Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fees) Regulations 2013
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Lord Newby
That the draft regulations laid before the House on 21 May be approved.
Relevant document: 2nd Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 12 June.
Motion agreed.
Offender Rehabilitation Bill [HL]
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Lord Ahmad of Wimbledon
That the amendments for Report be marshalled and considered in the following order:
Clauses 1 and 2, Schedule 1, Clause 3, Schedule 2, Clauses 4 to 7, Schedule 3, Clauses 8 to 12, Schedule 4, Clause 13, Schedule 5, Clauses 14 to 17, Schedule 6, Clauses 18 and 19, Schedule 7, Clauses 20 to 22.
Business of the House
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Lord Newby
My Lords, I beg to move that the House do now adjourn during pleasure until not before 1 o’clock to enable those who wish to do so to make their way to the Queen’s Robing Room to hear an address from the Prime Minister of Canada. All Members of the House are welcome to attend, and I encourage them to do so.
Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fees) Regulations 2013
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Lord Newby
That the Grand Committee do report to the House that it has considered the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (Referral Fees) Regulations 2013
Relevant documents: 2nd Report from the Joint Committee on Statutory Instruments
Lord Newby
My Lords, these regulations concern the ban on referral fees introduced by the Legal Aid, Sentencing and Punishment of Offenders Act 2012. They make provision for the implementation of the ban in two specific areas. First, they provide for the ban on referral fees to apply to certain types of financial services firm—namely, those in the insurance sector. Secondly, they provide for the enforcement of the ban, as it applies to financial firms, by the Financial Conduct Authority.
I turn first to the rationale for the ban. In late 2008 Lord Justice Jackson was commissioned to undertake a review of the rules and principles governing the costs of civil litigation in England and Wales and to make recommendations to promote access to justice at proportionate costs. His report set out a number of proposals to tackle the disproportionate costs of civil litigation. In responding to these proposals the Ministry of Justice included provisions to ban referral fees in relation to personal injury cases in the LASPO Act 2012. Referral fees are typically paid by solicitors to third parties who refer business to them. Most personal injury claims are referred to solicitors by claims management companies. However, other parties, such as insurers, are also often involved. In cases where policyholders contact insurers to make a claim on their motor insurance policy, the insurer may check whether there is a related personal injury claim and refer the policyholder to a lawyer in return for a fee. If the case is successful, the lawyer’s costs, including the referral fee, would be recovered from the losing defendant. In many cases, the losing defendant could be another insurance company.
Referral fee payments have increased from around £250 per case in 2004 to around £800 per case in 2009. Both the Law Society and the Association of British Insurers raised the concern that the circular flow of money generated by referral fees incentivises and rewards making claims and therefore inflates the cost of claims and ultimately insurance premiums. According to the ABI, the average insurance premium increased by approximately 10% from 2009 to 2010 in order to make up for insurance underwriting losses of over £2 billion in 2010, when 20p was lost in every £1 of premium earned.
Lord Justice Jackson recommended that the payment and receipt of referral fees should be banned. A ban discourages lawyers from bringing unnecessary claims for compensation, including unmeritorious lower-value claims, while reducing the overall level of legal costs in personal injury cases and related insurance costs. The Ministry of Justice took forward Lord Justice Jackson’s recommendations. Rules against referral fees in personal injury cases were included in the LASPO Act 2012. The rules cover both the payment and the receipt of referral fees. The ban captures all the main businesses involved, such as solicitors, claims management companies, insurers and insurance intermediaries. Under the provisions of the 2012 Act, the individual regulators in each sector are required to effectively enforce the ban. For regulated financial services firms, the relevant regulator is the FCA.
I will now explain the specifics of the regulation. The provisions in Sections 56 to 60 of the LASPO Act 2012 introduce rules against the payment and receipt of referral fees for legal services in relation to personal injury cases. The ban on the payment and receipt of referral fees generally came into effect on 1 April.
Lord Newby
My Lords, I am most grateful to the noble Lord for his thoughtful comments on these draft regulations. I will attempt to deal with his questions as best I might.
I have an introductory comment. The noble Lord referred to the noble Baroness, Lady Hayter, saying that the referral fee system was supported by some people. The thing that no one is objecting to is referrals. People are objecting to the fact that people are now being paid probably more than £800 on average to do it. That is a heck of a lot of cash. The problem is that it pushes up insurance payments to everyone and gives an incentive to the referrers to refer anything because they are on a winning ticket: if the case is taken up they get their fee, and if it is not then they do not lose anything. That means that there is a perverse incentive in the system for people to take cases that may or may not have huge validity, particularly when the amount being claimed is relatively small. If I am right in thinking that people like the prospect of being referred on but do not like the idea of paying fees, I would have thought that that would apply to NGOs, unions and others as well. However, as the noble Lord said, we are not discussing that principle today; the die is cast on that one.
