked about the mis-selling of CDOs where that was being done, as I understand it, by foreign banks in this country. I can confirm that UK regulators could take action against any firm for mis-selling in the UK, including, obviously, foreign firms that were based here.
The noble Earl, Lord Caithness, talked about banks owning your money. He proposed what is essentially the same as full reserve banking and limited reserve banking, as it is known in the trade. The ICB has considered that issue and rejected the approach that he suggested.
The noble Lord, Lord Sharkey, asked whether the Government had gone soft on payday loan regulation: no, they have not. The FCA will be bringing forward proposals about how it intends to regulate the sector early in the autumn, which means that regulators are not waiting until next April to start to have impact. On central counter-parties, the noble Earl said that perhaps this is not the right Bill, and he is correct. The Financial Services Act 2012 extended the resolution powers in the Banking Act 2009 to systemically important investment firms, CCPs or group companies. Those powers will commence when secondary legislation has been laid in the autumn.
The noble Lord, Lord Northbrook, said that the SIs do not allow ring-fenced banks to provide export finance to SMEs. That is not the case. They can support UK businesses trading internationally. Obviously that is a very important issue for many small businesses.
I am extremely grateful to the noble Lord, Lord Tunnicliffe, for the constructive approach he took to the way we deal with this. I completely accept that we are asking noble Lords to work very hard over a relatively short space of time looking at a lot of new material. From the Government’s point of view, we will be making available all amendments and secondary legislation the moment we have them, and we are very keen that the House has the full opportunity to give all the proposals, not just those already in the Bill but those that will be coming forward, the maximum possible considered scrutiny.
Lord Tunnicliffe
A noble Lord asked that the amendments be accompanied by explanatory memorandum-type documents to help us understand them. Will the Government be providing those sorts of documents?
Lord Newby
I am very happy to give that assurance. Apart from anything else, Ministers will need such documents, so it is only reasonable that everybody else should have them, too.
The strength of this legislation will be due in no small part to the intense degree of scrutiny that it has already undergone and will undergo. It will be an onerous job, but I am confident that we will be able to strengthen the Bill further and look forward to further debates in the constructive spirit we have seen this evening. I look forward to the autumn, and I commend this Bill to the House.
Bill read a second time and committed to a Committee of the Whole House.
Age-Related Payments Regulations 2013
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Lord Newby
That the Grand Committee do report to the House that it has considered the Age-Related Payments Regulations 2013.
Relevant document: 7th Report from the Joint Committee on Statutory Instruments.
Lord Newby
My Lords, as noble Lords will be aware, this Government established the Equitable Life payment scheme in 2010 to make payments totalling up to £1.5 billion to as many as 1 million former Equitable Life policyholders who suffered financial losses as a result of government maladministration that occurred in the regulation of Equitable Life. Since the establishment of the scheme, the Government have received representations suggesting that a specific group of elderly policyholders who bought their with-profits annuity from Equitable Life before 1 September 1992 should be included within the scheme.
The Government remain of the view that there is no basis for their inclusion in the scheme. The reasons for the exclusion of this group of policyholders are well documented and have been subject to debate in Parliament. In short, the Equitable Life payment scheme is based on the understanding that those investing with Equitable Life relied on regulatory returns that were subject to government maladministration. As such, they had lost the opportunity to make a fully informed decision and if they had had this opportunity, they might have invested elsewhere. The first returns that would have been different if maladministration had not occurred were those of 1991, which would not have influenced policyholders’ decisions until September 1992. Therefore, investment decisions made before this time are not included in the scheme.
However, it is clear that this particular group of policyholders are under financial pressure in their later years, as they have not received the income they hoped for from the Equitable Life annuity that they bought more than 20 years ago. In this year’s Budget, the Chancellor announced that the Government will make an ex-gratia payment of £5,000 to those individuals who bought an Equitable Life with-profits annuity before 1 September 1992 and were aged over 60 on 20 March 2013. An additional £5,000 will be available to those policyholders who meet the above criteria and are in receipt of pension credit.
The draft regulations before the Committee today confirm the rules surrounding these payments. Policyholders will not be required to prove their eligibility for these payments; instead policyholder information held by the Prudential, which makes regular annuity payments to all Equitable Life with-profits annuitants, will be used to identify those eligible for a payment. Eligible individuals will receive one payment of £5,000—£10,000 if they are in receipt of pension credit—regardless of the number of policies they hold. I can also confirm that should an annuitant pass away after the Budget announcement on 20 March this year but before receiving their payment, the payment will be made to their estate. The rules are available in full on the Government’s website.
The Government recognise the need to issue these payments to elderly individuals as soon as possible. The Treasury has been considering all the possible options for delivering these payments quickly and efficiently. I am pleased to confirm that it now plans to make these payments within the current financial year, rather than in 2014-15 as previously envisaged. It is currently planned that in the coming months letters will be dispatched to all eligible policyholders to inform them of the Government’s plans to make these payments. A few months after that takes place, the payments will be issued to all living pre-1992 WPA policyholders. Payments to estates, and the £5,000 additional payment made to those overseas policyholders in respect of their receiving a specified equivalent to pension credit, will be made later this financial year.
