Banking System

Debate between Lord Newby and Lord Eatwell

Monday 9th February 2015 Lords Chamber

[Lord Newby]

My Lords, there are several elements of holding people to account. I think the shareholders need to hold them to account. If there has been any criminal wrongdoing it is obviously for the police and prosecuting authorities in the relevant jurisdictions to pursue those matters.

[Lord Eatwell (Non-Afl)]

My Lords, I am sure the Minister will confirm that the agreement with Switzerland to reveal tax information was made in 2011, after the coalition Government took office. Does he believe that confidence in the banking system is enhanced by the fact that concrete evidence of a major bank aiding and abetting tax evasion was comprehensively ignored by the coalition Government?

[Lord Newby]

No, I do not. As for the first part of the noble Lord’s question, the agreement with Switzerland, which he seems to deride, has generated £1.2 billion for the Exchequer. That is £1.2 billion more than was being generated under the previous Administration.

Banks: Payment Protection Insurance

Debate between Lord Newby and Lord Eatwell

Monday 13th January 2014 Lords Chamber

[Lord Newby]

My Lords, every call made in respect of PPI is not necessarily inappropriate. Some are. Many people have used claims management companies because they did not feel confident going through the process themselves. I accept that there has been abuse. The key thing we have done is to give the regulator power to crack down on firms which make speculative claims to the banks when there is no justification for it.

[Lord Eatwell (Lab)]

My Lords, the noble Lord has not answered the point made by the noble Lord, Lord James, which was that individuals have to apply to the banks for restitution of PPI claims rather than the banks recognising the obligation that they know they have. Why are the Government letting the banks off the hook?

[Lord Newby]

My Lords, the Government are not letting the banks off the hook. The banks have paid out almost £13 billion in respect of PPI claims, which is about 70% of the total we think is payable, and a lot more claims are in the pipeline. The concern raised by the noble Lord in his Question relates primarily to the way in which the detailed amounts were calculated and the extent to which individuals can understand those calculations from the material that they receive from the banks.

Financial Services (Banking Reform) Bill

Debate between Lord Newby and Lord Eatwell

Monday 9th December 2013 Lords Chamber

[Lord Eatwell]

My Lords, I am glad to see that the introduction of Clause 15 on Report has at last seen the Government take the recommendations of the Parliamentary Commission on Banking Standards seriously in this matter and introduce these amendments that capture most, though not all, of the recommendations. What we have left, as the noble Lord, Lord Turnbull, has pointed out, is something of a tripartite muddle because we now have three different regimes affecting persons working within banks. I am afraid that this is characteristic of so many parts of this Bill and will need to be sorted out in future.

I would like to ask some questions about Clause 17 which, as was pointed out, brings branches into part of this aspect of regulation. As the House will be aware, in recent months the Prime Minister has significantly weakened Britain’s regulatory protections of its banking system by encouraging the establishment of branches in this country. Previously, the regulatory authorities had strongly discouraged this because they are not then regulated by British regulators but by their home regulator. The Prime Minister has chosen to weaken this protection particularly by encouraging the establishment of Chinese branch banks, which will be regulated by the Chinese authorities.

However, what is particularly interesting about Clause 17 is that it brings some branches possibly within some British regulatory ambit. I say possibly because according to this clause the Treasury may by order provide that authorised persons falling within any of the descriptions are relevant authorised persons. Relevant authorised persons, for those who have not participated in these debates before, are actually banks. The Treasury can choose which branches will be brought into the ambit. It is enormously important that the branches should be. The noble Lord, Lord Newby, was absolutely right in this respect. I hope the Prime Minister will not undermine this legislation by instructing the Treasury to exclude particular branches, perhaps those emanating from Chinese banks, from this regulation.

[Lord Newby]

My Lords, I am very grateful to noble Lords for the general welcome that they have given these provisions. I have some sympathy with the noble Lord, Lord Turnbull, and the tripartite system of regulation which we now find ourselves with but the approved persons regime is still needed, in our view, not least for people responsible for money-laundering. At some point we may want to see whether it is possible to rationalise all these provisions but I do not think at this stage it would be sensible to attempt it.

The noble Lord, Lord Flight, asked about banks in Crown dependencies and referred to the discussions that he had with the Financial Secretary on this. I will take his concerns back to the Financial Secretary and ensure that we bring some clarity to these discussions so that people in the Crown dependencies and banks can be clear of their position.

The noble Lord, Lord Brennan, asked about the role of directors and responsibility for the enforcement of the standard. One of the key things we are trying to achieve here is to put the responsibility on the banks to ensure that their staff on appointment have and continue to follow adequate standards. The alternative is to say to the regulator, “You have a look at all these people and make sure that they are behaving in a responsible way and have the appropriate qualifications”. We believe that the banks should not be able to duck out of that and that it is for directors and the board to ensure that they follow the rules and do not hide behind the regulator.

The noble Lord, Lord Eatwell, asked whether it would be possible for the Treasury to choose certain categories of branches and treat them in a different way from other categories: in other words, whether it would be possible to deal with Chinese banks in a different way. Your Lordships’ House has spent many a happy hour discussing the meaning of “may”. My belief and understanding is that in the situation we are discussing “may” means that the regulators will adopt rules in respect of branches and will treat all branches equally.

[Lord Eatwell]

That is very helpful, but will the noble Lord therefore explain why proposed new Subsection (3B) begins with the word “If” rather than “When”?

[Lord Newby]

I think that is consequential on using “may”.

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[Lord Eatwell]

My Lords, my noble friend Lord Mitchell in speaking to his amendment on the proposed date referred to 90 days. One might ask how 90 days can make a difference. Surely when the Government need something to be done they can get it done. The idea that somehow the whole process is so darn elaborate that they cannot do it in a period of time which saves 90 days on their side is, in the true meaning of the word, incredible. On the other hand, for the borrower 90 days includes Christmas Day 2014. That is a big issue, because this is the period when short-term borrowing is at its peak. That is why it is incumbent on this Government to take swift action. They have been dragging their feet on this issue for four years. It is incumbent on them to take swift action and that is why Amendment 22 is so important.

The noble Lord, Lord Sharkey, has raised a crucial and frightening point—that payday lenders within the European Economic Area could lend within the UK. I hope the Minister will be able to tell us that we are not wasting our time completely this evening—because that is what that would mean we would be doing—and that the noble Lord’s fears are unfounded.

Swift action is so important that when this amendment is called I intend to test the opinion of the House.

[Lord Newby]

My Lords, noble Lords have raised a number of issues and questions. I shall do my best to answer. The noble Baroness, Lady Oppenheim-Barnes, discussed the way in which the total cost of the loan, as opposed to the interest rate, is portrayed, and of course many people do not understand interest rates. The Government are discussing with the European Commission the relative prominence of the total cost of the loan. This discussion is taking place in the context of the Commission’s review of the consumer credit directive, so I hope we are well on top of that.

My noble friend Lord Sharkey asked a raft of questions. I hope that I managed to write them all down. He asked whether the FCA understood the particular problems of multiply sourced simultaneous loans. I can assure him that that is within its remit. My noble friend talked about rollovers and asked whether the FCA would look at one or none as part of this review. I can give him that assurance. He asked whether he could see a draft regulation in a timely manner. We will try to do that. Of course, if we are going to consult on draft regulations, things such as the odd 90 days here and there make a lot of difference. Our ability to consult properly at any point in this process requires us to follow something like the timetable that I set out earlier. He asked whether data sharing is being considered as part of the FCA’s remit. I can assure him that the FCA is looking at that.

My noble friend asked for a definition of “excessive” and why it was not in the Bill. The FCA will be looking at existing definitions of excessive, including that in Florida. Different people in different places who cap payday loans have different definitions of excessive. There is no single definition that is uniquely right. It has to be taken in the context of all the other factors and the overall design of the scheme. The FCA will be looking at international definitions as part of that work.

My noble friend asked whether there will be an opportunity and time in Parliament for debate on the publication of the draft rules. That partly goes to the speed with which we do that. If, as I set out, the FCA publishes a consultation paper by the end of May, it will be perfectly possible for Parliament to debate it. There are a number of ways in which that could be done. In your Lordships’ House, it is now very easy for individual Members to get a debate on an issue within a very few weeks, even if no other formal debate was allowed. I would be very happy to raise that issue in the usual channels. Finally, my noble friend asked whether the FCA will consider the limit to cover both the amount and the term of the loan. I can give him that assurance.

The noble Lord, Lord Higgins, asked why we do not refer to interest in the Bill. The provision covers every aspect of the cost of a payday loan, of which interest is only one part. The definition in the Bill subsumes interest.

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[Lord Newby]

My Lords, I now turn to an amendment which will better position the PRA to take account of consumer interests by drawing on the views of the FCA’s Consumer Panel. This follows the debate at Lords Report stage where the noble Lord, Lord Eatwell, proposed amendments which would have created a role for the Consumer Panel by creating a duty on the PRA to consider representations made to it by the panel and to publish its responses, equivalent to the duty on the FCA.

We have considered the issues carefully, as I said we would on Report, and have proposed alternative arrangements which are more proportionate to the PRA’s prudential remit, but deliver, we believe, the essence of the noble Lord’s amendment. Our amendment will confer a role on the panel by allowing it to raise issues it is considering with the PRA; for example, through meetings or in correspondence. It will also enable the PRA to meet the expenses of the Consumer Panel when the Consumer Panel discharges this function. This will ensure that the PRA can benefit from the expertise of the panel without the undue burden on either the PRA or the Consumer Panel of a binding requirement on the PRA to consult the panel each time the PRA changes its rules or policies.

I have no doubt that this amendment, which has been welcomed and supported by the chair of the Consumer Panel, will strengthen the voice of consumers at the PRA, and I am pleased to add it to the list of improvements we have been able to make as a result of constructive debate and scrutiny in your Lordships’ House. I beg to move.

[Lord Eatwell]

My Lords, I welcome this amendment, which will add important coherence to the consideration of consumer affairs within the regulatory structure.

Financial Services (Banking Reform) Bill

Debate between Lord Newby and Lord Eatwell

Wednesday 27th November 2013 Lords Chamber

[Lord Newby]

My Lords, I am sorry that when we discussed this amendment on a previous occasion, the Government failed to convince the noble Lord, Lord Eatwell, that his amendment was not necessary. I hope that I will have more success this time because I believe that the amendment is neither necessary nor helpful.

We all share the objective of driving up standards in banking and improving the treatment of customers. That is why the Chancellor set up the Parliamentary Commission on Banking Standards and why we have accepted the vast majority of its recommendations. However, we remain unconvinced that the noble Lord’s amendment will add anything meaningful to these reforms.

The regulator’s FSA Principles for Business already includes what is virtually a fiduciary duty. Principle 10 states:

“A firm must arrange adequate protection for clients’ assets when it is responsible for them”.

As other noble Lords have mentioned, these high-level principles also already include the principle that:

“A firm must pay due regard to the interests of its customers and treat them fairly”.

I am not sure how the noble Lord’s amendment would improve standards or help bank customers; nor do I think that he has explained what the new duties on firms really mean. When he spoke in Committee, he said:

“This will increase consumer protection and help to restore confidence of the retail customer in banks. It will raise standards of conduct because banks will know they are responsible for acting according to these duties”. —[Official Report, 23/10/13; col. 1092.]

But my question is: how will it do that? How will it, as he hopes, stop the kind of scandals that we have had in the past? I think that that is an extremely difficult question for the noble Lord to answer in that neither “fiduciary duty” nor “duty of care” in this context describes a specific, precise obligation. As I have explained before, regulators’ rules provide very specific obligations.

I should add that the Official Opposition in the other place seemed to understand this difficulty. When an identical amendment was considered in Committee there, the opposition spokesperson, Cathy Jamieson MP, acknowledged the risk of unintended consequences or lack of clarity. She emphasised that the purpose of the amendment was to ensure that,

“customers are looked after and that banks are clear about their responsibilities and remember the part of the contractual relationship with customers that is about looking after their money”.—[Official Report, Commons, Financial Services (Banking Reform) Bill Committee, 16/4/13; col. 247.]

Of course, that is what we all want. That is why the Government introduced the regulatory reforms and new properly focused regulators. The FCA, in particular, will focus on protecting consumers and maintaining market integrity.

This Bill will take the process further by strengthening the regime of individual accountability and standards for those who work in firms, in line with the recommendations of the Parliamentary Commission on Banking Standards. These rules will be specific. They will be precise. They will set out the responsibilities of banking staff and senior persons to their customers. Moreover, they will be enforceable by the regulator. If they are broken, those people will be punished and could be subject to fines or public censure.

If we were to have the general duty of care or fiduciary duty as set out in the amendment, how would that be enforced? In law a fiduciary duty is enforced by the person to whom the duty is owed taking action in the courts. Does the noble Lord really believe that those people, some of the most vulnerable at the sharp end of bank practices, are likely to pursue their bank through the courts? Instead, the Government’s reforms have established a regulator with real teeth, of whom the banks will genuinely be scared—indeed, I think they are. Bolstered by a clear and binding set of banking standards rules, which specify codes of conduct and personal responsibility through the senior persons regime, this will mean a real change for consumers. The noble Lord referred to the SEC introducing a fiduciary duty in the United States. The proposed fiduciary duty in US securities law is not comparable. The proposal, on which incidentally the SEC itself has not yet taken any clear position, extends only to covering activities that involve giving advice. In any case, in the UK, when a firm provides advice to a customer, a duty of care already exists under the general law. In that respect, the US is simply looking to catch up.

To sum up, attempting to add duties of care or fiduciary duties of the kind proposed in this amendment would add nothing to the existing protections for customers. It is unnecessary and would not add any clarity to existing requirements. I hope, therefore, that the noble Lord will withdraw the amendment.

[Lord Eatwell]

My Lords, I regret that the Government seem to have learnt nothing since Committee stage. We have heard the repetition of high-level principles of the regulator protecting customers. What has actually happened? There have been successive scandals when customers were not protected by the regulators and successive scandals in which treating customers fairly was simply a joke.

The noble Lord also referred to a number of specific provisions. That is the great weakness of the regulatory structure. We have simply specified conditions. As we all know, that which is not specified is permitted. The whole point of having a fiduciary responsibility and duty of care in the terms that I set out when I moved the amendment is to create a general responsibility that will be enforceable in law by individuals and, indeed, by collective actions. Therefore, it seems to me that simply saying, “We have made things better by making them more specific and providing regulators with teeth”, is not the same as providing protection for the individual, which is exactly what the amendment would do. Given that the notions of fiduciary duty and duty of care are successful in other professions, why—the Government failed to answer this question—can they not be successful in the banking profession? That question was not answered. This is so important that I wish to test the opinion of the House.

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[Lord Eatwell]

My Lords, Amendment 172 derives from, and is a response to, an amendment that the Government successfully moved in Committee, which gave the PRA a secondary competition objective directly related to issues of market structure and performance. We have developed in this Bill, and in the previous Financial Services Bill which we also considered in this Session, a twin-peaks approach to financial regulation, with the Financial Conduct Authority looking at conduct of business and the Prudential Regulation Authority looking at issues associated with the prudential behaviour of firms.

Given that the PRA now has a competition objective, we should not allow the twin peaks to isolate consumer representation. The FCA consumer panel has an important role in advising on and responding to FCA proposals with respect to conduct of business but, with the PRA now having a competition objective, the issues which affect consumers directly will involve the competition element of prudential regulation. It is important, and entirely appropriate, that the PRA at least considers and responds to representations made by the FCA’s Consumer Panel—that is all we are asking for—so that decisions which the PRA makes with respect to market structure and performance have an appropriate consumer input. I beg to move.

[Lord Newby]

My Lords, this amendment concerns the important issue of consumer representation at the PRA and requires the PRA to consider and respond to representations from the FCA’s Consumer Panel.

There is much to welcome in the approach suggested. It is important to ensure that there is sufficient regard to consumer concerns at the PRA, especially where there are specific issues of consumer protection that the PRA should take into account. I welcome the recognition that it will not require the creation of a completely new body in order to achieve this. We need, of course, to be mindful of maintaining flexibility on the best way for the PRA to take into account representations from consumers and the need to avoid overly burdensome arrangements.

Following the earlier discussions on this issue, the regulators have considered how best to ensure consumer interests are communicated to the PRA. The regulators have come to the view that there should be arrangements for the FCA Consumer Panel to be able to raise concerns with the PRA, and I believe that it is worth considering putting arrangements on a statutory basis. We will therefore consider coming back at Third Reading with amendments, subject to reflection on the best way to do that without incurring unnecessary costs or burdens for the regulators or the panel. We would be happy to discuss further with noble Lords opposite the most effective approach to doing this. In view of that, I hope that the amendment can be withdrawn.

[Lord Eatwell]

There I was with my notes saying how inadequate the noble Lord’s answer was going to be. I am delighted that the Government have recognised the power of this argument and I look forward to discussions with them and to the moving of amendments at Third Reading.

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[Lord Eatwell]

My Lords, I support my noble friend Lord Brennan in his attempt to remove subsection (2)(b) from Clause 124. As he has clearly told the House, it would enable secondary legislation to amend future Acts prior to the end of the Session—not this Act, but other enactments. This is an extraordinary power which was justified in Committee by using the argument that there are precedents. No precedents have been produced. It is shocking that the promise of a letter made over five weeks ago has not actually been kept on something which raised considerable concern in Committee. I think that the Government need to take this matter very seriously indeed and not palm it off with what seem to be entirely unsubstantiated stories of precedence.

[Lord Newby]

My Lords, I understand the concerns expressed by the noble Lord, Lord Brennan, and I assure him again that there is nothing unusual about the form of the power to make consequential amendments in Clause 124, and in particular, subsection (2)(b) does not extend the power unreasonably. My memory of exactly what I have written to whom, given that I have written to quite a number of people, is slightly hazy. I think I may have referred to this issue in what was a sort of portmanteau letter to the noble Lord, Lord Eatwell. It covered a whole raft of issues that had been raised not only by him but by other noble Lords. If I did not do so, I apologise to the noble Lord, Lord Brennan. However, in what I am about to say, I think that I can deal with the main point that he made.

Removing paragraph (b) would limit the power to make consequential amendments to Acts which are passed before the passing of this Act. That can produce unpredictable results depending on the progress of Bills and the dates on which they happen to reach Royal Assent. For this reason, powers to make consequential amendments to existing legislation often refer to Acts which are passed in the same Session as the Act in question. Noble Lords have asked for examples of this, and I can give them several. Such powers can be found in Section 51 of the Constitutional Reform and Governance Act 2010, Section 237 of the Planning Act 2008, Section 28 of the Welfare Reform Act 2007 and Section 118 of the Financial Services Act 2012—the provision on which Clause 124 was modelled.

The assumption is that Bills of the same Session are likely to have been prepared by reference to the existing law at the beginning of the Session, while the Bills of the next Session would have to take account of the change in the law produced by the Act in question. Where a Bill is amended significantly in its passage through the second House, it is particularly unlikely that Bills passed or made in the same Session will have taken account of all the provisions of the new Bill. That clearly applies in this case, as your Lordships know. The need to implement the recommendations of the Parliamentary Commission on Banking Standards has required very extensive amendments to the Bill in this House, and therefore it will not have been possible for the Bills which are being considered by Parliament in this Session to have taken full account of all the changes in the law which will be made by this Bill. Nor has there been time for the Government to consider all the Bills currently before the House to see if any consequential amendments may be required, or to follow all the amendments being proposed to these Bills. We have not, for example, had the opportunity to review the Pensions Bill, which may have provisions relevant to the subject matter of this Bill, or the Immigration Bill, which has some provisions on banking. We cannot rule out the possibility that it may be necessary for the Government to make consequential amendments to them.

I assure the House that the amendment introducing this power was considered by the Delegated Powers and Regulatory Reform Committee, and that committee has not expressed any concerns in relation to this power. I hope that, in the light of these assurances, the noble Lord will feel able to withdraw his amendment.

Financial Services (Banking Reform) Bill

Debate between Lord Newby and Lord Eatwell

Tuesday 26th November 2013 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, having listened to my noble friend Lord Brennan and the noble Lord, Lord Phillips, I found this discussion quite disturbing. The creation of a criminal offence is one aspect of the Bill that pushes forward the regulatory regime in the UK and creates an environment more suited to the somewhat cavalier nature of finance in a global marketplace—in particular by identifying those activities that have inflicted enormous harm upon our fellow citizens. What I heard was that, as drafted, the probability of securing a conviction or even a prosecution, as the noble Lord, Lord Phillips, put it, is vanishingly small. Unless the terminology is clarified in a way laid out so clearly by my noble friend, this part of the Bill will simply bring that aspect of regulation into disrepute because it will be worthless. That is why I regard the remarks that I have heard from the two distinguished lawyers who have just spoken to be very disturbing. It is incumbent upon the Government not simply to produce a pat answer here this evening but again to produce a carefully written assessment of the case for an appropriate criminal regime and its implementation in order that the whole House has an opportunity to assess this important aspect prior to Third Reading.

[Lord Newby (LD)]

My Lords, these amendments essentially aim to make three changes to the criminal offence: first, to allow defendants to be prosecuted under the offence when a number of decisions taken together cause the bank to fail; secondly, to enable the offence to be made out when the decision or decisions in question were a significant contributory factor to the failure of the bank, rather than its sole cause; and, thirdly, to include within the definition of bank failure the systematic failure of the bank to prevent liability with regards to broader criminal offences.

On the first two issues, while I understand noble Lords’ concerns, I assure them that these amendments are not necessary to deliver the effects they intend. First, I assure noble Lords that, as a matter of law, under Section 6 of the Interpretation Act 1978 words in the singular include the plural unless express provision is made otherwise. The term “decision” includes “decisions”, plural. Therefore, where appropriate, it will be possible to prosecute on the basis of the implementation of a number of decisions. The Interpretation Act 1978 ensures that it is not necessary to repeat the defined terms or make express provision for the singular to include the plural in every single statute. The case for abandoning that practice seems rather minimal in this instance.

Moreover, in practice we generally expect a prosecution of the offence to focus on one individual decision in order to maximise the ability of the prosecution to make its case effectively when asking the jury to consider what are likely to be very complex events. This would enable the prosecution to focus on the causal relationship between the implementation of one decision and the failure of the bank, where that relationship seems to be most clear. In these cases, any other relevant decisions would be taken into account by the jury as the circumstances in which the key decision was taken, when the jury was deciding whether the defendant’s behaviour fell far below that which reasonably could be expected of him or her. For example, a decision to take on a risky acquisition may be more or less reasonable depending on earlier decisions to strengthen or weaken the bank’s capital position.

These amendments also include references to agreeing to the carrying on of activities by a firm. This would add nothing to the offence as currently drafted, since the reference to agreeing to the firm carrying on certain activities assumes that those activities in some way require authorisation and this must involve taking a decision, or agreeing to the taking of a decision, by or on behalf of the firm, and is therefore already included in the offence.

Moving on to Amendments 94, 95, 100 and 102, under general principles of criminal law the test for an action having “caused” an event to occur is that, had that action not been taken, the event would not have occurred. Therefore, in this specific offence the test is that, if the decision or decisions in question had not been implemented, the bank would not have failed. The implementation of the decision need not be the sole or even the main cause of the bank’s failure. In practice, because of the evidential standard that applies to criminal cases, we expect that cases will be prosecuted only where it is very clear that the implementation of the decision or decisions in question was a significant contributing factor to the failure of the bank.

In addition to these general points, the Government oppose some aspects of the amendments in principle. As well as including reference to “activity”, Amendment 97 would lower the bar of the reasonableness test for when the offence would be committed. As set out in Committee, the Government do not think this is appropriate. Referring to conduct which is far below that which would be expected has precedents in the Law Commission proposal for a statutory offence of killing by gross carelessness and in legislation creating the offence of corporate manslaughter. We have used this particular phrase knowing that it works and can be effectively interpreted by the courts. There is no precedent in UK criminal law for criminalising behaviour that is merely unreasonable. To do so would amount to an indiscriminate diffusion of criminal liability, in a way that made it hard for individuals to know with sufficient certainty when they might be committing an offence.

Amendment 118 would expand the definition of institutional failure that would trigger the offence to include occasions where there was a systematic failure of the bank to comply with a range of laws imposing criminal liability in connection with the conduct of financial services business. A similar amendment was raised in Committee, focused specifically on compliance with the Fraud Act 2006, the Proceeds of Crime Act 2002 or the Money Laundering Regulations 2007. The Government’s position on this remains unchanged—this offence has been introduced to plug a gap in existing legislation where there are no criminal powers available to sanction senior managers who have recklessly caused their banks to fail. By definition, criminal liability can arise where offences already exist that individuals can be convicted for and appropriately punished, depending on the seriousness of the breach. In certain cases, they can also be charged with consenting to or conniving in such activities. It is difficult to see how this amendment strengthens the offence.

The noble Lord, Lord Brennan, raised the question of the definition of “way”. The expression includes both the activities in the business and how those activities are carried out. This makes the offence broader. The noble Lord also suggested, if I understood him right, that in some cases the real risk is that people did not know what risk they were taking or wilfully turned a blind eye. While it might appear attractive to include incompetence by senior managers in the offence, doing so could introduce unwelcome and potentially damaging uncertainty into the sector. Further, to comply with the European Convention on Human Rights, the offence must be sufficiently certain to enable individuals to know when they are at risk of committing the offence. However, this does not mean that it is possible for a senior manager to simply close their eyes to the risk the bank is taking. In some cases a court may decide that it can be inferred that a particular person had knowledge of a risk. In the case of a director, ignorance of a risk to the bank’s existence may, in some cases, be to admit to breaches of the duties under the Companies Act 2006. Accordingly, there are cases in which an argument that a defendant had no knowledge of a particular risk would carry very little credibility and could even expose the defendant to criticism for breach of duty.

We take this offence extremely seriously as a key part of the new infrastructure that we are putting in place and we believe that it meets the test we have set out. On that basis, I hope that the noble Lord will withdraw his amendment.

Financial Services (Banking Reform) Bill

Debate between Lord Newby and Lord Eatwell

Tuesday 26th November 2013 Lords Chamber

[Lord Newby]

My Lords, that is the key focus of the senior managers regime—that, for the first time, senior managers and their banks will have to tell the regulators what the specific responsibilities of those people are, and we are introducing enhanced penalties if people do not stick to those responsibilities and break the rules. I think that we are indeed doing what the noble Lord requires us to do. I hope that when the noble Lord, Lord Lawson, and the most reverend Primate see our amendments, they will feel that we have done everything we can to meet their requirements.

Amendment 21, proposed by the noble Lords, Lord Eatwell and Lord Tunnicliffe, is an amendment which we saw in Committee. As I explained on that occasion, it would really just rename the existing approved persons regime as a “licensed” persons regime. The only extra feature in the proposal is for annual validation of competence by the regulator. This would have the effect of increasing the number of approved person applications from around 30,000 to around 150,000 a year. This would mean an unnecessary and costly extra burden on firms and regulators.

The Official Opposition’s amendment would not deliver the real reforms proposed by the parliamentary commission, which Clauses 14 to 26 of the Bill deliver and which we will enhance. It would just add to regulatory burdens without producing any real improvement in standards of conduct in the industry. I hope, therefore, that the noble Lords, Lord Eatwell, will agree to withdraw his amendment.

[Lord Eatwell]

My Lords, I was intrigued by the proposals which the Minister suggests will be brought forward at Third Reading and I look forward to having the opportunity to see them—perhaps in good time—before we have to debate them.

The key issue in Amendment 21 is that of qualification: professional qualification, minimum thresholds of competence and continuous professional development. These are fundamental to any serious professional standards and are vital if we are to have in the future the sort of people who can deliver a banking industry of which we in Britain can once again be proud.

I should make it clear that Amendment 21 is not in any way contrary to Amendments 50 and 51 by the commission; it is complementary. It adds to the overall structure of the requirements to be met by those who seek to pursue a banking profession. It is that word “profession” which we regard as central. It is no accident that we have labelled our amendment “Professional standards”. That is what this amendment seeks and that is what I believe it would achieve in addition to, and complementary to, the amendments by the commission and, as I hear it, the endeavours by the Government to develop a framework of rules which ensure that standards are met. The professional standards must be the bedrock. That is why I have moved Amendment 21 and why I wish to test the opinion of the House.

Financial Services (Banking Reform) Bill

Debate between Lord Newby and Lord Eatwell

Wednesday 23rd October 2013 Lords Chamber

[Lord Eatwell]

My Lords, this amendment refers to portable account numbers. I am sure that noble Lords will have read in yesterday’s Financial Times the story about the voluntary endeavour by the banks to increase the possibility of customers switching their accounts from one bank to another. The current switching drive does not include portability of account numbers. As the Financial Times boldly declared:

“Account switching drive fails to dislodge customers”.

The general assessment is that the complications associated with the non-portability of account numbers—that is, the complications of changing account numbers—are a significant disincentive to customers to switch their account from one bank to another. This is of course a considerable diminution of competition. The Government have argued very strongly that they are in favour of competition and choice in the retail sector. The noble Lord has repeated that position in discussing some of the amendments that we have already looked at this evening. However, here there is a clear opportunity to increase the possibility of competition in a very concrete way through the portability of account numbers.

The noble Lord will recall how successful this process has been in the telephone industry. The portability of telephone numbers has very evidently provided a significant competitive boost, which suggests that being able to move a number would increase competition significantly in the banking industry as well. I understand that this would be more difficult within the banking industry. For example, the amendment refers specifically to both portable account numbers and sort codes. That makes the issue more difficult because two individuals who bank at different banks may have the same account number but, of course, different sort codes; their entire identification is in the combination of the two. Therefore, a new means of identifying the core bank would have to be developed, and I understand that that would have various knock-on effects.

However, the idea that this would all cost £5 billion, as has been argued by the banking industry, seems to be vastly overstated. We had the same situation with telephony. We were told that this process was going to cost an enormous amount but, in the end, introducing transferable telephone numbers resulted in a tiny proportion of the costs which the industry had said it would need to incur.

Therefore, if we are really going to get competition and choice for the consumer, this seems to be a necessary step. The attempt to develop such competition through facilitating switching but without portability has, it seems, failed. Given that, if the Government are really going to put themselves on the side of the consumer in a competitive market, it is their responsibility to require the possibility of portable account numbers. I beg to move.

[Lord Newby]

My Lords, it goes without saying that the Government are fully behind the objective of increasing competition in banking and making sure that customers who wish to switch banks can do so without impediment. The notion of portable account numbers was considered by the Independent Commission on Banking and in its final report the ICB chose to recommend a new account switching service over portable account numbers. It considered that such a service, if designed correctly, would provide the majority of the same benefits as portability, but with significantly reduced risk and cost.

The Government acted quickly on this recommendation to secure a commitment from the banking industry to deliver current account switching in two years. This was an ambitious timetable for such a big project, but the banks have met the challenge. The new current account switching service was launched on schedule in September and covers almost 100% of the current account market. It has been designed to meet all the ICB’s criteria for tackling customer concerns over switching and to give customers the confidence they need to make the banks improve their services by ensuring that their customers can vote with their feet.

However, it is important that the new system delivers on its promises. That is why the Government continue to engage closely with the Payments Council, which has delivered the service on behalf of the industry, on the progress of switching.

[Lord Newby]

My Lords, I did not mention the parliamentary commission; I was referring to the Independent Commission on Banking. None the less, I shall come to the substantive point that the noble Lord has just made.