The noble Lord asked about alternative business structures and whether they would be able to get around the ban. As the Committee knows, the Government strongly support alternative business structures to increase competition and innovation. Alternative business structures do not allow organisations to avoid the ban but allow them flexibility to operate in the personal injury market in a way that is compliant with the law.
Taxation: Evasion and Avoidance
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Lord Newby
My Lords, I begin by thanking the noble Lord, Lord Foulkes, for initiating this debate. It is a very important subject and this is a timely point at which to be discussing it. I reassure noble Lords that despite the tenor of the debate, the vast majority of UK taxpayers do not avoid or evade tax. They pay the tax that is due and they pay it on time. However, some do not, and that is what we have been discussing today. The economic and social consequences of tax avoidance and evasion are not insignificant. A number of noble Lords referred to the tax gap, which is estimated to be around £32 billion, in total of which the amount due to avoidance and evasion was estimated in 2010-11 at £19 billion. This tax gap exists everywhere, and it is rather lower in the UK than it is in most other countries. Furthermore, it has been falling over a period both before and since this Government came to office, but it is still significant and too big.
As a number of noble Lords have said, the money that we are not collecting in taxes is money that we could be spending on services, something that I am sure we all wish we were able to do. The social consequences of failure to collect the right amount of tax are in many ways as significant as the economic ones. Many individuals and companies up and down the country are honest and pay the tax they owe on time, and it is not right that they should shoulder the burden for those who dodge or completely evade their responsibilities. It generates a huge sense of unfairness and anger, and erodes confidence in the tax system. At a time when the Government are facing tough spending decisions, it is even more important that the right amount is collected.
I agree that this issue has a moral dimension. Failure to pay tax that is reasonably due weakens the bonds that hold society together. I also accept that while there is a moral element to this, there are some companies whose moral compass is, by common consent, lacking. This has been attacked in a number of ways. The Companies Act 2006 lays on directors a range of duties that go beyond fiduciary ones. It is a statutory obligation for directors to have regard to the impact of their company on society as a whole. In my view, sometimes they put less emphasis on that than they do on some of their other duties. However, they already have this requirement.
The question is how we translate our moral outrage into effective action. Before coming on to what the Government are doing, I will take up a comment made by my noble friend Lady Kramer about a potential kite mark, and the remarks made by a number of noble Lords about the effect of consumers. There are some things that consumers can do more effectively and quickly than government, and it seems that some of the actions that have been taken against some well-known companies have had more of an impact in a matter of days or weeks than anything that government, with the best will in the world, could do in the same length of time. I do not have a suggested kite certification body, and I do not think that such a body should come from government, but it is a good idea that should be pursued.
We believe that this Government have a strong track record on tackling both tax avoidance and evasion. That is demonstrated, for example, in the 33 changes to tax law that have been made since 2010 to close down numerous tax avoidance loopholes, and illustrated by the 1,560 individuals who have been prosecuted for tax crimes by HMRC since then. We have shown a similar willingness to confront those who try to hide their money offshore. Some 50,000 taxpayers have already come forward in response to all the offshore disclosure facilities, of which Liechtenstein disclosure facility was the first. To date, these have generated over £1 billion of tax in penalties and interest, and in the years to come there are many billions more to come from that relatively narrow source. That activity reflects a wider transformation in the way HMRC now tackles avoidance and evasion.
Since 2010, some 1,000 additional staff have been deployed to tackle avoidance, evasion and criminal attack, and to cut back on tax debt. I shall deal head-on with the issue of how cuts to the overall HMRC budget have reduced the focus and effort being put into this area. Nothing could be further from the truth. One of the main reasons it has been possible to cut both the budget and the staff at HMRC while increasing effort and resource in this area is that the way people pay their taxes has changed. A huge number of companies and individuals used to pay their taxes using paper tax forms, but now virtually no one does. That has enabled HMRC greatly to reduce the number of people whose job was essentially to manage bits of paper. I do not know if there is a figure for it, but the amount of paper that goes through HMRC is a very small fraction of what it used to be. It means that we have already been able to allocate around an extra £1 billion to this area. So in answer to the first of the questions the noble Lord put to me, I can say that I am pretty confident, indeed very confident, that HMRC has the resources to tackle this issue more effectively than it did in the past, and we have said that we shall look at whether there is scope for putting more resource into it in the future. However, there is something to consider with regard to further resource: you cannot do it too quickly because we are talking about highly trained staff if they are going to be effective. We have put in a lot more and we are keeping the position under review.
In connection with HMRC, the noble Lord asked about it cutting deals with big business. He was concerned about that. The settlements he referred to were reviewed independently by a judge and found to be satisfactory. However, HMRC has put in place robust new assurance and governance rules for settling large cases, so I think that some lessons might have been learnt.