The letter sent to all eligible policyholders will also advise that they check their eligibility for pension credit. Individuals will have until 1 November this year to do that, and to apply for pension credit if necessary. Policyholder information will then be securely shared with the Department for Work and Pensions to identify those eligible policyholders in receipt of pension credit. The payments due to them will be increased from £5,000 to £10,000 accordingly before they are dispatched. More information on the delivery of these payments will be announced in due course. Finally, I draw the Committee’s attention to a correction slip issued today that makes minor corrections to the numbering of the regulations. I commend the regulations to the Committee.
Lord Newby
My Lords, I am extremely grateful to the noble Lord for the speed with which he joined this debate from the Chamber and for his typically forensic questions. He asked me whether the reality validates the view we originally took on under and overpayments on Equitable Life. I believe that it does. If I am wrong, I will write to him, but I think that it does. He asked when the payments would score. I believe that they will score when they were made, so earlier.
The noble Lord asked one or two detailed numerical questions. How many would be precluded by being under-60 at the relevant point? I understand that there are 19, so it is literally a handful. He asked about how many are resident overseas. There are 223 overseas policyholders, 125 of whom are within the EU. He asked about the incomes of the people involved—how many would be paying tax at the various rates. We simply do not have information about the incomes of those pre-1992 with-profits annuitants.
The noble Lord asked whether there would be multiple payments. No, there will not be multiple payments. There will be one payment per policyholder even if they have more than one policy. He then asked the wider question of why £5,000 and why this group. These are simply matters of judgment. Should it be five rather than four rather than six? The view taken by my colleagues in the Treasury was that £5,000 had a sense of justice about it, and that it was felt broadly right and was affordable.
Why this potential group? As the noble Lord knows, this group has been part of the debate about Equitable Life all the way through—about where do you draw the line between payment and non-payment. After a very long period of discussion it was simply thought that these groups were Equitable Life policyholders who had not got the sort of benefit that many other Equitable Life policyholders had got, notwithstanding the fact that they were not subject to maladministration in the same way, and that it was a question of fairness to them. That was the telling argument which decided us on this course.
I hope that I have answered all the noble Lord’s questions. On that basis, I commend the regulations to the Committee.
Lord McKenzie of Luton
I am grateful for the very full answers that the noble Lord has given, but perhaps I may come back on this issue of only one payment. I hear very clearly what the Minister says. Either I am misreading the Explanatory Note, or it is something that we will have to settle outside our discussions today, but it would be good to be clear on that.
On the issue of who we are supporting here, it is quite possible that the people who are getting these ex-gratia payments are higher-rate taxpayers as well as people who do not pay tax at all. Obviously, having a tax-free ex-gratia payment is of particular value to such people. The overall cost, which is, I think, £45 million, is not in these days a small sum. This is why my last question is about all the demands and all the challenges that we have, particularly some of the benefit changes. Why spend £45 million on this group, including some who are higher-rate taxpayers who are going to do very well out of a tax-free ex-gratia amount? I think that I have made the point, and I am grateful for the noble Lord’s explanations.
Lord Newby
I do not think that there is any doubt that one individual will get a maximum of one payment. I am sorry if the note is not very clear but I think that that is correct. Should these payments be tax free? One of the considerations—bearing in mind that these are not insubstantial payments, but they are not vast payments—was that, given that we do not know the current incomes of the people, having a common payment to this group of elderly policyholders seemed to us to be the easiest, simplest, and fairest outcome.
Economic Prosperity and Employment
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Lord Newby
My Lords, I join other noble Lords in thanking the noble Lord, Lord Haskel, for introducing this debate, particularly because he gave me advance notice that he was to draw some of his remarks from the recently published book by the noble Lord, Lord Sainsbury, which meant that I spent a happy time reading that book while watching the cricket last weekend. I recommend it to all noble Lords.
One of the challenges for a Minister in my position after such a wide-ranging debate is to try to have a theme running through my concluding remarks. I would like to take as my theme—my text, if you like—two of the three defining beliefs of the noble Lord, Lord Sainsbury, in what he calls progressive capitalism. They are the importance of institutions, which he says need to be market-supporting rather than directed, the need for an active and competent state and the need for fairness. We have been talking very much about the first two today and I shall concentrate on those. I should like to take as my core text one sentence from the book of the noble Lord, Lord Sainsbury, which underpins a lot of what noble Lords have said. It states:
“I can think of few more challenging or socially valuable jobs than building up a high value-added business in today’s knowledge economy”.
If that is the text, I think that we are all progressive capitalists now.
The noble Lord, Lord Haskel, discussed these themes and made the point with which no one would disagree: we need to raise our game in a number of respects. I start with skills, and draw noble Lords’ attention to a press release issued today by Young Enterprise about the skills challenges that employers face, and they are quite interesting. The press release states:
“The five most important skills British employers think young people should have when entering the workforce are: communication and literacy … a positive attitude … self-management … people skills … and team working”.