As I was saying, to aid transparency we have asked the Payments Council to publish statistics regularly, including switching volumes on a monthly basis and more detailed statistics every quarter, which include data on awareness and confidence in the new service. The Government consider that making this information public is the best way to hold the current account switching service to account. As has been mentioned, the Payments Council has just published the first set of data, covering the four-week period following the switching service becoming fully operational. The numbers show that 89,000 switches were completed—an 11% increase on the 80,000 completed during the same period last year. I am a great fan of the Financial Times, but to describe a scheme that has been running for a month as a failure, when it has already got 9,000 extra people to switch, is clearly complete rubbish.

Account portability is a more complicated issue. I am not necessarily disagreeing with the noble Lord, Lord McFall, but the only way to make a properly informed assessment as to whether, or how, steps towards portable account numbers should be taken is to conduct a comprehensive analysis. I must say, almost in parenthesis, that I do not believe that the analogy with telephone numbers takes us as far as might appear at first sight. For a start, as an individual I am quite happy if lots of people know my telephone number —but I am very unhappy if anybody knows my bank account details. This means that I have a completely different view about how I want to deal with that account. That is one of a number of different reasons why this is a complicated issue. It is not, however, an issue that the Government have just pushed to one side. We have made a commitment to ask the new payment systems regulator to undertake the comprehensive analysis that is required.

There has not yet been a proper study of account portability in the UK, but it is clear that operating the payments systems alongside account portability would be one of the significant challenges. That is why we think that the payment systems regulator is the right body to carry out this work. It will have the appropriate expertise and will be able to give an independent view. To be clear, the payment systems regulator will have the powers described in subsection (2) of the proposed new clause. There would be no need to confer new powers on the regulator in order to implement the recommendations of a review. In order to get a complete picture of what benefits account portability could bring, the experience of the current account switching service will need to be fully considered. Therefore, the Government expect the success of the switching service to be firmly within the scope of the payment systems regulator’s view of portability. The switching service is new and the regulator is not yet established. In our view, the logical step is to let them both become properly established and bedded in and then have a proper and comprehensive analysis. On the basis of that, a decision can be taken.

[Lord Eatwell]

The noble Lord just said that the payment systems regulator is going to be asked to do this. What timetable is the regulator going to be given?

[Lord Newby]

The regulator will be asked to make this one of its top priorities once it has been established, but it is impossible to say at this point that it will have to do it within three or six months. We think that that would be overly prescriptive. However, it is one of the priority tasks that it will be given from its inception.

[Lord Eatwell]

My Lords, that is why the amendment specifies 12 months. It seems that what the Government are saying is that they are behind the concept of competition but they are not behind the means of making that concept actually work. However, I must say that it is encouraging that the payment systems regulator is being asked to study this matter. It would be more encouraging if we were given some clarity that this will not simply be kicked into touch but will actually be presented to Parliament within a given timescale.

This is a matter of considerable importance if the Government are serious about competition and giving competitive advantage to consumers. It is therefore a matter to which we must inevitably return. In the mean time, I beg leave to withdraw the amendment.

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[Lord Eatwell]

My Lords, I am delighted that the Liberal Democrats are coming behind the proposals developed by my noble friend Lord Mitchell. I hope they acknowledge his success in having the various clauses limiting payday loans and high-cost credit agreements inserted during the passage of the Financial Services Act 2012.

Given that that Act is now in place and the measures advanced by my noble friend Lord Mitchell are on the statute book, the argument of the noble Lord, Lord Sharkey, as I understand it, is about why nothing is happening and why there is a lack of movement towards getting appropriate regulation in place. If he is indeed correct that things are moving so slowly—I have no reason to believe that he is not—the Government owe him an explanation as to why that is the case. Obviously, one is sympathetic to getting my noble friend Lord Mitchell’s measures going as fast as possible, but I have a couple of questions about the amendment.

First, do we really feel that there is a simple read-over between state government in the United States and a local authority in the UK? It seems that we pile responsibilities on local authorities without giving them sufficient funding, in many cases, to fulfil their responsibilities. I do not see that the amendment provides for any resources to go to local authorities to enable them to do the job.

Secondly, as far as I understand it, quite a lot of payday lending is done online. The amendment will do absolutely nothing to address loans that are made online because it is all geographically defined. A payday lender may have a registered address but that may have absolutely nothing to do with the location of the customers of that payday lender. The disjuncture between the registered address and the location of the customers suggests that knowledge of local needs would not necessarily be very relevant in such a case.

I am very sympathetic to the need to get things moving and look forward to the Government telling noble Lords how energetic they are being and giving us some concrete evidence of how my noble friend Lord Mitchell’s measures are being effectively brought into being. I would also like the Government to consider whether the noble Lord, Lord Sharkey, has, with the notion of the local authority—or indeed any other authority—identified a means of getting things moving more quickly.

[Lord Newby]

My Lords, the Government wholeheartedly agree with my noble friend that consumers must be protected when they borrow from payday lenders and use other high-cost forms of credit. As noble Lords have pointed out, the Government fundamentally reformed the regulatory system governing these lenders to protect borrowers by transferring the regulation of consumer credit to the Financial Conduct Authority in the Financial Services Act 2012.

The FCA takes up this new regulatory responsibility on 1 April but has already demonstrated that it is serious about cracking down on high-cost lenders. It is absolutely unfair on it to say that nothing has happened since the Act was passed last year.

On 3 October, as the noble Lord, Lord Sharkey, has pointed out, the FCA set out an action plan on high-cost lending to protect consumers, with tough new rules covering a number of issues, including a limit on rollovers and restricting the use of continuous payment authorities. These proposals have won widespread support and will profoundly change how this industry operates. I completely agree with the noble Lord, Lord Sharkey, that self-regulation has failed, but the industry is not going to be self-regulated any more.

Turning now to the noble Lord’s amendment specifically, I am surprised that he thinks that local authorities should be given additional responsibility for regulating high-cost lenders. I can see why it might work in the States, and having looked at the Florida scheme I completely agree that it has been an extremely successful scheme there. I hope that there are a number of additional elements of that scheme that might, in time, be introduced into the UK. However, I frankly cannot see the case for duplicating regulatory effort within such a small geographic area of the UK, especially as consumers will find this confusing. Nor can this be considered a good use of public funds, given that the FCA, which is fully funded by the industry, already has this responsibility.

Most payday lenders have a national reach, especially the biggest players which dominate the market and, by definition, those which are online, so it does not make sense to permit scores of local authorities, in addition to the FCA, to all regulate the same lender. We believe that a well-resourced and empowered single national regulator will provide the best outcome for consumers. Consumers will be better protected by having a regulator with the resources, expertise and national consistency of the FCA. I am not convinced of the benefits for consumers of a federal approach to regulation. In fact, this could lead to more consumer harm; payday lenders are more likely to target consumers in local authority areas where the authority is less active.

The nub of the amendment is, of course, that the noble Lord has framed it to ensure that the Secretary of State imposes a cap on the cost of high-cost credit. While I entirely support the noble Lord’s ambition to bring down the cost of such loans, I am not convinced that the best way to do that is via a mandatory cap. The Government do not believe that current evidence provides sufficient justification to support a cap on the cost of credit.

The noble Lord has referred to the work commissioned by the Government from the University of Bristol. It does not, as he says, say that the main arguments against a cap on the rate relate to loan sharks. It does point out that although that may happen in some cases, lenders may try to bypass the cap by introducing other charges or fees which are not subject to it. Evidence shows that, with a cap in place, lenders may be less likely to show understanding if customers get into repayment difficulties.

While the Government are not convinced that a mandatory cap is the best overall solution for consumers now, they have made it clear that the FCA has a specific power to impose a cap in future, should it decide that it is needed to protect consumers. The FCA has already committed to start analysis on use of this power from April 2014.

Capping the cost of credit is a major intervention with potentially profound consequences for consumers, so it is right that the FCA contemplates use of this power in a responsible and evidence-based way, which is what it will now do. Noble Lords should not be in any doubt about the FCA’s commitment to using its powers to protect consumers whenever it feels it is necessary. The Government stand ready to support the FCA to ensure the best overall outcome for consumers.

I know it is extremely frustrating that we have not got a comprehensive solution in place, but the Government have moved with considerable alacrity in setting up a new, effective regulatory framework. The regulator has acted quickly to set out proposals and on that basis, I hope that the noble Lord will feel able to withdraw his amendment.

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[Lord Eatwell]

My Lords, my noble friend has made a very strong case. He needed to add one other element to persuade the Government, which is that this would enhance competition. If one improved information in this way, then, given the enhancement of consumer choice, the competitive objective of the Government would be better served. This would be a diminution of some of the severe problems of asymmetric information that distort competition in financial services, especially retail financial services. If it was developed with care it would be a considerable boost to the overall efficiency of retail financial services in this country.

It is very easy to say, “The time is not ripe; it is not really quite the time; there are unintended consequences”. All that is required is a consistent bias towards transparency. The Government should approach this issue by saying, “In principle, we are in favour of transparency”. The argument should be made for not being transparent. In other words, the strong case has to be made for not revealing something. The fundamental prejudice should be that this information should be transparent. Effective transmission of information is a key element in creating an efficient market and enhancing the competitive goal that the Government claim to be their own.

[Lord Newby]

My Lords, as the noble Lord, Lord McFall, pointed out, we debated this issue at great length during proceedings on the previous Financial Services Bill. Sections 348 and 349 of FiSMA govern the treatment of confidential information obtained by the regulators and the ability of the regulators to disclose such confidential information. The noble Lord argued at the time, and repeated today, that there was inadequate transparency and insufficient disclosure of information in the financial services regulatory regime. This led to the argument that Section 348 should be amended to make it as unrestricted as possible.

In response, the Treasury undertook a careful review of Section 348 and its associated provisions. The review concluded, first, that it would be difficult to amend Section 348 without negative consequences. Scaling back Section 348 would increase the risk that firms would become less willing to share information with the regulators, undermining those important relationships and the regulators’ ability to protect consumers. Secondly, even with Section 348 in place, the FCA could and should do more to increase transparency.

With that in mind, the Government decided at the time not to amend or delete Section 348 but agreed with the FSA, as it then was, for it to carry out a fundamental review of how transparency would be embedded in the new FCA regime. This was published as a consultation in April of this year and received positive feedback from consumer groups—that is, the very people the new or changed approach was intended to benefit. The review covered use of disclosure as a regulatory tool by the regulator, disclosure of information by firms, both voluntarily and as a result of FCA rules, and transparency on the part of the regulator.

In terms of publishing details of enforcement action, the FCA is already required to publish details and information about decisions and final notices that it considers appropriate. It can also publish the fact that a warning notice has been issued in respect of disciplinary action. In response to the recent PCBS recommendation that it should require firms to publish more information, the FCA has outlined its plans to issue a call for evidence next year on data that it should require firms to publish to help consumers better understand the firm and product quality.

I hope the noble Lord will agree that this is exactly what the PCBS was seeking to achieve and that it can be done without further amendment to Section 348.

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[Lord Newby]

My Lords, these are technical amendments relating to a number of the new powers introduced to the Bill as a result of the Government’s amendments in your Lordships’ House.

Amendment 113A amends Clause 17 of the Bill to specify the procedures applying to statutory instruments made under the new powers. It provides that the affirmative resolution procedure will apply to: orders made by the Treasury to exclude certain systems from the definition of “payment systems” for the purposes of the new clauses establishing the new payments regulator; orders to make amendments, which are consequential to the Bill, to other primary legislation, under the power introduced by the second amendment in this group, to which I will return in a minute; and orders made under paragraph 6 of the schedule on the conduct of financial market infrastructure administration, which allows the Treasury to make further modifications to primary legislation to make appropriate provision for FMI administration. Orders made under other provisions of the Bill will be subject to the negative resolution procedure, unless they are required to be made using the affirmative procedure, or they are commencement orders.

Amendment 114 enables the Treasury to make amendments consequential to the Bill—and any statutory instruments made under it—to other primary and secondary legislation. For example, it is likely that this power will be used to bring other legislation in line with the terminology of the new senior managers regime. This power can be used only in certain circumstances and the Treasury can make orders under the power only if it considers it necessary or expedient to do so as a consequence of a provision in the Bill. Furthermore, the power applies only to legislation which is made before the Bill is passed, or which is made in the same Parliamentary Session in which the Bill is passed. I beg to move.

[Lord Eatwell]

My Lords, first, with respect to Amendment 113A, it is useful to see the use of the affirmative procedure here. However, the noble Lord will recall that the Delegated Powers Committee recommended an amendment which referred to the amendment of clauses that deal with ring-fencing. I asked more than two weeks ago how the Treasury would react to the Delegated Powers Committee in this respect and was told that I would receive a reply. I have not, as yet, received a reply. As we are now reaching the end of the Committee stage, it would be very helpful to know whether the Government are simply ignoring the Delegated Powers Committee, in which case we would require an explanation, or what the Government intend to do about this.

On Amendment 114, these powers are sometimes referred to as Henry VIII powers. Given this new clause, the good King Henry would regard it as rather excessive and would be taken aback by the power that the Treasury takes,

“amending, repealing, revoking or applying with modifications any enactment to which this section applies”.

The enactment applies to,

“any enactment passed or made before the passing of this Act”,

so, presumably, since the birth of Henry VIII. The new clause then refers to,

“any enactment passed or made on or before the last day”.

That I understand. What scrutiny will be given to these measures? We have been through a Committee stage which has identified a consistent rejection of proposals by the banking commission and particularly of the amendments that have been put forward. I have not heard the Government accept a single amendment put forward on behalf of the banking commission—not one—so there has been a consistent rejection of those. Now we are told that we will have the possibility of,

“amending, repealing, revoking or applying with modifications”,

a series of quite controversial measures in which the Government have attempted to water down the proposals of the banking commission. I would like to feel that I could get some reassurance that this power is to be used sparingly and is to be used only if there is some oversight or accountability to Parliament when it is used.

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[Lord Newby]

My Lords, three issues have been raised. The first is whether we have responded to the Delegated Powers Committee. I explained at some length last week what the Government’s response was. Subsequently, I wrote to the chair of the committee, reiterating what I had said. I am sorry if noble Lords have not seen the letter; I will make sure that it gets to them. I will repeat what I said and what the letter said.

The Government’s view, bearing in mind that the committee said it was for the House to decide and did not make a recommendation on the procedure to be followed, is that, given the technical nature of these statutory instruments, the best way forward, in the light of the Government’s response to the consultation process that they have just completed, is to invite noble Lords who are interested in the secondary legislation to the Treasury to have an informal discussion on the issues, and to see what they feel might be done, and whether any amendments are required. The Treasury does not have a fixed view on the detailed provision of that secondary legislation, and would welcome the further views of Members of your Lordships’ House.

Secondly, I find literally incredible the suggestion of the noble Lord, Lord Eatwell, that the Government took no account of the recommendations of the PCBS.

[Lord Eatwell]

Which amendment proposed by the PCBS have the Government accepted?

[Lord Newby]

The noble Lord may or may not remember that at the start of today’s discussions the noble Lord, Lord Lawson, pointed out that the size of the Bill had expanded multiple times. I admit that part of this relates to the Government’s amendments on bail-in. However, every other amendment is in order to implement a recommendation of the PCBS. That is what we spent nearly all of last week discussing.

[Lord Newby]

My Lords, I am sorry; with the exception of the bail-in provisions, the expansion of the size of the Bill is specifically in order to implement recommendations of the parliamentary commission, such as the senior managers regime, the criminal sanctions and the enhanced electrification power. The reason that the Government have not today accepted everything that the PCBS has recommended is that we have already accepted the majority of the commission’s recommendations and put them in the Bill. It is simply not the case that we have accepted no recommendations of the parliamentary commission—quite the opposite.

The final issue is specifically about the powers in this amendment. The powers can only be used to make consequential amendments—that is, those which are needed to deal with the provisions passed in the Bill. The example I gave was in relation to the senior persons regime, and I can reassure the noble Lord, Lord Brennan, that there is nothing sinister or unusual in what is being proposed. These powers are commonly taken in Bills which make significant changes to existing law. I am very happy for Treasury lawyers to set out in a letter the precedents that these powers exactly replicate. The hour is late, but I can assure the House that we are not doing anything here that is in the slightest way unusual.

[Lord Eatwell]

Will the noble Lord agree that Amendment 114, at least, should be withdrawn until it can be considered by the Constitution Committee and the Delegated Powers and Regulatory Reform Committee? He has plenty of time to bring it back on Report if he then has substantial justification for it, and it would give considerable comfort to the Committee.

[Lord Newby]

My Lords, I do not think that we need to withdraw the amendment. As I say, it is a standard provision. Interestingly, the specific reason that I gave for requiring it relates to the implementation of a recommendation of the Parliamentary Commission on Banking Standards. However, as I say, this provision is not in any way unusual. Therefore, I do not believe it needs the process that the noble Lord suggests.

Financial Services (Banking Reform) Bill

Debate between Lord Newby and Lord Eatwell

Tuesday 15th October 2013 Lords Chamber

[Lord Newby (LD)]

My Lords, these amendments establish a special administration regime that will apply to operators of recognised interbank payment systems, operators of securities settlement systems and crucial service providers to those operators.

The establishment of this new administration regime, to be known as financial market infrastructure—FMI—administration, is the latest in a series of measures that this Government are bringing forward to ensure that the failure of a single financial institution is not allowed to put UK financial stability at risk.

Underpinning the financial sector are a number of critical pieces of infrastructure that, if allowed to fail, could severely disrupt markets and the normal functioning of the wider economy. The need to ensure that some of these systemically important pieces of infrastructure continue to operate in times of crisis has already been addressed in legislation passed by this Government. However, there remain other pieces of systemically important market infrastructure that have not yet benefitted from statutory provision designed to ensure continuity of service in times of crisis. With that in mind, the amendments forming Part 6 have been tabled in order to ensure the continuity of service provision of recognised interbank payment systems, which facilitate or control the transfer of money between banks and building societies, and securities settlement systems, which enable the title to units of securities to be transferred electronically. These systems are integral to the efficient operation of the financial system, processing transactions worth hundreds of billions of pounds a day. As things stand, in the event that the operator of an interbank payment system or securities settlement system was to become insolvent, it would be likely to enter the normal administration procedure. In such cases, the administrator would be under a duty to look after the interests of the company’s creditors, without concern for implications for the wider economy. In these circumstances, the continued operation of crucial payment and settlement services could be threatened.

Part 6 introduces a special administration regime, known as FMI administration, which prioritises continuity of critical service provision during administration. The key features of this administration are the appointment of a special administrator, who will have an overarching objective to continue critical services during administration; the Bank of England’s ability to apply to a court to place a relevant company into FMI administration with the court appointing the FMI administrator—no one else will be able to institute insolvency proceedings against one of these firms without giving the Bank prior notice; the Bank of England’s power of direction over the FMI administrator; the availability of powers allowing for the property, rights and liabilities of the relevant company to be transferred; and restrictions on early termination of third party contracts.

In addition to operators of relevant systems, FMI administration will also be available in respect of companies that the Treasury designates as crucial service providers to the operators of the relevant systems. Service providers will be designated if the Treasury is satisfied that an interruption in the provision of services would have a serious adverse effect on the effective operation of the relevant system. Insolvency rules made under the powers in Part 6 will be made in due course. These will prescribe certain procedural details relating to the conduct of FMI administration. Different rules will be made in respect of England and Wales, Scotland and Northern Ireland. Any rules made under this power that apply to England and Wales will need to be cleared by the Insolvency Rules Committee before the Lord Chancellor may proceed to make them.

We believe that the likelihood of these powers ever being needed is extremely small. However, if an interbank payment system did get into financial difficulty, it would clearly be in the interests of financial stability that it was able to continue in operation as its financial problems were resolved. The special administration provisions in these amendments would allow this to happen, and I therefore commend them to the House.

[Lord Eatwell (Lab)]

My Lords, I believe that these measures are valuable as an ultimate backstop, as the noble Lord has suggested. I just wonder, as I intimated earlier, whether there is some confusion in ultimate authority, as between the discussions of the payments systems regulator, and the role here, involving the Bank of England and the Treasury, given that the payments regulator will lie outwith both.

[Lord Newby]

My Lords, I will write to the noble Lord on that point. My officials do not believe there is such confusion in reality, but we will seek to clarify this before Report.

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[Lord Newby]

My Lords, the Government want to see a competitive banking sector that delivers good outcomes for consumers and are taking steps to make that happen. Much has happened already.

We worked with the banking industry to secure from it a new seven-day current account switching service. This service, which launched last month, has made it easier, simpler, safer and faster to switch accounts, and will help to stimulate competition between providers. We also asked the regulators to undertake a review of barriers to entry and expansion in the banking sector. The review, published in March, introduced a range of changes to capital and liquidity requirements and to the authorisations process to make it easier for new banks to enter the market and for smaller banks to compete.

In addition to this, as noble Lords will be aware, we are introducing a ring-fence to remove the competitive advantage that big banks have received, we are creating a new independent payments regulator, and we have already put competition at the centre of the Financial Conduct Authority’s responsibilities by making competition one of its three objectives and giving it a separate competition duty.

However, we believe that more can be done. In addition to giving the PRA a secondary competition objective, we will provide the FCA with new competition powers. These new powers include Competition Act 1998 enforcement powers that are used to address restrictive practices which are engaged in by companies operating in the UK that distort, restrict or prevent competition—for example, ordering that offending agreements or conduct be stopped. They also include power under the Enterprise Act 2002 to carry out market studies and make references to the Competition and Markets Authority for a decision on whether action should be taken.

The FCA wrote to the Chancellor to request those powers. Since being given a competition objective last year, the FCA has worked hard to increase its technical, legal and economic skills and expertise on competition, building its capacity to identify and address competition issues in the financial services markets. The Government are therefore confident that such powers will strengthen the FCA’s ability to ensure competitive banking markets that deliver good consumer outcomes. These changes, which bring the FCA in line with other sector regulators, will enhance the credibility of the FCA and make it easier for it to persuade firms to alter their behaviour voluntarily.

Finally, the changes will enable the FCA to become a member of the European Competition Network, leaving it much better placed to engage with regulatory issues at a European level. In short, giving the FCA these powers is another step taken by this Government that is good for competition. I beg to move.

[Lord Eatwell]

My Lords, I am grateful to the Minister for introducing these amendments. However, can we reflect a little on the rush towards competition? A competitive system, if it is working effectively, is likely to result in the elimination of institutions from time to time, a process that was famously described as “creative destruction”. That sort of process can be seen quite clearly in countries that have large numbers of relatively small banks. Banks fail regularly in the United States—it is quite a common process. The process is, of course, managed effectively because these banks are relatively small. Has some thought been given to the relationship between the size of banking institutions in Britain and the effectiveness of competition? If competition were truly enhanced, one bank managed to eliminate another and both were relatively large, that could be extremely disruptive. This is not to argue against a competitive process but simply to say that it should not be regarded as an exclusive guideline with respect to what are desirable policies. Has the FPC been consulted on these clauses, and what is its view?

[Lord Phillips of Sudbury (LD)]

My Lords, there is an assumption that competition is essentially and necessarily good and that more competition is better. We have had manifest evidence in the past six years in the City—and indeed much longer than that— that there is a point at which competition turns in on itself. Indeed, the values of out-and-out aggressive competition are inimical to the values of integrity and honesty. I want to strike a note of caution, because this word is overdone in terms of its necessary public benefit.

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[Lord Eatwell]

My Lords, I remember discussing this at length during the passage of the previous Financial Services Bill. At that time, I commented that one could often detect whether a proposition made any sense by proposing a negative outcome. If we suppose that the duty is to make the markets work badly, that does not make any sense at all. Therefore, it seems to me that the strategic objective is entirely redundant and serves no useful purpose. Indeed, the idea of changing what were previously operational objectives into prime objectives places competition at that prime level and achieves the objectives which the Government themselves have argued are necessary. For some reason, this issue was never satisfactorily explained previously and has not been satisfactorily explained now. We should apply Occam’s razor and take it out.

[Lord Newby]

My Lords, I am sorry that the noble Lord does not think that the matter has been satisfactorily explained. All I can say is that it has been explained and was debated at great length when we took the Financial Services Bill through the House. Martin Wheatley made it clear that the operational objectives are the key drivers for the FCA’s actions. After taking legal advice, the FCA has subsequently written and confirmed that it is happy with the strategic objective. On that basis, we are happy that the FCA is happy and wish to retain it.

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[Lord Newby]

My Lords, this amendment modernises building societies legislation and enables them to compete on more of a level footing with banks.

In the Government’s founding document, the coalition agreement, we set out our commitment to,

“promote mutuals and foster diversity in financial services”.

This commitment underscores the importance that we attach to the contribution that mutuals make to the economy and shows our determination to support them.

Building societies play a central role in the mutual sector. They provide vital services for their members, taking savings deposits and providing mortgages. Indeed, the sector has come through the financial crisis in good health, and has been responsible for much of the new mortgage lending and lending to first-time buyers in the UK in recent years. Building societies also regularly outperform the other retail banks in terms of customer satisfaction.

The Government are keen to ensure that the sector continues to play an integral role in our financial services sector. That is why, in last year’s consultation The Future of Building Societies, the Government asked the building society sector whether there were any changes to the Building Societies Act which would remove unnecessary limitations or barriers to growth, while preserving the distinctive and traditional building society model. Following that consultation, the Government now propose to make several amendments to the Building Societies Act.

The amendments will, first, make it easier for building societies to communicate with their members electronically rather than by paper. This is obviously in line with what banks can do. Secondly, they will allow societies to create floating charges. At the moment, societies can create fixed charges, but are not permitted to grant security over fluctuating assets. This causes practical difficulties, because floating charges are commonplace in financial services. The ban was originally introduced in 1997 to prevent holders of floating charges taking control of a building society, but due to changes in insolvency law this threat no longer exists.

Thirdly, the amendments will change the classification of small business deposits for the purposes of calculating the proportion of a building society’s funding from wholesale sources. Under the Building Societies Act, no more than 50% of a building society’s funding can be wholesale funding. This amendment will mean that a certain amount of small business deposits will no longer count as wholesale funding. The amendment will give societies greater freedom to source wholesale funding, and creates a bigger incentive for societies to compete for small business deposits.

Fourthly, the amendments will allow owners of deferred shares, which are a type of mutual capital instrument, to be eligible to receive shares or cash payment on a demutualisation, irrespective of how long they have held the shares. This will provide an exception to the existing rule that shareholders must have held shares in the society for at least two years. This exception is necessary to remove the risk that deferred shares which are categorised as tier 1 capital would be degraded to tier 2 capital on a demutualisation, because the holder was not able to be given shares. Fifthly, I should add that our new provision makes it clear that the restriction applies to any right to acquire shares by members, and not just rights to acquire shares in priority to others, as is currently the case. The existing provision has not worked as intended and the amendments also correct that.

Sixthly, the amendments will allow building societies to change their financial year to any day in the year, not just 31 December. That is in line with banks. Seventhly, they will remove the requirement for building societies to provide new members with a copy of the latest summary financial statement. There is no equivalent requirement for banks, and this will have cost benefits. Eighthly, they will remove the requirement for societies to disclose information in their annual business statement about officers who are not directors. Such disclosure is excessive, time-consuming and costly, and there is no equivalent requirement for banks.

Taken together, these amendments provide significant modernisations to the legislative framework for building societies, and I commend them to the House.

[Lord Eatwell]

My Lords, in general these are desirable and beneficial changes, although they do not really represent the great boost to the growth of the mutual sector which we might have expected. However, I want to raise just two major issues. The increase in the use of electronic communication, particularly given the typical customer profile of building societies, raises the possibility that certain members will be disadvantaged with respect to the availability of regular information and of course the summary financial statement, which they should be able to receive in order to understand the overall status and security of their building society. Is the noble Lord content, and can he reassure the House, that there are suitable safeguards so that those who do not have ready access to electronic communication receive appropriate paper copies?

Turning to the issue of owners of preferred shares, can the noble Lord reassure me that the definition of ownership is the same as for those who have held shares for two years? The noble Lord may remember that initially when building societies were demutualised this caused problems, because if Mr and Mrs Smith held a joint account, in fact only Mr Smith was deemed to be the owner. If Mr Smith happened to die within the two-year period, Mrs Smith did not then gain mutualisation advantages. In a Private Member’s Bill which I helped take through the House, we changed that regulation so that in that circumstance both Mr and Mrs Smith would have the advantage if one of them was deceased. Even young Jimmy Smith would have the same advantage if his parents were killed in a car accident. Does the definition of ownership in this case have that broad scope that was specifically created for the demutualisation efforts—in other words, the owners are not the first-named person on the account but can include both a spouse or a partner and a first child?

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[Lord Eatwell]

My Lords, I was a member of the first regulatory decisions committee established under the Financial Services Authority. It was established at that time because it was felt that the FSA’s procedures would run counter to the Human Rights Act, in the sense that those procedures were both judge and jury. The role of the committee was to act as an independent assessor of the regulatory and enforcement proposals put forward by the FSA.

It worked reasonably well, at least from the perspective of a member of the committee, but not from the perspective of the FSA; we tended to give it a rather difficult time when we felt that its cases were ill prepared and ill focused. It played a particular role for a short period. Then, after a particular dramatic case was lost by the FSA in the tribunal, the FSA decided that it did not like the RDC being foisted upon it, and the role of the RDC was slowly downgraded. I think that was unfortunate—obviously I do, because I participated in the early days when I thought it was working rather well, but be that as it may.

The role here is slightly different from the challenge role that the RDC played. Will the Minister address the question of whether any effective enforcement role for a regulator is compatible with the Human Rights Act?

[Lord Newby]

My Lords, we have considered extremely carefully all the recommendations from the PCBS. They contain a number of observations about the importance of banking expertise, accountability, clarity of responsibility and consistency of decision-making, which we certainly agree with.

I shall explain how the current arrangements already deliver all those things in a way that is tailored to the regulators’ individual approaches. First, on expertise, the call to create a separate decisions committee solely for the banking sector partly reflects concerns about the level of banking expertise on the RDC. At the FCA, the regulatory decisions committee is responsible for taking enforcement decisions. Its remit extends beyond banking, but that does not mean that it does not contain banking expertise. Indeed, the FCA has recently addressed the balance of expertise on the RDC through the appointment of two new members with banking expertise. At the PRA, of course there is no lack of banking expertise on its decision-making committees.

Secondly, on clarity of roles and responsibility, Section 395 of FiSMA provides for the separation of supervision from disciplinary decision-making. Under the current arrangements, there is also a clear separation of the function of making enforcement decisions from that of judicial consideration of the issue.

I do not accept the argument that the fact that the PRA does not have an RDC gives rise to human rights concerns. We do not believe that there is a problem on that front. The prospect of decisions being appealed to the Upper Tribunal means that the system already provides an independent judicial challenge function to the decision-making process for all financial services cases. The proposed requirement for regulatory decisions to be made by a committee chaired by a person with senior judicial experience, on the other hand, would appear to give this new committee a quasi-judicial role more suitable for an external review tribunal than an internal decision-making body.

On consistency of decision-making, I understand that a key part of the recommendation was to encourage a greater consistency of decision-making across the PRA and the FCA. Unfortunately, I believe that the creation of an additional statutory committee for banks would create only new inconsistency. The new committee relates only to banking, so any enforcement decisions relating to a building society, insurer or investment firm would be made under the existing framework and the FCA would have to maintain the existing RDC. This would mean one body dealing with the breach of a rule by a bank and a different body dealing with the same breach of the same rule by a building society, with potentially different outcomes, which seems undesirable. While I think that the PCBS report contains some useful observations in this area, I believe that the current, flexible arrangements are the right ones. On that basis, I would be grateful if the noble Lord withdrew his amendment.