In the Budget, we vowed to do more to tackle avoidance and evasion. We announced the signing of major new automatic exchange agreements and disclosure facilities with the Isle of Man, Jersey and Guernsey, and I shall come back to that later. We also announced the introduction of the first general anti-abuse rule, which will shortly be legislated for through the Finance Bill. This will target effectively the most abusive forms of avoidance and provide a strong deterrent against using such schemes in the first place. Is it strong enough? We shall see when we review it. Is it something against which the last Government set their face? Yes, it is. I would not want to get into too much retrospection, so let us leave it at this: having made the case in your Lordships’ House for an anti-abuse and an anti-avoidance rule for many years, I am very pleased that at long last it is now happening.
For those who choose to contrive complex mechanisms to disguise their employment status and thus avoid employment taxes, we have published a consultation to review two areas of the partnership tax rules, while just last week we published a consultation on the use of offshore employment intermediaries. Our focus on tackling avoidance and evasion will continue, but as a result of the investment that we have already made, HMRC is now set to raise total additional compliance revenues of £22 billion per year by 2014-15.
The noble Lord, Lord Foulkes, asked me three questions, the second of which had to do with beneficial ownership. The Financial Action Task Force on Money Laundering sets standards on anti-money laundering and these issues. The FATF standards are at a high level and are implemented at EU level. EU action is driven by the money laundering directives, a new one of which will be negotiated this year. The standards on beneficial ownership place the requirement on countries to ensure that there is adequate, accurate and timely information on the beneficial ownership of companies, which can be obtained or accessed by competent authorities. Member states are now implementing those standards. The Treasury is working with BIS, and BIS is currently drafting a discussion paper on corporate transparency, which includes beneficial ownership. This will be published over the summer. The measures agreed to through the G8 in this area will, as I say, be implemented in the UK through the EU money laundering directive, as well as by UK money laundering regulations and changes to the Companies Act.
Those concerned with these matters have been promoting the multilateral information exchange for a long time. There has been the most extraordinary acceleration of activity in this area in recent months. The key starting point—the stone, if you like, that started the avalanche—was, as noble Lords have pointed out, the US Foreign Account Tax Compliance Act, which requires non-US financial institutions to report extensive information on US customers with accounts overseas to the US authorities. The US is saying, “We want to know from you what our companies and citizens have in your back accounts”. This has been in operation for only a relatively short time.
As an example of how that standard has really become an international norm, I will go through the following year. In June last year, the UK, France, Germany, Italy and Spain agreed a model information exchange agreement with the US to implement FATCA. In September, the UK and the US signed an agreement on that model. In December, the UK announced that we saw it as a new standard and would look to build on it ourselves and internationally. In January, the Prime Minister announced that tax transparency, including this, would be a priority for the G8. I confirm that it is. In February, the Isle of Man agreed to a FATCA-type regime with the UK. In March, Jersey and Guernsey agreed to the same thing. In April, France, Germany, Italy, Spain and the UK agreed to develop and pilot multinational tax information exchange based on the FATCA model and we made it clear that that was our priority for the May council. Last month, the overseas territories and Crown dependencies made a commitment to join the pilot: that is, to join the FATCA approach.
That is hugely significant. It means that, for the first time, places that have become a byword for tax avoidance will be required to make information available to other tax authorities. Also in May, another 12 European member states agreed to join the same process, while the European Council supported the creation of what it calls a new global standard for automatic exchange of information: that is, a FATCA-type approach. All this has happened in a year. It is an extraordinary acceleration of events but is all to the good. It is our intention that it should be pursued even more rigorously in the future.
The noble Lord, Lord Browne of Ladyton, asked about developing countries and the problems that they face in not being able to collect the tax revenues that they are due. There are two elements to how you deal with that. One is that we do our bit to make clear what is happening in those countries in relation to multinational companies. That is why we support the extractive industry transparency initiative and why the EU accounting directive will require country-by-country reporting for the extractive industries, so that at least you can see what is happening in those places.
We have also realised, in recent years, that we can play a major part by helping those countries themselves improve the efficiency of their tax collection. HMRC has been putting money into support for the tax administrations in those countries. In Ethiopia, where we have been doing it for a number of years, tax revenues have risen by as much as 40% in a year. In Zambia, to which the noble Lord referred, although we are committed to spending £235 million between 2011 and 2015 on reducing poverty, we are also committed to building their tax collection capacity, and HMRC has been supporting the Zambia Revenue Authority to build its own tax collection. Obviously, the quicker they can raise their own proportion of tax, the less reliant they will be on aid. In the Budget, we announced a programme of capacity building, which DfID and HMRC were going to promote in many of those countries. I think that is a very important move.
The noble Lord also referred to the future of tax havens and what they are going to do if they do not have a financial services sector. That is an extremely pressing issue but it must not be the principal issue. We cannot delay action in this area because some tax accountants in the Cayman Islands might find themselves slightly shorter of work.