As we discuss curricula and structures, at least four of those five areas of core skills are very rarely debated. I will not spend much time on them today, other than to say that we need to think about them more. I am very pleased to see that the noble Lord, Lord Stone, agrees.
In terms of raising the game, I agree with the requirement of the noble Lord, Lord Haskel, that Whitehall must raise its game. The noble Lord, Lord Mitchell, also talked of games—the Olympic Games. He commented on how much was achieved by the Government working well with high achievers. There are lessons to be taken from that, and the Government have taken one of them in appointing my noble friend Lord Deighton, who oversaw the Olympics, to bring some of the disciplines that he used there to government, not least in terms of the way in which we manage infrastructure. Everybody agrees that Governments in this country have been poor at delivering infrastructure projects to time and on budget. He is focusing his attention on getting government departments to produce infrastructure capacity plans, use private sector expertise and worry, a lot more than they have sometimes done under past Governments, about delivery.
I agree very much with another comment by the noble Lord, Lord Haskel, about the need to replace short-termism with long-termism. I commend to all noble Lords the LSE Growth Commission, which specifically looks at these issues. I am very pleased to say that members of the commission are in detailed discussions with Infrastructure UK to look at how some of their learnings can be brought to bear in the way that we do things.
The noble Lord, Lord Cope, and the noble Baroness, Lady Kramer, concentrated their remarks on SMEs, which they said were crucial. That is something on which we all agree.
The noble Lord, Lord Cope, talked about UKTI’s shift in focus towards SMEs. This is very welcome and is having a real impact. The other specific initiative taken by the UKTI—one of the most cost-effective initiatives that the Government have undertaken—is its appointment of trade ambassadors from across your Lordships’ House. These are having a material impact on developing trade links with some of the countries that we have traditionally ignored; my noble friend Lord Sharman in Morocco and my noble friend Lord Risby in Algeria, for example. We are finding that there is considerable scope for enhanced UK trade with parts of the world that we have tended to ignore.
The noble Lord, Lord Cope, talked about the challenges of the PAYE system. I agree with him. He may be right in saying that companies will find it simpler in the long run to adopt the latest technology. With regard to national insurance, we have introduced a £2,000 per year allowance for businesses. That will be particularly beneficial for SMEs. That is not a mechanical point but it is a hard cash point.
The noble Baroness, Lady Kramer, talked about funding, particularly the challenges in getting new forms of funding into SMEs. I very much agree with her. One of the leitmotifs of this debate has been people drawing on experience from elsewhere in Europe and North America. We can learn from these countries but it is quite difficult, as the noble Lord, Lord Sainsbury, says in his book, to replicate exactly their institutions. The American community development and investment funds work very well in the States, but it is not easy simply to transpose them here. On the question of new sources of funding for SMEs, one of the key things to have happened is that the PRA has in effect torn up the old methodology of the FSA in terms of getting new banks going. It was virtually impossible to start a new bank in the UK and we clearly need a raft of new banks, not least business banks. I believe that the PRA’s approach to this will prove to be extremely beneficial. In the mean time, the Government have introduced the Funding for Lending scheme, which should help small business funding and is in the process of establishing a business bank.
The noble Lord, Lord Giddens, thinks that we should be academic-led in the way that we look at these issues—I suppose that, as an academic, he would. I hope that we do not need to wait to have a raft of academic literature in front of us before we can start doing a lot of the things that he would like us to do. He talked, for example, of shale gas and whether we could take that opportunity quickly enough. As he will know, when the spending review was announced, we announced that we were taking a series of steps in the very near term to move forward on the development of shale gas here. These include developing technical planning guidance for shale gas exploration and looking at how we can put in place a generous community benefits scheme so that those communities that will be affected will be fairly recompensed. We are also consulting on tax incentives to encourage exploration. Hopefully, we are making a lot of quick progress in an important area that is bound to be controversial.
The noble Lord, Lord Monks, used a phrase that I have not heard for a considerable time, “the commanding heights”. It used to be extremely prevalent in political discussion. One of his main concerns was that too many UK companies have been bought by foreign companies and that foreign owners have different priorities from domestic ones. That is right, sometimes. However, we must have a more nuanced view. One of the most impressive success stories in British industry in recent years is that of Jaguar Land Rover. Does anyone think that there was a company in Britain that could have taken over Jaguar Land Rover and made the success off it that Tata did? I do not. It has been a phenomenal success. The Kay review, looking at short-termism and long-termism, will play a part in trying to redress the balance here, but I do not think that a great constraint on foreign ownership of British companies is a good idea.