Financial Services (Banking Reform) Bill

Debate between Lord Newby and Lord Eatwell

Tuesday 15th October 2013 Lords Chamber

[Lord Newby (LD)]

My Lords, it is a great pleasure to respond to this fascinating debate. I should say at the outset that the Government are committed to greater competition and diversity in the UK banking sector, both locally and nationally. Effective competition is essential for ensuring that customers get suitable and affordable products.

It is not true to say that there has been no fundamental thinking by the Government on the structure of banking and the need for greater competition. That is why we asked the Independent Commission on Banking to investigate competition issues in the UK as a key part of its work. Half of its report covered competition issues. It identified a number of issues and areas which needed action and we are taking forward its recommendations for dealing with these. For example, we are removing the competitive advantage big banks get from being seen by the market as too big to fail through the ring-fence. We have secured a new seven-day switching service, delivered by industry to tackle inertia in the personal current account and SME business account market. This service was launched on 16 September. We have introduced a strong competition regulator by giving the FCA an objective to promote effective competition.

The new regulators have already brought forward big changes on the regulatory side through their barriers to entry work. I commend the report that they produced earlier in the year to the noble Lord, Lord Phillips, in particular. This will make it easier for new banks to enter the market, to grow and to compete with the large incumbent banks. These changes have been greatly welcomed by the industry and will make a big difference going forward for those who want to start a new bank, be it to serve the local community or to compete nationally.

I should highlight here the PRA’s consultation on an initial capital exemption for some small specialist banks. The proposed exemption would allow some banks to gain authorisation with minimum capital of as little as £1 million, and to do so much more quickly than has ever been the case in the past. These are not small changes. Within the narrow world of bank authorisation, these are revolutionary changes which will make it much easier for new entrants to come forward. There have been some extremely successful new entrants. Metro Bank is one of the most successful and I suspect that its competitors consider that it is being disruptive by making a number of changes in the way it does banking which will affect the whole system, in many cases for the better.

The actions that we have already taken will be supplemented by what we are doing in the Bill. We are creating a new payments regulator to ensure fair and transparent access for new and smaller banks to the payment systems. We shall discuss that later today. The Government have announced that they will ask the new payments systems regulator to look at the case for and against introducing full account portability as an early priority, as well as the case for requiring the big banks to give up, in whole or part, ownership of the payments systems.

We are giving the PRA a secondary competition objective to strengthen its role in ensuring that we have competitive banking markets. We will provide the FCA with further competition powers so that it has even more appropriate tools in that area.

As to the OFT, it has brought forward its investigation into SME banking and the competition issues affecting these markets. This is arguably the most contentious area in terms of the lack of appropriate products and volume for that market. The study is part of its ongoing programme of work to investigate concerns over competition in banking and to inform the decision on whether key banking markets should be referred to the Competition Commission for a formal market investigation. In January it reported on its review of the personal current account market, so it is not true to say that no work is being done on looking at competition on current accounts.

The review raised significant concerns over concentration levels. However, it concluded that the important changes being implemented, such as the ring-fence and the new account switching service, meant that market referral was not appropriate at this time.

The OFT aims to conclude its programme of work by 2015 and will make a decision then as to whether a market referral to the Competition Commission is needed. In consideration of the significant measures currently being implemented to improve competition, along with the importance of allowing the OFT to complete its current investigations, I hope that the noble Lord, Lord Eatwell, will feel that his Amendment 102 is not necessary and will not seek to press it.

Turning now to Amendment 43, I have already detailed the extensive action the Government are taking to improve competition.

[Lord Eatwell]

I wonder whether the Minister will allow me to comment on the series of measures he just outlined. All are worthy in their little way, but will he acknowledge that the Government have actually rejected the commission’s recommendation that there be,

“a full public consultation on the extent of competition and its impact on consumers”.?

This is what the Government are not giving.

[Lord Newby]

The Government are saying that the OFT is in the process of undertaking a series of pieces of work. We believe that the appropriate way forward is for it to complete that work and to decide whether it wishes to make a referral. We think that that is a sensible approach; it is already in train and we think it should reach its logical conclusion.

To help increase diversity in business lending, the Government have introduced several important schemes, which include the business finance partnership and the introduction of the business bank. The Government are promoting alternative finance to boost overall lending through investments and various innovative non-bank channels, including two peer-to-peer firms, Funding Circle and Zopa, as part of a small business programme. Peer-to-peer platforms enable people to lend money directly to businesses and consumers; they can therefore offer a more effective way for businesses to access finance. They are certainly disrupted in terms of the way in which finance is going directly into many small businesses.

The business bank is drawing together existing government initiatives under one roof and deploying £1 billion of capital to address gaps in the supply of finance to SMEs. So far, £75 million is being invested in venture capital and £300 million in new sources of lending. The Government are also taking action to support local banking—for example, through a credit union expansion project which includes a £38 million funding package from the Department for Work and Pensions.

Community development finance institutions are also providing loans in support of those struggling to access finance from the commercial banks. The regional growth fund is supporting their work through £60 million of wholesale funding and the Government also provide tax relief worth up to 25% on investments. Both credit unions and CDFIs typically operate in quite a tightly defined geographic area and have that special focus.

At national level, both RBS and Lloyds are already in the process of divesting part of their UK banking businesses as a requirement of EU state aid rules, creating new challenger banks. The divestments are part of a package designed to improve competition in the banking sector. The Government have taken the first step to return Lloyds to the private sector and are actively considering options for further share sales. The reintroduction of the TSB brand on the high street is a major step forward for retail competition. This action is further evidence of the Government’s stated aim not to be a permanent investor in the UK banking sector. This is an important step in further normalising the sector and continuing the process of removing government from the extraordinary measures taken during the crisis.

For RBS, the Government are already investigating the case for creating a so-called “good bank/bad bank” split. We will report the findings of this review shortly, later in the autumn. We do not believe that the case for breaking the core operations of any bank in which the Government have a stake into regional entities meets the objectives of maximising the bank’s ability to support the British economy, getting the best value for the taxpayer while facilitating a return to private ownership. The cost of any reorganisation would be attributable to the banks, and, as a result, to the taxpayer. In addition, the time required to execute such a reorganisation would be lengthy, further delaying the Government’s ability to return the banks to private ownership. As a result, the amendment would run directly contrary to the Government’s stated objectives.

This does not, however, mean that we do not see a role for regionally or subregionally focused banks. I have been impressed, for example, by the work of the Cambridge & Counties Bank, which is based in Leicester and is using its local expertise to support SMEs in Leicester and the broader East Midlands region. Its capital comes from a combination of a Cambridge college and a local authority pension fund, which seems to me a model that could with benefit be replicated elsewhere.

I was extremely interested to hear from the noble Baroness, Lady Liddell, about the success of the Airdrie Savings Bank. I am happy to work with officials to see how that bank is faring and whether anything that the Government are doing is making its life unnecessarily difficult.

The challenge, however—looking at that model on the one hand, and on the other saying that in Germany there are a lot of regionally successful banks—is that that is not where we are starting from now. It is very difficult for government to change a culture single-handedly. If banks such as Cambridge & Counties are successful and other people see that they are, we will see more regional banks, but I do not think that government either can or should try to impose a new overall structure on the banking sector against competitive forces and what people in the banking sector want to do.

I do, however, welcome the news that Santander wants to regionalise decision-making. RBS has for some time been trying to re-educate its SME bank managers about the virtues of relationship banking. It is amazing that that was lost, but the penny has dropped, and I very much hope that the statement by Santander is part of a broader process to push down decision-making to regional and local levels.

I hope that I have been able to persuade my noble friend that the Government have considerable sympathy with his amendment, but that much is already happening to bring greater diversity into the banking sector. Frankly, the pace of change—the number of new entrants, the change in the way that the system is operating and the way that people are doing banking—is quicker than at any previous point in our lifetime. I hope that, on that basis, he will feel able to withdraw his amendment.

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[Lord Eatwell]

I was thinking of the Crown Dependencies.

[Lord Newby]

I had not realised that the noble Lord, Lord Eatwell, was thinking of the Crown Dependencies. I will write to him about that.

The noble Lord asked whether the concept of no less favourable treatment was appropriate. This concept relates only to the insolvency counterfactual. It is reasonable that an investor should be no worse off due to an action of the authorities than in an insolvency. That is the option that might be facing investors if the bail-in was not taking place.

The noble Lord asked about temporarily high balances. This is an issue that we have debated over the years. As far as bail-in is concerned, the bank will have discretion not to bail in certain liabilities. In terms of the general issue about temporarily high balances, this is being pursued within the context of the EU. There is a very widespread recognition that it would be desirable to get protection for people who have such temporary high balances.

The noble Lord asked about transitional arrangements. The issue of bail-in has been debated at international level for some time. Markets know that bail-in is now an acceptable, and indeed a leading, tool for dealing with large banks in the European fora. We have agreed that there should be no transitional agreements, especially as the counterfactual would be insolvency.

The noble Lord asked about our response to the Select Committee. My noble friend Lord Deighton, as the noble Lord knows, is in China this week, so he will be replying formally when he returns. But the approach that the Treasury has taken so far in terms of working with parliamentarians who have a close interest in these matters has been to circulate draft secondary legislation at the point at which it has gone out for wider consultation. The current consultation exercise on the big draft statutory instruments under this Bill has, I think, now closed. We are drawing up a response to all the stakeholders who have made comments and the intention is that at that point the Treasury will directly contact noble Lords who have expressed an interest so that we can discuss where we have got to and consider any suggestions that noble Lords might have on the secondary legislation.

My view, having looked at it, is that this is highly technical legislation and the best way of getting an input is to have a conversation around it. The Treasury is very open at this point to any suggestions from your Lordships, or indeed Members of another place, in terms of the details of the secondary legislation. They are not set in stone. We are trying to get the best outcome. We think that that more discursive approach in the context of these highly technical instruments is the best way of getting the maximum positive involvement with parliamentarians in the process. As I said, my noble friend Lord Deighton will be writing to the noble Baroness, Lady Thomas of Winchester, about that.

The noble Lord, Lord Higgins, asked whether bail-in would mean that taxpayers would not have had to make any contribution. It is difficult, if not impossible, to say definitively since we do not know how much could have been bailed in. What is clear is that we would have substantially reduced any government contribution. Loss-absorbing capacity provisions in the Bill will further strengthen that concept. The ICB said that the 17% PLAC proposals would have been sufficient to deal with the problem last time in all but the most extreme cases.

The noble Lord, Lord Higgins, asked about the creditor hierarchy and whether it will be stated in the Bill. We have not stated it in the Bill, but we will be working on the statutory code of practice under the Act when it is enacted. The aim is that it will be set out more fully there.

The noble Lord, Lord Blackwell, asked what protection there was against inappropriate use of the powers by the Bank of England. The conditions before which the Bank can intervene are pretty stringent; they are that the bank is failing or likely to fail and that it is in the public interest to do so. If the Bank operated vexatiously or against the public interest, that would be an inappropriate use of its powers—but so it would if it acted in that manner under any other of its powers. Our view is that the conditions are clear enough and give the Bank sufficiently clear steer that we are reasonably confident that the problem that the noble Lord anticipated would not arise in practice.

The noble Lord, Lord Flight, asked whether the bail-in could work for big international banks. We believe that it could; the UK authorities are working with international counterparts to put in place resolution plans for large banks to ensure that the tool can be applied effectively. We see bail-in as being the leading tool for such banks.

The noble Lord, Lord Eatwell, asked whether bail-in was necessary for all banks, including those outside the ring-fence. The truth is, obviously, that all banks can encounter difficulties, not just retail banks. We believe it appropriate that the Bank of England has the tool available for dealing with non-retail banks as well as retail banks, which this provision would do.

I am not sure that I have answered every last question that I have been asked. To the extent that I have not, I will write to noble Lords.

[Lord Eatwell]

I just take up the Minister on that last point. Surely one of the key arguments about the ring-fence is that there is an implicit guarantee from the public authorities not to allow institutions within the ring-fence to fail. That implicit guarantee is worth a lot of money to those banks that have been too big to fail. Surely the whole point about the ring-fence is that those outwith it would not benefit from that form of public continuity guarantee. But is the noble Lord saying that the Government wish to retain such measures, which would allow them to implement such continuity guarantees?

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[Lord Eatwell]

As clarification, given what the Minister has said about wholesale deposits, if there was an organisation providing banking services on a fee-based basis, would it be alone? Would it be exempt?

[Lord Newby]

My Lords, unless it was taking deposits it would be exempt under the amendments as they stand. It is fair to say that I have heard what the House has said and I will relay it with all force to my colleagues in the Treasury, who will not have had the privilege to hear it directly.

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[Lord Newby]

My Lords, these amendments will create a new competition-focused utility-style regulator equipped with the full range of powers to tackle the deeply rooted issues in the market for payment system. The Government have serious concerns about the structure of the payment systems market, which sees problems in three main areas: competition, innovation and responsiveness to consumer needs.

Under the existing self-regulatory framework, there is no systematic oversight holding the big banks, payment scheme companies and infrastructure providers to account. Large banks jointly own the payment system companies and the infrastructure provider, and they dominate the Payments Council, the pseudo-regulatory body responsible for setting industry strategy. This allows the incumbent players to erect barriers to entry, preventing challenger banks from competing on a level playing field. It also limits incentives for the systems to innovate and respond to consumer needs, as there is no competitive advantage to any bank in doing so. There are also competition concerns in the international card schemes, as highlighted by the European Commission’s proposed regulation capping multilateral interchange fees. The card schemes have an incentive to increase interchange fees to encourage banks to issue their cards, but merchants have little opportunity to influence this process, and have no real option but to accept the major payment cards.

The first objective of the regulator will be to address the problems arising from imperfect competition. To tackle barriers to entry in banking arising from access conditions for the payment schemes, the payment systems regulator will have powers to tackle anti-competitive fees, terms and conditions, and to mandate access to the core systems. If deemed necessary, it will be able to break up the current ownership structures to create a landscape where fair competition can thrive. Secondly, the regulator will examine issues relating to innovation. Payment systems are characterised by strong network effects. Just as owning a telephone brings little benefit if no one else has one, each user gains added value from a payment system with the addition of further users. The shared ownership of the interbank payment systems by the banks reinforces this, because no single bank stands to gain an advantage over the others by investing in and developing the systems. This tendency to underinvest means that, while there have been some important innovations in recent years, they have too often required the Government’s or the OFT’s intervention to drive change, and the industry has taken too long to realise their full benefits.

The Government want to challenge underinvestment and lack of innovation in the co-owned systems. They want a payments industry that rewards entrepreneurial behaviour and develops systems that are innovative, efficient and effective. Therefore, the regulator will have an objective to promote the development of, and innovation in, payment systems.

The third problem identified in the market is the failure of the industry to respond to end-user needs. This, too, stems from the market’s network characteristics and ownership structures, which mean that failing to respond to end-user needs incurs no competitive disadvantage to any of the banks. This makes it possible for the banks to take decisions about the provision of services, even if this is directly against the interests of the wider public, as we saw in 2009 when the industry attempted to abolish cheques. The Government want to see a market where payment systems work for end-users, rather than one that serves only the self-interest of the big established banks.

Successive Governments and UK regulatory authorities have been trying to find a viable solution for these problems for more than a decade, dating back to Sir Don Cruickshank’s report to the Treasury in 2000 recommending that the Government create a utility-style regulator for payment systems. Instead, however, the process resulted in the creation of the industry-dominated Payments Council. In February, the Chancellor announced that the Government would introduce a new regulator to open up payment systems. Over the summer, the Parliamentary Commission on Banking Standards endorsed the Government’s commitment to bring payment systems into formal regulation. In their response to the final report of the PCBS, the Government confirmed that they will ask the payments regulator, once established, to urgently examine account portability.

I turn to the details of these amendments. They establish the payment systems regulator as a separate legal entity established by the FCA. This provides bespoke objectives and powers to address the distinctive problems in the market for payment systems, and allows for the benefits of close co-ordination with the FCA. The objectives of the regulator will be to promote competition, innovation and the interests of service users. The payment systems regulator will oversee all domestic payment systems brought into scope by being designated by HM Treasury. Initially, it is expected that the main interbank schemes and international card schemes will be designated. Once a system is designated, the regulator will have powers over that system’s operators, infrastructure providers and payment service providers that provide payment services using the system. This new regime will not affect the existing role of the Bank of England under the Banking Act 2009 in overseeing recognised interbank systems for stability purposes. The Bank will be excluded from the scope of regulation in its current capacity as a payments system participant. There will also be a duty for the co-ordinated exercise of functions between the PSR, FCA, Bank and PRA, and a memorandum of understanding setting out how this will happen.

The payment systems regulator will be equipped with a toolkit of regulatory powers enabling it to address the deep, structural issues causing problems in the market for payment systems. To open up access and encourage greater competition, the regulator will be able to intervene and require changes to any anti-competitive fees, or terms and conditions of an agreement for access to a regulated system. It will have powers to require the provision of both direct and indirect access to payment systems. It will also have competition powers to enforce Competition Act 1998 prohibitions against anti-competitive agreements and abuse of dominance, and to make market investigation references to the Competition and Markets Authority. These competition functions will be exercisable concurrently with the CMA. Ultimately, if the payment systems regulator determines that the current ownership structures need to be broken up to achieve adequate competition, it will have the power to require disposals of interests in operators of regulated systems.

In furthering access and competition, the regulator will also address underinvestment by the industry and the slow pace of innovation. There is no shortage of players who want to be able to innovate in this space, and with greater access to the core systems and infrastructure, inventive, entrepreneurial players will be able to bring propositions to market when they have previously been blocked from doing so. Greater competitive pressure on industry participants can be expected to drive up standards and force payment system owners, operators and payment service providers to deliver improvements in the payment systems space. However, in cases where market forces are still unable to play out, if the big incumbent banks resist, the regulator will have powers to drive through improvements as it sees fit, by issuing directions that require or prohibit action by participants in regulated systems, and this includes requiring specific developments to be pursued.

In advancing its service-user objectives, the regulator will be able to require or prohibit the taking of action in the operation, management and development of payment systems. This means that it can prevent the industry ignoring the legitimate needs of consumers—for instance, by trying to abolish cheques. The payment systems regulator will be able to publish details of a compliance failure and to impose financial penalties; if deemed necessary, it will be able to require owners of payment systems to dispose of their interests in them, subject to Treasury approval.

Taken together, these amendments create a strong, competition-focused regulator, which will have the right objectives, functions and powers to ensure that conditions in the payment systems market are such that challenger banks and innovative non-bank players are given a level playing field to challenge the big incumbent banks; innovation takes place to facilitate useful new services for businesses and consumers; and decisions on the provision of payment options are taken in the interests of all users of payment systems, not just the interests of the big banks. I commend these amendments to the Committee.

[Lord Eatwell]

My Lords, I have a number of queries about another set of amendments that are longer than the original Bill. First, I support entirely the notion of establishing a payments regulator, but why is it being established as yet another independent regulator? Surely, covering the activities that it refers to—the nature of markets and settlement systems, which are akin to clearing and settlement in business and financial services in general—is the clear role of the FCA. Why are we establishing an extra organisation? After all, one thing that we have learnt through the financial crisis is that communication between organisations is less than perfect, even in the best of all possible worlds. Surely it would be better if this was simply a division of the FCA rather than an organisation having, as the schedule makes clear, an entirely separate board and chairman. This seems to be a proliferation of institutions with no purpose when we already have the FCA there to do the job.

Secondly, I want to explore the competition objective a little more. It is very clear that enhancing competition by giving access to payment systems is highly desirable. It is also clear that users might benefit from competition. What is not terribly clear is whether we want to have very diverse structures in the fundamental architecture of the payments system, which is absolutely core to the banking system. It recalls to me the early days of the railways when there were more than a dozen railways from London to Brighton, as they all competed with one another. This was not conducive either to the effective development of the railway companies or the provision eventually of a proper service to passengers. Therefore, I am a little puzzled, given the essential role of the payments architecture as being absolutely fundamental to the operation of the banking system, as to whether we want to see diverse structures and how they might be related to one another. I wonder what the Government’s thoughts are on this.

My third point also refers to the nature of fundamental market infrastructure. Within these new clauses it is the responsibility of the regulator to assure maintenance of service. However, another part of the Bill, which we will look at next, is labelled “fundamental market infrastructure” and is also devoted to the maintenance of market service more generally. The responsible authority for maintaining market service is different in the two cases. In one it is the Treasury; in the other it is the Bank of England. Why do we have two different authorities responsible for the maintenance of fundamental market infrastructure when the payments system is undoubtedly part of fundamental market infrastructure? It seems to me that, in inserting this desirable measure into the Bill, the fact that it has created some ambiguities and inconsistencies has not been noticed.

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[Lord Newby]

A number of noble Lords raised the same question and have come down on different sides. Should we have a separate regulator or should it be just a division in the FCA? In the end, it was a question about how important we thought the issue was. A division in the FCA would be a division among a lot of divisions. The staff of a division in the FCA would probably be at a somewhat more junior level than that of a chief executive of an important regulator. The priority that the overall body, namely the FCA, would give to this would obviously be somewhat less than a body on its own could give, because the sole concern of the people working for it would be to make the scheme work.

It would have been possible to do it in the FCA. In a sense, you literally pays your money and takes your choice. Our view is that this is a fundamental element of the system that needs shaking up and the best way to do it is to have a group of people whose sole interest—and whose career interest—is associated with making this thing work. That is why the body is being established on its own.

The second question of the noble Lord, Lord Eatwell, was about the definition of competition. As he said, competition in terms of access and users is clearly desirable. Will it be desirable or possible to have diverse structures for all elements of the system? Almost certainly not; some parts of it are a natural monopoly. That is one reason why a regulator is needed. At the moment, you have a natural monopoly controlled by a small group of banks. What we want to do is open up that access but give more scope for looking at options, which at the moment are closed down by the structure. My personal view is that it is highly unlikely that the basic plumbing of the system will replicate the situation in the railways; it would make no sense. However, there may be elements of the payments system, including new forms of payment, which may be susceptible to competition, and we want the regulator to have that in its purview and look at it. There is no suggestion that we are seeking to break up those elements of the system that form a natural monopoly.

The noble Lord also asked about maintenance of service. There is a difference between what the regulator will be doing on a day-to-day basis in making sure that the whole system works effectively and what happens if the whole thing is failing. That is the difference in the second provision, which we will come on to later, about resolution. The people to look after resolution when something has failed are not necessarily the best people to be doing the day-to-day management of it.

[Lord Eatwell]

My Lords, I beg the noble Lord’s pardon, but the question related to a possibility of interruption of service. Amendment 62 states:

“The Treasury may by order designate a company”,

and so on, to maintain the service. We then move on to the next section relating to fundamental market infrastructure, which states that the maintenance of service is the responsibility of the Bank of England. There is an inconsistency here. As regards the issue of the infrastructure as a payments system and the issue of all other aspects of back-office infrastructure, the Treasury is responsible for one and the Bank of England is responsible for the other. However, they are so interrelated and interdependent that it does not really make sense. You have either one or the other. I do not mind which. I would prefer the Bank of England to be responsible because it is closer to the payments system, but you do not have both.

--- Later in debate ---

[Lord Newby]

It will cover the UK end of international transactions. The counterparty in another country is regulated by that country’s operations, not by the UK end of it. Obviously, close working between both countries is required but we are dealing with the pipes that leave the UK. Once they have left the UK, the pipes are regulated by someone else. As far as cheques are concerned, if there were to be a decision or view expressed that cheques had come to the end of their useful life, it will not fall under the purview of the regulator to effect that change. I think that I am right in saying that the budget forms part of the FCA’s overall budget, as set out in the legislation. Therefore, the overall financial services sector pays into the FCA for a whole raft of specialist functions. This is no different from anything else that is funded by the FCA.

[Lord Eatwell]

Perhaps I may follow that. The overall financial services industry, or that bit of it which is regulated by the FCA, some of which has nothing to do with banking and payments systems, has to pay for this regulator. On top of that, let us remember that he who pays the piper calls the tune. All this stuff about separate careers and career paths is subsumed by the fact that the financial controller of the FCA will control the funds going into this organisation. I take the argument of the noble Lord, Lord Turnbull, about the focus on this role, but I really do not understand why you cannot have a division with a senior figure in charge of it, and therefore some clarity within the FCA.

[Lord Newby]

My Lords, I am extremely sorry that the noble Lord does not understand. We just have a difference of view about that. The noble Baroness, Lady Noakes, asked about the kind of action that the regulator could take and whether it could, in effect, behave unreasonably. The answer is—

Financial Services (Banking Reform) Bill

Debate between Lord Newby and Lord Eatwell

Wednesday 24th July 2013 Lords Chamber

[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.

Bank of England: National Debt

Debate between Lord Newby and Lord Eatwell

Monday 24th June 2013 Lords Chamber

[Lord Newby]

My Lords, at Question Time with less than three minutes to go, I cannot give a very detailed description. The key point is that the Monetary Policy Committee is committed to working with the Debt Management Office to make sure that, as and when the present situation is unwound, that takes place in an orderly manner so that we do not have undue volatility in the market.

[Lord Eatwell]

My Lords, what contingency has the Treasury made for repaying to the Bank of England the revenues it currently receives should the Bank incur a loss on its bond holdings?

Taxation: Income Tax

Debate between Lord Newby and Lord Eatwell

Monday 24th June 2013 Lords Chamber

[Lord Newby]

My Lords, I think that the conclusion I draw is that the Government always have a tricky task in maximising tax revenues, particularly at a time of austerity and when people are looking for tax changes to be fair. In that context, at the same time as the Government reduced this tax rate they introduced changes to stamp duty land tax and anti-avoidance measures on residential property which will raise several times the amount of tax lost from reducing the 50p band.

[Lord Eatwell]

My Lords, the noble Lord has introduced the issue of avoidance. What is the Treasury’s estimate of the loss of revenue due to bonuses and other payments being held back after the Chancellor provided his friends with such an easy means of tax avoidance by pre-announcing their top-rate tax cut?

[Lord Newby]

My Lords, there is an awful lot of hype about what may or may not be achieved by reducing or retaining the higher rate of tax. HMRC produced its report on the matter last year and estimated that, in the short term, the cost to the Exchequer was £100 million. It said that the “direct yield” from the higher rate,

“might fall over time toward or beyond zero”.

EU: Budget Report

Debate between Lord Newby and Lord Eatwell

Thursday 25th April 2013 Lords Chamber

[Lord Newby]

My Lords, I thank all noble Lords who have taken part in today’s debate. As the noble Lord, Lord Davies, said, we have covered everything, from macroeconomic theory to House of Lords procedure, and I will do my best to respond to as many of the issues raised as I can.

I will start with the noble Lords, Lord Eatwell and Lord Barnett, who both discussed growth, and in particular the growth forecast. The noble Lord, Lord Eatwell, suggested that the growth forecasts were wrong for theoretical reasons and because the assumptions that were made might be unsustainable. The noble Lord, Lord, Barnett, had a more fundamental problem, which was that he does not believe any growth forecasts, almost by definition. We see in today’s figures, with the 0.3% increase in GDP in the first quarter, that, as they say, if present trends continue the OBR will have got it wrong again. This time, however, it will have got it wrong on the downside instead of the upside. I hope we will not be too unhappy in those circumstances if they perhaps do not get it right. I agree with the noble Lord, Lord Barnett, that growth figures, or indeed any forecasts for five years ahead, have to be treated with a very large pinch of salt. However, there are only two alternatives. Either you do your best and work on the best that you can do, or you throw your hands up in horror. On balance, the Government prefer to do the former.

I will deal with a core assertion of the noble Lord, Lord Eatwell, that everything was fine in 2010, the economy was growing by 2%, and that if only the policies that were in operation then had been carried on, growth would have continued and possibly increased. In 2009-10 the borrowing was £158.9 billion, some 11.2% of GDP. At the time, my colleagues and I supported that borrowing on the basis that the Government were dealing with what Vince Cable called “a massive heart attack” to the economy, and so this had to be dealt with by very significant public expenditure to prevent a total collapse, and in particular, to shore up the banks. What I cannot accept is that that level of borrowing was sustainable in the medium term, and neither could Alistair Darling. A number of noble Lords have spoken in support of Alistair Darling’s economic policies, but remember that they were in two parts. There was a high level of immediate expenditure, but we passed a Bill that would have required by law the Labour Government, had they been re-elected, to halve the deficit by the current financial year. Does anybody believe that if Mr Darling had been in power, he could have continued putting money into the economy at anything like the rate he did in 2009-10 if he wanted to meet that outcome? It is inherently implausible. The question that was being debated as we reached the election in 2010 was not whether there would have to be reductions in public expenditure, but purely about their scale and size. Therefore, the suggestion that all was well in 2010 and that we could have continued with high levels of growth by pushing public sector borrowing along at an unsustainable level does not hold up.

[Lord Eatwell]

My Lords, the noble Lord has rather ably misrepresented what I said. I said that the economy was growing at 2%, which it was, and that the 2% growth would lead to a fall in the deficit, which it did. I did not say that at the time there was a need to increase the deficit. What happened was the destruction of business confidence by the foolish remarks of the new Chancellor of the Exchequer—the comparisons with Greece and so on—that led to a collapse in private sector investment and growth.

[Lord Newby]

My Lords, businessmen take some notice of politicians, but they do not make investment decisions purely—or even largely—on what politicians say. They look around the market and see what is happening elsewhere in the world. The speech of the noble Lord, Lord Eatwell, was notable in a number of respects. One was that although he used the word “Europe” in his first and last sentences, he did not refer at all to the crisis in the eurozone and to the fact, supported by the OBR, that one of the greatest problems and brakes on growth in the UK has been what happened to the eurozone. It is a crisis in which we had no part and that we were obviously unable to deal with. The eurozone countries are dealing with it themselves.

I will move to an area where I have a greater degree of agreement with the noble Lord, Lord Eatwell. It is the importance now of infrastructure expenditure as a source of growth going forward. There are two elements that are linked but separate. One is non-housing infrastructure and the other is housing infrastructure. On non-housing infrastructure, as the noble Lord will be aware, the Government have made available up to £40 billion of guarantees to enable private sector investment in key infrastructure. He will have seen that the policy bore fruit yesterday with the announcement that the Drax power station is using the facility to enable it to invest £75 million in upgrading the station. We hope and expect that this will be the first of many such deals.

Housing is a major problem. It was a major problem during the previous Parliament and remains so, to the extent that the demand for new housing is increasing by about 250,000 units a year. Nothing like that amount of housing has been built for many years. The Government are attempting to deal with this with a three-pronged approach. First, we will make it easier to get planning permission for new housing development. Secondly, we will increase demand. This is why we are supporting first-time buyers and others who want to take out mortgages in circumstances where the banks are requiring prohibitively large deposits from most people. Thirdly, we will improve the supply of housing. That is why, in addition to the £40 billion guarantee for other infrastructure, we have in place a £10 billion guarantee programme for housing.

There remains a major problem with getting the banks involved in funding developers, particularly small developers, and I am engaged in discussions with the BBA to see whether we can help. However, in terms of government support for new investment, both for housing and general infrastructure, which the noble Lord, Lord McFall, suggested we should be doing, I remind him that we have established the Green Investment Bank. We are also establishing a small business bank. This is a degree of banking activism that was absent during the time of the previous Government.

Public Service Pensions Bill

Debate between Lord Newby and Lord Eatwell

Wednesday 24th April 2013 Lords Chamber

[Lord Newby]

My Lords, as the House is aware, the Government accepted on Monday the substance of the amendment of the noble Lord, Lord Eatwell. I said we would make some small, technical changes to ensure that it works as intended. The government Motion before us makes all those necessary tweaks, while upholding the principles of the policy in full.

