Eurozone Crisis

Lord Newby Excerpts

Tuesday 17th January 2012 Lords Chamber

[Lord Peston]

My Lords—

[Lord Newby]

My Lords, if there is a collapse in the eurozone—

[Lord Strathclyde]

My Lords, there is plenty of time to hear the noble Lord, Lord Peston. Can we hear first from my noble friend Lord Newby, and then from the noble Lord, Lord Peston?

[Lord Newby]

My Lords, does the Minister agree that if there is a collapse in the eurozone, it is highly likely that the IMF will be asked to play a larger role that it has done up to now? What is the Government’s thinking about making further resources available to the IMF in those circumstances?

[Lord Sassoon]

I am happy to try to clarify the Government’s position. It is very clear that the Government see the IMF’s role as supporting individual countries and not currencies. That has always been its role. If the IMF puts forward a case, as it may well do, for an increase in its resources, and if there is a strong case, the UK will support the IMF in increasing resources as required, as it has always done in the past.

Taxation: Inheritance Tax

Lord Newby Excerpts

Wednesday 21st December 2011 Lords Chamber

[Lord Newby]

The proposals in the Law Commission report, which is the subject of my noble friend’s Question, relate to intestacy, the most difficult period in people’s lives. In those circumstances, may I urge on the Minister and his colleagues to move more quickly than 12 months as this is a very technical and straightforward matter, not just in terms of giving a response, but also in terms of putting pressure on the Government collectively to legislate on this matter in the next Session?

[Lord Sassoon]

My Lords, I hear clearly what my noble friend says and I am sure that the Ministry of Justice will want to move faster, but I am just giving what the backstop date is.

Independent Commission on Banking

Lord Newby Excerpts

Monday 19th December 2011 Lords Chamber

[Lord Newby]

My Lords, I warmly welcome these proposals because we have been advocating many of them for a number of years. I have two questions. First, on timing, the noble Lord has made it clear that the aim is that primary and secondary legislation will be completed by 2015. Can he confirm that, given that there will be a lot of secondary legislation, the Government intend that the primary legislation will be introduced in the 2012-2013 Session, so that we can get that through and then get all the secondary legislation through well in advance of an election in 2015?

Secondly, on bonuses, the Minister made it clear that the Government wish the bonus pool in respect of RBS and Lloyds to be lower next year. Can he confirm that the Government have done more than express a view on this, and have in fact instructed UKFI that the bonus pool, particularly in respect of RBS, shall be significantly less than it was last year and that we have not a vague aspiration but a very firm steer from the Government?

Financial Restrictions (Iran) Order 2011

Lord Newby Excerpts

Monday 12th December 2011 Grand Committee

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

My Lords, this financial restrictions measure against the Iranian banking sector was introduced on 21 November by my right honourable friend the Chancellor of the Exchequer. The Treasury laid the Financial Restrictions (Iran) Order 2011 before Parliament under its powers in Schedule 7 to the Counter-Terrorism Act 2008. The order contains restrictions requiring UK credit and financial institutions to cease business relationships and transactions with all banks incorporated in Iran, including their branches and subsidiaries wherever they are located, and with the Central Bank of Iran.

I would like to turn first to the rationale for the order. The restriction contained in the order responds to the risk to the national interests of the UK caused by activity in Iran that facilitates the development or production of nuclear weapons. The Government have had serious concerns about Iran’s nuclear activities for some time, and these concerns are shared by the international community. The 18 November board of governors report of the International Atomic Energy Agency, which is the UN body charged with monitoring Iran’s activities, provided further evidence that Iran’s nuclear programme was being used for non-civilian applications. In particular, the report sets out the IAEA’s concerns about,

“possible military dimensions to Iran’s nuclear programme”.

The case for UK action is underlined by the urgent call from the Financial Action Task Force—the FATF—which noted its particular and exceptional concern about Iran’s failure to address the risk of terrorist financing and the serious threat that this poses to the integrity of the international financial system. Other countries share our concerns in respect of Iran. These include the US and Canada, both of which implemented further restrictive measures against Iran on 21 November. The EU also has financial sanctions in place, including further asset-freezing measures against 180 Iranian individuals and entities agreed at the beginning of this month, and is considering future measures to implement.