My noble friend Lady Kramer and the noble Lord, Lord Haskel, in particular, talked about the problem of multinationals not paying tax and asked what we were going to do about it. There is a major push via the OECD, in which we have taken a lead, to change the rules. A lot of the accounting rules have been in place for nearly a century, so it is not surprising that they do not deal very well with the current situation. I assure the noble Lord, Lord Davies, that the Prime Minister will take a lead and will push this very hard at the G8 later this month. Next month, the OECD will present proposals to the G20 on how exactly it proposes to revise the rules. There is a huge amount of work going on in this area—I gather there are 15 work streams—so we should not think that this is being taken at all lightly.
The noble Lord, Lord Haskel, asked whether the Government would deny contracts to tax avoiders. In the Budget, the Government announced that businesses must certify their tax compliance if they want to bid for government contracts. That is new, and we hope and think that it will be effective.
The noble Lord, Lord Watson, questioned whether employees of accountancy firms should be able to spend time on secondment with HMRC. We realise that there can be perceived conflicts of interest. At the moment, secondees have to sign an agreement with the host department and their permanent employer to ensure that there is no conflict of interest when they return. On balance, we value such secondments and think that HMRC gains an advantage by taking employees from the big accountancy companies to help with its work and to help bridge what used to be a complete silo between the accountancy firms and the department. It is a bit of a caricature to think that all accountants are necessarily evil-minded and are going to use the information they get to their clients’ advantage. My experience of accountants is that they are part of a very fine profession and are often unjustly criticised.
The noble Lord, Lord Brooke, asked a specific question on the charity tax. I assure him that HMRC is working closely with the Charity Commission to make sure that charities comply. It conducted 10 joint inquiries with the Charity Commission in 2012-13. There are about 20 exchanges of information every month about charities where it appears that there might be a problem. To go back to an earlier point, HMRC has doubled the staff working on charity compliance since 2012.
I hope I have gone some way to answering the points that have been made in the debate this afternoon and to reassuring noble Lords that tax compliance is an issue that the Government take extremely seriously and will continue to prioritise, both domestically and internationally.
Economy: Fiscal Framework
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Lord Barnett
To ask Her Majesty’s Government what was meant by the reference to “flexibility in the fiscal framework” in the Chancellor of the Exchequer’s speech to the International Monetary Fund in Washington in April.
Lord Newby
My Lords, the Government’s fiscal strategy is grounded in the clear, credible and specific consolidation plans and new fiscal framework announced in the June Budget of 2010. The fiscal mandate to achieve a cyclically adjusted current balance by the end of the rolling five-year forecast period has ensured a flexible fiscal response to economic developments by allowing the automatic stabilisers to operate and by protecting the most productive public investment expenditure.
Lord Barnett
My Lords, if that was an answer to my Question, I thank the Minister. The Chancellor used to be proud to claim the IMF as a supporter of his policies, but it has now said a number of times, and it is worth repeating, that the Chancellor might revisit his austerity programme. Does that mean that he is or he is not?
Lord Newby
My Lords, I know that the noble Lord is a great reader of IMF reports and that he will, therefore, have read the following from its recent report:
“The commitment to a medium-term plan has earned the government credibility … While adhering to the medium-term framework, the government has shown welcome flexibility in its fiscal program”.
We agree.
Lord Vinson
My Lords, does the Minister agree that this country currently has to borrow over £50 billion a year to meet its obligations, largely due to our inability to export? That £50 billion comes after selling some of our prime assets like our water companies and utilities which, for some reason, pension funds abroad think better of investing in than our own pension funds do. Leaving that aside, we have a floating pound and the only way that we can actually make ourselves more competitive is to let the pound float down. I hope that the Government and the new governor will encourage this.
Lord Newby
My Lords, as the noble Lord said, we have a floating exchange rate. The Government do not set a target for the exchange rate; it responds to economic circumstances, including the decisions taken by the independent Bank of England.
Lord Peston
My Lords, given the economic mess that the Government’s policies have got the whole country into…
Lord Peston
Oh yes. I hope I do not have to remind the coalition how long it has been in power and it is about time it accepted some degree of responsibility. Some flexibility in the fiscal framework is called for, and the obvious flexibility is to extend the planning horizon—I advise the Government on this with no charge—to the whole length of the business cycle so that we could have some expansionary fiscal policies now, followed, in due course, by further fiscal adjustment. That is the way we ought to be going, and the sooner we have a Government that does it, the better.
Lord Newby
My Lords, the Government have pushed back the period during which we are going to eliminate the deficit. The rate at which we are doing it, at about 1% of GDP per annum, is exactly in line with IMF guidance to countries that find themselves in the position that we do.