I briefly explain the reasons why the tweaks were necessary. The Government’s redrafted Motion seeks to address some inadvertent consequences that could arise from accepting the amendment that the House approved as it stood on Monday. First, the names of the workforces were not quite right. We have corrected this to ensure they are consistent with other statutory references to these groups of public servants. Secondly, there was the potential for confusion about the role of the Secretary of State for Defence, who is included in the general term Secretary of State. The noble Lord’s amendment implied that he would carry out any review of the terms and conditions of these workforces in conjunction with himself. That has now been corrected. I suspect that the original wording sought to ensure that the Treasury and the MoD worked together on the review; I can confirm that that is the intention.

Finally, there is the issue of commencement—the timeframe for when the Motion would come into force. The amendment of the noble Lord, Lord Eatwell, would have started the clock only after the entire Bill came into force, which would delay the review considerably. Instead, the Government’s Motion creates a specific deadline linked to the relevant clause of the Bill, a timescale which has been further clarified by the Economic Secretary in another place. I am also happy to confirm to noble Lords that the Government will commence the relevant sections promptly to ensure that the review takes place without further delay with a view to concluding and reporting within eight months.

My colleague the Economic Secretary has already committed in the other place that the Government will not be blind to the context in which the review will take place. The review of pension arrangements will take account of the wider pay and remuneration package of the forces involved.

The Government will now work closely with the relevant interested parties to pursue the appropriate way forward. Workforce representatives are some of the most important and interested parties, and so will be fully involved. I hope that noble Lords will agree that the Government have been very clear in their support for this review. We are now keen to get on with it and to establish the best way forward. On that basis and in this spirit, I urge noble Lords to support the Motion. I beg to move.

[Lord Eatwell]

My Lords, I am grateful for the corrections which the noble Lord has made to the amendment which I put down yesterday, and for the commitment that the review will be done within eight months. There was another change that he did not cover. The term of art, “statements of requirement”, which refers to the level of physical ability that the fire service and police must attain, was changed to “operational requirements”. What is the significance of that change?

[Lord Newby]

My Lords, I do not think that there is any significance in the change. As I said earlier, there has been no change of substance in the content of the Motion as it appears before your Lordships’ House from the amendment that the noble Lord moved on Monday, which was accepted by the House. I am 99% certain that that was the case. If I have misled him or the House, I will write immediately to correct it. I can assure the noble Lord that the aim and the intention is simply to have language that is clear, unambiguous and enables us to get on with it. I beg to move.

Banking: Quantitative Easing

Debate between Lord Newby and Lord Eatwell

Wednesday 27th March 2013 Lords Chamber

[Lord Newby]

My Lords, we need to pursue more than one course at the same time. The Green Investment Bank and the new business bank are one way forward; further innovation by the MPC is another. We need the full range of tools at our disposal to promote growth.

[Lord Eatwell]

My Lords, given that interest rates have been at record lows for three years and that liquidity is high, with no notable impact on the overall rate of growth, will the Minister tell us exactly what the mechanism is by which this greater monetary activism will stimulate growth?

Bank of England: Monetary Policy

Debate between Lord Newby and Lord Eatwell

Tuesday 19th March 2013 Lords Chamber

[Lord Newby]

My Lords, again, that is a matter for the Bank of England. To the extent that the Chancellor—and the Treasury—wishes to change the way in which the Bank of England operates, he will have an opportunity tomorrow to set out what any changes might be.

[Lord Eatwell]

My Lords, from what the noble Lord has said, the Treasury has clearly been content with the policy pursued by the Monetary Policy Committee over the past three years. Is the noble Lord also content with the impact of that policy on pensioners’ annuities?

[Lord Newby]

My Lords, the Government’s view is that it is in the long-term interests of everybody, including pensioners and families, that we deal with the deficit and get growth going on a sustainable basis. In the short term, the Bank has taken the view that to keep within the inflation target and, subject to that, to support the economic policy of the Government, including their objectives for growth and employment, it should keep interest rates low.

EU: Eurozone Financial Transaction Tax

Debate between Lord Newby and Lord Eatwell

Tuesday 5th March 2013 Lords Chamber

[Lord Newby]

My Lords, I am sure that many noble Lords share that aim. The question is whether such a tax would have that impact, and the academic work on it is ambiguous at best.

[Lord Eatwell]

Will the noble Lord explain why the Government are so allergic to the financial transaction tax, which is to be levied at less than 1% of the value of transactions and by many countries, whereas we are quite happy to have stamp duty levied on transactions at 5%, which is effective only here in the UK?

[Lord Newby]

My Lords, we have some examples of where this kind of thing has been done in the past. In 1989, Sweden introduced its version of an FTT and in the first week the volume of bond trading fell by 85%, even though the tax rate was only 0.003%. The volume of futures trading fell by 98% and the options trading market disappeared. Not surprisingly, Sweden is not now supporting the idea of a Europe-wide FTT.

Social Security (Contributions) (Re-rating) Order 2013

Debate between Lord Newby and Lord Eatwell

Monday 4th March 2013 Grand Committee

[Lord Newby]

My Lords, I am pleased to introduce the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2013 and the Social Security (Contributions) (Re-rating) Order 2013 to the Committee. As both the regulations and the order deal with national insurance contributions, I hope the Committee will agree that it is sensible that they be debated together. As a matter of course, I confirm that the provisions in the regulations and the order are compatible with the European Convention on Human Rights.

All the changes covered by these two instruments were announced as part of the Chancellor’s Autumn Statement on 5 December last year. I should confirm from the start that the basis of indexation that has been used to calculate the changes covered by these two instruments is the same as that used for the 2012-13 tax year. In the Budget in March 2011, we announced that, from the 2012-13 tax year, the basis for indexation of most NICs rates limits and thresholds would be the consumer prices index instead of the retail prices index rate of inflation. This is because the Government believe that the CPI is the most appropriate measure of the general level of prices.

I will start with the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations. These regulations are necessary in order to set the class 1 national insurance contributions lower earnings limit, the primary and secondary thresholds, and the upper earnings limit for the 2013-14 tax year. The class 1 lower earnings limit will be increased from £107 to £109 per week from 6 April 2013. The lower earnings limit is the level of earnings at which contributory benefit entitlement is secured. However, NICs do not need to be paid by the employee until earnings reach the primary threshold. The class 1 primary threshold will be increased to £149 per week from 6 April 2013. The secondary threshold is the point at which employers start to pay class 1 NICs. In line with the commitment in the Budget in 2011, this is being increased by RPI to £148 per week.

From this April, the personal allowance for people born after 5 April 1948 will be increased above indexation by £1,335, from £8,105 to £9,440—the largest ever cash increase. As part of that increase, the basic rate limit will be reduced by £2,360 to £32,010. This means that the point at which the higher rate tax kicks in will be reduced to £41,450 in 2013-14. As I mentioned, the upper earnings limit is not subject to CPI indexation. In order to maintain the existing alignment of the upper earnings limit with the point at which higher rate tax is paid, the upper earnings limit will be reduced to £797 per week.

The regulations also set the prescribed equivalents of the primary and secondary thresholds for employees paid monthly or annually. There will be no changes to NICs rates in 2013-14. Employees will continue to pay 12% on earnings between the primary threshold and the upper earnings limit, and 2% on earnings above that. Employers will continue to pay contributions at 13.8% on all earnings above the secondary threshold.

The social security regulations set out the NIC rates and thresholds for the self-employed and those paying voluntary contributions. Starting with the self-employed, the order raises the small earnings exemption below which the self-employed may claim exemption from paying class 2 contributions. The exemption will rise in April from £5,595 to £5,725 a year. Many self-employed people choose to pay those contributions to protect their benefit entitlement, even though they may claim exemption from paying class 2 contributions. The rate of voluntary class 3 contributions will also increase, from £13.25 to £13.55 a week.

Today’s measure also sets the profit limits for class 4 contributions. The lower profit limit at which these contributions are due will increase from £7,605 to £7,755 a year, in line with the increase to the class 1 primary threshold. At the other end of the scale, the upper profit limit will be reduced from £42,475 to £41,450 for the 2013-14 tax year. This is to maintain the alignment of the upper profit limit with the upper earnings limit for employees. The changes to the class 4 limits will ensure that the self-employed pay contributions at the main rate of 9% on a similar range of earnings to employees paying class 1 contributions at the main rate of 12%. Profits above the upper limit are subject to the additional rate of 2%, in line with the 2% paid by employees. I commend the order to the Committee.

[Lord Eatwell]

My Lords, these measures are pretty straightforward and I do not have many comments to make, other than that I noticed that in the noble Lord’s introduction, although he made the traditional argument for CPI over RPI, he mentioned particular rates with respect to RPI. Those are clearly elements which are grandfathered within the social security structure. Are those RPI upratings to be maintained over the medium term, or is this a transitional arrangement? I have lost that in the complexity. That is entirely my failing and I should be grateful if the Minister would help me.

Secondly, and more broadly, can the Minister address the issue of entitlements? Both measures refer to securing entitlements, and that is particularly true with respect to the order on contributions. The whole notion of an entitlement is that one has some predictive expectation of returns, but we know today that there is no such predictive entitlement to returns. Governments—I do not say just this Government—change the pension rules upratings with respect to pensions and the pension age. So the entitlement that individuals are acquiring by making those contributions is simply in the hands of this and any future Administration.

Is that an appropriate way of going about that? The whole notion of national insurance was introduced as insurance—as a relationship, therefore, which would be defined between contribution and entitlement. That relationship has now broken down. Should we be rethinking on what basis the relationship between individual contributions and subsequent returns is calculated?

[Lord Newby]

My Lords, I thank the noble Lord for his comments. On the first point, perhaps I should have said that the RPI, as opposed to the CPI, is used in respect of the secondary threshold and the upper earnings and upper profit limits. Do the Government intend to maintain that in the medium term or to phase it out? We have said that the RPI increase will be for this Parliament, so we have no immediate intention to phase it out.

On entitlements under national insurance legislation and the fact that the Government change the rules, the problem here, I suspect, is that, as the noble Lord said, the link between paying into national insurance and what one gets by way of benefits from the system is very weak. We have gone a long way from the Lloyd George principle, when it was all very straightforward. Because the situation is much less clear than it was when the system was established, it will be quite difficult for the Government either to link national insurance payments more closely to entitlements or to merge income tax and national insurance into a single payment, which I know that my party and others and the Government have considered. We have ended up with a complicated system which succeeds in generating, broadly speaking, the amount of money required to fund the welfare state. I cannot see in the near future, and certainly not in this Parliament, a fundamental rethink about how we do that.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2013

Debate between Lord Newby and Lord Eatwell

Monday 4th March 2013 Grand Committee

[Lord Newby]

My Lords, the Government have been clear that the attempted manipulation of the London interbank offered rate is completely unacceptable and has no place in the UK’s financial services industry. That is why we moved quickly after the initial revelations emerged to ask Martin Wheatley, the chief executive-designate of the new Financial Conduct Authority, to consider what immediate reforms could be made. The Wheatley review, which was published in September, provides a 10-point plan to reform LIBOR, including recommendations to both government and market participants. The Government welcomed and endorsed the Wheatley review’s recommendations, and have asked all institutions to which they are addressed to implement them without delay.

The Government believe that the banks and the British Bankers’ Association have to take responsibility for their failings and act on Mr Wheatley’s recommendations, including the removal and replacement of the BBA as operational LIBOR administrator. HM Treasury and the BBA have been working together and have made significant progress in laying the foundations for this unprecedented process. The noble Baroness, Lady Hogg, is now leading an independent committee that will recommend an appropriate successor. This builds on the legislative changes that we have already made. Following the Wheatley review, we introduced the following amendments to the Financial Services Act, which are relevant to today’s debate, to enable benchmark activities to be brought within the scope of statutory regulation under FiSMA, and to create a new, distinct criminal offence for making false or misleading submissions in connection with the determination of benchmarks.

Following a period of consultation at the end of last year, the two draft orders that underpin these changes, which we are debating today, were laid before Parliament. Last week they were approved by the other place. The Government plan to bring both orders into force at the beginning of April. This will continue the Government’s approach of taking decisive action to reform LIBOR.

The first statutory instrument amends the Financial Services and Markets Act 2000 (Regulated Activities) Order, to denote that submitting to and administering a benchmark are both regulated activities. The draft order specifies LIBOR as the relevant benchmark. The regulation of these activities will enhance and strengthen the FCA’s ability to make rules on benchmark-setting, as well as its ability to supervise directly and take regulatory action against those involved in benchmark-setting processes. It will also implement a key recommendation of the Wheatley review. Under this order, the banks that submit to LIBOR and the successor to the BBA will be regulated by the FCA.

The draft order provides certain exemptions to these activities to cover information that was not created specifically for the benchmark-setting process. Where a person simply supplies publicly available factual data, such as the stock market closing price, to the administrator of a specified benchmark, their activities will not constitute submission to a benchmark. Similarly, if the administrator of the benchmark happens to subscribe to a general information service such as a newspaper, the provider of that service will also not be carrying out the activity of submitting to a specified benchmark. The draft order includes provisions to ensure a smooth transition to the new regulated regime for those currently involved in the setting of LIBOR.

Finally, the order makes two consequential changes to the definition of “consumer” for the purposes of the FCA’s objectives. These changes ensure that individuals whose rights, interests or obligations are affected by the benchmark are classed as consumers by the FCA in meeting its objectives.

The second order under discussion today underpins the new criminal offences created by the Financial Services Act, as recommended by the Wheatley review. The Government have been clear throughout the ongoing enforcement actions that any organisation or individual found guilty of this sort of wrongdoing must take full responsibility and should be punished, if appropriate, by the civil and criminal law. The Serious Fraud Office has launched a criminal investigation into allegations of LIBOR manipulation under the Fraud Act. However, the Government believe that the FCA should also have the powers to investigate and prosecute this type of conduct in relation to benchmarks in the future. Although the FCA will have powers to investigate misconduct in relation to LIBOR and other benchmarks, none of the offences currently provided for in FiSMA apply to misconduct in relation to the kinds of benchmarks revealed by the recent investigations.

To close this gap, the Government created a new criminal offence specifically related to benchmark misconduct in the Financial Services Act. The Government also took the opportunity to review and expand the existing offences which relate to misleading statements made with a view to inducing the recipient to engage in market activity. These offences are backed up by strong and dissuasive criminal penalties of imprisonment for up to seven years and an unlimited fine.

The draft order specifies the activities, investments and benchmarks to which these offences relate and carries forward the existing law which is needed to support the new offences. Article 3 of the new order specifies the benchmarks to which the new offence applies—specifically LIBOR. Rogue individuals may still attempt to manipulate the rate but if they do, the FCA will have the appropriate powers to investigate and prosecute them.

The amendments introduced to the Financial Services Act last year give the Government the power to regulate benchmarks beyond LIBOR through appropriate secondary legislation. While we have taken swift action to deal with LIBOR misconduct, this does not mean that other benchmarks should go unregulated. We have given serious consideration to whether we should extend regulation to other benchmarks where we believe there to be a risk of manipulation.

The Government consulted on the matter at the end of last year. In answer to the Government’s consultation, respondents argued that an international consensus and framework should be developed under the auspices of the International Organisation of Securities and Commissions, the Financial Stability Board and the European Commission before the scope of benchmark regulation is extended beyond LIBOR. Progress is being made on these international initiatives. The Government agree with the consultation respondents and have decided, for now, to apply those new provisions only to LIBOR. We continue actively to engage in and drive forward the international work on this issue. However, as we have done in the case of LIBOR, we stand ready to move ahead of international work streams and table further secondary legislation to extend the scope should we deem it necessary. I commend these orders to the House.

This group also includes the Uncertificated Securities (Amendment) Regulations, which amend the Uncertificated Securities Regulations 2001 to transfer responsibility for the approval and regulation of operators of securities settlement systems from the Treasury—which had delegated the responsibility to the Financial Services Authority—to the Bank of England. The regulatory arrangements for securities settlement systems have always been modelled on those for recognised clearing houses and recognised investment exchanges in Part 18 of FiSMA. The new powers and other changes to these regulations essentially follow the changes that the Financial Services Act 2012 makes to Part 18. Specifically, the regulations provide the Bank of England with new powers to require reports to be produced by skilled persons in respect of operators, to appoint investigators for the purpose of making inquiries about operators and to publicly censure operators in appropriate cases. In addition, the regulations replace the existing provision regarding the prevention of restrictive practices with provision for the purpose of preventing operators adopting excessive regulatory provision.

The final order in this group is the consequential amendments order. A number of changes to other pieces of legislation are required as a consequence of the regulatory reforms introduced by the Financial Services Act. The majority of these were included in Schedule 18 to the Act. However, a small number of amendments have required further consideration during the Act’s passage and are therefore being made through this instrument. Primarily, it amends references to the FSA’s rulebook in primary legislation, taking into account that both the PRA and the FCA will make rules in the new regulatory system. It also amends references to provisions of the Financial Services and Markets Act 2000 which have been amended by the Financial Services Act 2012. These orders are all necessary for the effective implementation of the Financial Services Act and, on this basis, I commend them to the Committee.

[Lord Eatwell]

My Lords, I thank the Minister for introducing these orders. I will take them in reverse order, so to speak, since the major issue of the amendments relating to LIBOR and its subsequent management is the most weighty, and we can take some of the later amendments perhaps more quickly and dispose of them.

First, as the noble Lord says, the consequential amendments refer primarily to the specification of which parts of the FSA rulebook are to be divided between the PRA and the FCA. This seems rather minor but has very significant consequences, because you are taking what was, we hope, an internally consistent document and ripping it apart. The question is therefore whether the consistency that existed in the previous document will be retained in the subsequent two documents. It would be helpful if the noble Lord could elaborate a little on that, particularly in the light of the recent arguments being made by Mr Haldane of the Bank of England, who has argued most strongly that the excessive number of pages of regulation should be significantly reduced in order to reduce complexity. If Mr Haldane’s rule is to be followed, will we end up, when these rulebooks are divided following these measures, with more pages or fewer? A particular element puzzled me in this particular order. In respect of Article 13, which amends the Corporation Tax Act 2009, can the Minister explain how transforming “Insurance Prudential Sourcebook” into “Prudential Sourcebook for Insurers” has any substance whatever?

Uncertificated securities is a very important area and there has been huge growth in electronic exchanges and uncertificated insurances of this type. The order refers at many points to the notion of excessive regulation by the managers or operators of electronic transfer systems. Can the noble Lord elaborate on who is to define “excessive” and, indeed, how it is to be specified? If there is to be some clarity in this law, it would help if the notions of “excessive” and “disproportionate”, which are used at several points throughout the order, were clearly defined. There was one other puzzle, rather like the puzzle I have about the Insurance Prudential Sourcebook, on which the Minister could perhaps help me. In the redefinition of responsibility from the Treasury to the Bank of England, it is clear that “Treasury” is a collective noun while “Bank of England” is singular. Why is that? Is it because the Bank of England is a singular person, namely the governor, whereas the Treasury has responsibility shared out more widely?

I now turn to the meat of the matters before us today, the orders referring to misleading statements and impressions, which essential collect a number of areas which will be responsible if other benchmarks should be developed rather than simply LIBOR, and of course to the major one on regulated activities. First, I was very struck by the list of organisations and responsibilities associated with misleading statements and impressions. In the noble Lord’s description of the creation of those lists, he referred to the possibility of further benchmarks being included within the procedures defined within the Act. He told us that these were now being considered internationally, and that we await international rulings on these matters. It seems that there is a stark contrast between the very prompt action that was taken following the Wheatley report in respect of LIBOR and the effective kicking into touch of all the other areas which are of equivalent importance. Can the Minister assure us that major benchmarks used within the City of London are not today being manipulated? Can he assure us that the delays in international consideration of these matters will not result in some of the same activities as we have seen with respect to LIBOR?

--- Later in debate ---

[Lord Newby]

My Lords, I am extremely grateful to noble Lords who have contributed to the debate and will attempt to answer the questions they have raised. The first questions related to the effect of the tearing up, or bifurcation, of the rulebook and how continuity will be retained. I hope that the cultural commitment which the noble Baroness, Lady Kramer, mentioned, pervades those at the head of the new organisations and that it will be carried forward. In formal terms, consistency will be maintained by the operation of the memorandum of understanding between the two bodies, the PRA and the FCA, which we discussed in relation to other orders last week.

This is of course not the first time that there has been an attempt to reduce the number of pages. The FSA at one point consulted on it, but the answer it got back was, “Actually, we do not want the number of pages reduced significantly, because they tell us what to do, and if you reduce the number of pages, that puts more of a requirement on us to exercise our own judgment”. That is the balance that we are grappling with here. On the one hand, everybody wants less regulation, but when the consequence of less prescriptive regulation is that people have to exercise more of their own judgment, sometimes they become less keen.

[Lord Eatwell]

The noble Lord has put his finger on absolutely the point that Mr Haldane was making, which is that the excessive complexity of regulation these days is actually being trapped in a game between the regulated and the regulators; as the regulated develop yet more complex instruments, the regulator responds with more complex regulation, and then the regulated respond with more complex instruments to evade the regulations that have just been introduced. The whole point of Mr Haldane’s argument was that there should be a much stronger and simpler structure and that chasing complexity was a fundamental mistake. Complexity in regulation just adds complexity in taxation, which is the origin of successful evasion.

[Lord Newby]

My Lords, I have a lot of sympathy with that view. Of course, one of the reasons why, in a slightly different bit of the forest, we are introducing the general anti-abuse rule is to start moving away from a situation in which the regulator is not only almost institutionally behind the game but responds to problems by having to produce vastly long and complicated legislation, which is why the tax code is as long as it is today.

The noble Lord also asked who defines “excessive”. The use of “excessive” is not new and it follows the existing FiSMA provisions. It means not required by UK or EU law; not justified by reasonable regulatory objectives; or disproportionate to any regulatory objectives. So there is a definition and I am glad that I do not have to administer that.

The noble Lord asked why the Treasury is plural and the Bank of England singular. I am sure he will be interested to know that the Treasury is defined in the Interpretation Act 1978 as,

“the Commissioners of Her Majesty’s Treasury”.

This reflects the fact that, for historical reasons, the Treasury has acted through two or more Lords Commissioners rather than a single Minister. I am extremely pleased to know that there is a rationale for that.

The noble Lord asked, in respect of the misleading statements order and the LIBOR orders more generally, about adding further benchmarks, and whether I can be sure that these are not being manipulated now and that delays will not lead to some of the same activities in respect of the other benchmarks. We do not think they are being manipulated now. By definition with these things, one does not always know until long after the event that people are behaving badly, but there is no indication that by sticking to LIBOR at the moment any illicit activities are taking place. We are putting most of our effort into international discussion on these issues at the moment but the legislation is very clear: we can add additional benchmarks unilaterally by secondary legislation if we feel that we need to do so, but at the moment we do not feel that we are in that position.

The noble Lord asked about interim permission. Interim permission is being given to the person who is administering LIBOR on 1 April and to those banks that are submitting to LIBOR. It is being given so that the new regulatory regime can start without any delay and before the longer-term reorganisation of the LIBOR system is in place.

[Lord Eatwell]

I see that, but to whom is interim permission being given—by whom and to whom?

Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013

Debate between Lord Newby and Lord Eatwell

Tuesday 26th February 2013 Grand Committee

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for introducing these orders. Like him, I will deal with them altogether. Before doing so, I declare an interest as a non-executive director of a financial services firm as set out in the Register of Lords’ Interests. Turning first to the PRA-regulated activities order, I still am somewhat puzzled as regards the whole definition of the large investment firm. Are we simply relying on the CRD definition expressed as €730,000-odd or is there some broader definition of what is meant by a “large investment firm” which the PRA has in mind?

Also with respect to that, under Article 6.5, what is the procedure if the FCA disagrees with the PRA’s decision to withdraw a designation? The consultation process should form a check on the PRA and not just act as a rubber-stamping on behalf of other bodies. There should be some scrutiny of important decisions that the PRA wishes to undertake, although of course without undermining its powers. What will be the dynamic when there is some form of disagreement and how are those disagreements to be mediated?

The threshold conditions are entirely appropriate but I want to focus on Article 2A about suitability. I found the discussion of suitability as a threshold condition—a very important threshold condition in any regulatory system—to be rather more vague than I would have expected. For example, under Article 2E(e) those who manage the affairs in investment firms have to have “adequate skills and experience”. Who defines adequate? What is meant by adequate? Does adequacy refer to a particular examination standard or standards of experience which might be expected?

In addition, the PRA might be expected to act with probity. Do we need a more precise definition of probity or will we simply regard it as having not yet been caught? How will we determine the conditions of suitability? Should they not be more precise, as individuals who wish to work in the financial services industry surely should have precise conditions and not be turned down on the basis of those rather general statements?

I have rather more questions on the Financial Services Compensation Scheme. Again, I will start with the problem of consultation between the PRA and the FCA. It seems to me that the PRA and the FCA are required to develop rules for access to the FSCS. How will they disclose that? What is the rule-making procedure referred to in this instrument? What will the procedure look like? Will they review the FSCS’s current rules? Presumably, they will. When we have had that review, will there be a transparent report to Parliament of the substance of that review?

There is a relationship between the discussion of mutuals and the FSCS. As the noble Lord will be aware, there has been considerable disquiet, to put it mildly, among mutuals with respect to the contributions that they make to the FSCS relative to those made by banks. I may have missed it, and if I have I apologise, but has there been any development on the levies made on mutuals in their contributions to the FSCS?

Turning specifically to the order before us, are there any substantial changes to the functions of the regulator in relation to mutuals contained in this order, or is it purely a transfer activity? Let us take one example which attracted my attention as I read through the order and raised this question. Paragraph 5 of Schedule 1 states that the FCA has an obligation to,

“maintain arrangements … to determine whether persons are complying with requirements”.

That is pretty vague. What sort of arrangements do we mean? Could there be some clarity as to what is to be implemented here?

Given the Government’s determination to make five regulators where there was once just one, what will happen with respect to consultation between the PRA and the FCA when action is required rapidly; for example, in criminal proceedings? How can we ensure that the consultation procedure will be prompt?

Overall, we are broadly content with the orders. We are concerned specifically about a lack of clarity at various points, to which I have referred, and about the introduction of additional complexity because of the requirement for consultation at various stages between the PRA and the FCA. I would like some reassurance on those points.

[Lord Newby]

My Lords, if there is a leitmotif running through the noble Lord’s questions, it has to be about how the two bodies work together. This theme ran also through previous debates in your Lordships’ House and gets to the core of arguments about whether the Government were right to split the FSA at all. The view that we took is that we needed to give greater focus to the two elements of regulation. It was very important, having done that, we then set in place ways in which the two regulators would work together. As the noble Lord knows, there are a number of points in the Act where the two bodies are required to establish memoranda of understanding explaining exactly how they are going to work together. The success of the new structure will depend to a very large extent on that working. I know that the bodies as they are establishing themselves are absolutely aware of that and are putting co-ordination and consultation procedures in place.

Perhaps I may deal with some of the specific points that the noble Lord raised. He asked whether the designation of a larger firm was simply the €730,000 capital requirement. The order takes a number of criteria into account, not all of them from the CRD. I read some of them out. The PRA, for example, has to conclude that designation is desirable, having regard to its objectives—this is part of the regulator exercising judgment. That is an additional criterion beyond the €730,000; it is not automatic.

The noble Lord asked what would happen if the FCA disagreed with the PRA’s decision to withdraw designation. This is a decision for the PRA. We expect it to give considerable weight to the views of the FCA, but it is ultimately a matter for the PRA.

The noble Lord asked whether the definitions should be more precise, in particular the definition of “probity”. The Government do not consider that the concept of probity is significantly more subjective than other criteria against which the regulator must make regulatory judgments. Recent conduct and mis-selling scandals have shown more than ever how important it is that firms conduct themselves with probity, and it is right that the regulators can make an assessment on whether this is the case and take action where it is needed. A general question for legislation is how far it attempts to define terms which are in common parlance and have a common understanding. Our view is that in this respect the legislation goes as far as it should do.

The noble Lord asked about mutuals and whether there had been a change in class. This has been a long-standing beef of the mutuals; they feel that they have to bear the burden of the incompetence, folly and recklessness of others. That is a question for the authorities to decide, but for the time being they remain in the same levy class that they have already stayed in.

I shall try to deal with one or two other points. The noble Lord asked about the procedure for FSCS rules. The same procedure applies as for other rules; there is a duty to consult but no duty to carry out a cost-benefit analysis. There are no plans to change the rules as part of the transition. Once the transition has taken place, it will obviously be for the new regulators to decide whether they are happy with them, but we are not planning to do that at the same time.

On the question of consultation between the FCA and the PRA on mutuals functions, the order makes express provision for consultation where it is needed. The general provisions relating to the FCA/PRA MoU, which I referred to earlier and which are set out in Section 6 of the Act, will apply in this area as they will in many others.

I hope that I have answered the majority, if not all, of the questions posed by the noble Lord, and I commend the regulations to the Committee.

Bank of England Act 1998 (Macro-prudential Measures) Order 2013

Debate between Lord Newby and Lord Eatwell

Tuesday 26th February 2013 Grand Committee

[Lord Eatwell]

My Lords, that was interesting introduction to this order as it spent most of its time discussing measures that are not included. It also began with a preamble that was an extraordinary rewrite of history, referring to a failure to identify macroprudential risks prior to 2008. Will the Minister specify any Government or regulatory document that includes a reference to macroprudential risk before 2008 and before publication of the Turner review? He will be hard put to find it. There are some academic articles on systemic risk but the whole issue of macroprudential risk was simply not on the horizon at that time.

I was also somewhat distressed to find that the Government still believe that following the Basel III approach of using capital related to risk-weighted assets is still at the centre of the approach to the determination of stability, particularly in the banking sector. This is using weapons with which we fought the last war to try to deal with the new war. It is an excessive emphasis on the asset side of the balance sheet to the detriment of the liability side, and indeed has been criticised very strongly recently by the IMF. I hope that the Government will rethink their approach and not continue to rely on this outdated measure.

I want to talk about some of the measures before us rather than some that might appear in the future, although the Minister has tempted me to ask what is happening with the leverage ratio. Leverage collars, which after all apply to the liability side of the balance sheet, have been demonstrated to be far more effective than risk-weighted capital requirements. Do the Government still plan to weaken the Vickers proposal of a leverage ratio of 25:1 and to fix the requirements simply on the Basel minimum of 33:1? When thinking about the leverage ratio, is the FPC planning any distinction between deposits and wholesale funding in the specification of a leverage cap?

In its earlier consideration of these measures, the FPC rejected the adoption of a loan-to-value ratio in mortgage finance, arguing that this was a political decision. In this instrument, though, we find the requirement on financial institutions to maintain additional own funds with respect to exposure to residential property. Will that not have the same effect? Is it not a back-door method of introducing loan-to-value restrictions by the requirement to hold additional capital against residential exposures?

Turning to the sectors specified in this instrument, it is striking that the measures are confined to financial instruments issued by financial sector firms. Why is that? If there were a bubble in the stock market, it could involve predominantly financial instruments issued by non-financial firms. Why is this legislation restricted only to instruments issued by financial institutions?

Another peculiarity of the drafting of this instrument is that it refers only to an increase in requirements of holding of own funds. It refers to “additional funds required” and that the PRA may require additional own funds both by banks and by other financial institutions. How will the PRA reduce the amount of funds required since the instrument only allows it to require additional funds? How will that happen?