The noble Lord spoke of the problem of top salaries and growing income inequality. That has been a very significant development in recent years, driven largely, but not exclusively, by the financial services sector. When I served on the top pay board, we looked at methods of beginning to redress this, not least by shareholder activism, and the Government are implementing a large proportion of those measures. Bank bonuses, without a bank bonus tax, have fallen very significantly—they are down 70% in the case of RBS and 40% in the case of Barclays.
The noble Baroness, Lady Valentine, raised a number of issues. I cannot deal with all of them. On airports, all I will say is that the Government taking quick, decisive action would be extremely easy if there were no such thing as public opinion. In this case, any Government would, quite rightly, take public opinion into account, as well as the narrower, though crucial, economic analysis that would underpin any decision.
The noble Baroness made a point about immigration and visas. As she knows, we are looking at methods of improving the situation in respect of visas, not least for China. We have introduced a VIP visa service for visitors from China. I could not claim that we have this right. It would be easier, in a narrow respect, if we were members of the Schengen agreement, but she knows as well as I do that that simply will not happen. We are looking at other ways of redressing the problem.
She pointed out that London is a centre for businesses that want to trade in Europe and that we need to engage in the EU as an equal partner. I agree with everything that she said on that subject. I also agree with the noble Baroness, Lady Donaghy, who pointed out the costs of adopting a Norwegian posture. To me, that is simply a risible option.
I thank the noble Lord, Lord Bates, for his speech, not least because he has saved me from saying a great deal of what I would otherwise have said about what has been happening.
The noble Lord, Lord Bhattacharyya, referred to protecting the science budget. The Government have done that. Any debate about science, particularly this one, should recognise the seminal role that the noble Lord, Lord Sainsbury, played as the first politician for a very long time to take science seriously. Without his persistence, we would not have had the expenditure on science in the previous Government that this Government have been able to build upon.
I share the support of the noble Lord, Lord Bhattacharyya, for HS2. While I agree with the noble Lord, Lord Mitchell, that the way we do business is changing, I have spent a great deal of time travelling to Birmingham over the past 20 years—once to do with developing Brindleyplace, as it now is, in its early stages and, secondly, working for a charity—and in both cases there is no way I could have done that without being there and engaging people face to face. While I am sure that a hologram of myself in front of Birmingham City Council or a head teacher would have been mightily impressive, I simply do not believe that at any point in the foreseeable future we will be able to do without transport.
We will need more of it. One of the things that has not been mentioned is that the population of the UK is set to increase significantly over the coming decades, which means that all forms of transport will need to be enhanced. That is why the Government have put so much effort into looking for longer-term infrastructure proposals, and why those proposals are included in, and form the basis of, the spending review last week.
I liked the point of the noble Lord, Lord Bhattacharyya, about evaluating the way in which we do things. I shall certainly raise that issue with my colleagues in BIS.
The noble Lord, Lord Bradshaw, referred to the value of engineers and said that there were too many apprentices who were not engineers. What we have got to do is to increase the number of engineering apprentices and not reduce the number of apprentices in a range of other industries. An apprentice in the catering industry is as important to me as an engineering apprentice. There are good examples of leading companies in the UK who have terrific records on apprentices—BAE and Rolls-Royce, for example. The university technology colleges will help to change, to a certain extent, the bias against a vocational approach to careers and I hope that they succeed.
I have referred to the points made by the noble Baroness, Lady Donaghy, but I would like to comment again on the shortfall in engineering graduates. One of the matters that the noble Lord, Lord Sainsbury, mentions—and with which I strongly agree although it is controversial—is that we need to better align the courses that we provide in further and higher education with labour market needs. This is a major challenge, not least because many young people are working very hard to obtain degrees in subjects that they think are quasi-vocational, such as law, and then find that the careers that they had envisaged for themselves simply are not available because of the excessive competition. I agree with the noble Baroness that tourism is a hugely important sector that is sadly overlooked.
The noble Lord, Lord Skidelsky, raised a raft of macroeconomic conjectures. The only part of Keynes that I would like to quote back to him is the importance of animal spirits. It seems to me that animal spirits are now operating in a different direction than they were a year ago. That is one of the key reasons why we are seeing growth, and will see faster growth in the future.
I agree with him completely about looking at the unemployed as a resource. However, I think his analysis is flawed because when you look at the level of unemployment in London—8.6%—who can say that there are not jobs in London for every Londoner who wants one? London has hundreds of thousands, if not millions, of people who come from the rest of the world to take up jobs that could be done by Londoners if they were properly trained. This is not a macroeconomic failure. There is a huge supply-side failure that we have completely failed to grapple with over the years, and we need to do better.
The noble Lord, Lord Hunt of Chesterton, referred to the Damascene conversion of Mr Willetts and asked me to comment on it. I am afraid that I cannot see within the mind even of my own colleagues, far less those of my coalition partners. I am sorry that he did not mention the fact that the Government have confirmed that they are investing in the new high-performance computer for the Met Office, which I am sure he will welcome.
The noble Lord, Lord Kirkwood, talked about long-term unemployment, which is a huge problem. The Work Programme is designed to address that. Although it is doing better it needs to be more flexible, and I hope that it will be.