Baroness Kramer
My Lords, I have some sympathy with the noble Lord, Lord Barnett, because he put down his Question before Ed Balls did a U-turn yesterday on the Labour policy that his Question reflects. However, would the Minister not agree that the greatest risk to recovery at the moment is the lack of credit as business returns to its growth phase and will need that credit in order to succeed? What is his assessment of the capacity of the banks to fill that need?
Lord Newby
My Lords, the capacity of the banks to fill that need is shown by the latest borrowing figures, which are mixed. Of the 40 banks that are participating in the Funding for Lending scheme, 27 expanded their lending and 13 contracted it. There was a small net contraction—much less than in recent quarters. There is evidence that net lending will expand as the year progresses, as a number of banks—such as Santander, which is winding down its mortgage book—come to the end of programmes.
Lord Davies of Oldham
My Lords, in his somewhat oblique Answer to the Question put by my noble friend Lord Barnett, the Minister mentioned the automatic stabilisers. Will the Government commit, in the forthcoming spending review, to the automatic stabilisers being maintained?
Lord Higgins
Does my noble friend agree that the impression that one gets of the IMF’s views on the Chancellor’s policies by reading the press are very different from the impression one gets if one actually reads the IMF reports?
Lord Newby
I will say yes to that as well. However, the Government completely agree with the point that the IMF made about the desirability of bringing forward infrastructure expenditure. That is why last year we put in place the infrastructure guarantee programme, which is already bearing fruit with the allocation of £1 billion to the Northern line extension to Battersea, and the recently announced £75 million to be given to Drax power station for its partial conversion to biomass.
Lord Flight
My Lords, does the Minister agree that running a deficit of over £100 billion when it was planned as roughly half that sum and creating money to the extent of £380 billion is extremely flexible in terms of policy? Some might even view it as rather excessively Keynesian.
Lord Newby
Clearly some do view it as that. It is worth bearing in mind that while we are reducing our deficit to the 3% EU Maastricht target over the period to 2017-18, even the relaxation that the EU has agreed in recent weeks with France, Slovenia, the Netherlands and Spain will get them back to a target of borrowing of less than 3% by 2015 or 2016. It is therefore taking us a lot longer. The Government have agreed to phase down borrowing over a much longer period than is allowed even under the reduced timetable elsewhere in the EU.
Lord Forsyth of Drumlean
My Lords, is my noble friend not concerned at the way in which asset prices, particularly housing and shares, are now being inflated as a result of quantitative easing? Will he confirm that this Government will never use inflation as a means to get rid of the debt, because that will result in substantial unemployment, a loss of competitiveness and the road to Carey Street?
Lord Newby
My Lords, this Government will make that commitment, which is why the target that we set for the Monetary Policy Committee of the Bank of England has not been relaxed, and will not be relaxed during this Government’s tenure of office.
Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013
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Lord Newby
That the draft regulations laid before the House on 26 March be approved.
Relevant document: 23rd Report from the Joint Committee on Statutory Instruments, Session 2012-13, considered in Grand Committee on 20 May.
Cash Ratio Deposits (Value Bands and Ratios) Order 2013
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Lord Newby
That the draft order laid before the House on 26 March be approved.
Relevant document: 23rd Report from the Joint Committee on Statutory Instruments, Session 2012-13, considered in Grand Committee on 20 May.
Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013
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Lord Newby
That the Grand Committee do report to the House that it has considered the Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013.
Relevant document: 23rd Report from the Joint Committee on Statutory Instruments, Session 2012-13.
Lord Newby
My Lords, the Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013 set out the legal framework under which tax-transparent funds will be introduced to the UK. We are introducing two new vehicles, both of which will be subject to Financial Conduct Authority authorisation and which are collectively known as authorised contractual schemes. The first of these schemes is the co-ownership scheme; the second is based on existing limited partnership models. As a matter of course, I can confirm that the provisions in the regulations are compatible with the European Convention on Human Rights.
The UK investment management industry serves millions of customers all around the globe and is one of the UK’s success stories. It is a key part of the UK’s financial sector, managing £4.9 trillion of funds and earning an estimated £12 billion a year for the UK. About a third of European assets under management are managed out of the UK and the industry is a significant provider of high value-added jobs and skills, with clusters of expertise in London, Scotland, and across many UK regions.
However, this sector is about more than just the management of funds, it is also about where the funds themselves are located. The establishment of a tax-transparent fund vehicle is an important part of our programme to ensure that the UK remains competitive as a European centre for fund domicile.
Once introduced, these funds will be suitable for use in many roles, whether by themselves as stand-alone schemes, or as part of more complicated structures. Introducing them will also help to ensure that the UK is able to take full advantage of the opportunities presented by the Undertakings for Collective Investment in Transferable Securities IV—UCITS IV—Directive. That directive governs more than 70% of the net value of European funds for collective investment in transferable securities. The directive in 2010 enabled fund managers for the first time to operate cross-border UCITS master funds. That means that feeder funds from across different member states can invest into a much larger master fund, pooling their assets and thereby benefiting from economies of scale and greater investment diversity.