I also regret the exclusion of smaller firms, to which the noble Lord referred in his introductory remarks. The Treasury seems to have totally failed to understand that a significant amount of the financial crisis was due to the aggregation of a large number of small firms doing the same thing at the same time, which had the same consequence as a large firm doing the similar thing in terms of the development of systemic risk.

The measures also refer to the requirement to ask or require that banks treat particular exposures as if they give rise to an increased level of risk, which is true not just of banks but also of investment firms. How is this level of risk to be specified by the FPC? Is it as a risk weight or as a modification of the stochastic distribution model used in the calculation of the firm’s value at risk? How is it to be done? If it is with respect to the modelling, does that now mean that the ability of firms to use their own risk models is to be modified and that there is to be a standardisation of risk models used by firms in the calculation of capital requirements?

The noble Lord referred to the use of these measures in what he called a granular way and what in the instrument is referred to as a solo basis. What will the relationship be between the FPC’s requirements of measures and competition policy, in the sense that imposing measures on a single firm would have competition implications? Will the views of the competition authorities be taken into account?

I assume that this is the first of a series of instruments that will implement the various proposals aired in the consultation papers issued by the interim FPC. Perhaps it would be helpful if the Minister gave us some timetable as to when those other instruments will be laid before the House.

[Lord Newby]

I am grateful to the noble Lord for those extremely thoughtful questions, and I will do my best to answer them. He said that systemic risk was not on the horizon before the crisis. I think that the phrase was first used in academic literature in 1979. Although the phrase was not in common parlance, it was well understood, at least by some people, that a bubble was building up that was capable of creating systemic risk. The first problem was that it took a long time for the authorities and the Government to accept that there was a bubble. The second was that when they realised that there was a problem, and indeed when there was a crisis, it was far too late to forestall it. It was then necessary to deal with a crisis rather than dealing with a problem at an early stage.

The noble Lord said that we rely far too much on Basel III and that it is a weapon of the last war. We are part of an international discussion on Basel III. Although Basel III is part of the armoury that we use, it is only one part. Indeed, the measure that we are looking at today is not a Basel III measure. Even if the noble Lord was correct that Basel III does not deal with every issue that we will be grappling with, it is not the only tool that we are looking at.

The noble Lord asked me about the leverage ratio, and whether we still plan to weaken the Vickers ratio. I do not believe that the Government’s view on this has changed.

[Lord Eatwell]

Why not?

[Lord Newby]

The Government said in response to Vickers that they believed he was going too far, and I do not believe that that view has changed. The noble Lord asked about the loan-to-value ratio and whether that tool would not have the same effect as introducing a loan-to-value ratio. In an aggregate sense, in many ways it does so. However, the advantage of this approach over adopting a loan-to-value limit is that it places an overall requirement on an institution in terms of its lending to the property sector, but still gives that institution the flexibility to provide loans at a high loan-to-value ratio. This might take place, for example, in a minority of cases in which the circumstances of the person to whom the loan is being given makes that loan prudent. In many ways it could have the same overall effect on the sector, but it gives institutions greater flexibility than a prescriptive loan-to-value ratio.

The noble Lord asked why the stock market was not included and why we were not including firms in that sector. The answer is that at this point the FPC believes that the definition of which firms are covered includes those firms that are most likely to cause a problem. The FPC has taken the view that firms in the stock market are not creating an equivalent risk to those elsewhere and those already covered. That is its judgement, which one can take a view on. The noble Lord disagrees, but that is the answer to the question.

The noble Lord asked about the order using the word “increase” and how it is envisaged that any increase might be unwound. When the FPC considers that any increase is no longer required, it will revoke the direction.

[Lord Eatwell]

Let us suppose that we are in the situation that we are in today, that there is no direction in place and that we wish to reduce the own funds. How do we do that?

[Lord Newby]

My Lords, I do think that that is an eventuality that the order caters for because, as the noble Lord says, it uses “increase”. If I am wrong on that, I shall let him know but, as he has said, the order is relatively straightforward. It will be for the PRA to decide whether it wants to do that, and it may do so, but obviously I will correct the record if I am wrong. It may require an amendment to the order for it to do that.

The noble Lord asked about the aggregation of a large number of small firms. This issue formed part of the consultation. The strong view came back that the effect that was being sought could be achieved by limiting the order at this point to larger firms. If any evidence built up that a large number of small firms could cause a risk beyond that currently envisaged, it would be for the FPC at that point to make appropriate provision.

The noble Lord asked how the FPC would specify risk. It will be for the PRA to determine capital models allowed by firms within the overall levels set by the FPC.

The noble Lord asked me about the timetable—whether there would be more orders and when they were going to be. There may be more orders, but none is envisaged at the moment. There is not a conveyor belt of other orders that are half-thought of. The view is that these measures are adequate for the time being. It is always open for further orders to be brought forward, but there is no perceived need for any further orders at this point.

There is one issue that I have not dealt with concerning the relationship between the FPC and the competition authorities. I hope that the noble Lord will forgive me if I write to him on that subject.

[Lord Eatwell]

Before the Minister sits down, perhaps we could go back to how an increased level of risk is to be specified by the FPC. Is that to be specified as a change in risk weights in old-fashioned Basel I structures, or is it to be specified as a modification of the value at risk models used by the financial institutions? If it is the latter, are we moving away from the ability of institutions to use their own value at risk modelling towards a standardised model?

[Lord Newby]

My Lords, as I said earlier, the PRA will set overall levels; the capital models allowed by firms will, I believe be determined by the PRA.

[Lord Eatwell]

I am sorry, but the noble Lord contradicts the instrument before us. It states clearly,

“if they gave rise to an increased level of risk specified by the FPC”.

It is not the PRA, it is the FPC that has to specify this increased level of risk.

Public Service Pensions Bill

Debate between Lord Newby and Lord Eatwell

Tuesday 26th February 2013 Lords Chamber

[Lord Newby]

My Lords, this group contains a large number of technical amendments. Amendment 1 reflects the fact that some of the obligations in the Bill are set in the main clauses and not in scheme regulations. This means that the drafting of Clause 3, which allows only for consequential, supplementary, incidental or transitional changes as a result of provisions in scheme regulations, leaves a theoretical gap in powers that we would like to plug. If such changes were required solely as a result of provisions in the Bill rather than in scheme regulations, we might not be able to do so without making new primary legislation. We do not believe that that would be appropriate, so the amendments in this group seek to address the slight gap in the current drafting.

Of course, this extends the powers to cover only consequential, supplementary, incidental or transitional changes that result from clauses that have been debated at length in both Houses. Parliament is already aware of the desired effects of the Bill. These powers ensure that the effects can be realised. As we discussed on Report, any use of these powers to amend primary legislation could only be for consequential purposes and to Acts that have already been passed. I therefore hope that noble Lords can support this small but sensible amendment.

Amendments 4 and 5 are minor technical amendments. They are simply to provide consistency throughout the Bill in the form of cross-references to Schedule 4 to the Pensions Act 1995. They ensure that the same format is used in Clauses 34 and 35 as is used in Clause 10.

Amendments 8 and 9 are again minor amendments intended to clarify the wording, in this case of amendments I brought forward on Report. Noble Lords will recall that those amendments give schemes flexibility to define pensionable earnings for the purpose of the final salary link, and also safeguard the value of members’ final salary benefits. The safeguard is that the amount of earnings in the new scheme that are pensionable earnings for the purpose of the final salary link must not be materially less than the amount that would have applied had the person been in the old scheme until the point they eventually left service. The amendments simply clarify the safeguard. They make it clear that it applies to what would have been the person’s pensionable earnings had that person been in active service in the old scheme or deemed transfer scheme, rather than the new scheme. They would, of course, not have been in actual active service in those schemes after 2015, since they would have been in active service in the new scheme instead. The amendments do not change the substance of the meaning of the previous amendments in any way, but are just clarificatory.

Amendment 10 is concerned with circumstances where a pension that is calculated in accordance with the final salary link has been put into payment and the person subsequently returns to public service employment. It is designed to allow flexibility for schemes to continue their current treatment of a final salary pension in payment in such circumstances. Our intention is for the final salary link to accord with the rules on final salary benefits in each scheme that are currently in force. Some schemes currently allow the final salary benefits to be recalculated after a period of re-employment. The provisions in Schedule 7 allow this approach to continue where there is continuity of service, as provided for in paragraph 3. However, many schemes currently treat final salary benefits that have already been put into payment as fully crystallised, and consequently unaffected by any future period of employment in scheme service. Our amendment would allow for scheme regulations to provide that this continues to be the case too, if desired. Rules of existing schemes can also continue to provide for some limited aggregation of periods of employment, as some do at the moment. This amendment assists schemes in the implementation of the recommendation of the noble Lord, Lord Hutton, to honour the benefits built up under the current final salary schemes.

Amendment 11 consists of a series of minor, consequential amendments to the Pensions (Increase) Act 1971. It clarifies how the uprating provisions of that Act apply to those with service in both an existing scheme and a new one. The 1971 Act provides for the uprating of pension benefits for deferred and pensioner members of the public service schemes. The intention is that while a person is a member of a new scheme after 2015, and they have also old scheme benefits, those old scheme benefits should be treated for uprating purposes as though they remained an active member. This should remain the case until the member takes the old scheme pension or leaves the new scheme. This means that for those persons whose existing scheme is a final salary scheme, their benefits in that scheme will be uprated through the final salary link provisions in Schedule 7 to the Bill. For those persons whose existing scheme is a career average scheme, their benefits should continue to be revalued as if they remained an active member. This amendment clarifies how the provisions in the Pensions (Increase) Act apply in the circumstances I have just described.

Where people continue in service, the old scheme benefits should not be treated as deferred from 2015. To do so would mean that those benefits would be uprated in line with prices from 2015, which would run counter to the treatment of old scheme benefits recommended by the noble Lord, Lord Hutton.

The final amendment in this group relates to an amendment I introduced on Report to paragraph 30 of Schedule 8. This paragraph amends Schedule 4 to the Legal Aid, Sentencing and Punishment of Offenders Act 2012 to enable those active members of the Legal Services Commission pension schemes to transfer into the Civil Service scheme on 1 April 2014 to have full access to the transitional provisions contained in Clause 18. This subsequent amendment is a minor tweak to paragraph 30 to ensure that, in addition to those active members, deferred members of the LSC pension schemes who rejoin within a five-year period will also benefit from the transition provisions. This is entirely consistent with wider government policy on the treatment of deferred members of public service pension schemes. It will ensure that employees of the LSC are not unfairly disadvantaged by the changes to their pension provision. I beg to move.

[Lord Eatwell]

My Lords, I am grateful to the noble Lord for explaining the content of these essentially technical amendments. I particularly welcome the approach, which is in accord with the recommendation of my noble friend Lord Hutton.

I have but one question of the noble Lord, and that is why his remarks were not prefaced by an apology to the House for having put down these amendments as late as 5 pm yesterday afternoon.

[Lord Newby]

My Lords, I have my apology prepared and I will now give it. I thought it was the next group of amendments about which the noble Lord was particularly concerned.

I apologise to the House for the late tabling of these amendments. There is nothing sinister about it. As noble Lords will have understood, I hope, from my explanation of them, they were extremely minor technical amendments. The reason for the delay was simply to ensure that all legal issues had been adequately addressed in the final drafting. I had hoped we could have done it sooner, but that was the sole reason for the delay in the amendments being submitted. I repeat, I am sorry that we did not do it earlier.

Public Service Pensions Bill

Debate between Lord Newby and Lord Eatwell

Tuesday 12th February 2013 Lords Chamber

[Lord Eatwell]

My Lords, this amendment, which is a reprise of something that we debated in Committee, derives from a peculiarity of the process through which this Bill has gone, in that many of the measures in the Bill derive from negotiation between the trades unions, other interested parties and the Government. Having reached agreement, the Government’s side seems to appear in the Bill but the assurances given to the other side in the negotiations do not. What we have instead is simply a continuous series of government assurances.

This amendment requires that a defined benefit scheme should be replaced with a defined benefit scheme. This reinforces the Government’s oft-repeated commitment to maintaining the defined benefit structure once the definition of the defined benefit has been changed, in the way that was proposed by my noble friend Lord Hutton. However, Clause 8 still provides that any scheme, once closed, can be replaced by,

“a scheme of any other description”.

Those are the exact words. As I said just now, the Government have continuously sought to give assurance that they would not replace a defined benefit scheme by anything other than a new defined benefit scheme but they have proved peculiarly reluctant to place such a condition in the Bill. This persistent reluctance is becoming quite disturbing and is significantly undermining the confidence of pension scheme members that their rights are going to be protected in the ways that have been suggested.

As I pointed out in Committee, the noble Lord, Lord Newby, further undermined the confidence of members when he said on 19 December that,

“although the Government have absolutely no intention to change the basis of the schemes, it makes sense for a piece of legislation, which we hope has a long life itself, to allow flexibility in the future if there are unforeseen changes”.—[Official Report, 19/12/12; col. 1585.]

Therefore, the Government are making a commitment: they continuously assure members that they will replace defined benefit schemes only with newly constructed defined benefit schemes—but, on the other hand, perhaps unforeseen circumstances mean that they will not.

I feel it is appropriate that the Government keep their side of the deal, which was that the defined benefit schemes would move from a final salary scheme to a salary-averaging scheme, which was a deterioration in the future pension benefits available to scheme members. They accepted that because the other side of the deal was that the Government said that they would commit not to move away from defined benefits. The Minister really has to tell us why the Government are so reluctant to keep their side of the deal. I beg to move.

[Lord Newby]

My Lords, this is indeed a reprise of a debate which we had in Committee. I believe that the Government have been extremely clear about their position on this issue throughout the legislative process, both here and in another place. Let me explain again why we remain unmoved. At the risk of stating the obvious, the Government have no desire or intention to replace the defined benefit schemes that have been negotiated. Officials, employers and member representatives have worked extremely hard to agree scheme designs that meet the needs of the different workforces and which are fair and affordable.

We believe that the new schemes are fit for purpose. Everyone is now working to implement these schemes from April 2015 for most workforces, but earlier than that in some cases. Draft regulations for the Civil Service scheme have been shared with the House, while the local government scheme in England and Wales has gone out to informal consultation on its own draft regulations.

While each set of regulations remains a work in progress, there can be no doubt that they would establish a defined benefit scheme of the agreed career average design. So when the Government say that we have no other intention than to create defined benefit schemes, those are not mere words—we are putting them into practice. The Government say that we have no intention of replacing defined benefit schemes with other designs, and that intention is underpinned clearly in the Bill by Clause 22.

The extent to which a scheme is a CARE scheme is explicitly one of the protected elements in the clause. That means that for a full 25 years—26 years in some schemes—the defined benefit design could not be easily changed. To do so, the responsible authority would have to consult on the proposed changes with all those affected,

“with a view to reaching agreement”.

That is a higher standard of consultation than in most other statutory consultations. The authority must do more than seek out and consider the views of interested parties; it must engage with them, with the aim of reaching agreement with them. In addition, the authorities must present a case to Parliament, or the devolved legislature, for changing the scheme design from career average, notwithstanding an explicit presumption written into the Bill that it would not be desirable to change the design before 2040.

There is no ambiguity here. Noble Lords and scheme managers can be fully reassured of our commitment to a defined benefit arrangement. It would be misleading and unnecessarily alarmist to imply anything to the contrary. So I say again: there is no prospect of the Government wanting to replace the defined benefit schemes that we are working so hard to develop, and I believe that that is the position of the party of the noble Lord, Lord Eatwell, also. The noble Lord may say, as he has in the past, that Governments come and go, but the status of the new defined benefit schemes will be protected by the Bill. I therefore urge the noble Lord to withdraw his amendment.

[Lord Eatwell]

That was an intriguing reply. The usual reply in circumstances where the Government feel that they have covered all bases is that an amendment is unnecessary, but the Minister did not feel that he could say that. It is striking that, despite his variety of assurances, a simple statement is unacceptable. However, under the circumstances, I will take this away and think about it further. For the moment, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Eatwell]

My Lords, I fully support the arguments put forward by my noble friend Lord Whitty, particularly on the complications that would arise with respect to the Local Government Pension Scheme. The amendment in my name and that of my noble and learned friend Lord Davidson refers to the general proposition in Clause 9(3) that,

“the Treasury may determine the change in prices or earnings in any period by reference to the general level of prices or earnings estimated in such manner as the Treasury consider appropriate”.

The Treasury has a completely free hand to determine the change in prices or earnings to be applied to the structure of the pension scheme. It seems to us on this side that this is really a step too far, so we have proposed that it should be subject not to a negative Commons procedure but to the affirmative procedure so that there can be a truly substantive debate on any particular proposal that might be unreasonable.

In Committee the Minister said:

“Any attempt to exercise this discretion in such a way that did not produce accurate and appropriate estimates”—

I must say as an economist that there is no such thing; there are estimates, but “accurate and appropriate” is something different—

“with reference to a reasonable index of prices or earnings”—

there is no such thing as that either—

“could be challenged by scheme members. Any decision which is not reasonable”—

that is fine—

“even without this amendment … could be challenged by judicial review and struck down by the High Court”.—[Official Report, 15/1/13; col. 608.]

What a cumbersome procedure. The affirmative procedure may be seen as taking somewhat more time and requiring more effort than the negative procedure, but how much better than saying, “Well, if this goes wrong, you’ve got to take it to the High Court”? That really is truly unsatisfactory.

Introducing this very minor amendment will provide an environment for the discussion of changes in the chosen index that can be deemed to be reasonable and to have the confidence of members of the schemes. I feel that this approach, perhaps allied with that suggested by my noble friend, would provide the confidence in the process of revaluation that from time to time can be enormously important in maintaining standards of living, particularly of more elderly pensioners.

[Lord Newby]

My Lords, as we are debating a group that started with an amendment moved by the noble Lord, Lord Whitty, I shall take this opportunity to answer the question he asked me earlier about whether the administering authority or the employing authority would determine whether an effect is significant. I am extremely pleased that I did not try to reply at the time because the answer is neither. It will be the “responsible authority”, because that is the authority that will be making the scheme regulations. In the local authority scheme, it would be not the employer but the Secretary of State. I hope that answers that question.

We have debated the amendments in this group before, so I shall try to be relatively brief in explaining why I do not believe it would be fair to restrict the revaluation of accruals from directly tracking growth, including when it is negative. Even though negative changes in prices or earnings are exceptionally rare, the Government firmly believe that if there is no revaluation ceiling, it would be unfair to have a revaluation floor to the benefit of members.

This is the sort of unbalanced risk-sharing between members and the taxpayer that the measures in this Bill seek to remove. The report by the noble Lord, Lord Hutton, specifically criticised this “asymmetric sharing of risk”. In addition, such a revaluation floor could lead to the cost cap being breached, to the detriment of future members who simply end up paying for past members’ accruals growing faster than the scheme revaluation rate. For those reasons, I will not be able to support the amendment of the noble Lord, Lord Whitty.

I am also unable to support the amendment of the noble Lord, Lord Eatwell, which would make the annual Treasury revaluation order affirmative rather than negative. As we have said before, this would not be an efficient use of parliamentary time and would be counter to the long-standing convention with other public service pension indexation. The order will be a run of the mill piece of legislation, and it would be incongruous for it to be subject to the affirmative procedure in each and every year.

However, I hope that I can go some way to meeting noble Lords’ concerns. In the years when the values in the order are negative, there will be a strong expectation that the Government of the day should ensure that there is a full parliamentary debate on the changes, not least because they would be so rare. Perhaps we can go further than that general statement and look at whether to require the affirmative procedure when, as unlikely as these events will be, the order sets out a negative figure. It seems that this would strike the appropriate balance between parliamentary scrutiny and sensible regulation-making.

I would therefore be willing, if the noble Lords were able not to press their amendments, to take this away to consider it further, with a view to returning to the matter at Third Reading with an amendment that would require any annual order to come before the House for affirmative procedure if the CPI index slipped into negative territory. I therefore hope that the noble Lord, Lord Whitty, will feel able to withdraw his amendment.

Taxation: Tax Collection

Debate between Lord Newby and Lord Eatwell

Tuesday 5th February 2013 Lords Chamber

[Lord Newby]

My Lords, HMRC has a target of answering 90% of calls. It was more than achieved in the third quarter and was certainly a better performance than that achieved in some earlier parts of the year. An example of the challenge that HMRC finds itself facing in this respect is that the number of calls that it gets per day ranges from 86,000 to 3.2 million on a peak day. Either a very small number or a very large number of people phone, and it is unsurprising that on a small number of days it is impossible to reach the 90% target. However, HMRC has put more resource in. It has upgraded the equipment and, as I said, the 90% target has been more than met in the last quarter.

[Lord Eatwell]

My Lords, when he assumed office, the Chancellor of the Exchequer commissioned a study on the creation of a general anti-avoidance regime. The committee that performed that study reported two years ago. When are the Government going to do something about it?

[Lord Newby]

I am surprised that the noble Lord does not know that the Government are committed to introducing a general anti-abuse rule in this year’s Finance Bill.

Public Service Pensions Bill

Debate between Lord Newby and Lord Eatwell

Monday 21st January 2013 Lords Chamber

[Lord Newby]

My Lords, this is a rather disparate group of amendments. I will start with government Amendment 117. Amendment 117 is part of the wider package of amendments that seek to meet the desire of the Northern Ireland Executive to be removed from the provisions of the Bill. The provisions in question would have required a report to be laid in the Northern Ireland Assembly, should the responsible authority have sought to make changes to the protected elements in the schemes for which Northern Ireland has devolved competence. Given that this is consequential and in line with many other amendments relating to Northern Ireland, I hope that that amendment will be uncontroversial.

I will now speak to government Amendment 118 and Amendment 118ZA. Government Amendment 118 recasts the timing of the 25-year period of protection. The amendment will ensure that all schemes made under the Bill benefit from this protection until 31 March 2040. It is currently intended that the new Local Government Pension Scheme will be in place earlier than April 2015. Concern was expressed in another place—which the noble Lord, Lord Eatwell, expressed here today—that the scheme would lack the protection in this clause until 1 April 2015 had passed. The amendment seeks to deal with this concern. Although the Government have no intention of making changes to the core elements of the new Local Government Pension Scheme in its first year, we are happy to rectify the situation. The amendment will ensure that all schemes, even those that might be implemented before 1 April 2015, receive the full protection from Clause 20 for 25 years.

Amendments 116A and 119A would increase the required levels of consultation and parliamentary process for all scheme regulations that make adverse retrospective changes to members’ benefits. As the noble Lord, Lord Eatwell, says, we have debated the issue of retrospection a number of times in your Lordships’ House. As discussed when we were considering the potential amendments laid to Clause 3, the Government are aware of the concerns on this issue and intend to bring forward their own amendments in this area. I plan to have a draft amendment available in advance of Report stage and I hope that it will meet the concerns of the noble Lord, Lord Eatwell.

Amendment 117A in the name of the noble Lord, Lord Flight, would, as he said, end the protection set out in Clause 20 after 12 years. It would require a review of the effectiveness of the cost cap to be conducted by the Office for Budget Responsibility, and that review would determine whether the clause’s protections would be extended beyond 2027.

Although I understand the noble Lord’s reluctance to bind subsequent Administrations for 25 years to a more onerous process, I must reiterate the Government’s position on the new 2015 schemes. First, we believe that if the cost cap is necessary, it will work. If it does not, the solution does not lie in reducing the consultation and reporting requirements that govern fundamental changes to public service pension schemes. To make this amendment would risk causing unjustified concern and uncertainty to scheme members about the commitments that the Government have given in the context of negotiating the important reforms made by this Bill. I am very happy in that respect to repeat the statements of my right honourable friend the Chief Secretary to the Treasury when he described the new schemes as,

“a deal that can endure for at least 25 years and hopefully longer”.—[Official Report, Commons, 2/11/11; col. 929.]

We have committed that this belief should be enshrined in the primary legislation governing these schemes. We do not share the gloom of the noble Lord, Lord Flight, as to their unaffordabilty. Therefore, I hope that he will not press his amendment.

Amendment 118B was discussed in another place, and there the Government set out their belief that the elements of the new pension scheme designs which have been designated as “protected” are the right ones. It is right that members and their representatives should seek reassurance from the Government over their commitment to the new schemes that have been negotiated. However, these schemes must work in the real world. Public service pension schemes require regular tweaking to keep them in line with all kinds of other legislation, and the processes in Clause 20 are not designed for such changes. The protected elements, which have been included by the Government in Clause 20, are those which form the core of the new schemes. The kind of regular, purely administrative, changes that are made to the regulations of public service pension schemes are unlikely to touch on these aspects of design. If they ever do, it would be right for scheme members to be reassured about the impact of such changes through the procedures in Clause 20. Those elements suggested by the amendment go beyond this. These are aspects of design which are likely to require administrative changes, and so the proper consultation requirements which should apply to them are those set out in Clause 19. It is not as though the changes are not consulted on at all.

It may be of benefit to the House if I give a couple of examples of the kind of changes to the three heads under the noble Lord’s amendment that have been made in a couple of years, which demonstrate the kind of thing that we are talking about. In respect of pensionable earnings, for example, we are about to remove all references to primary care trusts in connection with their role in establishing pensionable earnings for practitioners. That is a small administrative change to reflect the fact that PCTs are on the way out. On ill health benefits, we have made changes that allow scheme medical advisers to determine that a member can satisfy the severe ill health condition for the purposes of the Finance Act 2004. It is a small administrative change. In respect of early retirement, changes made from 1 April 2010 required that an employer should pay the costs of the early payment of a mandatory retirement lump sum, paid to a member retiring on the grounds of redundancy. So, again, it is a small administrative change.

In view of the reassurance that I have, I hope, been able to give the noble Lord, and my attempt to clarify the way in which the clauses work, I hope that he will feel able not to press his amendments.

Having given reassurance to the noble Lord, Lord Flight, that we believe that the cost caps will work, I am afraid that I cannot support Amendment 118C. This amendment cuts across the provisions relating to the cost cap mechanism set out in Clause 11. As discussed in another place, that mechanism already contains a number of its own consultation requirements. Indeed, the arrangements in Clause 11 are actually more stringent than those set out in Clause 20. It may be to the benefit of the House if I read it out. The Bill says that,

“scheme regulations may provide for … a procedure for the responsible authority, the scheme manager … employers and members (or representatives of employers and members) to reach agreement”.

So there is a requirement in the Bill that they have to reach agreement, whereas Clause 20 requires only consultation with a view to reaching agreement.

[Lord Eatwell]

The noble Lord is very kind to read out that little piece from the earlier clause. However, it uses the word “may”, and “may” is not a requirement.

[Lord Newby]

My Lords, we are back to the “may” and “must” issue here. Clause 11(6) states:

“For cases where the cost of the scheme would otherwise go beyond the margins, scheme regulations may provide for—”.

It then lists several things that may be provided for. This is one of those cases where in reality the difference between “may” and “must” is not only negligible, it does not exist. The schemes will include those provisions; that is exactly why they are in the Bill. Having another process for consultation, as the noble Lord suggests, is unnecessary. I hope, therefore, that he will feel able to withdraw the amendment.

[Lord Eatwell]

My Lords, I am grateful to the Minister for those comments. I am particularly pleased with government Amendment 118, which achieves what we were attempting to achieve through Amendment 118ZA in a very satisfactory and comprehensive manner. Regarding the other amendments which we have proposed, as I have said on numerous occasions, we look forward to the Minister’s amendments with respect to the retrospective measures in this Bill.

I wish to comment on his rejection of Amendment 118B, which seeks to include the scheme’s definition of pensionable earnings, ill-health benefits and early retirement rights under the so-called protected elements in Clause 20. The examples he gave were indeed administrative, but they were not in the least reassuring. The fact that there was a series of administrative changes does not mean that future changes will also be of such limited significance, because the clause allows for greater changes. It is like saying that it might not be very significant if one player on a football team has a shirt that does not quite match those of the others. It is very significant if he is then not allowed on to the pitch. Giving us these so-called reassuring examples is an exercise in which I hope we will not indulge in the future, because it does not address the nature of the argument. However, at this time I beg leave to withdraw Amendment 116A, which deals with the issues of retrospection that we will discuss on Report.

--- Later in debate ---

[Lord Eatwell]

My Lords, the purpose of this proposed new clause is to evaluate scheme participation. I am sure all of us are very concerned that members should participate fully in the pension scheme that is available with their employment. Some of the new measures which will be introduced this year are complex but it will typically be in members’ best interests to remain in their defined benefit scheme—in this case, their average earnings defined benefit scheme.

The role of the proposed new clause is to require the Government to assess the attrition of membership of public sector pension schemes consequent upon the increase in contributions which will take place following the 2010 spending review. The purpose of the amendment is to determine whether the number of members opting out of any public service pension scheme in consequence of the increase in contributions exceeds by 5%—this is an arbitrary number—the drop-out rate immediately before the contribution increases. Therefore, it seeks to pick up what the consequence of contribution increases and the various changes which the Bill will introduce might be.

The amendment is not a challenge to the appropriateness of the contributions but merely seeks to provide the sort of information that the Government, employers who are members of the various schemes and, indeed, the members themselves need in order to understand the dynamics of what is going on in public sector pensions. Providing that information to all those groups would be beneficial and would lead to a better informed debate and better informed consideration in future of the development of public sector schemes. I beg to move.

[Lord Newby]

My Lords, it is probably sensible to remind ourselves why the increases in employee contributions were felt to be necessary. The noble Lord, Lord Hutton, was clear when he said in his interim report that,

“there is clear rationale for increasing member contributions to ensure a fairer distribution of costs between taxpayers and members”.

He sets this in the context of the cost of public service pensions having risen by a third over the past decade to £32 billion and of those increases having fallen mostly on the taxpayer. Subsequently, in 2010, the Chancellor announced a proposed increase in member contributions of 3.2 percentage points, to be phased in progressively over three years from April 2012. Let me be clear: the Government stand behind the justification for these increases and fully expect them to be implemented and carried forward into the new schemes. Proposed scheme final agreements clarify this. The noble Lord, Lord Eatwell, is right to raise the issue of participation, and I welcome the opportunity to set out what we are doing to maximise this.

First, we have protected the lowest earners from the increases. We know that they are those most likely to opt out, so there will be no increases for those earning under £15,000, and limited increases for those earning under £21,000. Secondly, we have split up each year of proposed increases so that we can assess the impact, particularly on opt-out, of year one, before finalising the approach for the next. As a result, I am pleased to be able to say that following the increases in contributions in April 2012, scheme data show that there has been no discernible increase in opt-out. This perhaps should not come as a surprise. Union representatives at the Bill’s evidence session in the other place unanimously stated that they would continue to advocate membership to their members.

We should also remember that the auto-enrolment policy—begun by the Opposition but implemented by this Government last year—will further encourage pension participation more generally. Therefore, given the clear rationale for rebalancing costs fairly, and the specific steps that the Government have taken to minimise opt-out, we do not intend to revisit the contribution increases after their implementation.

Of course, the Government will closely watch what is happening in practice. We monitor opt-out as a matter of course. In the unlikely eventuality that opt-out rates dramatically rise, naturally we will have to consider the best way forward. However, we think that this is highly unlikely, and the evidence bears that out.

We do not, however, believe that a statutory, independent review of the appropriateness of the increases would be right or necessary. We believe that increasing contributions is appropriate and that it will leave public service workers with pensions which remain the envy of many in the private sector. Introducing a statutory review mechanism would be misleading to members about the intended permanence of these increases.

The Government will continue the implementation of the increases and will continue to monitor opt-outs from schemes, but we cannot agree to this amendment to provide for a formal review, as, in our view, this would set an unrealistic expectation that the increases might be reversed.