The Government introduced the Financial Restrictions (Iran) Order 2011 to respond rapidly to further evidence of the risks posed by Iran’s nuclear development programme. Iranian banks play an important role in providing financial services to individuals and entities within Iran’s nuclear and ballistic missile programmes, and many Iranian banks have been sanctioned by the UN and EU for their role in Iran’s proliferation-sensitive activities. Given the UK’s important position as a global financial centre, the UK restrictions will have a major impact on the options available to Iranian banks. This will make it more difficult for Iranian banks to use the international financial system in support of proliferation-sensitive activities. The action also protects the UK financial sector from the risk of unwittingly being used to facilitate activities which support Iran’s nuclear and ballistic missile programmes.

I will now explain the specifics of the order. The order was made under Schedule 7 to the Counter-Terrorism Act 2008, which provides the Treasury with powers to impose a range of financial restrictions in response to certain risks to the UK’s national interests. The powers enable the Treasury to respond to proliferation risks, as we have in this case, and to money-laundering and terrorist financing risks, or where the FATF calls for countermeasures.

Shortly after the restrictions came into effect on 21 November, the Treasury published a series of documents on its public website. These alerted the financial sector to the restrictions and provided guidance on their implementation. These documents were also e-mailed to more than 13,000 subscribers to our e-mail alert system.

In addition, the Treasury worked with the Financial Services Authority, HM Revenue and Customs, and the Export Control Organisation to publicise the restrictions and provide information to firms on the requirements. The documents published by the Treasury on 21 November included six general licences exempting specific activities from the restrictions. These general licences enable credit and financial institutions with existing business relationships or transactions with the entities concerned to manage the cessation of business in an orderly way. They permit them to provide financial services for humanitarian purposes and personal remittances between individuals here and in Iran.

Further licences, whether general or individual, may be granted by the Treasury to manage the impact of the requirements on third parties. Companies affected by the restrictions can apply for a licence of exemption and we are particularly minded to grant licences where UK companies are owed money under existing contracts. This approach is similar to that used in other sanctions.

Firms already have in place procedures and systems to meet obligations relating to financial sanctions and anti-money laundering. They help to minimise the burden of complying with these restrictions. It is expected that compliance costs for the sector as a whole will be moderate, although any institution with significant business relationships with an Iranian bank will face larger costs. Supervision of the financial sector’s compliance with these restrictions will form part of the existing supervisory regime of the Financial Services Authority, HM Revenue and Customs, the Office of Fair Trading and the Department of Enterprise, Trade and Investment Northern Ireland.

Let me conclude by emphasising that this order was issued by the Government to respond to the severe risk that Iran’s nuclear activities posed to the UK’s national interests. This is a strong measure, but it is necessary. Iran’s proliferation-sensitive activities are a serious and ongoing concern for the UK and the international community as a whole. It is vital that we continue to take steps to increase pressure on the Iranian regime and to encourage Iran back to the negotiating table to find a diplomatic solution. For these reasons, I commend the order to the Committee.

[Lord Newby]

My Lords, I thank the Minister for the clear introduction that he has given to this measure which seems, broadly speaking, to be proportionate. I have just one question. To what extent will Iranian banks be able to continue doing business here direct with companies as opposed to with UK financial sector bodies? I think that the Minister said that they will be able do that. If so, have the Government given any consideration to freezing the operations of Iranian banks so that they simply cannot do any business out of the UK?

[Lord Tunnicliffe]

My Lords, the Minister will be delighted to know that we support this order. I would like to thank him for his introduction and to say that he has certainly satisfied any questions that I might have had on the technical side of the banking—not that I am particularly qualified to be able to ask him any questions on that. This is, essentially, a foreign policy issue and I will say a word or two on what has led to this very strong action, which we support.

We are contemplating a nuclear-capable Iran, the consequence of which would be dire. It would destabilise the region; it would cause other states to react; it would probably put the non-proliferation treaty under pressure—perhaps terminal pressure—and, of course, it would lead to an increased possibility of the use of nuclear weapons. The military solution that has been talked about in some international circles is no less dire. The idea of a simple, surgical strike is almost certainly unreal and we may well see ourselves in military conflicts whose breadth and depth are quite appalling to think about, stretching from Hezbollah as one actor through to Saudi Arabia, the Emirates, Israel, US facilities in the area and, as ever, the Strait of Hormuz.