For that structure to work well, the master fund must be tax transparent. That means that there is no taxation of income in the master fund itself. The feeder funds and any other investors are then taxed as normal in their own jurisdiction on their investment return. In this way, the Exchequer does not lose revenue. Instead, investors pay tax as appropriate based on their circumstances.
As I mentioned, we are introducing two types of authorised tax transparent funds. Both of the types being considered are contractual funds under the UCITS IV directive. One type is the co-ownership scheme. This is a new type of fund structure in the UK, but is already in place and used extensively in other European member states.
Legislation being introduced separately will provide that for the purposes of UK capital gains tax, such funds will be treated as opaque. That means that the investors’ holding in the fund will be the relevant asset for investors’ capital gains tax purposes, not the underlying assets held by the fund. That will avoid some of the complex reporting and accounting requirements associated with investment in fully tax-transparent entities.
We are also introducing an authorised limited partnership scheme, which will be based on the already well-recognised unauthorised limited partnership vehicle currently used in the UK, and which will be fully transparent for both income and gains. Given the existing availability of these funds in other domiciles, there is commercial demand to have similar vehicles in the UK.
Once introduced, the tax transparent funds will enable UK fund managers to take advantage of the opportunities created by UCITS IV and establish master funds here in the UK. These funds will also be suitable for other purposes, and fund managers will be able to make commercial decisions over how best to employ them. For example, the new fund structure will also allow some investors, in particular pension funds and charities, to retain the benefit of lower rates of withholding tax on their foreign investments under double taxation treaties. These benefits cannot be retained if investment is made through non-transparent funds.
Whether forming part of a master-feeder structure or not, these new funds are an important part of our strategy to support the UK as a competitive location for fund management and domicile.
The Government consulted widely with industry to ensure that these vehicles are as competitive as possible. The consultation responses were strongly supportive of the introduction of the new vehicle. Many respondents have stated that the new structure would enhance the UK’s reputation as a fund domicile and help promote the UK investment management industry.
The instrument is to be made under the European Communities Act 1972 to provide for the formation of UCITS in accordance with contract law. Specifically, the instrument inserts a new Chapter 3A in Part 17 of FSMA to govern the authorisation and supervision of contractual schemes by the FCA. It extends to contractual schemes the FCA’s power to make rules for this purpose in relation to unit trusts. As with other authorised collective investment schemes, and to ensure consistency and coherence of tax treatment, the rules will also extend beyond UCITS to non-UCITS retail schemes and to qualified investor schemes. These latter more lightly regulated schemes will be within the ambit of the new AIFMD directive. As well as providing consistency with other UK funds, this will give greater flexibility to fund managers.
Other primary and secondary legislation is amended to provide for contractual schemes broadly in line with provisions already made for unit trusts and open-ended investment companies. The Limited Partnerships Act 1907 partly governs limited partnerships and is modified for the operation of partnership schemes. The Insolvency Act 1986 and insolvency rules and equivalent legislation for Northern Ireland are modified to enable co-ownership schemes to be wound up in the event of insolvency.
In addition to this legislation, there will be additional regulatory changes to bring the tax-transparent funds into effect. Regulations governing the tax treatment of UK resident investors in the new funds will shortly be laid before the House of Commons. These regulations will cover the capital gains tax, stamp taxes and VAT treatment of these funds. Regulations covering stamp duties and VAT are being made through the negative resolution procedure; the capital gains tax regulations are subject to affirmative resolution of the House of Commons. Before any new schemes can be launched it will also be necessary for the FCA to approve its own rules which govern their regulation. This regulation is necessary to ensure the schemes are operated in a responsible and appropriate manner.
These changes pave the way for the introduction of effective and competitive tax-transparent funds to the UK. These funds will help to provide improved returns to investors, as well as providing new opportunities to industry and strengthening the UK investment management sector. I therefore commend these regulations to the Committee.
Lord Tunnicliffe
My Lords, I thank the Minister for introducing these regulations and for the speed with which he read his brief. I have looked at the regulations and particularly at the impact assessment, as well as all the various issues related to the regulations, and it seems to me that they are good news for everybody who has been consulted—and they seem to be pretty good news in general. However, the consultation has essentially been with the industry, and a couple of words that I heard in the Minister’s speech were “lightly regulated”. We have had light regulation in the past, and, clearly, that is good for the industry, fund managers, and so on. But I seek an assurance that the regulations have been carefully checked so as not to increase the opportunities for tax avoidance and that there will be no increase in tax avoidance as a result of our approving the regulations.