[Lord Eatwell]

It would have been very nice if the Minister had addressed the actual amendment instead of the fictional one that he seems to have been discussing. There is no suggestion in this amendment of looking at the “appropriateness”, as he put it, of higher contributions. The intention is simply an information exercise; we want to know what is happening and we want it to be clearly revealed. The various measures that he described to maximise participation are very appropriate and desirable, but will they work? We are told, “We believe they’re going to work”, but some people believe in fairies.

[Lord Newby]

My Lords, I suggest to the noble Lord that it is not a question of hoping, thinking or believing; it is a fact that the increases have been implemented and there has not been a discernible increase in the opt-out rate.

[Lord Eatwell]

The point is that, if there is a proper review available to all—which the noble Lord is not relying on; I presume that he is relying just on the evidence provided by his officials—we will be able to assess the consequences of the increases.

Finally, I think that when the noble Lord was discussing the measures to prevent opt-out, he mis-spoke. It is not correct that somebody earning less than £15,000 a year is not subject to higher contributions. I think he will find that part-time workers earning less than £15,000 per year are subject to higher contributions.

However, given what we heard, which was clearly a misunderstanding of the purpose of the amendment, for the moment I beg leave to withdraw it.

--- Later in debate ---

[Lord Newby]

My Lords, the Government have always been clear that pension reform should extend to all public service pensions. Clause 28 and Schedule 10 are the means by which that work will be continued, even after enactment of the Bill. To date, the Government have focused their resources on reforming the largest public service pension schemes as these affect the vast majority of public service employees. As such, pension reform for the smaller public bodies is not as advanced as the reforms to these major schemes. Noble Lords may be reassured to know that reform of these smaller schemes is anticipated to be completed by 2018, after the reforms to the larger schemes are operational in 2015.

The Government’s policy with regard to these schemes is clear: any public body whose defined benefit pension scheme needs to be reformed is listed in Schedule 10 or may be added to it. Members of these schemes should be well aware that their pensions are in scope of the reforms. However, the arrangements surrounding some of these pension schemes are complex and it may be unnecessary to include them in Schedule 10 if they are able to reform on their own initiative. If so, they will not need to be listed.

To date, we have worked hard to ensure that all the public bodies that operate pension schemes eligible for reform by the powers under Clause 28 have been listed in Schedule 10. However, we are trying to be realistic with this provision: of the more than 400 public bodies that provide pensions to their employees or officeholders, some may not yet have been identified appropriately. That said, I can assure the noble Lord that the vast majority of public bodies that provide pensions through one of the major public service schemes will be reformed by Clause 1, so the number of public bodies that may have to be added will be extremely low. However, if we need to include such schemes, the Bill needs to provide for the Treasury to add them via Schedule 10.

I note what the noble Lord says about draconian powers but it is worth noting that the Delegated Powers and Regulatory Reform Committee did not express any concerns whatever about this power as currently drafted. It is a sensible way of dealing with the addition of a small number of public bodies to the universal principles of public sector reform. I hope therefore that the noble Lord will withdraw his amendment.

[Lord Eatwell]

My Lords, perhaps the Minister will clarify for my edification his reference to schemes reforming themselves and then not needing to be incorporated into Schedule 10. What will be the criteria of satisfactory reform and who will do the judging?

[Lord Newby]

My Lords, the criteria for satisfactory reform is that we want all public bodies to adopt schemes which are in line with the provisions of the Bill. So, if the schemes do that, that is fine. There are a number of schemes, some of which are listed already and some of which may need to be listed subsequently, when the Government and the Treasury believe that the process will be helped if they are formally listed in the Bill or under the Act.

[Lord Eatwell]

I thank the Minister but this is unsatisfactory. It leaves an area of uncertainty hovering over smaller schemes, which may be in or may be out. I presume, therefore, that the Treasury will make a judgment as to what it thinks in its wisdom is right. I do not think that is a proper way to go forward and may return to this issue later. For the moment, I beg leave to withdraw the amendment.

Public Service Pensions Bill

Debate between Lord Newby and Lord Eatwell

Tuesday 15th January 2013 Lords Chamber

[Lord Eatwell]

Perhaps I might respond to the point that the noble Lord has just made. I think that he is being a bit obtuse. Amendment 45 refers to an advisory board to be established for each scheme; it does not refer to general national boards, which would cover a range of schemes that may be within a particular area of concern. This is a different animal. If he thinks that it is the same, it would have been enormously helpful if he had made it clear when he introduced the amendment, which he failed to do.

As I read this, the scheme advisory board refers only to defined benefits schemes. We know that there a small number of defined contribution schemes. Why are they left out? Amendment 45 also states that:

“Scheme regulations … must provide for the establishment of a board”,

which suggests a board related to each scheme, not the overall national bodies referred to in Amendment 46.

[Lord Newby]

Perhaps I may quote the noble Lord’s Amendment 46:

“The Treasury shall make directions providing for the establishment of a pension policy group for each scheme”.

That is what Amendment 45 says. What is the difference?

[Lord Eatwell]

Perhaps we are arguing over the definition, but it seems to me that the whole issue of the policy boards was that they were national boards. If we look at the actual boards that have been established, they are national boards, which have a national overview. If that is what was meant by Amendment 45, I am very happy. However, it would have been enormously helpful if the Minister had said so when introducing his amendment.

[Lord Newby]

I apologise to the noble Lord. There is no doubt in my mind that when government Amendment 45 says:

“Scheme regulations … must provide for the establishment of a board”,

for each scheme, that is the same definition of “scheme” as in Amendment 46. I am sorry if I did not make that clear to the noble Lord. I made in error the assumption that it was relatively straightforward.

--- Later in debate ---

[Lord Newby]

My Lords, this issue has been debated in another place on a number of occasions. There is a technical problem with the amendment over the concept of “replacing schemes”, which is pretty difficult to express in law. The key thing here is not the drafting but the principle that is raised by the amendment.

I am pleased to be able to add my assurances to those of the Chief Secretary and the Economic Secretary in another place. The Government have no—zero—intention of replacing the defined benefit schemes that have been negotiated with different scheme designs. Officials and members’ representatives have worked very hard to ensure that these reforms are sustainable. I am confident that they will last for a generation. The Government would not have invested so much time and energy in developing and legislating for the mechanisms in the Bill if we were intending to do anything other than retain defined benefit schemes. It is not the case that these mechanisms could be amended on the nod. If any future Government wanted to move away from the current defined benefit system, they would have to go through the procedures in Clause 20.

However, that is not really the point. As I have made clear, there is no possibility of this Government wanting to replace the defined benefit schemes that we have worked so hard to develop. We therefore feel that this amendment is unnecessary and I hope that the noble Lord, Lord Eatwell, will withdraw it.

[Lord Eatwell]

My Lords, that is extraordinary. The noble Lord, Lord Newby, has simply reinforced the argument that I made. We are expected to accept assertions about intentions in the future and that that is to be enough to cover this particular circumstance. I accept that there may be difficult technical issues in drafting but that is not the point, as the Minister himself said.

The point is that those members who have given up their final salary defined benefit schemes, and reached a deal that agrees to the Government implementing career average defined benefit schemes, should have confidence in the Government keeping their part of the deal. It should not just be the Minister standing here and this Government but Governments stretching over the next couple of decades doing this. That confidence would rest in the commitment to maintaining a defined benefit structure.

What I hear from the Minister is an unwillingness to do that. All he will do is say, “I will give assurances”. How can he give an assurance for someone standing at that Dispatch Box, whoever it may be, in 10 years’ time? He cannot, so the point of this amendment, ill drafted though it may be, is to ensure that any Government of the day changing the status of pension schemes for so many of the public servants who make our lives worth while and secure would have to come back to Parliament with primary legislation to change the nature of the scheme. I did not hear any commitment on the part of the Government to do any such thing and to include such security in their pension provision for those who serve us so well. I shall look at the drafting, but we shall certainly return to this on Report. I beg leave to withdraw the amendment.

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[Lord Newby]

My Lords, the amendment proposed by the noble Lord, Lord Whitty, raises the important question about how negative growth should be treated in these new schemes. For the revaluation of active members’ accruals each year the Treasury will lay an order which will establish the changes in earnings or prices. Scheme regulations will then use these changes when applying the revaluation mechanism that they decided on in their proposed final scheme designs. This approach mimics the current arrangements for the indexation of public service pensions in payment; it allows for the agreed scheme-specific variations, but also ensures that the underlying growth measures are transparent and consistent.

As the noble Lords have pointed out, this approach allows for the growth measure to be negative. I am not looking bemused because I did not realise that that was the case; we have never sought to hide that fact. Before explaining the rationale behind this, I should point out that brief periods of negative growth are unlikely to impact significantly upon the total value of any pension, in much the same way that brief periods of unusually high growth would not. After all, pensions are built up over a long period. I should remind the Committee that negative growth is exceptionally rare. It is not the case that in recent times the preferred index has been negative; the CPI has never been negative. The Committee should also be aware that this clause impacts only on those scheme members who are in employment, building up their pensions. It does not impact at all on pensions in payment.

However rare negative growth might be, if scheme members can benefit from the upside risk of revaluation—which they will, since there are no plans to cap revaluation rates—it would be unfair, in our view, for them to be shielded from any potential downside risk. Furthermore, by imposing a revaluation floor, scheme costs would rise and could lead to a breach of the cost cap set out in Clause 11. This is because previous scheme valuations based on standard, long-term growth assumptions would have essentially underestimated the cost of future accruals. If this were the case, it would be likely to lead to an increase in members’ contributions or a reduction in the scheme accrual rate. This would be unfair to anybody reaching pension age when positive growth returns. Their benefits would have been reduced to pay for those people who benefited from the revaluation floor.

It is only right that public servants receive their defined benefit pensions so that they can plan properly for their retirement. However, there is no logic in going beyond this by protecting their accruing benefits from any brief periods of deflation before their pensions come into payment. I believe the approach of directly tracking growth—with no caps or floors—is the fairest way forward. As I have said before, the noble Lord, Lord Hutton, described the idea of an indexation floor as an “asymmetric sharing of risk”. We agree. It is fair to say that the Local Government Pension Scheme does not specify, as the noble Lord, Lord Whitty, implied, that there will be no decrease possible within the scheme rules. My understanding is that it says that the basis of revaluation would be CPI.

Another point was raised about legislating for the measure. I am now coming on to the amendment of the noble Lord, Lord Eatwell, about whether we should legislate for a specific measure and whether the Treasury is being given too much discretion. It has obviously been the case within the last generation that the basis of measuring prices has changed: it has changed from the RPI to the CPI. Our expectation is that the CPI would continue for a very long time, but these things sometimes change and we therefore believe that the best way of dealing with it is in primary legislation. Incidentally, I am not implying that if the measure changed, the pensions would change. It would simply be that the scheme rules would have to reflect any new measure that came into general use.

Moving on to Amendment 49, it is worth re-emphasising that the annual revaluation will set out the general changes determined by the Government’s preferred measure, which is CPI at the present time. As I said, it is necessary to give a limited amount of discretion to the Treasury to determine the measures, but we do not believe that this is going to be a likely or common thing. It is apparent from the wording of the clause that the estimates of changes must be made in a reasonable and appropriate manner. Any attempt to exercise this discretion in such a way that did not produce accurate and appropriate estimates, with reference to a reasonable index of prices or earnings, could be challenged by scheme members. Any decision which is not reasonable—even without this amendment—could be challenged by judicial review and struck down by the High Court, so we do not believe that this amendment would change the position or provide any additional protection to members.

[Lord Eatwell]

I have listened very carefully to what the Minister had to say. Of course, my amendment does not in any way restrict any necessary flexibility in the future in adjusting the manner in which revaluation takes place. However, it would—if I may use the term—sensitise the Treasury when making decisions of this sort to be aware that it is required to act in a reasonable and fair manner.

At the moment, the expression in the Bill provides the Treasury with such a carte blanche—

“estimated in such manner as the Treasury consider appropriate”—

that not even the words “reasonably” or “fairly” appear in the Bill. All we were trying to do was to avoid any rounds of judicial review over these matters and instead to ensure that when Treasury officials look at the calculation of an index—whether they are moving to geometric means or whatever they are doing—they consider very carefully whether this would be deemed reasonable in the public domain. The Minister himself has used the expression “reasonable and fair” in referring to what the Treasury will do, so surely this amendment has either no effect or a positive effect. We may disagree about whether it has no effect or a positive effect, but it does no harm and reinforces what the Minister has said. Surely, he would regard that as a good thing.

[Lord Newby]

My Lords, this question of putting “reasonable” into the Bill came up in a number of contexts on the Financial Services Bill. It would be perfectly possible to spatter this Bill, that Bill and every Bill with “reasonable”. The view that we took then, and which I take now, is that, of course, the Treasury always operates in a fair and reasonable way, but because it already has a broad legal obligation to do so it is simply unnecessary to put it into the Bill.

--- Later in debate ---

[Lord Newby]

My Lords, although these amendments all have a common theme, they are quite specific, so I will start with Amendments 52, 55 and 57. It is important to note that the link between the normal pension age and state pension age in most schemes is not the only provision in the Bill which is designed to manage the longevity risk. The link between the deferred pension age and state pension age in all schemes is just as important. This link is universal, with no exceptions. It therefore applies to former members of the police, firefighters and Armed Forces schemes with deferred pensions in those schemes.

There are two reasons why the Government have not extended the exemption from the state pension age link for these workforces to apply to the deferred as well as their normal pension ages. First, it would not be fair to other former public servants whose deferred benefits would not be payable until state pension age. We have been clear that exceptions to normal pension age have been made for police officers, firefighters, and members of the Armed Forces because of the unique nature of the work they do, which we value very much. Once police, firefighters and Armed Forces personnel leave their jobs and no longer carry out those unique duties, there is, in our view, no justification for them to be able to take their deferred benefits earlier than anyone else.

Secondly, there would be cost implications. As we are all aware, increases in—

[Lord Eatwell]

Perhaps I may deal with that first point about leaving the scheme. I accept that in the case of somebody becoming a police officer at the age of 20 or 21 and leaving at 25 the noble Lord has a good case. But let us suppose that the police officer leaves at the age of 55. Is the case the same? Here is someone who has worked in a physically onerous profession for all that time—34 years, let us say. He has moved to another job because an opportunity has come up but he has performed that physically onerous task for a considerable time, which will have had an effect on his overall well-being. Would it not therefore be reasonable in that case for the deferred pension age to be the same as for those who stay on for just a few years more?

[Lord Newby]

My Lords, the noble Lord gives an example. I was literally just about to give another example. I will come back to his example. My example concerns a former police officer who leaves service aged 35 to work as an office-based local government worker for the rest of their career. It is by no means an unusual or impossible example. Should their police pension still be available, unreduced, at 60? That is the question, particularly when a local government colleague sitting at a nearby desk must wait until the state pension age to take his or her full pension. Surely the answer can only be no. The strength of that argument is greatest if someone left the police after a year aged 22 and is weakest if they left it aged 59. I agree with that. The argument is not exactly the same at every age.

However, in looking at this, the noble Lord, Lord Hutton, recommended that we should go to the provision that we have indeed gone to, which is that all deferred pensions are payable in full from the state pension age. If we were to move towards what the noble Lord suggests, we would have an extremely complicated position where there were grades of deferment, if you like. We wanted first of all to have a relatively simple approach. We have followed the recommendations of the noble Lord, Lord Hutton, and we think that we have come up with a sensible, practical solution. We understand the argument, but we have deliberatively taken the view that deferred pension age should be the same as normal pension age.

On Amendment 53 in the name of the noble Lord, Lord Kennedy, the noble Lord was asking about the position of firefighters and the Williams review, and where we had got to with that. The starting point, as we know, is that firefighters continue to have their normal pension age at 60, as set out in the new Firefighters’ Pension Scheme in 2006. The Williams review of the normal pension age recognised that, as long as firefighters maintain their physical activity levels and adopt a healthy lifestyle, there is no reason why they cannot maintain operational fitness levels until the age of 60. The report does not call for a change in the normal pension age. However, as the report recommends, firefighters who wish to retire early will continue to be able to do so from 55, with an actuarial adjustment to their pensions. There were other detailed recommendations within the Williams review and the Government are still considering them.

[Lord Newby]

My Lords, I am always willing to meet the noble Lord. However, I will do so on the basis that we are not reopening the whole of the scheme. The Williams review has made it clear that there is no reason why the retirement age should not be 60. That, certainly, is not up for discussion. If there are other issues around it we can discuss those, although my initial view is that it is highly unlikely that anything else he is discussing would require amendments to primary legislation, although it may require amendments to the scheme rules. On that basis, I am very happy to have a meeting.

The next amendment in this group is Amendment 54, tabled by the noble Baroness, Lady Donaghy. It looks at further exemptions from the state pension link. We have set the current exemptions in line with historical precedent and the Hutton review. There are no other groups that are currently recognised in such a way through their normal pension age provisions as the three set out in the Bill. In fact, as a result of the previous Administration’s reforms, new employees in all other groups of public servants already have a normal pension age of 65. This includes ambulance service staff under the most recent changes to the NHS scheme, which were agreed to by unions.

As we are all aware, this Bill seeks to rationalise provisions across the public services, not to add further diversity. We are trying to move away from the general inconsistencies in the current schemes, which lead only to unfairness for subsections of particular workforces. That is not to say that we do not recognise the physical nature of the work that is carried out by groups such as ambulance service staff, or the risks attached to that work. The schemes introduced under Clause 1 have been developed very carefully with this in mind. They follow extensive discussions with members, trade unions and other member representatives to ensure that they best meet the needs of all members of each scheme. This includes ambulance service staff in the development of the NHS scheme. It would be wrong to reopen those negotiations—not least because, as my noble friend Lord Sharkey alluded to, there are many groups with degrees of stress in their job that are greater than those in others. We could spend a vast amount of time assessing afresh all those groups. Over the years that work has been done and it has led to the schemes we have now. It was also looked at again by Hutton. I am therefore extremely unwilling to start a long process of looking at a raft of groups when they have been considered before. I understand only too well the stresses and strains faced by 999 responders, but other groups face stresses and strains as well. As I say, we have decided that the three groups which are already exempt from the normal retirement age provisions are the only ones that we believe are in a distinctly different category from any others.

Amendment 56 also relates to this issue, but the difference from this amendment is that it would allow any group to be exempted from the state pension age link should a capability review recommend it. Presumably that would mean that the pension ages for these groups would be set out in secondary legislation. I have just explained why I do not agree with the spirit of the amendment. The link was a key feature of the Hutton report and was a cornerstone of the constructive discussions we held with unions and member representatives over the course of 18 months. The outcome of those discussions was the proposed final scheme designs, including the universal retirement age link which the Bill honours in full. We have no plans to reopen those designs, although we have made it clear that we will review the link to the state pension age as and when future changes to the state pension age are announced. The DWP White Paper published yesterday says that we intend to hold a review every five years, so the link will be reviewed when a review is announced.

The Bill as it stands takes a sensible future-proof approach to review the provisions when it is most appropriate to do so; that is, when there are other pension age changes that affect public servants. Naturally, those reviews will take into account any evidence submitted by interested parties—

[Lord Eatwell]

I understand what the noble Lord is saying, but can he tell us what the status of the working longer review in the NHS is?

[Lord Newby]

The noble Lord has an uncanny ability to ask me a question as I am getting to the relevant paragraph. I was about to say that the capability reviews are not reviewing the pension age link. They are considering the implications of working longer in the light of increased longevity and looking at how people are deployed as they move towards retirement. There is no question of these capability reviews reaching the conclusion that people should retire earlier as a block; rather they say, “If there are professions which have a significant physical component, how can we make sure that, as people move towards retirement age, the proportion of their work which has a significant physical element is reduced?”. A simplistic approach is to say, “Why can we not have firemen doing desk jobs from the age of 55?”. It is not as simple as that because there are not enough of those jobs, but that is the basic thought process we are going through in the reviews.

This is a challenge not just for public sector workers, but for the whole of society. People are living longer and the pension age is going up. Some people who are doing physical work will not be able to maintain the same degree of intensity at the age of 67 as they could at 47 or 27. As a society, how do we deal with this? What sort of mechanisms can we put in place to enable people to work towards a later retirement age in a way that avoids their facing undue stress?

To take an extreme example that does not cover the public services, I have a number of lawyer friends in their early 60s. Traditionally, solicitors in big firms would be forced out at that age because they were not earning as much as they did when they were 40. A very welcome development is that partners, with the encouragement of their firms, are thinking about what they can do that does not necessarily mean that they are expected to generate the profits and income that they did 20 years before, and in this way they can keep their expertise. That is at a different level from the public sector but it is still entirely welcome. The working longer reviews, about which we are talking here, look at exactly that kind of thing for people in the public sector. It is not about pension age but about how to ensure that we manage people who, as they move into their 60s, may not be able to work at the same intensity as they did when younger.

Finally, I turn to Amendment 59 regarding the reviews of the pension age provisions in the Bill. The Government have made a clear commitment to undertake these as and when future changes to the state pension age are announced. These reviews will look at, among other things, whether the provisions remain appropriate in light of scheme members’ longevity. This will ensure a consistent cross-government approach to all pension age policy and follows the recommendation by the noble Lord, Lord Hutton, that the provisions should be kept under review.

The state pension age review process that I have mentioned should mean that the core principle of this amendment, to ensure the public service pension age provisions continue to track appropriately changes in members’ longevity, will happen automatically. The work on state pension age reviews is still in its early stages. Yesterday the DWP published a White Paper that proposed a review every five years. We are still at a consultation stage and it may be that we move on from that but I do not know.

It would be premature at this point to seek to lock down the details of the reviews for public service pension ages. The state pension age reviews will obviously apply to more than just the pensions established in the Bill. It is therefore important that the Bill does not restrict the flexibility to design those reviews. Even though the reviews are not in the Bill, this does not restrict the powers to change the pension age provisions. Changes to state pension age will require primary legislation, so any consequent changes to this Bill could be made in at the same time.

Furthermore, it would be misleading to put reviews in the Bill and give the impression that these provisions may be continually changed when that is not the intention. The Government believe that we have appropriate provisions at the moment and we do not plan to change them. It is important that these are made clear to members so that they can plan for their retirement. I therefore urge the noble Lord to withdraw the amendment.

[Lord Eatwell]

My Lords, I note the comments in general of the noble Lord, Lord Newby, and I am grateful for the support of the noble Lord, Lord Sharkey, for Amendment 56 in particular. This strengthens the position of those administering public service pensions by incorporating the notion of a specific capability review and therefore providing a standardised mechanism across the various sectors in public service. These could be utilised both to include groups in the exemption and, indeed, to confirm that groups should not be included in it.

The examples given by the Minister, of changes in working practices among his lawyer friends, indicate just the sort of thing that a capability review would take into consideration. It is regrettable that he has dismissed this in rather a cavalier manner, by just saying that it would make the thing too complicated. People’s lives are complicated. People lead very different lives, and we need a degree of flexibility to take account of those differences that they encounter. Simply having a one-size-fits-all approach to the public services, which is the case in the Bill—with the exception, of course, of the uniformed services, which we discussed earlier—does not seem to future-proof the Bill, a factor that the Government are so continuously concerned with. What will happen is that some real anomaly will appear; it will become a scandal and suddenly a matter of major press interest. You can just imagine the sort of the thing: for example, some elderly ambulance worker being unable to assist a prominent celebrity in distress. You can imagine how the tabloids would go for that. Or it could be a much more serious scandal. Being able to perform capability reviews would provide a degree of flexibility, which is exactly what future-proofing this sort of legislation really means.

The Government are being a bit blinkered over this. They are standing on the podium of simplicity, but simplicity does not always make for true effectiveness. However, I am sure that the noble Lord, Lord Sharkey, and I will return to this on Report. I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Newby]

My Lords, we agree with the underlying concept of this amendment that the pension age for those close to it should not change without sufficient notice. When normal and deferred pension ages change, there must be consideration of how such changes will impact on all those who are most affected. However, I hope I have made it clear that a key pillar of the Bill is the clear link that it will provide between the normal pension age and the state pension age. The DWP’s White Paper on state pension reform, published yesterday, sets out that future changes to the state pension age will be subject to a 10-year notice period. It therefore follows that the normal pension age changes will be subject to the same minimum notice period while the link remains in place. Therefore, from the noble Lord’s point of view, fortunately this amendment is unnecessary.

[Lord Eatwell]

I think that the Minister is right.

--- Later in debate ---

[Lord Newby]

I thank the noble Lord for moving this amendment on behalf of my colleague, the Chief Secretary. I am sure he will be very pleased when I tell him that he did so. The Government are completely committed to the fair deal policy and to its reform. Commitments have been made, both in this House and in the other place, to ensure that members of the schemes who are compulsorily transferred to independent contractors can retain membership of those schemes.

The noble Lord asked about the provisions in the Bill that are relevant to achieve this. Clause 26 will extend access to the existing civil service pension scheme to allow those members who are compulsorily transferred out to stay in the scheme. Clause 22 will allow scheme regulations to make provisions for pensions for other employees who would not otherwise be members of the scheme. The policy will be delivered via the contracts made with independent providers. This will ensure that members of the schemes will be entitled to accrue future benefits through the scheme after the first tender and any subsequent retendering.

There are specific reasons why the proposed amendment cannot be accepted. The Government are currently considering when and how the new fair deal policy will be implemented. We are also consulting on how the new fair deal should be applied to those who have already been transferred out of the public sector under the old arrangements. It would be premature to put something on the statute book while this work is under way.

The amendment also captures the Local Government Pension Scheme. We have been absolutely clear that the principles of the new fair deal policy should apply to the reformed Local Government Pension Scheme, but the policy has always operated differently in that scheme. The Department for Communities and Local Government will bring forward detailed proposals in due course; again, in our view it would be premature to legislate while this work is under way. However, if the noble Baroness, Lady Donaghy, has some specific instances which she can show us of how the current arrangements might be being subverted, we would obviously look at exactly what is going on and how we might deal with that. My guess is that the most effective way of doing it would not necessarily be via this amendment. Obviously, however, because we are committed to the principle, if that principle is being undermined, we would want to look at how that is happening and what we could do to stop it. With those comments, I hope the noble Lord would feel able to withdraw his amendment.

[Lord Eatwell]

My Lords, I looked carefully at Clauses 22 and 26 and they seem to be enabling clauses. They enable members who are compulsorily transferred to retain their membership of a public sector scheme, but they do not ensure that they will. That is the import of our Amendment 61. It seems to me that it was also the import of the Chief Secretary’s Statement. He said very clearly that following transfers, those members “will retain membership”. He did not say that they “may” or “could”, or that “facilities will be made available for them to”, but that they “will” retain membership. The Bill certainly does not make that provision.

The noble Lord also said that considerations are under way to find a means of implementing the Chief Secretary’s promise in an appropriate manner. I must say that it would have been a jolly good idea if that had been done before we got to this stage of the Bill, but people are busy and I understand that. Let us hope that this is resolved by Report, so that the Government can then bring forward the results of those considerations in the form of an appropriate amendment in order to keep their fair deal promise. They have made the promise, and we want to see that promise in the Bill—as, I presume, do they—in an appropriate form. If those considerations could be expedited over the next couple of weeks, we look forward to considering an appropriate fair deal amendment on Report. In the mean time, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Newby]

My Lords, I will respond first to the noble Baroness, Lady Donaghy, before returning to the specific issue raised by the amendment. The vast bulk of the provisions that will affect people are not in the Bill; they are under the schemes. I have circulated the draft Civil Service scheme, an extremely long and detailed document that has in it most of the things—the headlines—that people will look at in determining whether they think the pensions they will get are fair and reasonable. I hope that those who worry that the Bill does not cover a lot of the things that they want covered can be reassured, as I have sought to reassure the House, that in the vast bulk of cases these points will be in the regulations, which obviously have the same force as the Bill.

With regard to Amendment 68, I will not repeat at great length that we have no intention to do what the amendment seeks to prevent. I do not need to refer the noble Lord, Lord Eatwell, to the Treasury paper because he has read it. I do not need to remind people about the UK and European legislation that would limit the Government’s freedom to do what the amendment prevents because I have already done so. What I will say is that we are committed to giving further consideration to the protection of accrued benefits, of all sorts, in all circumstances. I plan to have amendments to that effect ready for Report; they will cover this point along with accrued benefits, so I hope that is a reassurance to the noble Lord.

[Lord Eatwell]

My Lords, I am grateful to the Minister for that. Of course, he made that commitment at the previous day of Committee when we were discussing the whole issue of retrospection. I am delighted to hear that the amendments he will bring forward—relatively soon, I hope, so that we will have the opportunity to examine them carefully before we discuss them on the first day of Report—will also cover this particular eventuality. On the basis of that assurance I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Newby]

My Lords, Amendment 72 delivers on the Government’s commitment to come forward with an amendment to require scheme members to be provided with information about their pension benefits. Amendment 83, in the name of the noble Lord, Lord Eatwell, is also in this group and is based on an amendment, tabled in another place, which we believe is not quite right for a number of reasons. I hope the noble Lord will be satisfied that Amendment 72 is an appropriate alternative.

The new clause will apply to each public service pension scheme made under Clause 1 of the Bill and, by virtue of Amendment 137, all new public body pension schemes. It requires that every active member of the schemes must be regularly provided with information about the pension benefits they have earned. The clause allows for this to be done in a number of ways, including via electronic media. The first statement must be provided within 17 months of the new schemes coming into effect and at least annually thereafter. Like me, noble Lords may wonder why 17 months has been chosen as the period in the amendment. The reason is that 17 months would take us to September of next year, which would mean that scheme members would have this information before they needed to submit their tax return. This is relevant only to high- end earners, who may need to take account of the contributions going into their schemes for tax purposes. This period will ensure that the schemes have the correct infrastructure in place to carry out this commitment. They can, of course, provide statements earlier where they are ready.

In developing the clause we have been mindful of the obligations that already apply to all occupational pension schemes, including the public service schemes. Regulations made under Section 113 of the Pension Schemes Act 1993 set out various information requirements. These are known as the disclosure regulations and include requirements to provide deferred members with information about the benefits they have earned up to the point at which they leave the scheme. As this legislation already requires information to be provided to those members, it would not be appropriate for our amendment to address them. The disclosure regulations also require defined benefit pension schemes to provide information to active members, but only upon request. The effect of our amendments will be to require each of the public service pension schemes to go further than this. Once they are up and running, information will automatically be provided to all active members at least once a year.

The disclosure regulations specify the information that all schemes must provide on request, how it may be provided and certain detailed points about how it must be calculated. Our policy is for the new benefit statements provided under this clause to be produced to the same standards. Rather than mirror the requirements of the disclosure regulations in the Bill, our amendment provides for Treasury directions to specify the information that must be provided to members. We have taken this approach because we are mindful that the disclosure regulations themselves may change over time and we will want the public schemes to keep in step. In fact, the regulations governing the disclosure of information in occupational pension schemes are currently under review. We have set out a commitment to consult on those provisions later this year.

We propose to retain parity between the Bill provisions and the disclosure regulations wherever appropriate. It is important that members are given consistent and complementary information about their pension scheme benefits. This approach is also consistent with that we have taken elsewhere in the Bill in extending the role of the Pensions Regulator to the public schemes. The Pensions Regulator will also have a role in overseeing the provision of benefit information to members of the public schemes.

Amendment 86 adds annual benefit information to the list of matters that the regulator will issue guidance on. Amendments 84 and 87 also include the new clause in the areas that the regulator will oversee and on which they can take enforcement action should schemes fail to comply with their duties. The amendments meet the commitment that we made on making information available and I hope that noble Lords will agree with them.