Fortunately, actions taken to date that are short of military actions are being successful. Most commentators seem to view them as successfully holding Iran some two years away from capability. This order is part of that widespread non-military action that international states are taking to keep Iran away from that capability. Nevertheless, the seriousness of this order and the reaction to it in Iran is illustrated by the probability that the attack on the British embassy in Tehran was stimulated by it. I pay tribute to the bravery of our staff in Tehran during the violence that they were subjected to in that difficult situation.

Having looked at the FCO’s statement, it seems to me that the order has a twin-track set of reasons. The first is the International Atomic Energy Agency's latest report on Iran, highlighting fresh concerns. In situations such as this, I always like to try and turn to the source information. The document that it refers to has 25 pages and is quite chilling reading, if one knows anything about nuclear weapons. The general view is that nuclear weapons are about getting enough nuclear material but they are much more difficult than that. They are about clever explosives, hydrodynamics and all that sort of thing. Just flicking through the report, the chilling thing is to see the amount of energy that Iran is apparently putting into that technical side of making a bomb work.

Sadly, one of the problems with the IAEA is that while it is a very capable body, at the end of the day it does not have the ability to instruct people to do things. If you actually read its resolution, it uses words such as press, stress, urge, express and commend. The only thing that it decides to do is to remain seized of the matter, so I would be grateful if the Minister could express to me just how widely this concern, which I think was expressed on 18 November this year, has been followed up by other countries. Can he flesh out any more detail of the actions on it that other countries have taken?

Open-Ended Investment Companies (Amendment) Regulations 2011

Lord Newby Excerpts

Monday 12th December 2011 Grand Committee

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

My Lords, these regulations amend the Open-Ended Investment Companies Regulations 2001 to introduce a protected cell regime for open-ended investment companies, or OEICs. They will ensure the segregation of liabilities of different sub-funds held under the same OEIC umbrella company so that investors in one sub-fund will not be liable to creditors in the event of another sub-fund failing.

I would like first to give a little background on why this legislation is needed. Open-ended investment companies are one of two major forms of pooled investment fund. UK regulations for OEICs were first approved by Parliament in 1996 to help UK fund managers compete more effectively in the European market. Collectively, there is around £580 billion in UK-domiciled funds and the work needed to administer those funds brings jobs to a number of parts of the UK, including outside the UK’s traditional fund management centres of London and Edinburgh.

Large fund managers generally operate a small number of OEIC umbrella companies with a large number of sub-funds within each umbrella, allowing them to operate a large range of funds more efficiently. The sub-funds, or cells, do not have a separate legal personality but are separately managed, charged, accounted for and assessed for tax. Under current UK law, there is no segregation of liabilities between sub-funds, so creditors of one sub-fund could have a claim on the assets of another sub-fund. While using multiple separate OEICs instead of sub-funds within a single OEIC would protect investors from this risk, it would make operations less efficient and add significant cost to end-users. In practice, the likelihood of creditors having a claim is small, both because OEICs must comply with borrowing limits imposed by the FSA and because feedback from the industry suggests that most credit agreements stipulate segregated liability. However, because this risk has never crystallised, it is not certain how these stipulations would be treated by the courts.

This legislation increases consumer protection and, by doing so, improves the competitiveness of the UK as a domicile for funds. Investors increasingly require segregated liability to address the small risk present in umbrella structures. Managers seeking to domicile their funds in the UK need to be able to offer this based on a statutory provision. This legislation does just that. It removes the risk of contagion by providing an effective ring-fencing of a sub-fund’s assets from the other sub-funds and the umbrella itself. The Government are introducing the regime to ensure that the UK can continue to compete with other jurisdictions that already operate protected cell regimes. Failure to introduce the legislation would risk funds being unwilling to domicile here.

In deciding how to implement this legislation, the Government have been mindful that, despite the undoubted benefits, there are some potential costs to operators in converting from their existing arrangements. We have, therefore, provided for a general two-year transition period, which may, at the FSA’s discretion, be extended for a further year. During this period, existing OEICs cannot enter into any new contract that is not subject to a protected cell regime unless that contract is subject to an existing master agreement which governs the terms of all contracts entered into under it. This should allow firms ample time to convert the necessary contracts, many of which will have come up for renewal in any case. For operators establishing new OEICs, the costs introduced by this legislation are negligible, so they are required to comply immediately with the new regime.