The noble Baroness, Lady Turner, referred to investment being the key. Indeed it is. The Green Investment Bank has £3 billion of government funding, and so far, of the £633 million it has committed, for every government pound committed private investment has brought in three.
The noble Lord, Lord Stone, raised the question of self-awareness. I hope that he will start with Members of your Lordships’ House.
The noble Lord, Lord Shipley, raised a number of key points, some of which I have dealt with. On public procurement policy, the problem that he raised, which was new to me, seems to be a very real one. I shall take it up with my colleagues and write to him.
The noble Lord, Lord Davies, basically suggested that things were extraordinarily gloomy. The only thing I would say to him is that there was a 1.4% growth in real household disposable income last year; over 1.3 million more people are now working in the private sector; last year employment grew faster than in any G7 country; and the number of women employed is the highest it has ever been.
This has been a fascinating debate. We have discussed fundamental issues relating to the economy and society and I am extremely grateful to the noble Lord, Lord Haskel, for initiating it.
Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2013
Lord Newby Excerpts(10 years, 10 months ago)
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Lord Newby
That the Grand Committee do report to the House that it has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2013.
Relevant document: 6th Report from the Joint Committee on Statutory Instruments.
Lord Newby
My Lords, I am pleased to introduce the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2013 and the Financial Services Act 2012 (Consumer Credit) Order 2013. I will refer to the former as the RAO order and the latter as the consumer credit order.
I am sure that we can all agree that a well functioning consumer credit market is vital to the functioning of a healthy economy. However, the market is not functioning as it should, and consumers are not being properly protected. The current licensing regime, run by the Office of Fair Trading and established under the Consumer Credit Act 1974, lacks the capacity and powers to comprehensively tackle consumer detriment in a fast-innovating market. The National Audit Office estimated that there was £450 million of unremedied consumer detriment in this market last year. This Government are determined to ensure that the market functions well for consumers, firms and the economy. That is why we are moving the regulation of consumer credit to the Financial Conduct Authority next April. Consumers will be far better protected; the FCA will require higher standards of firms and will have more robust enforcement powers. However, we will also make sure that the regime is proportionate and supports a sustainable and competitive credit market.
There is widespread support for the transfer to the FCA, and agreement that we have got the balance about right. We first consulted at the end of 2010 on broad policy options. Then, following extensive work on regime design with firms and consumer groups, the Government published detailed proposals on 6 March this year.
The statutory instruments that I am introducing today take into account the feedback that we received from a wide range of stakeholders during the consultation period. These instruments effect the transfer of consumer credit regulation to the FCA under powers taken in the Financial Services Act 2012. The RAO order amends the Financial Services and Markets Act 2000, or FiSMA, and associated secondary legislation, to bring consumer credit into the scope of FCA regulation and to apply the FiSMA regulatory regime to consumer credit. The order also makes extensive amendments to the Consumer Credit Act 1974—or CCA—in relation to the functions of the OFT. The consumer credit order ensures that retained provisions of the CCA continue to apply appropriately and can be effectively enforced.
Before turning to the specifics of the new regulatory regime for consumer credit, I draw attention to the scope of regulated activity in this market. The Government’s policy is to carry forward the current scope of consumer credit regulation. We are, however, making a few key changes that were well supported by respondents to the consultation. The most significant of these relates to a new growth sector in the market, peer-to-peer lending.
First, the RAO order creates a new, bespoke regulated activity that brings together what peer-to-peer platforms do when they arrange credit agreements between lenders and borrowers. It ensures that the consumers who borrow and those who lend via the platform are both protected. Secondly, we are aligning the definitions of credit broking and credit intermediation, and narrowing the definition of credit reference agencies to capture only those who provide credit references as a primary activity. Thirdly, we are removing third-party tracing agents from the scope of regulation, as they do not carry on a financial activity. Fourthly, we are clarifying that not-for-profit debt advice is carried out by way of business and is therefore a regulated activity. This was called for by not-for-profit debt advice providers themselves, and will ensure consumer protection is consistent. Finally, in view of responses to the consultation, we are extending the current exemption for insolvency practitioners to include advice that they may reasonably provide in their professional capacity in anticipation of a formal appointment.
I now turn to the three main components of the new FiSMA regime for consumer credit. The first one is authorisation. Unless they are exempt, all firms will need to be authorised by the FCA in order to carry on consumer credit business. They will have to meet a much higher bar than under the current licensing regime. The RAO order revokes the OFT licensing regime to allow for the move to authorisation under FiSMA, but the Government recognise that a one-size-fits-all approach will not deliver their vision for a competitive and sustainable credit market.
The RAO order therefore provides for what is known as the “limited permission regime”. To be eligible for this regime, firms must only conduct certain specified lower-risk credit activity. The quid pro quo is that those firms will face lower costs and fewer regulatory burdens. The RAO order defines the activities which are eligible for the limited permission regime. They include: credit brokerage, where firms do this as a secondary activity to their main business, such as car dealers; and sellers of goods and services who provide credit without interest or charges, for example a gym or golf club.