[Lord Eatwell]

My Lords, I listened carefully to what the noble Lord had to say and I am cognisant that this is a response to the arguments made in another place by my honourable friend about the disclosure and availability of information. My Amendment 83, which is in this group, also seeks to enhance communication to members. I will not go into in any great detail the argument about why that should be done because the noble Lord has already said why it should be done. But I would be grateful if he could set out what are deemed to be the deficiencies of Amendment 83 so that I have the opportunity to study his arguments between now and Report.

[Lord Newby]

My Lords, the main difference between the two is that the noble Lord’s amendment sets out what information would be included in the benefit statement. We are saying that we wish the information to mirror the disclosure regulations that apply to private sector schemes. These will change from time to time. They have improved over the years and become less opaque. They may change again and we want the information that people under public sector schemes receive to keep up with what is, if not the gold standard, the best practice under those regulations.

We will provide information that mirrors the regulations, which may change. The noble Lord’s amendment is very prescriptive about what the information is. I have not gone through it to see what it misses, if anything, beyond what we are planning, but I hope that when he reads what I have said he will find that we are covering rather more than he wants covered and enabling a certain amount of flexibility to meet best practice.

Public Service Pensions Bill

Debate between Lord Newby and Lord Eatwell

Wednesday 9th January 2013 Lords Chamber

[Lord Eatwell]

My Lords, my noble friend has made some interesting and important points. One of the issues that really need to be faced, on Report in particular, is that in the negotiations that followed the Hutton report, Local Government Employers, the unions and the Government managed to formulate what could be called a “deal” about the way in which pensions were to go forward. Regrettably, elements of that deal do not appear in the Bill. In response to challenges in the Commons, Ministers gave assurances on a number of occasions but, given that this is expected to be a Bill lasting 25 years, covering several Administrations, these assurances should be in the Bill. A deal is a deal and simply going back to assurances is, at least partially, reneging on the deal.

Having said that in support of my noble friend, I will now speak to Amendment 35, which is also in this group. My noble friend Lord Hutton’s report recommends:

“Every public service pension scheme (and individual LGPS Fund) should have a properly constituted, trained and competent Pension Board, with member nominees, responsible for meeting good standards of governance including effective and efficient administration.”

One can understand why my noble friend recommended this given that, as my noble friend Lord Whitty has commented, there are 89 local government pension funds, with over £150 billion of assets under management, as well as the other pension schemes. Clause 1 currently provides for the establishment of a pension board for a scheme but leaves it completely unclear whether there is a requirement for one pension board for each fund in the Local Government Pension Scheme. Under the clause as drafted, it would be perfectly possible to have one pension board for all 89 pension funds—that is not ruled out. The Minister in another place said the combined effects of Clauses 4 and 5 rule this out. I have studied these clauses carefully and have taken advice, and have been assured that they do not rule this out. Indeed, one could have various combinations of boards servicing the 89 LGPS funds and other schemes.

Given that, as the Hutton report says,

“all scheme members deserve to know that their scheme is being properly run”,

it is entirely desirable to make clear in the Bill that a pension board for each pension fund is a prerequisite, both as a measure of efficient management and to give confidence to the members of individual schemes that they have a board that they can identify with and have access to. I will, in due course, ask the Minister to consider carefully taking on board Amendment 35 to give suitable clarity to what is meant by the establishment of pension boards and ensure that there is a pension board for each scheme.

[Lord Newby]

My Lords, the noble Lord, Lord Whitty, has proposed Amendments 33, 36, and 44, which are concerned with ensuring that there is a scheme manager and pension board for each local authority pension fund. The amendments also provide for national pension boards in the Local Government Pension Scheme. Amendment 35, tabled by the noble Lord, Lord Eatwell, raises much the same issue.

Both noble Lords seek assurance that there must be a pension board for each local authority pension fund within the local government scheme. I can reassure them on that point. Police, fire and local authorities will be scheme managers in respect of their part of the pension schemes for those workforces. The effect of Clause 5 is that the scheme regulations must provide for a pension board to assist each scheme manager in that role. It follows that there will be a pension board for each scheme manager.

Noble Lords may say that Clause 4 does not in explicit terms require there to be a scheme manager for each local pension fund, and hence a pension board also for that fund, but that is the purpose of Clause 4(5). The intention is also clear from Clause 5(6). This anticipates that the scheme managers of locally administered funds will be the local authority or a committee of the authority.

Amendment 36 is also concerned with requiring national pension boards to be established in the Local Government Pension Scheme for England and Wales, and the one for Scotland.

[Lord Eatwell]

I ask the noble Lord to return to the point he just made, because it is similar to a point made in another place. There is a scheme manager for each scheme. Clause 5(1) states:

“Scheme regulations for a scheme under section 1 must provide for the establishment of a board with responsibility for assisting the scheme manager”.

That does not suggest that there should be a board associated with each scheme manager. It does not say that, but a board might be just one gargantuan board that serves a variety of scheme managers. I quite understand that the noble Lord is sympathetic on this issue and wishes to assure us that that is what the Government mean but it is not what they say.

[Lord Newby]

My Lords, that is what we mean and I am advised that that is what the clause says. I will look at it again and if there is any further clarification that I can give the noble Lord, I will write to him. I think that we just have a difference of view about what the current provision states.

Amendment 36 would require national pension boards to be established in the Local Government Pension Scheme for England and Wales, and the one for Scotland. We cannot support these amendments but, as the noble Lord, Lord Whitty, will be aware, we have tabled Amendment 45 to deal with that issue, which we will consider in due course. When we do, I hope that the noble Lord will be persuaded of it.

Amendment 115 concerns Schedule 7, which sets out the mechanism to maintain the final salary link for service in the current schemes. The schedule is designed to allow public servants’ final salary benefits to remain fixed to their final salary on leaving pensionable public service, even after they enter the new schemes. This was a key part of the recommendations of the noble Lord, Lord Hutton, and a vital aspect of the reform deal for public servants. The mechanism also includes provisions for this link to be maintained even if the person moves between public service schemes or leaves public service for periods of not more than five years. Again, this is exactly in keeping with what the noble Lord, Lord Hutton, proposed.

This approach allows public servants the flexibility, for example, to take carer’s leave or gain experience in other sectors, without being inhibited from doing so by the detrimental impact on their final salary pensions. This is consistent with a wider objective to modernise public service terms and conditions, and it smoothes movement between different sectors and departments to enable the sort of skills-sharing that is required for a modern-day workforce. Amendment 115 seeks to remove this flexibility for those in the Local Government Pension Scheme by stipulating that the link is maintained only if the person remains in pensionable service for the purpose of the new local government scheme.

I am not sure that the amendment delivers on its purpose but, none the less, I must oppose it on principle. It would leave in place a movement barrier that we wish to dislodge and be inherently unfair to local government workers. It would lead to the unfair scenario where a teacher who moves to local government for a period before returning to teaching would maintain their final salary link, whereas a local government worker who moves to the education sector before returning to local government could lose their final salary link. That would not be right.

I reassure the House, however, that the Bill does not impose any new liabilities on the funded local government scheme while a person is not in local government scheme employment. Under paragraph 2 of Schedule 7, the link applies only where someone who leaves the local government scheme transfers their rights to benefits from the old scheme, and therefore the liability, to their new employer’s final salary scheme.

Amendment 126 seeks to remove local government pension schemes from the powers set out in Clause 23, which allows pension payments to be made outside schemes that will be established under Clause 1. Although the pensions that will be made under the Bill will continue to be among the best, not every last person working in the public sector will want to be part of them. In these circumstances, it is important that alternative provision can be made so that public servants can continue to save for their retirement, where the scheme manager or employer considers this appropriate. The clause therefore allows for pension payments, or other benefit payments, to be made outside the new schemes to people who are entitled to join the schemes made under this Bill.

An example of an alternative arrangement would be the employer making contributions to an individual’s personal pension scheme where that individual is on a short-term contract and does not wish to be part of the public service scheme for just that short period. This is nothing new across public service schemes as a whole. The power already exists for some of the current schemes; for example, in Section 1 of the Superannuation Act 1972.

However, I recognise that there is some concern, expressed by the noble Lord, Lord Whitty, and no doubt shared by others, that these powers may be used to override eligibility for the schemes that will be established under Clause 1. I can reassure noble Lords that the clause will not allow eligibility for the main scheme benefits to be overridden. The scheme regulations will spell out who is eligible to be a member of a pension scheme made under the Bill. This scheme could not be used to remove these eligibility rights. In short, while this clause could allow alternative arrangements to be offered, where these suit an individual’s personal circumstances, it does not allow schemes and employers to make such alternative arrangements mandatory. I hope I have reassured the noble Lord, Lord Whitty, that any fears he has about the operation of Clause 23 with regard to the LGPS are entirely unfounded, and that this amendment is not necessary.

Finally, Amendment 127 seeks to remove the reformed Local Government Pension Scheme from the provisions of the Pensions (Increase) Act 1971. This Act provides for the indexation of pensions in payment across the public sector. The amendment would mean that the provisions of that Act would not apply to the CARE element of the LGPS, instead, indexation of CARE pensions in payment would be linked to the revaluation of active member benefits, which is provided for under this Bill.

I understand that this amendment has been tabled to overcome a perceived problem with the Pensions (Increase) Act, which creates difficulties for uprating pensions in the year the member retires. However, this amendment is both unnecessary and undesirable. It is undesirable in a piece of framework legislation such as this to carve out one particular scheme for special treatment. This is especially the case when the revaluation of CARE benefits in the year of retirement is a calculation that will have to be made by all the new CARE schemes established under the Bill.

Furthermore, it is unnecessary. I am pleased to be able to reassure the noble Lord that the Government already run a CARE scheme: the Nuvos section of the Principal Civil Service Pension Scheme, which makes provisions for civil servants. This issue was addressed when that scheme was introduced, and is dealt with via the scheme rules. Should the noble Lord care to look at the detail of this, I refer him to rule C.9—the retirement index addition—in the 2007 rules for the existing civil service scheme. The reformed schemes set up under this Bill, including the LGPS, will also be able to overcome any technical difficulties with appropriate provisions in scheme regulations. There is no need to make any further provision in the Bill to allow them to do so.

With these reassurances, I hope that the noble Lord will feel able to withdraw this amendment.

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[Lord Eatwell]

My Lords, before speaking to the amendments in this group tabled in my name and that of my noble and learned friend Lord Davidson of Glen Clova, perhaps I may associate myself most heartily with the words of the noble Lord, Lord Sharkey. That should not be surprising as the first part of my Amendment 41 is virtually exactly the same as his amendment, but I must say that he put the argument beautifully. The idea that one could not accept the notion that one-third of pension board members are nominated by members of the scheme seems extraordinary. One-third is a lower limit which should certainly be accepted.

On the pension fund board which I have the honour of chairing there is one independent member; namely, myself. Otherwise one half of the remaining members are nominated by the members of the scheme and the other half by the employer. It is just under 50% because of one independent member. If that can be the case in what is, I hope, a harmonious pension scheme, I do not see why it cannot be appropriate for public sector schemes. The argument that the public sector is widely spread over different locales and can cover lots of different activities is clearly spurious as a private scheme for a very large company would be doing the same thing. That is the argument which was presented in another place, but it has been dismissed by the noble Lord, Lord Sharkey, and he was absolutely right to do so. It really has no substance at all.

I shall deal briefly with the amendments tabled in my name. Amendment 38 is all about transparency and effective governance. Under Clause 6(2)(c) pension boards are obliged to publish information about,

“matters falling within the board’s responsibility”.

As we can see in Clause 5(2), these include compliance with a whole series of aspects of the scheme’s regulations, whether it be an unfunded scheme, a defined contribution scheme or, indeed, a funded scheme with respect to its investment strategy. All the amendment seeks to do is ensure that the financial information associated with the running of the scheme is available to the board members so that they can comply with the requirements set out elsewhere in the Bill. If they do not have all the financial information they need, how can they fulfil the responsibility of ensuring that the scheme complies with regulations and other legislation relating to governance? Surely having knowledge of the financial structure and oversight thereof is key to this. We learnt from the Financial Services Bill that oversight does not mean control of but simply access to information about, so if this Bill is to be consistent with that Bill, oversight here would mean access to information that will allow the board to fulfil its responsibilities.

Amendment 39 similarly is devoted to transparency and requires that a policy governing the appointment of board members should be published. High quality board members are absolutely essential if public service pension schemes are to be well run. It is vital that the process for appointment is clear and well considered. It is therefore important that this is a transparent process so that members are reassured as to the quality of their board members. This will also promote fairness in appointments. Given that under Clause 5(4) scheme managers have an obligation to ensure that board members do not have any conflicts of interest, a clear and open appointment process with established criteria for appointment will aid scheme managers in fulfilling that statutory obligation. All Amendment 39 does is say, “Publish your policy on your appointment so that everybody knows what the criteria are, how they can apply, and so on”.

Regarding Amendment 41, I have already referred to the part which deals with the one-third of board members, and the noble Lord, Lord Sharkey, has put it better than I could. Amendment 41 also includes the requirement that there be one independent member. It is enormously valuable to have independent members, who often have professional expertise, to assist on pension fund boards. The report of the noble Lord, Lord Hutton, made it clear that it would be desirable for pension boards to have independent members. The amendment seeks to ensure that the recommendation of the noble Lord, Lord Hutton, is taken into account.

Finally, Amendment 42 uses exactly the same definition of member nominee and independent board member as the Pensions Act 2004 and provides for a nomination process for board members. In that respect, it simply mirrors the Pensions Act 2004, and in particular mirrors the definition of an independent board member, referring specifically to the nature of their independence. The criteria set out in Amendment 42 are those which we have already accepted for the private sector, and it seems entirely appropriate that they should fit here. These amendments are to provide transparency, which will enable the boards to do their jobs better. Transparency over an appointments process and a nomination process will enable the boards to be better constructed.

[Lord Newby]

My Lords, I begin by speaking to government Amendment 40. It deals with matters related to those that have been raised by the noble Lords, Lord Sharkey and Lord Eatwell. Amendment 40 delivers the Government’s policy commitment for scheme members to be represented on pension boards. Our amendment explicitly requires scheme regulations to provide for members of a public pension scheme, and any connected scheme, to be represented on the pension board. Unlike the amendments proposed by the noble Lords, Lord Sharkey and Lord Eatwell, it does not specify a proportion of board members that must be member representatives, nor does it say how member representatives are to be appointed to the pension board.

The noble Lord, Lord Sharkey, asked whether draft regulations could be made available to Members of your Lordships’ House. I confirm that we will make them available to all Members who have spoken in the debate today. In our view, these matters are rightly left to scheme regulations. In their amendments, the noble Lords have broadly sought to replicate the requirements that relate to boards of trustees in other occupational pension schemes. Amendments 34 and 41 seek to adopt the requirement for at least one-third of board members to be members or their representatives in trust-based schemes. Amendment 42 seeks to adopt a similar process for nominating member representatives to the board.

The noble Lord, Lord Sharkey, asked me to explain our rationale from first principles. I am not sure whether I shall go quite that far back, but I will attempt to explain it. We believe that the amendments fail to recognise the major differences between the public service pension schemes and the trust-based schemes that these provisions were designed for. For example, the effect of Amendment 42 would be to require Norfolk County Council to allow every member of the local government pension scheme in England and Wales, directly or indirectly, to participate in the selection of member representatives to their pension boards. The same would apply to each of the other 88 funds in the Local Government Pension Scheme. This is clearly unintended but it serves to highlight the fact that the public service schemes are indeed different. A one-size-fits-all process for nominating member representatives to pension boards would not, in our view, be appropriate, nor is it appropriate to set a quota. The public schemes are not directly comparable to trust-based pension schemes. The public service schemes are significantly bigger than most occupational pension schemes and many involve multiple and diverse employers. For example, there are over 5,000 employers in the LGPS in England and Wales. Those are not just local councils but also local charities and housing associations. That broad range of interests needs to be represented on the public service pension boards too.

Consequently, our view is that imposing a requirement for one-third of pension board members to be members, or their representatives, could lead to them being the largest interest group on the pension boards. Of course this is not an issue in private sector schemes, where there is often only a single employer to accommodate on the trustee board. The Bill already provides the necessary flexibility for the details to be agreed in each scheme, following consultations with members and other interests. This approach will allow the pension board membership to be tailored to the varying structures of each of the public schemes. The pension boards will then be able to appropriately reflect the range of employees and employers in each scheme. We believe that this is the right approach.

One of the other amendments in the name of the noble Lord, Lord Eatwell, relates to public pension boards having an independent member. The noble Lord, Lord Hutton, did indeed say in his report that it was important that pension boards include independent members. Although we accept that independent members can play a role in pension boards, we do not see a case for mandating each pension board to have such members. The reasons for mandating independent trustees in the private sector do not, in our view, flow through to the public sector schemes. Independent trustees reinforce the separation of pension schemes from the employer in the private sector and, as we have discussed previously, we are not convinced that this is required in the public scheme.

Amendment 39 would require a scheme manager rather than scheme regulations to determine the policy governing the appointment of pension board members. Clause 5 provides that it is the scheme regulations that would provide for the establishment of a board. Within that, schemes are likely to set out the detail of a board appointment process in the scheme regulations. If schemes determine to delegate this matter to scheme managers, then scheme regulations could require the scheme manager to publish these matters. It would be wrong for the Bill to prejudge the outcome of scheme-level discussions about how to best constitute and appoint pension boards in each of the schemes.

Having said that, we agree with the sentiment of the amendment. Pension boards must be transparent and representative of the interests of stakeholders, both members and employers. That is why Clause 6 already requires the publication of details of pension board membership and the board’s responsibilities.

In responding to Amendment 37 from the noble Baroness, Lady Donaghy, I hope she will not mind if I repeat what I said at Second Reading: the Government believe that the Local Government Pension Scheme,

“is fully compliant with Articles 8 and 18 of this directive. We believe this compliance is achieved by the high standard of legal security that applies to LGPS funds and benefits”.—[Official Report, 19/12/12; col. 1586.]

I am well aware that Unison has long argued that the scheme is not compliant with the European directive, and I recognise that it feels strongly on this issue, but we simply do not agree. The reasons why have been set out in a number of letters from Ministers to Unison over the past five years, not just the past two.

The previous Government implemented EU directive 41/2003 through the Pensions Act 2004. As that Act relates to the governance and administration of pension funds, that legislation is therefore already within the scope of Clause 5(2). I assure the noble Baroness that Amendment 37 is therefore not necessary. I hope that she will feel reassured and not press it at the appropriate time.

The final amendment in this group is Amendment 38, tabled by the noble Lord, Lord Eatwell. This amendment was considered in another place and resisted on the grounds that its application would be inappropriate. One of the key concerns that we have with this amendment is that it seeks to give the pension board of a funded scheme responsibility for the oversight of investment management. The existence, performance or level of any local authority pension fund has no bearing on the benefits that members receive.

Public Service Pensions Bill

Debate between Lord Newby and Lord Eatwell

Wednesday 9th January 2013 Lords Chamber

[Lord Newby]

My Lords, this is an extremely long group of government amendments. I preface my remarks with an apology to noble Lords who have taken an interest in the Bill. The letter that I circulated about government amendments was done at an extremely late stage. There is nothing Machiavellian about that: it flows directly from the fact that we are having this debate two days after the end of the Christmas Recess. The Bill team, myself and others were not working over Christmas to the extent that would have permitted us to get the amendments down earlier and inform noble Lords about them. However, I hope that in most cases, if not all, noble Lords will find them helpful and so will forgive me for that.

I start by noting that I will not move government Amendment 3, which relates to Northern Ireland civil servants. On reflection, that amendment is considered unnecessary because Amendment 9 to Schedule 1 does what is needed to remove Northern Ireland civil servants from the scope of the Bill.

In line with the recommendations of the noble Lord, Lord Hutton of Furness, the Bill was drafted to provide a legislative vehicle for the reform of all public service pension schemes in the UK to make them fairer and sustainable. However, legislative competence for some of the pension schemes is devolved to the Administrations in Northern Ireland, Scotland and Wales. We have always been clear that the devolved Administrations would have the final decision as to whether or not the Bill should apply to their devolved pension schemes.

On 26 November, the Northern Ireland Executive announced their decision to bring forward their own legislation to reform the pension schemes of their public servants. These schemes will be based on the recommendations of the noble Lord, Lord Hutton. This will affect schemes relating to Northern Ireland civil servants, the devolved Northern Ireland judiciary and, in relation to Northern Ireland, local government workers, teachers, health service workers, fire and rescue workers, and police and public bodies whose pension provision has been devolved.

On 28 November, the Scottish Executive announced their decision to exclude the small schemes for which they have legislative competence from these reforms. This will affect a small number of members of the junior Scottish judiciary and some Scottish public bodies whose pension provision has been devolved. The Bill will still make provision for Scottish schemes for which Scottish Ministers have executive, but not legislative, competence. These are schemes relating to teachers, health service workers, firefighters, police and local government workers in Scotland. Consequently, I beg to move these amendments that will collectively ensure that the Bill is disapplied from those pension schemes for which the Northern Ireland Executive and the Scottish Government have legislative competence.

Amendments 102 and 109 relate to the Scottish Government’s wish to extend a power in the Police and Fire Reform (Scotland) Act 2012 to enable pension and other benefit schemes to be made for Scottish police cadets and special constables. This will be done by way of an order made under the Scotland Act 1998 which will be laid before Parliament shortly and is expected to commence in 2013. In anticipation of that order, these amendments will ensure that these pension schemes will be included in the reforms legislated for in the Bill. As such, the new pension schemes made for Scottish police cadets and special constables will be reformed in the same way as the other public service pension schemes in Scotland.

The amendments also ensure that any compensation or injury benefit schemes made under the extended powers will not be subject to the reforms. This is consistent with the Bill’s treatment of compensation and injury benefit schemes in other areas of public service, such as the main police schemes. I am sure that noble Lords will agree that such equitable treatment is fair and proper, and I beg to move these amendments to the Bill.

[Lord Eatwell]

My Lords, I am grateful to the Minister for introducing his amendments, and for his apology with respect to their late arrival. It is of course understandable that this comes after the holiday period, although I was slightly taken aback to hear just now that the Northern Ireland announcement was made on 26 November. What has been happening since then? Christmas started a month later. I am very surprised that we now have Northern Ireland effectively removed from the Bill on the day before Committee, and the House not being informed about this when the team apparently knew of it a month and a half ago.

Before commenting on these amendments, I myself apologise to the House for being unable to be here for Second Reading. I am grateful to my noble friend Lord Davies for having stood in on that occasion.

In considering the Bill most broadly, the first thing that strikes one is the list of professions under Clause 1. These people are the very bedrock of our society. It is crucial to ensure that they have the best conditions, including the best pensions, that are affordable. At the same time, we have to recognise the pressures that an ageing society places on pension provision. The key to squaring the circle is trust; this is going to be a theme in discussing all the amendments to come. We need to incorporate into the Bill a framework that provides clear assurance so that people who perform the public services on which we all depend can face the future with confidence. That means that the Government must place clear, unambiguous commitments in the Bill—not vague promises of Ministers—about what they may really intend. Ministerial promises are simply not good enough, because these measures are intended to be long-term. In the long term, Administrations change and no Administration can bind its successor, so in the long term ministerial assurances are virtually worthless. But if future Administrations are faced with clear primary legislation, then change can be made only by returning to Parliament.

It does not assist in the building of trust when the Government table well over 100 amendments on the day before Committee. Most of these—although not all, as the Minister pointed out and I will demonstrate—arise from the refusal of the Northern Ireland Administration to pass a legislative consent Motion in respect of the Bill. In effect, as we have heard, Northern Ireland is being written out of the Bill. It would be interesting to know what Northern Irish colleagues in this House feel about this. Moreover, given that an important objective of the Bill is to manage the cost of pensions, what implications does this last-minute decision have for the public finances? Presumably this will increase long-term deficit projections—by how much?

More importantly, what negotiations are under way with the Northern Ireland Administration about the future shape of pensions in Northern Ireland; and, indeed, with the Scottish Parliament about the future shape of pensions in Scotland; and, indeed, with the Welsh Assembly, which we are told is still to consider the matter? This Bill has passed the Commons and we do not even yet know who is to be included in it because the Welsh Assembly has not reached its decision.

I am astonished that we have this brief note, circulated the night before, with amendments. We have this brief introduction from the Minister when the Bill has been changed in such a radical and fundamental way. What are the Government going to do now about both Northern Ireland and Scotland? What are they going to do about Wales if the Welsh also refuse to pass a legislative consent Motion? Given that the terms of devolution are different in Northern Ireland, Scotland and Wales, the result of all this is going to be a confused plethora of pension conditions throughout the UK—exactly the sort of confused melange that the admirable report by my noble friend Lord Hutton sought to eliminate. Indeed, it was my noble friend’s recommendation 24 that the Government should introduce primary legislation to adopt a new common UK legal framework for public service schemes. This is clearly what the Government are failing to do.

The reference to Scotland is important, because not all the amendments in this group refer solely to Northern Ireland. The Minister referred to Amendment 96, to a “holder of devolved office”. That therefore applies to Northern Ireland and Scotland. Interestingly, the noble Lord did not refer to Amendment 148, which, in defining what a “devolved office” might actually be, excludes Wales. What will happen to Amendment 148 if the Welsh now refuse to accept being included in national procedures? We really ought to be told to whom this legislation is actually going to apply.

Amendments 102 and 109 expressly include Scottish schemes, established under the Police and Fire Reform (Scotland) Act 2012, within the scope of the Bill. Amendment 139 on the approval of new schemes again refers to all devolved Administrations. What does that mean? It certainly does not mean what is defined by Amendment 148, because we do not know what the Welsh are going to do.

What we have here is a bit of a mess. The Minister must tell us how this mess is going to be resolved. How are we going to try to have some degree of consistency in public pension provision in which people can have confidence throughout the United Kingdom? We can go two particular ways. One is to attempt to negotiate an all-UK structure, which has the sort of simplicity and clarity that was suggested by my noble friend Lord Hutton. The Minister should then tell me what negotiations are proceeding to establish that common UK structure, given the devolved responsibilities of the devolved Governments and Assemblies. We should be completely clear that pensions in Northern Ireland are different from pensions in Scotland, different from pensions in Wales and different from pensions in England, and that the relevant authorities have responsibilities for their particular jurisdictions. However, of course, we do not have that. In Scotland, we have a mixture: some pensions are the responsibility of the Scottish Parliament and some are not.

Our Amendment 28A—which noble Lords may have noticed is buried in this group so that it is almost undetectable, but it is there, although the noble Lord did not deign to refer to it in his opening remarks—seeks to make some sense of this mess by recognising that regulations relating to local government workers in Scotland should require the approval of the Scottish Government. I am well aware that local government pensions are a reserved power under the Scotland Act. In the past, as the noble Lord said, Scottish Ministers have had executive responsibility for making regulations for public service schemes, but they require Treasury approval. But these have typically concerned minor matters. There has not been any big issue which has been likely to bring about a significant difference of opinion between the Scottish Parliament and the Treasury.

However, this Bill completely transforms the situation. It is a framework Bill that will be followed by regulations that are very substantial indeed. Moreover, the local government workers’ schemes in Scotland, like those in England, are funded schemes. It is important, given the extensive powers of interference conferred on the Treasury by this Bill, that the Scottish authorities have appropriate responsibility for decision-making on those funded schemes.

Since, as I understand it, the UK Government have not used their reserve power on Scottish local pensions in the past—in other words there has not been any disagreement in the past, although I am quite willing to stand corrected as it is quite difficult to research these things—it is surely inappropriate to do so now. It is surely right that the Scottish authorities should be responsible if we are going to go for this devolved structure of pensions and give up on the idea of my noble friend Lord Hutton’s proposal for a common UK scheme.

Far from being technical, this huge swathe of amendments raises major questions over the scope of this Bill and introduces complexity where there was once consistency. If the devolved Administrations are to have entirely separate schemes, so be it, but make it clear, rather than this hotchpotch of amendments and qualifications. If we are to have a Public Service Pensions Bill, not a “some people in the public service and some others not” pensions Bill, the Government must reach agreement with the devolved Administrations. They must bring back to this House a proper, comprehensive structure so that we can understand the relationship between those schemes that will obviously be national, such as the schemes for the Armed Forces, who are of course servants of the Crown, and those schemes which are to be devolved. If we are to have a common scheme, let us get on with the negotiations and bring the common scheme to this House. Last-minute changes as far-reaching as these are entirely unacceptable.

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[Lord Newby]

The distinction between the very small numbers that I have been talking about and the rest of the public servants in Scotland is that the rest of the public servants in Scotland are covered by the Bill. The schemes established under the Bill for public servants in Scotland were still negotiated in Scotland, but the framework for public sector pensions in Scotland, with the exception of those very small numbers, will be the same as in the rest of the UK. There is devolved power to the extent of the scheme negotiations within the framework of the Bill.

[Lord Eatwell]

In using the word “power” there, is the Minister aware that it will still require Treasury approval?

[Lord Newby]

I shall come to that in dealing with the noble Lord’s Amendment 28A. I did not fail to refer to it in any slight meant to the noble Lord. I thought that it was more courteous for me to allow him to make his case and then for me to reply to it.

Amendment 28A would change the current devolution settlement. I know how much importance many noble Lords across all sides of the House attach to devolution matters, but a Bill on the reserved matter of public service pensions is not, in the Government’s view, an appropriate vehicle for reworking the devolution settlement put in place by the Scotland Act 1998 or for rewriting the long-standing Sewel convention. I hope that I can explain what I mean by this.

Part II of Schedule 5 to the 1998 Act makes it clear that, with minor exceptions, this Parliament has exclusive competence to legislate for public service pensions in Scotland. This includes the local government pension scheme in Scotland. Requiring the approval of the Scottish Government in relation to reserved matters would run counter to the principles of the Sewel convention. In constitutional terms, approval of the Scottish Parliament in relation to primary legislation on Scottish local government pensions is not needed under the convention. Furthermore, as the Scottish Finance Minister told the Scottish Parliament on 28 November, the Bill does not contain any provisions,

“over pensions for local government, the national health service, teachers or police and fire staff—that would trigger the Sewel convention”.—[Official Report, Scottish Parliament, 28/11/12; col. 14014.]

I can reassure noble Lords that, although the Bill sets a legislative framework setting the parameters for pension scheme designs, Scottish Ministers have the freedom to decide on many of the details of scheme regulations relating to Scottish local government workers. This includes how generous the scheme is. The Treasury has not set a cost ceiling for any of the Scottish schemes. The cost of Scottish schemes will have to be met from the Scottish block grant. Furthermore, Clause 3 explicitly states that Treasury consent is not needed for Scottish local government scheme regulations. When pension regulations are made for the Scottish local government sector, the Scottish Government will design the terms of those pensions under the framework of the Bill, and will put them before the Scottish Parliament. That is how legislation on this topic falls to be dealt with under the devolution settlement. It would be a novel and unhelpful step to make the application to Scotland of legislation that is reserved to Westminster, subject to the prior approval of the Scottish Government in the way suggested by this amendment.

I hope that goes some way to explaining to the noble Baroness, Lady Donaghy, what the situation is in Scotland and why it is not for the Westminster Government to set out or agree the details of the schemes. It is for us to set out the framework and then, under the devolution settlement, for the Scottish Government to have negotiations that will lead to detailed scheme provisions.

--- Later in debate ---

[Lord Newby]

My Lords, these amendments seek to add members of the Ministry of Defence Fire and Rescue Service and the Ministry of Defence Police to the categories of “fire and rescue workers” and “members of a police force” set out in the Bill.