The Government’s Plan For Growth, published alongside the March Budget, also announced a moratorium on new domestic regulation for microbusinesses—firms employing nine staff or fewer—for a period of three years. The protected cells legislation complies with this announcement. Microbusinesses will be fully exempt from the legislation’s requirements for a period of three years. However, early indications are that they may seek to comply with the legislation earlier, given the benefits it brings.

The UK fund management industry has been calling strongly for a statutory protected cells regime and has warmly welcomed news of its introduction. The industry has worked closely with the Government to get the regulations right and they will bring considerable benefits to investors in UK funds and increase the competitiveness of UK industry. I hope that noble Lords will give their support to the regulations today. I beg to move.

[Lord Newby]

My Lords, this is a fascinating example of the industry asking for regulation that the FSA seems to have been slow to introduce. This is an almost unique experience for the sector, which is normally grumbling that there is too much regulation.

I am intrigued that it is being introduced here purely under domestic legislation rather than within the ambit of any EU cover, and I wonder whether there is any prospect of OEICs, in this regard, being the subject of any of the many EU directives that are currently on their way down the track or being discussed. I note that, at the moment, the jurisdictions that already have this additional regulation are a mixed bag and include Jersey, Ireland and Luxembourg. I find it slightly surprising that it has taken some time for both the UK industry and the Government to get round to implementing this legislation, given that its benefit is that it will improve the competitive position of OEICs in the UK. It seems extremely sensible. I want to confirm what I think the Minister said: that there is no suggestion that this is being introduced because there has been any difficulty with any existing OEICs. Is it purely as a pro-competitive rather than as an anti-competitive measure?

[Lord Tunnicliffe]

My Lords, I make it clear from the outset that we support this order. I am looking forward to the Minister’s answer to the noble Lord’s questions about how the regulations fit in with the EU—questions which are particularly apposite at this moment. I will content myself with a few comments on the impact assessment and two or three questions.

The impact assessment is absolutely fascinating. From my reading of it—and I am happy to be corrected here—the net benefit of the regulations will be between £18 million and £360 million, which is a pretty wide range that will involve lots of sums to prove that. The only point that I feel I can take from the impact assessment is that, in all credible scenarios, the introduction of a protected cell regime will be favourable, and I think that we can all be satisfied with that.

I have just a few questions. First, new Regulation 11A(4) provides for an exception, which is referred to in the Explanatory Note. However, for myself I cannot quite see what sorts of transactions or assets the exception refers to. Like all exceptions, one is always slightly worried that the exception ends up negating the intent of the order. I am sure that it does not, but I pose that question for assurance.

Secondly, as I understand it—once again, I could be wrong—there will be a period in which PCR products and non-PCR products will be on sale at the same time. I may have misunderstood that, but if I am right in that assumption, what actions are the Government taking to ensure that there is no confusion in the marketplace during that period of overlap? I will be happy if there is no period of overlap, but if there is one then it is important that we do not introduce confusion through these very sensible regulations.

Finally, I like reading impact assessments, which is a little burden that I have to carry. The wonderful thing about impact assessments is that I always sense that they are written by rather more junior people— I was going to say with rather less care, but care is perhaps the wrong term—as you get that little hint from things. On page 10, the impact assessment states:

“The UK fund regime has been viewed as less favourable by managers and investors for a number of reasons, with the lack of a PCR being one of them”.

Perhaps the Minister could enlighten us as to what other reasons exist and what, if anything, he is doing about them.

Economy: Government Policies

Lord Newby Excerpts

Wednesday 7th December 2011 Lords Chamber

[Lord Newby]

On that exact point, my Lords, the IFS says that the £20 billion of additional funds from the pension funds looks to be,

“more of an ambition than a done deal”.

It adds that they,

“have little clarity as to what the nature of this potential additional spending might be”.

Is the Minister able to tell us, first, what priorities the Government have assigned to that potential additional expenditure; and secondly, when he hopes the benefits of that additional funding might come through?

[Lord Sassoon]

My Lords, to repeat, the pension funds and also the insurance companies have come to Government and asked for our help. We have signed a memorandum of understanding to help them set up their vehicle as quickly as possible, because clearly they want to find an investment home for their money.