The FCA must assess firms against prescribed threshold conditions. Limited permission firms will have to meet a smaller, modified set of threshold conditions which have been designed to suit the lower-risk nature of their business. For example, a simpler solvency test will apply. One of the advantages of the FCA regime is that it can make rules to tackle actual or potential detriment in the market much more quickly than the Government could legislate. Its rules are also binding on firms, while the OFT’s guidance is not.
The RAO order repeals certain provisions of the CCA and related secondary legislation to allow the FCA to make rules in these areas. It revokes advertising requirements so that the FCA can make rules under its financial promotions regime instead and it revokes “form and content” requirements in the CCA so that the FCA can cover these requirements in its rules.
Finally on enforcement, the FCA has a more flexible and robust enforcement toolkit than the OFT, and will have greater resources to take action on breaches of its rules. The RAO order therefore provides that certain requirements in the CCA that are currently subject to criminal penalties should instead be punishable by the FCA’s regulatory powers. Some criminal offences in the CCA will remain in force under the FCA regime, where there is greatest risk of consumer detriment.
In addition, the consumer credit order applies the FCA enforcement toolkit to provisions of the CCA which will still apply under the new regime. It also ensures that there is no double jeopardy—a person may not be convicted of an offence under the CCA where the FCA has already used its enforcement powers in relation to the same breach. The consumer credit order provides for the continued role of local authority trading standards, and the Department of Enterprise, Trade and Investment in Northern Ireland, in investigating and prosecuting offences under the CCA. Trading standards will play an important new role in supporting the FCA to police the regulatory boundary and to take action against illegal loan sharks.
Consumer credit firms should not see this transfer as wiping the slate clean. The RAO order gives the FCA the power to take enforcement action against any breach of the CCA prior to the transfer, but it will not be able to apply its rules or sanctions retrospectively, as this would be unfair to firms. Unlike the OFT, the FCA also has the power to require redress to be paid to consumers. In addition, customers of consumer credit firms will still have recourse to the Financial Ombudsman Service.
The timetable for the transfer to the FCA is driven by the demise of the OFT on 31 March. We recognise that this is a challenging timetable for firms, which is why the Government have introduced provisions to help smooth the transition. We recognise that firms will need to prepare for FCA authorisation, so the RAO order allows the FCA to grant interim permissions based on firms’ existing OFT licences. Interim permissions will allow firms to continue to trade from 1 April, but all firms will still need to apply for full authorisation by April 2016.
This approach will mean business as usual for firms but allows the FCA to deploy its full enforcement powers to protect consumers during this period. The RAO order includes transitional provisions, so that firms who have already applied to the OFT for a licence do not have to reapply from scratch for FCA authorisation and live enforcement action will be seamlessly picked up by the new regulator.
The Government are committed to promoting continuity in the conduct requirements that firms need to abide by to ensure that the compliance burden is manageable. The RAO order allows the FCA to designate, as rules, secondary legislation made under Part 2 of the CCA. The new regulator is also incentivised to replicate CCA requirements in its rules. Where rules are the same, or substantially the same, as CCA provisions, the requirement to conduct a cost-benefit analysis is waived and the FCA’s competition duty does not apply.
I hope that I have been able to explain the purpose and the benefits of these orders and I commend them to the Committee.
Lord Kirkwood of Kirkhope
My Lords, I will make a brief intervention in the Grand Committee’s proceedings. These are extensive and important orders. I confess that I defer to the knowledge that other noble Lords have on consumer credit, but I would like to tax my noble friend with a request for assurances about payday loans and unsecured household credit. There have been some big changes in that field and I want to detain the Committee for a moment on that issue.
However, before I do that—and my noble friend will understand why I have been put up to this in a moment—I want to raise an issue about Article 9 of the consumer credit order, which includes provisions for local weights and measures authorities to institute proceedings in England and Wales, and in Northern Ireland. Given my accent, he will not be surprised to know that I would like an assurance that this does not mean that weights and measures enforcement cannot take place in Scotland. I am sure that he will tell me that it is a Section 30 order or some such thing but I will be able to go home more safely at the weekend if I can say that I asked the question.
I come at these orders from the niche direction of the whole question about unsecured short-term household lending. Other people have been doing a lot of work on this but the matter has been drawn to my attention simply because of the massive increase that we have started to see in the amounts of money rolled over and borrowed under the existing payday loan provisions.
Lord Newby
My Lords, I am grateful to all noble Lords who have spoken in this debate and for their broad welcome for the provisions that we are introducing.
The noble Lord, Lord Kirkwood, asked about Scottish weights and measures. He will have read Paragraph 9, which says:
“Local weights and measures authorities may institute proceedings in England and Wales”.
As he will know, it would be completely improper in Scotland for anybody but the Lord Advocate to initiate prosecutions. I have no doubt that he will wish to talk to his noble and learned friend Lord Wallace of Tankerness, as I am sure that he is doing his job properly.