Lord Newby
My Lords, I am grateful to the noble Lord for his speedy response to my speedy introduction. I think that I can give him the assurance that he seeks. In terms of tax avoidance, the great advantage of the new vehicles is that, by being transparent in the country of domicile, they ensure that each taxpayer is accountable for domestic tax payable in the country where they are based. So we are content that they will not become tax-avoidance vehicles.
I used the phrase “more lightly regulated” in respect of one relatively small category of schemes. The schemes will be fully regulated and, because of the scale of investment involved, will be taken very seriously by the FCA. On that basis, I hope that the noble Lord will be happy with the regulation.
Cash Ratio Deposits (Value Bands and Ratios) Order 2013
Lord Newby Excerpts(10 years, 12 months ago)
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Lord Newby
That the Grand Committee do report to the House that it has considered the Cash Ratio Deposits (Value Bands and Ratios) Order 2013.
Relevant document: 23rd Report from the Joint Committee on Statutory Instruments, Session 2012-13.
Lord Newby
My Lords, the draft order makes changes to the cash ratio deposit scheme, which is how the Bank of England funds its monetary policy and financial stability functions. Under the Bank of England Act 1998, banks and building societies of a certain size are required to place a proportion of their eligible deposits in a non-interest-bearing account in the Bank of England. The Bank of England then invests these deposits in interest-bearing assets, specifically gilts, and the return it makes funds its monetary policy and financial stability functions.
The Government continue to believe that the cash ratio deposit scheme is the right way to fund the important policy work of the Bank. The operation of the cash ratio deposit scheme means that the Bank’s income is subject to changes in two variables: first, changes in the gilt rate; and secondly, the size of deposits eligible for the scheme, which is largely driven by the performance of the banking sector. Over the past five-year period, both of these have been lower than expected, which has caused a shortfall in funding for the Bank. The Government seek to address this shortfall by recalibrating the parameters of the cash ratio deposit scheme to current economic conditions.
Specifically, the order increases the proportion of deposits that eligible financial institutions are required to deposit at the Bank of England from 0.11% to 0.18%. It also increases the total amount of deposits that an institution has to hold to be eligible for the scheme from £500 million to £600 million. These changes, when taken alongside efficiency savings to be made by the Bank, aim to ensure that the Bank of England’s income is able to cover the costs of its policy functions over the next five years.
The Government have come to this conclusion after conducting their five-yearly review of the cash ratio deposit scheme. The parameters for the scheme were last set out in 2008, and, of course, economic circumstances have changed significantly since that time. I shall set out some of the more detailed findings of this review.
The total costs of the Bank of England’s monetary policy and financial stability functions between 2008 and 2013 are expected to be around £600 million. The income that the Bank of England is expected to receive over the same period is only £520 million. This will generate a shortfall of £80 million, which the Bank will have to recoup from its reserves, resulting in a reduction in the dividend that the Bank passes over to the Exchequer. This has largely arisen because the return the Bank has received on its investments over the past five years has been lower than expected. At the time of the previous review, the Bank had estimated that its investments would generate a return of 5% based on market expectations of gilt yields in 2008. However, the Bank’s average return is now expected to be about 4.25% between 2008 and 2013.
In addition, the level of deposits that the Bank has received under the CRD scheme has grown slower than expected. In 2008, these were expected to grow at 4.5%. They have instead grown by just under 2%, reflecting the performance of the banking sector during the financial crisis. Should no action be taken, the review found that the outlook for the coming period is much worse. The projected costs of the Bank’s monetary policy and financial stability functions over the next five years are expected to rise to £670 million. This increase is driven by the costs of additional responsibilities that the Bank is taking on, including the supervision of clearing houses and security settlement systems, macroprudential regulation and the setting up of the Financial Policy Committee to identify, monitor and take action to reduce risks to the financial system.
In contrast, the income that the Bank will receive will fall further because market expectations of gilt yields remain low over the next five years. This means that if no action is taken, the Bank’s income will be £440 million and its costs will be about £670 million in the next five-year period, generating a £230 million shortfall. In meeting that shortfall, the Bank is playing its part. It has committed to bearing down on its costs. In particular, it will seek efficiency savings through establishing a shared corporate services model with the Prudential Regulation Authority. The Bank’s budget for the next five-year period takes these savings into account.
Lord Tunnicliffe
My Lords, I thank the Minister for presenting this order. I would almost say that the scheme is essentially a tax on banks and effectively a charge—a way by which the Bank of England receives appropriate revenues to support its policy activities. My understanding from the paperwork—I briefly read the report—is that in essence the revenue from this scheme has proved to be significantly less than predicted. Essentially, the Bank got its forecasts wrong, and therefore it needs to adjust the parameters of the scheme to raise its income over the next five-year period.