EU: Member States’ Budgets

Lord Newby Excerpts

Tuesday 29th November 2011 Lords Chamber

[Lord Sassoon]

My Lords, I very much doubt it. We are looking at the proposals for strengthening governance as they have been put on the table, and that is clearly what needs to be done. We should not rely on the auditors to sort out all our problems.

[Lord Newby]

My Lords, if the eurozone’s Finance Ministers decide that they want limited treaty changes, will the Minister be prepared to go slightly beyond his earlier answer and confirm that the UK Government will not stand in the way of any treaty changes to bring greater discipline within the eurozone, because it is clearly in our national interest as much as theirs that new rules are put in place?

[Lord Sassoon]

I am of course prepared to go a bit further in answer to my noble friend’s question. If such treaty changes are put forward, the Government will look to advance the UK’s national interest at that point, as appropriate. Above all, that means protecting and safeguarding our essential economic interests, and we will seek to do that.

Autumn Budget Forecast

Lord Newby Excerpts

Tuesday 29th November 2011 Lords Chamber

[Lord Newby]

My Lords, first, I thank the Minister for not repeating the Statement made by the Chancellor in another place. This is a welcome change in your Lordships’ procedure. I wonder if I could ask him two questions about infrastructure.

We welcome the fact that the pension funds have said that they are prepared in principle to invest £20 billion in infrastructure, but as the noble Lord, Lord Myners, said, it is clear that there is a long way to go before those plans are concrete. Can the Minister tell us something about the timetable that the Government envisage before the first tranche of that £20 billion starts to flow into specific infrastructure projects? Clearly, time is of the essence on this.

Secondly, on infrastructure more generally, the Statement is silent on the question of social housing, which in my view is a very serious omission because we have a housing crisis. Not only is housing necessary in itself, it is also one of the quickest and easiest ways of creating employment up and down the country. Does the Government’s definition of infrastructure, particularly in relation to the pension fund money which may be coming in, extend to social housing and, more generally, what plans do the Government have on this front?

International Monetary Fund

Lord Newby Excerpts

Thursday 24th November 2011 Lords Chamber

[Lord Sassoon]

My Lords, in answer to the first question, the position under the International Monetary Fund Act 1979 is that the limits agreed by Parliament currently stand at 38.8 billion SDRs, or about £38.3 billion. That is where the £40 billion figure comes from.

On the question of what the IMF is there to do, it is to look at the overall systemic risks in the world and support individual countries. It is not there to support countries in one particular zone as opposed to others or to support currencies. It is there to consider, under its criteria, country by country, where support might be needed.

[Lord Newby]

My Lords, in view of the failure of the German authorities yesterday to auction off debt, do the Government believe that the time has now come for the development of a Eurobond to provide a long-term stable approach to raising funds for the whole of the eurozone?

[Lord Sassoon]

My Lords, we are at risk of straying a bit far from the question about the IMF, but there are a number of serious points here. First, with respect to Germany or any other countries, one should not read too much into one particular bond sale that does not meet its target. That has happened to a number of countries over the years, including the UK. As for what the arrangements will be for the eurozone, we continue to wish that the eurozone makes as much progress as it can, as urgently as possible, to put the arrangements in place.

Economy: Monetary and Fiscal Policy

Lord Newby Excerpts

Tuesday 8th November 2011 Lords Chamber

[Lord Sassoon]

My Lords, the Bank of England is completely sticking to its statutory responsibilities and to the letter setting out its monetary policy mandate. If the noble Lord, Lord Peston, would care to look at the latest commentaries in the Bank’s quarterly documents —he is nodding—he will see that they identify the risks to inflation on the undershooting rather than the overshooting side. They identify a number of factors that will reverse the trend in inflation early in 2012. That is why the Bank decided to recommend increased quantitative easing to the Treasury to ensure that there is no risk of an undershoot on the inflation target.

[Lord Newby]

My Lords, does the Minister agree with the recent report of the Treasury Select Committee that, in a time of economic crisis, the buck stops with the Treasury, and that it should therefore be able to direct the Bank in such circumstances?

[Lord Sassoon]

My Lords, it is completely the case that the Chancellor of the Exchequer sets the inflation target for the MPC. I am sure my noble friend is not suggesting that we should go back on the previous Government’s decision, which I applaud, to give the Bank of England independence in this area. Monetary policy should be the first line of defence in the face of economic shocks.