The noble Lord, Lord Kirkwood, concentrated, as other noble Lords did to a certain extent, on payday loans and what is happening about them. The FCA has a formal responsibility for managing payday loans from next April, but it is not waiting until next April to start to think about the issue. Indeed, it is going to set out draft rules in September for a consultation. I am sure that many people will want to get involved in that consultation. That gives a certain amount of time to get rules in place by the time it takes over the formal responsibility. The FCA has also reminded the banks of their obligations when cancelling continuous payment authorities, which is obviously an issue for payday lending consumers.
The noble Lord said that he hopes that micro-businesses will not be exempt from this provision because they are very important even if they are not very big. The micro-business exemption does not apply in this area; that would obviously compromise consumer protection because there are a lot of small businesses. Although we tend to be familiar with a number of brand names, very often the worst offenders—literally—are small, local operations.
BIS has launched a review on voluntary payday codes that will survey lenders and consumers and provide a sense of progress. The codes were implemented by lenders last November, and we expect BIS to publish findings in the autumn. We hope that will put pressure on the trade association to raise its game ahead of April.
The noble Lord made the point that credit unions are not a perfect substitution for payday lenders, and I completely agree. The extent to which the two seem to be equated with the good and bad ends of short-term lending has rather surprised me. Credit unions are really vehicles for people who take a longer-term view of a loan. If you are signed up to a credit union and have established a history of savings, it can help if you get into difficulties and can act in the same way as a payday lender would, but they are very different. The other problem is that, in many areas, there is no credit union of any significance or it is quite difficult to find out about it. Having said that, the Government support credit unions, and we are doing a number of things to make them more attractive, such as increasing the maximum rate of interest that they can charge from 2% to 3%, but as the noble Lord said, they are a partial solution to the problem.
The noble Baroness, Lady Kramer, began by discussing peer-to-peer lending. I congratulate her on the extent to which she has been able to raise peer-to-peer lending as an issue in this House and more broadly and has encouraged the Government to come forward with these regulations. We are in discussions with the industry. We were actively engaged with it before we produced these regulations and it has been very keen to be regulated because it, in a sense, gives a stamp of authority to the whole sector which, for a new sector, is very welcome.
On payday lenders, the noble Baroness asked whether the order in any way compromises the FCA’s ability to undertake a number of things, including a capping power. It does not. That was one of the issues that it will consider as it thinks about its rule-making power. She described the conditions in Florida which have enabled very effective regulation of payday loans while enabling the payday loans sector to carry on in operation. Like her, I have been extremely impressed by the extent to which Florida has managed to go a long way to solving the issue that we are grappling with, which is how to ensure that poorer people can get access to money when they need it but do not get fleeced. We hope that there are some lessons that we can take from Florida, not least on a real-time payday database, which the FCA is very interested in. If we decide to go for it, it will take a bit of time to put in place, and it would be expecting a bit too much to think that we could do that by next April.
The noble Baroness asked about social investor exemption from the financial promotions regime. These regulations do not affect the rules in that respect. We are actively looking at how we can resolve the problem she explained. The challenge is, as ever, to make sure that we are able to put in place a regime that not only allows the kind of lending she is talking about but safeguards consumers. That is the balance we are still grappling with.
The noble Baroness, Lady Hayter, asked about R3 and its concern that in extending the exemption for insolvency practitioners, in part in response to its concern, we might not have got it quite right. We are pretty confident that the extended exemption that is designed to give comfort to insolvency practitioners when giving advice will do that without running the risk that she talked about. Officials have been and will remain in discussions with them to make sure that their fears are put to rest. We do not believe that they need to be worried.
The noble Baroness raised multiple rollovers of debt and hoped that we will not delay work in this area. The FCA is very much on to this. There is no delay. The business models of payday loan companies is one of the things it will look at.
Finally, the noble Baroness asked when the rule book will be available in draft. It will be available in draft early in the autumn, and we hope that the FLA and others who have a direct interest in it will, as they have until now, play a major part in scrutinising it and giving us their views. I hope we will be able to come up with something that they will find easy to live with.
I hope that I have answered the questions that have been raised, and I commend the order to the Committee.
Financial Services Act 2012 (Consumer Credit) Order 2013
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Lord Newby
That the Grand Committee do report to the House that it has considered the Financial Services Act 2012 (Consumer Credit) Order 2013.
Relevant document: 6th Report from the Joint Committee on Statutory Instruments
Alternative Investment Fund Managers Regulations 2013
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Lord Newby
That the draft regulations laid before the House on 10 June be approved.
Relevant document: 4th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 10 July.
Supply and Appropriation (Main Estimates) Bill
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Banking: Regulation
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Lord Newby
My Lords, none of the measures in the Government’s response to the Parliamentary Commission on Banking Standards are prevented by proposed European Union legislation on bank regulations. As the detail of these measures is developed, HM Treasury will ensure that they are appropriately aligned with any relevant European Union legislation.