The report says that the Government announced the setting up of a review on 18 September 2012. I just wonder how thorough this review has been, because it concludes that this scheme is the best way of going about this but there is little argumentation. It seems to be quite an elaborate scheme. Banks and building societies funding this policy activity is an entirely reasonable idea but the scheme does seem elaborate and I believe that it would bear a more careful review. Therefore, my first question is: in how much depth have the Bank and the Treasury looked at this scheme of requiring banks to place non-interest-bearing deposits with the Bank of England to fund the Bank of England? How much study has there been into whether this is the best way of doing it?
The increase in the levy—a de facto levy—is pretty substantial. As the Explanatory Memorandum points out, the expected revenue will rise from £436 million if the parameters have not changed to £657 million over the period under consideration. That is a 50% increase.
I note from the consultation that there has been no great squeal from the banks which will be paying it, and therefore one must assume either that these sums of money are lost in the roundings of such institutions or that the banks feel that the increase is fair. Nevertheless, it calls into question the efficiency of the Bank of England and whether, in what I loosely call the 2013 review, the efficiency has been properly considered.
In listing the outcomes of the review, the report goes on only to explain the parameters which have changed requiring a review and one efficiency saving, which is in the back-office joint operation with the PRA. Does the Minister feel that the efficiency of the Bank has been properly reviewed? Does he feel that there should be further mechanisms to review the level of funding of the Bank of England in the circumstances?
I have a very open mind on this. I think that the Bank of England should be as efficient as possible. Equally, however, given the tremendous change in circumstances and the responsibilities of the Bank of England, not only do we need an assurance that the Bank of England is as efficient as possible; we need an assurance that the resources are adequate to meet the exceptionally increased responsibilities now being placed on it. Has the Court of the Bank of England carefully considered the funding over the next five years, and can we be assured that the court feels that it is adequate for these new responsibilities?
I turn to my final question. This number might be too small but, again, it is in the roundings. The Explanatory Memorandum says that the larger institutions will have to top up their deposits with the Bank to the tune of £1.558 billion. To a mere mortal that is quite a substantial sum. I do not understand from the EM the extent to which this sum impacts on the balance sheet and capital reserves of the banks and the extent to which that will have an impact on their lending capability. The whole of industry, and in that sense the nation, is looking to the banks to lend more, to create more liquidity and to increase industrial activity. It is crucial that we do not see any significant impairment in the banks by the changed parameters in this scheme.
I would be grateful if the Minister could answer those questions. As I said, we do not want the Bank to be underfunded. We want it to be efficient and therefore, in the generality, we support the order.
Lord Newby
My Lords, I am grateful to the noble Lord. I will attempt to deal with his questions. He asked about the basis of the scheme. There was a significant review in 2008 which considered whether a fee-based approach would be a better way of funding the Bank. That review concluded that the benefits arising from the Bank’s activities accrued to the whole banking sector and that it was not possible to apportion the service being received in that way to individual firms. That remains the case.
We asked the banks whether they agreed with that. Some 154 organisations were proactively invited to respond to the Treasury's consultation which ran earlier in the year, in February and March, and the Treasury received three responses. Broadly speaking, the responses were sympathetic to what was being sought. I think that we can take it that this is one of those cases where the banking community is not up in arms about what is proposed.
The noble Lord asked about efficiency and whether this will be properly reviewed, whether resources are adequate and whether the Bank is operating efficiently. The background is that the Bank’s real-term budget is not any higher now than it was in 2000-01, so there has not been a drift. It is fair to say that the Bank has not been subject to significant savings over the past year or two. However, the Government’s view is that the past year or two has been a period of almost unrivalled change in the financial services and regulatory architecture and in the role that we wish the Bank to undertake. Therefore, this was not the time to have a root-and-branch look at efficiency, particularly given that many of the efficiencies that we are talking about will be realised only when the PRA is up and running and it is possible to see how well the joint operation of the back-office activities is going and how much can be saved in that way. Between now and the next review, the Treasury and the Bank itself will look at efficiency afresh in the light of the new arrangements which are happening all around them and the new responsibilities that the Bank itself has taken on in terms of the FPC and direct regulatory roles. Yes, we are concerned about efficiency, but we need to get the balance right and we will be looking very carefully at that over the next year or two.
Finally, the noble Lord asked about the effect of the cash ratio deposits on the Bank’s ability to lend. The cash ratio deposits continue to count as assets for the financial institutions making them so they do not have an impact on the capital requirements. Obviously, however, they represent an opportunity cost as the cash is tied up with the Bank without a return. Nevertheless, as he suggested, this opportunity cost is relatively small. The best estimates of the extra return they will forgo is about £220 million and this will be split between 150 institutions, albeit not equally. Although this is a not-insignificant sum, it is insignificant compared with the £13.8 billion that the banks have drawn from the Funding for Lending scheme. Taken together, the banks are bearing a modest cost. I think that that is why they were content when we undertook the consultation.
I hope that I have answered the noble Lord’s questions. On that basis, I commend the order to the Committee.