Lord Harrison
My Lords, given the slender reference to the European dimension both in the Tyrie report and the Government’s response, could the Minister illustrate what obligation there is at present, under CRD IV and Basel III, for us to report the British banks that have a high-risk assessment to the European Banking Authority? Given the flat-footed nature of the Government in responding to the financial transaction tax and the European banking union, may we have an assurance that preparatory work is being done in anticipation of the Liikanen proposals coming to fruition this autumn, and indeed the recovery and resolution directive that will cover all 28 member states?
Lord Newby
My Lords, I think that I can give that assurance as far as the Liikanen proposals are concerned. As the noble Lord probably knows, the Government believe that there is no incompatibility between what he is proposing and what the Government are doing in respect of banking and the banking reform Bill. I am confident that the Government are acting with all due speed on these measures, and indeed in some areas we have moved more quickly than the EU as a whole has been able to do.
Lord Lawson of Blaby
My Lords, as a member of the Parliamentary Commission on Banking Standards, I remind my noble friend the Minister that in our unanimous report we were in fact highly critical of the emerging European Union banking regulation, and indeed not greatly enamoured of the approach of Basel III either. We made it clear that, given that London is the only world-class financial centre within the European time zones, it is incumbent upon this country to put in place whatever system of bank regulation we feel is necessary to address the problems that have emerged.
Lord Newby
Yes, my Lords, and of course that is exactly what we are doing with the banking reform Bill.
Lord Barnett
My Lords, the draft banking Bill came from the House of Commons yesterday. I have only just had a chance to glance at it, but it clearly is not quite in line with what was recommended on the important issue of regulation regarding ring-fencing. Why not?
Lord Newby
My Lords, as my colleague the Financial Secretary has made clear in another place, there are some aspects of the commission’s views on the speed and timing of ring-fencing that the Government are going to look at further and revisit when the issue comes back to your Lordships’ House. We have Second Reading of the Bill on 24 July, and my noble friend Lord Deighton will look forward to telling the House more about the provisions of the Bill at that point.
Lord Pearson of Rannoch
My Lords, is the Minister aware that his answer to the noble Lord, Lord Lawson, does not quite stack up in view of Written Answers from the previous Government on 21 July 2009, at col. 365 of the Official Report, which confirmed that they had passed overall supervision of our banks and financial institutions to Brussels? Given that the EU has not had its own accounts signed off for 17 years, and given that it deeply dislikes the City of London, was this wise and how do we get out of it?
Lord Newby
My Lords, the basic assertion that the noble Lord makes, that the Government are unable to put in place a satisfactory regulatory framework for banks in the UK, is, frankly, simply not true. We have taken a wide range of measures to strengthen the regulatory structure and the provisions with regard to remuneration and capital, and in all those areas what we have done is compatible with what has been happening at EU level.
Baroness Kramer
My Lords, while many of us in this House will be working to strengthen banking regulation based on the commission’s report, and I was privileged to be part of that commission, is it not also true that what is remarkable from the evidence we received from the European Union is the common ground shared by the regulators, both in their definition of the issues and the areas in which they are seeking solutions? Is it not true that the key issue of dispute between the two is in fact whether or not there should be a cap on bankers’ bonuses—on which, ironically, the British public are with the EU?
Lord Newby
My noble friend is clearly right in that respect. The previous Government started a process with regard to remuneration for senior bankers, which has been strengthened in several respects. One of the more encouraging developments in recent years is that as a result of that—and as a result of public pressure—the level of bonuses at RBS has fallen by 70% between 2010 and 1012, and at Barclays by 40%.
Lord Tunnicliffe
My Lords, the report of the Parliamentary Commission on Banking Standards says at paragraph 896:
“Remuneration requirements should, ideally, be mandated internationally in order to reduce arbitrage. The Commission expects the UK authorities to strive to secure international agreement on changes”,
and it goes on to describe the changes. The Government’s response on this paragraph is unclear. Will the Government be taking a lead internationally to secure the commission’s recommendations on this issue?
Lord Newby
The Government have taken a lead on remuneration levels—in particular, in seeing how remuneration levels can be more closely matched to risk. We are, for example, sympathetic to one of the commission’s proposals about linking remuneration levels not only to the immediate risk, but by making some degree of the remuneration relevant to what happens even up to 10 years after its level is set. So we are already taking the lead and will continue to do so.
Health and Social Care in England
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Lord Graham of Edmonton
Sixty-one years ago. I may have just given away the age of the noble Baroness. Well, the noble Baroness is just younger than me and I am now 88 years old, so I have not given it away too much.
Lord Newby
My Lords, before the noble Lord embarrasses the noble Baroness, Lady Boothroyd, further—
Lord Newby
I remind the noble Lord that there is a time limit of five minutes on the speeches.
Lord Graham of Edmonton
I have watched a number of five minutes’ being put up for the past hour, but no one has said anything to me. Thank you very much.