I would like to begin by setting out the current situation before responding to the proposals for change. First, as the noble Lord, Lord Eatwell, pointed out, members of these forces are civil servants who currently, and historically, have access to the Civil Service pension scheme. This scheme currently has a pension age of 65. The principle of working beyond 60 for the MoD fire and police services is already established and has existed for a number of years, while the retirement age for the police and fire services has been well below 60.

Secondly, we should remember that the Civil Service scheme is an extremely good pension scheme with benefits which are far beyond the aspirations of many in the private sector. The scheme has provisions in place to ensure that any individuals who face ill health can be provided with their pension early. Alongside this there is, of course, the option for individuals to retire before their retirement age on an actuarially reduced pension. The value of the Civil Service pension scheme is shown in the fact that DFRS and MDP staffing levels remain good and that individuals in this force have already taken employment on the basis of the package of terms and conditions currently in force. The Government do not believe that there are significant recruitment and retention issues associated with the continued use of the Civil Service pension scheme.

Thirdly, it is worth remembering that the employment status of those working in the Defence Fire and Rescue Service and the MoD Police is very different from those working for fire or police authorities. Members of the DFRS and the MDP are direct employees of the Secretary of State for Defence and their remuneration package is managed in a different way. The kind of changes that are suggested by the amendments would make most sense only as part of a fundamental restructuring of not only the terms and conditions of these forces but their roles and responsibilities and they way in which they are managed. They are currently part of a single scheme that is administered at a national level. There would be significant logistical and administrative difficulties in moving them to be part of a locally administered scheme. The Government do not believe that such a restructuring is a way forward.

Having said that, I should point out that, within the new Civil Service scheme, the flexibility will exist for the impact of the later retirement age to be mitigated for certain groups, should this be felt to be justified. This could, for example, be through fully funded early retirement or more generous early retirement factors.

As the noble Lord, Lord Eatwell, pointed out, these issues were not discussed substantively in another place and the amendments have gone down only in very recent days. However, I can give an assurance that the Government will give these matters extremely careful consideration between now and Report. We are very happy to meet members of the Ministry of Defence Police and the Defence Fire and Rescue Service if they would like to do that. I will be in a position to give a more considered response to movers of the amendments and to the House as a whole on or before Report. I therefore urge noble Lords to withdraw their amendment today.

[Lord Eatwell]

My Lords, I am grateful to the noble Baroness, Lady Harris, for her remarks. I rather pre-empted her discussion of Amendment 15 and I apologise for that. It was, after all, her sensible, balanced and valuable amendment to which we added our names rather than the other way around. I must, of course, accept the Minister’s offer of further consideration. In looking at further consideration, I urge him to put aside the canard of logistical and administrative difficulties. The phrase “logistical and administrative difficulties” is a wonderful excuse for doing nothing on all occasions. As an academic, I recognise that very clearly. It is the doctrine of unripe time: the time is not ripe and therefore we must not do anything. Logistical and administrative difficulties fall into the same pattern.

Nor is the recruitment argument a terribly good one. In this country, where we have 2.8 million people unemployed, it is not hard to recruit people in many professions. The idea that a lack of recruitment difficulties is somehow a justification for maintaining something that is manifestly unfair is not very good. I am delighted that the Government will take this away and consider it. I look forward very much—as, I am sure, does the noble Baroness, Lady Harris—to the Government taking a fair and balanced approach to this issue, which will result in amendments to the Bill that are akin, if not identical, to those we have put down. In the mean time, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Newby]

I am very relieved to have that qualification. However, I briefly repeat what I said at Second Reading. The schemes that are now going forward, covered by the legislative framework of this Bill, are, in our view, extremely sensible and generous provisions that reflect the importance that the Government attribute to the work undertaken by all the public servants covered by the schemes.

Having got that out of the way, we quite like the amendment of the noble Lord, Lord Whitty. It has the advantage of simplicity and would allow schemes to make minor and technical changes in the interests of efficiency but restrict changes that were materially detrimental to members. The wording that he has used in the amendment and the sentiments contained in it will certainly form part of our consideration of what we ourselves table on Report.

Amendment 28 deals with member consent locks. I should be clear, as my colleague the Economic Secretary was in the other place, that the Government have significant concerns about the consent locks contained in the amendment. We do not believe that this is the right way forward. I have previously mentioned that there are a number of options in terms of how to facilitate retrospective powers, and in our view consent locks are very much at the extreme end of this spectrum. We do not think that it is appropriate to give members, employers or anyone else the power unreasonably to hold each other or the Government to ransom and to inhibit changes for the greater good. There have been some damaging examples of this in the past. Therefore, the application of universal consent locks is not an avenue that we intend to investigate as we develop our amendment on this subject for Report.

[Lord Eatwell]

My Lords, perhaps it will assist the Minister if I point out that this is not a universal consent lock; it refers purely to accrued rights and indeed, as I said, it reflects the Superannuation Act 1972.

I am the chairman of a private sector pension fund; I did not declare an interest because, as this is about public sector pensions, there is no particular interest for me to declare. With regard to the extreme end of the spectrum, we have used consent locks in the private sector while negotiating various reforms of rights and have always found that negotiations with members are fruitful and produce generally positive results. I therefore do not think that so-called consent locks should be seen as extreme; they are simply the fruitful basis of consensual reform of a pension scheme.

[Lord Newby]

I hear what the noble Lord says and I hope that our amendments can satisfy him in this area; I suspect they will do so without having consent locks. However, it will be a good outcome if he is happy at the end.

On Amendment 30, discussed by the noble Lord, Lord Witty, as part of the debate about retrospective powers, our view is that it simply does not do that. Clause 3(5) deals with the generality of Treasury powers and this amendment would loosen up the area that the Treasury would have to consider. The Treasury would not then look at changes to schemes that were revenue-neutral. Our view is that in order to meet the requirement by the noble Lord, Lord Hutton, that we need a greater degree of consistency across the schemes, it would be sensible for the Treasury to look at changes, whether or not they have a financial implication, to try to ensure that we maintain consistency to the maximum possible extent.

Moving to Amendments 116 and 119, which deal with consultation, this takes us back to a debate in the other place about the appropriate statutory consultation requirements for changes in scheme regulations for the new schemes. In the other place the Government set out the reasons why it is not appropriate that primary legislation should require that all consultation on such changes be carried out with a view to agreement. As made clear in the Government’s consultation principles, consultation can have a number of purposes, including garnering views and preferences, understanding possible unintended consequences of a policy or getting views on implementation. The Bill already goes further than those consultation principles, not to mention the arrangements in place for a number of the existing public service pension schemes, in requiring that all changes to scheme regulations would undergo statutory consultation. However, such consultation must be proportionate; it would not be right for us to establish today that all consultation must seek to reach agreement, as that will not always be possible, or indeed the aim of the exercise.

Amendment 119 goes even further, requiring that all changes to scheme regulations should undergo not only consultation with a view to reaching agreement but also a parliamentary reporting process. In the case of changes to the protected elements set out in new subsection (6), scheme regulations could be changed only by agreement. We believe that this is an impractical measure. Changes are required to scheme regulations for the most minor of reasons. Surely it cannot be right or sensible that such an exhaustive consultation procedure be put in place for every such minor instance. Instead, the Government have established a balance in their consultation requirements. Clause 19 puts in place a statutory requirement for consultation. Clause 20 goes further than this and puts in place more onerous requirements for those situations where a future Government may seek to amend the core elements of the new schemes. This already goes further than some feel is appropriate in binding the hands of future Administrations. However, the Government are determined that this protection should remain in order to give confidence to members of those schemes that the Government are committed to the scheme designs that have been negotiated.

Amendment 119 also makes changes to the protected elements set out in Clause 20. These are the core elements of the schemes protected by the extra consultation requirements in the clause. The Government have included the career-average nature of the schemes, member contribution rates and benefit accrual rates in these protected elements, and are convinced that including these elements strikes the right balance between giving reassurance to members and ensuring that schemes are flexible enough to operate in the real world. Finally, Amendment 119 also seeks to require agreement through consultation to any change to the protected elements before such a change could be made.

The Government are committed to the reforms to pensions set out in the Bill and in the separate documents that describe the details of the new schemes that have been negotiated with member representatives. We have put a great amount of time and resource into developing these schemes and have come to what we believe are the right outcomes in the designs that have been established. However, it would be irresponsible and frankly unrealistic for this Government to seek to bind the hands of all future Governments within the next 25 years, as this part of the amendment would seek to do. Instead we have sought to put in place a more onerous process that would cause any future Governments seeking to fundamentally change these pensions to properly consider the impact of their actions and to justify the need for such changes to those affected and to Parliament.

Amendment 120 is intended to be consequential on some of these other changes and would amend the provision in Clause 21 to specify that scheme regulations will be subject to the negative procedure unless otherwise specified. However, the amendments in question do not propose any change to the procedure around scheme regulations, and therefore we believe that the amendment is unnecessary. I hope that in view of the assurance I have been able to give about amendments coming forward on Report, noble Lords will feel able to withdraw their amendments.

Economy: Effect of US “Fiscal Cliff” Solution

Debate between Lord Newby and Lord Eatwell

Tuesday 8th January 2013 Lords Chamber

[Lord Newby]

My Lords, I completely agree with the noble Baroness. That is why the Prime Minister has set promoting a US/EU trade agreement as one of his top priorities for the G8, as well as moving forward on other trade agreements, such as that with Canada, which are already a long way down the pipeline.

[Lord Eatwell]

My Lords, will the noble Lord consider answering the Question asked by my noble friend Lord Barnett? He asked what the assessment was of the impact of the fiscal cliff solution on the UK economy. As the noble Lord said, this had led to a 1.7% increase in the fiscal burden on GDP, and the debt ceiling debates in seven weeks’ time referred to by the noble Baroness, Lady Kramer, may add further burdens to the US economy. Is this good or bad for Britain?

[Lord Newby]

Whether it is good or bad for Britain, it is what is happening in the US. What I said in my original Answer was that the estimates, which were published by the ONS at the time of the Autumn Statement, were based on an assessment of what was likely to happen, which is exactly what has happened. The Bill passed last week is having an impact of 1.7% on US GDP. The ONS assumed that the Bill passed last week would have an impact of about 1.7% on US GDP. We factored that into our calculations and the growth forecast produced for this year will be unchanged because what has actually happened is what we thought was going to happen.

Financial Services Bill

Debate between Lord Newby and Lord Eatwell

Wednesday 28th November 2012 Lords Chamber

[Lord Newby]

My Lords, this group of amendments was debated at length in Committee. I am sure that, like the noble Lord, Lord Eatwell, many of us were indeed inspired by the way that my noble friend Lord Sassoon sought to reject them. Amendments 107AA and 107AB, and Amendments 107AD and 107AE, attempt to create an early warning system for public funds notifications. I understand that this reflects a concern on the Benches opposite that the drafting of the Bill—specifically, the legal effect of the term “material risk”—does not require the Bank to notify the Treasury in enough cases, even those in which there is a very low probability of public funds interventions being required.

After our debate in Committee, my noble friend Lord Sassoon asked Treasury officials and legal advisers to look again at the material risk wording to make absolutely clear that it delivers the low bar that we are looking for: a possibility test rather than a probability test. Our officials have concluded that the legal effect of the existing wording is indeed to require the Bank to notify the Treasury where there is a realistic possibility of circumstances arising in the future in which public funds could be put at risk. I do not think it would be appropriate to lower the bar even further from “material risk”. The result of doing so would be to require the Bank to notify relatively trivial and implausible risks, which could mean the Treasury receiving a large number of notifications of far-fetched risks that require no action or engagement from the Treasury whatever. I am satisfied that the material risk terminology will give us the right result.

Let me reassure the House that I agree entirely that the Treasury must be informed well in advance of a risk to public funds crystallising in order fully to consider and evaluate different options for managing or mitigating the risk and, ultimately, with a view to avoiding entirely any recourse to public funds. As my noble friend Lord Sassoon said in Committee, no one would be keener than us to have an early notification mechanism in place if we believed it necessary to achieve this aim. However, I am confident that the existing trigger in Clause 57 already sets the very low bar that we need.

The other aspect of these amendments is to extend the duty to notify to the PRA, FCA and FPC. I feel strongly that diluting accountability in this way would be a mistake. As we saw with the failed tripartite system, the clear disadvantage of spreading responsibility across several different organisations is that each can blame the others when things go wrong and risks can fall between the gaps. I believe that the system set out in the Bill, which makes the Bank the single point of responsibility for financial stability and crisis management, is the correct approach to eliminate confusion and overlap and ensure that the Treasury is always informed of risks to public funds.

In a similar vein, Amendments 107AC and 107AF seek to add references to risks to the objectives of the PRA and FCA into the notification duty. I can reassure the noble Lord that any risks that arise in the spheres of responsibility of the PRA and FCA that could potentially pose a threat to public funds must be notified to the Treasury by the Bank in the normal way. As was made clear in Committee, the duty to notify the Treasury of risks to public funds will require the Bank and its senior management to identify and evaluate risks emanating from all parts of the financial sector, working closely with the PRA and the FCA. The Bill itself places duties on the PRA and the FCA to co-ordinate with the Bank in this work. New Section 3P(1)(b) of FiSMA, as inserted by Clause 6 of the Bill, requires the regulators to take steps to co-operate with the Bank in connection with its duty to notify the Treasury of risks to public funds. We believe that that is an adequate provision.

Amendment 107AG would add “comprehensive” to the requirement that the crisis management MoU make provision regarding the obtaining and sharing of information. I do not quite see what “comprehensive” would add. Surely the most sensible approach here is for the Treasury and the Bank to agree between themselves what information the Treasury would find useful, including the format of the information and its frequency. That is exactly the approach taken in the MoU. Paragraph 18 makes it clear that the Treasury and the Bank will determine between themselves a suitable frequency for updates on each different risk, reflecting the severity and immediacy of the risk to public funds. Paragraph 21 states:

“The Bank will provide the Treasury with information needed on the options for managing the situation, including on options commissioned by the Treasury”.

I therefore do not think that Amendment 107AG is necessary.

Amendment 107AH attempts to turn the MoU into a piece of secondary legislation, subject to parliamentary approval via the affirmative process. I agree with the noble Lord that the MoU is a very important document, which sets out how the Bank and Treasury will interact in a crisis, to a level of detail and in a style that simply would not be possible in legislation, either primary or secondary. Having looked again at the MoU, I continue to believe that its content and style make it unsuitable for inclusion in secondary legislation. I would be loath to lose the level of nuance and detail that is currently included in the draft MoU but which is not legislative in nature. It would also make the MoU less flexible and make it more difficult for the Bank and Treasury to adapt or change the MoU to reflect changing circumstances. On the basis of these explanations, I hope that the noble Lord will feel able to withdraw his amendment.

[Lord Eatwell]

Will the Minister explain why he always qualified the notion of “threat” as a threat to public funds and failed to accept the argument of serious threats to the financial system that do not necessarily pose a direct threat to public funds?

[Lord Newby]

The reference in the Bill to public funds goes to the heart of the Treasury’s responsibility vis-à-vis the regulators in managing the financial services sector, and we have been very clear that we want to do that. On the more general issues that the Bank may want to raise with the Treasury, which go beyond a risk to public funds, the Bank and the Treasury are in regular contact via non-statutory routes, as it were, which give ample opportunity for the two to discuss at great length and with great frequency any emerging issues that they feel the other should be aware of.

Financial Services Bill

Debate between Lord Newby and Lord Eatwell

Monday 26th November 2012 Lords Chamber

[Lord Eatwell]

My Lords, the government Front Bench should calm down and allow us to conduct this discussion broadly under Report mechanisms but in a way which takes us forward on what, as my noble friend has said, is an enormously complicated Bill.

I am afraid that I think the proposal of the noble Lord, Lord Flight, is unfortunate and I cannot support it. It is unreasonable to provide this sort of protection to financial advisers, who should take full and appropriate care in the advice that they give. If they have taken full and appropriate care, they will be able to defend themselves at a later stage against the problem that the noble Lord, Lord Phillips, raised a few minutes ago, but I think it inappropriate that they should not be sensitive to potential comeback for advice which is inappropriate and misconceived.

[Lord Newby]

My Lords, when we debated this issue in Committee, my noble friend Lord Sassoon made it clear that this was an important issue for the regulator to review. The FSA has now committed to consider whether to investigate the case for a longstop as part of its business planning for 2014-15.

The amendment deals with the Limitation Act. It is important to be clear about both the nature of the issue and why I do not think that requiring the regulators to apply the Limitation Act when making rules provides the solution.

First, it is important to be clear that time limits apply for consumers bringing complaints to the FOS. These are: six years from the event that the consumer is complaining about, or, if later, three years after the consumer became aware, or ought to have become reasonably aware, that they had cause for complaint. The question which we are now debating is whether there should be a further absolute or overriding limit, possibly of 15 years. This is an extremely important question for the regulator to review and it is clear that it needs to take into account the particular features of financial services and financial service products in doing so.

When the FSA considered the issue previously, it noted that the long-term nature of some financial services products means that it can take many years for consumers to be made aware that they may have suffered detriment. An example from recent years includes inappropriate pension advice to switch from one investment or one type of pension to another. Consumers did not necessarily realise that this advice was inappropriate until many years later and as they approached retirement. This kind of advice was the subject of the FSA’s pensions review covering the period 1988 to 1994, and concerns about advice given in this period came to light only some years later. Advice from this period is still the subject of consumer complaints now.

It is important to realise that many of the matters that the FCA or PRA, or indeed the FOS, which is also relevant here, will be dealing with will not be subject to the Limitation Act at all. The Act applies to certain causes of action in private law, such as actions for breach of contract or negligence, but the FOS is required to determine cases by reference to what is,

“fair and reasonable in all the circumstances of the case”.

In some cases, there will be no private law course of action and so nothing for the Limitation Act to apply to.

It is also worth remembering that the Limitation Act is very context-specific legislation. Time limits vary considerably according to the nature of the claim; for example, the time limit for libel is one year whereas for negligence it is six years. The time limit also varies on the facts of the case. For example, it is extended in certain cases involving fraud or where the claimant has a disability. Even the 15-year, longstop period that applies in cases of negligence has exceptions—for example, for claims involving personal injury. Therefore, it would be particularly inappropriate as a guide for the FCA in its rule-making powers. It would be next to impossible for the FCA to know how the Limitation Act would apply to all the cases that could be subject to any proposed rule. Far from bringing the financial services into line with other sectors, we would, in our view, be failing to acknowledge that in financial services, as in other sectors, there are many claims to which the Limitation Act does not apply.

Having said that, the regulator will look again at the case for a longstop. In view of my arguments and this commitment by the regulator, I hope that my noble friend will feel able to withdraw his amendment.

Financial Services Bill

Debate between Lord Newby and Lord Eatwell

Tuesday 20th November 2012 Lords Chamber

[Lord Eatwell]

My Lords, Amendment 73B reflects a concern that we have expressed at numerous stages in the discussion of the Bill about the process by which entry is possible within the financial services industry and the processes by which permissions are varied and are cancelled.

Our prime objective is to stimulate greater competition within the financial services industry. Entry is notoriously difficult, particularly in the banking sector, and it has been made more difficult since the financial crisis as the stable door has been banged firmly shut. The shutting of the stable door, of course, has not implied any extra sanction on those banks or other institutions which already exist but has made it much more complicated for new banks to be established or new firms to enter other major parts of the financial services industry.

From an examination of the provisions of the Bill on the issue of permissions, it seems clear that there will be firms that are regulated by both the PRA and the FCA and, indeed, that there will be firms that are regulated by one of these organisations but the process of granting permissions, variations and so on will require reference to the other organisation. Given the way in which permissions are dealt with at the moment, it seems likely that this will introduce further bureaucratic steps inhibiting entry. Those bureaucratic steps will be entirely unnecessary if the regulators have a statutory requirement to co-ordinate their procedures. If, on the other hand, as we suspect, the PRA and the FCA develop different procedures relative to their differing objectives, the possibility that processes will become excessively complex, slow and expensive increases significantly.

The objective of the amendment is simply to require the PRA and the FCA to,

“co-ordinate their procedures for, and provide clear and detailed guidance on, the processes for applying for, varying and cancelling permission”,

in order to facilitate competition and ease of entry into, particularly, the banking sector and into financial services in general. I beg to move.

[Lord Newby]

My Lords, as I said in Committee when we debated this issue, we are extremely sympathetic to what the noble Lord is seeking to achieve. However, as I also pointed out, the PRA and the FCA are already required by proposed new Section 3D in Clause 6 to co-ordinate their regulatory processes, including the authorisation process, so this element of the amendment would have no effect.

On the publication of detailed guidance, I point out that in order for the regulators to carry out authorisation, they will need to give instructions to firms about how to engage with the process. That is what the FSA does now, and what the PRA and the FCA will have to do in the future. Firms need to be authorised before they can enter the market and the Government agree that it is extremely important to encourage new entrants. The noble Lord talked about the shutting of the stable door in respect of new banks. The truth is that the stable door has been shut for many decades and there have been no new banks. We have to try to change the culture, in terms both of the regulators and of the regulated, that has been in place for many decades, and we are very keen to do it. That is why we had brought forward an amendment requiring the PRA to have regard to the need to minimise the adverse effect on competition that arises from its actions. One of the effects will be to ensure that the PRA works to remove unnecessary obstacles to new entrants; for example, by ensuring that the authorisation process runs as smoothly as possible.

The Government agree that it is important that the regulators explain how they will co-ordinate their regulatory activities. That is why there is a statutory duty to co-ordinate and to set out in an MoU how that co-ordination will operate in practice. The process for applying for permission is one of the things that proposed new Section 3E specifically envisages being in the MoU.

The Government entirely agree with the thinking behind the amendment but we do not believe that anything further is needed to implement what it seeks to achieve.

[Lord Eatwell]

That is rather complacent. If the noble Lord thinks that the FSA provides clear guidance at the moment, he has not tried to establish a bank. I can assure him that it does not. There is a reason for that. Given that most business plans are rather different and the guidance has to be specific, the FSA has expressed a reluctance to get involved in specific cases.

General guidance is of general use but is seldom useful in the establishment of a given institution. That is why the amendment calls for the provision of,

“clear and detailed guidance”.

That is not available elsewhere in the Bill. The Government are being seriously remiss by discouraging the competitive process as regards this aspect. I know that they want to increase competition but it is a mistake to do it in this way. It is not an intentional discouragement and so it would be enormously helpful if the amendment were to be accepted or some version of it were to be considered at Third Reading. I admit that it may well be belt and braces, but the amendment derives from experience of dealing with the FSA on these matters. It is in this area that the Government do not live up to the picture of assistance and guidance that the noble Lord has painted. However, at this stage, I beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Newby and Lord Eatwell

Monday 12th November 2012 Lords Chamber

[Lord Newby]

These amendments relate to the matter raised by the noble Lord, Lord Davies of Oldham, during earlier discussions of the FCA’s objectives. At the time, the noble Lord made the point that it seemed odd that the new section in this Bill setting out a number of indicative and non-exhaustive matters that may be considered to fall within the definition of financial crime should not include a matter of grave concern; namely, the financing of terrorism. My noble friend Lord Sassoon wholeheartedly agreed at the time that this was an odd state of affairs and promised to return to the matter on Report. That is why I am today tabling these two amendments, which have the effect of adding the financing of terrorism to subsection (3) of new Section 1H in Clause 6. This brings the provision very much into the 21st century and reflects the reality that we need our regulators to be ever more vigilant and do what they can to reduce the extent to which the financial system and firms within it can be used to finance terrorism.

I should stress that the list describing what may be considered to constitute financial crime is indicative and non-exhaustive and that there is no question that the FSA at present does not have the mandate to act in this space. It absolutely does. However, I agree with the noble Lord that this is very much a change worth making. I beg to move.

[Lord Eatwell]

My Lords, I am amazed at the inability of the Treasury to get this one right. My noble friend Lord Davies of Oldham pointed out that the definitions, even in this indicative list of financial crimes, do not accord with our international obligations to the Financial Action Task Force. The FATF defines the crucial area of international financial crime as money laundering, the financing of terrorism, with which the Government have now caught up, and the financing of the proliferation of weapons of mass destruction. Why are the Government not following the definition given in our international obligations? Why do they not consider including the financing of the proliferation of weapons of mass destruction—one of our key international obligations—as appropriate in the indicative list?

[Lord Newby]

My Lords, it is an indicative list. We have added to it on the basis of comments by the noble Lord, Lord Davies of Oldham. It is a non-exhaustive list and the question of weapons of mass destruction is already covered by the powers that we have. There can be no question but that the authorities will be bearing down very heavily if they think there is any question of the financing of weapons of mass destruction.

Financial Services Bill

Debate between Lord Newby and Lord Eatwell

Monday 8th October 2012 Lords Chamber

[Lord Eatwell]

My Lords, I welcome the noble Lord, Lord Newby, to the consideration of the Bill but I suggest that he has failed to take the point of Amendment 149AA. His argument consisted of two points. First, he argued that there was sufficient requirement for the PRA and the FCA to work together in giving permissions under new Sections 55E, 55F and 55G. Secondly, he argued, extraordinarily, that it was not the task of the Bill to require either the PRA or the FCA to publish guidance on these matters. One of the great failures in the current process in giving permissions is the inadequate guidance which firms have in preparing their permissions. It is one reason why the permission process has become so extended and has so limited the development of competition in financial services which we would all like to see. In particular—

[Lord Newby]

What I said was that at present the FSA does make guidance available on its website. The new regulators intend to do the same. For that reason, I did not think there was a need for an express requirement in the Bill to do so.

[Lord Eatwell]

They may intend to do lots of things, but it would be nice if the Bill could actually require them to do so in this particular case. However, the more important point I would like the noble Lord to help me with is that Amendment 149A requires the collaborative activity of the FCA and the PRA to publish guidance for applicants, so that an applicant is not caught between two stools, continuously going backwards and forwards between one and the other in the application process. If this is already in new Sections 55E, 55F, and 55G, can the noble Lord point out to me precisely where this requirement appears?

[Lord Newby]

The PRA and FCA are under a duty to co-ordinate covering all their functions, including those related to authorisations. They are under a duty to set out in their MoU how that co-ordination will be delivered. Therefore, the noble Lord’s concern that there will not be adequate co-ordination, and that even if there were, it might not be readily available to regulated or would-be regulated firms, is mistaken. There is recognition that there is a potential problem, obviously, with two regulators, but the Bill and the MoU seek specifically to address those problems.

[Lord Eatwell]

Pushing things into the MoU is unsatisfactory, particularly when the noble Lord pleaded in aid new Sections 55E, 55F, 55G, and so on. It does seem that there is a problem with the whole current application process. Anybody who has been involved with, or been approached by, people involved in the application process knows that as it stands it is not working very well. Once we have two regulators responsible for the approval of applications, there is the possibility that it will work less well, which will not be good for the health and vitality of financial services, particularly banking, in this country. However, we will no doubt return to this matter at a later stage. In the mean time, I beg leave to withdraw the amendment.

Government Resources and Accounts Act 2000 (Audit of Public Bodies) Order 2012

Debate between Lord Newby and Lord Eatwell

Monday 27th February 2012 Grand Committee

[Lord Eatwell]

My Lords, I have no comments on this order.

[Lord Newby]

My Lords, I am sorry to detain the Committee. A number of years ago I was an adviser to the School Food Trust and I should simply like to ask which of the two categories it falls into. I believe that it has become a private sector body rather than abolished. Both the Explanatory Memorandum and the Minister’s speech have failed to clarify into which of those two groupings it falls.

Financial Services and Markets Act 2000 (Exemption) (Amendment No. 2) Order 2011

Debate between Lord Newby and Lord Eatwell

Monday 17th October 2011 Grand Committee

[Lord Eatwell]

Perhaps, if the Minister would allow me, we can clarify this matter. In the consultation document on the FSA website, the first question is:

“Do you agree with the proposed legislative measures outlined in chapter 3?”.

The order before us today is included in Chapter 3. Does the Minister know the answer to that question from the people of Northern Ireland?

[Lord Newby]

My Lords—

--- Later in debate ---

[Lord Eatwell]

My Lords, I put a question to the noble Lord, which he has not answered, regarding the response of the people of Northern Ireland to the question about whether they agree with the order. On this side of the Committee we are entirely supportive of the objectives of the order. That is not the point that I am raising. My point is that the Merits Committee wrote to the Treasury on 13 October, reminding it to ensure that the summary of this draft instrument was available before the debate in the House. I have not been able to find a summary of the consultation on this draft instrument. Without the reactions of the people of Northern Ireland, who are closely and greatly involved in credit unions, as the Minister pointed out, it is very difficult to offer the order proper scrutiny. Therefore, I cannot continue, other than to say that it would be appropriate for the Treasury to ensure that relevant consultation material is published, as the Merits Committee requires, prior to consideration of draft legislation by the Committee.

[Lord Newby]

My Lords, there seems to be a muddle over the consultation. The Explanatory Memorandum said that the summary of responses to the March 2010 consultation will be published shortly. I think the Minister said that it was published today. I do not know when the March 2010 consultation formally finished, but it was presumably quite a long time ago. It is indeed unsatisfactory that we do not have the results of that consultation.

However, I think it is appropriate to look at what the order says. It is an extraordinarily short order, and it says nothing, as the Minister said, about the detail of how this change will be effected. All it says is that the change will be effected and that Northern Irish credit unions will be brought under the ambit of the FSA. I do not know, but I would be surprised if there was a single, solitary soul in Northern Ireland who would oppose that change, particularly if they look at what has been happening south of the border in recent weeks. Only a couple of weeks ago, the Irish Finance Minister was called upon to inject €1 billion into the credit union sector south of the border, because many of those credit unions—and we are talking about a sector that is as predominant as it is north of the border—found themselves, as a result of rising unemployment and declining income, in some difficulties. Of the 407 credit unions in the Republic of Ireland, some 79 are now in need of this injection of capital. It seems likely not only that that will need to happen but that there will have to be some consolidation in the sector and smaller credit unions will need to merge.

My question to the Minister is, in a completely different sense to that of the noble Lord, Lord Eatwell, why it has taken the Government so long to bring this legislation forward, given that the majority of the population of Northern Ireland would be affected if their credit union got into difficulty. Even if we approve this order in due course, it does not come into effect until 31 March next year. My question to the Minister was going to be, and remains, whether he has any evidence that the travails that afflict the Republic of Ireland credit union sector are spreading north. Does he envisage that any individual credit unions north of the border will get into difficulties over the coming weeks and months? In the absence of any covering FSA jurisdiction, what would the Government’s response be were they to find themselves in the same position of the Government south of the border, where a significant number—in their case about 15 per cent of credit unions—required short-term capital support?

EU: Financial and Monetary Co-ordination

Debate between Lord Newby and Lord Eatwell

Monday 6th June 2011 Lords Chamber

[Lord Newby]

My Lords—

[Lord Eatwell]

My Lords—

Budget Responsibility and National Audit Bill [HL]

Debate between Lord Newby and Lord Eatwell

Monday 31st January 2011 Lords Chamber

[Lord Eatwell]

My Lords, this is a rather heterogeneous group of amendments. In fact, the only common theme that I can see running through the amendments is that most of the ideas in them were proposed by the Opposition in Grand Committee. We are delighted that the Government have accepted many of the arguments made by this side concerning important failings in the Bill as originally introduced.

An essential difficulty with the structure of the OBR is that the OBR is to be both outside government and yet of government. The goal of the Bill is to make the OBR independent—a goal that we on this side fully support—yet, as the provider of the official forecast, the OBR is an essential part of policy-making and must be closely involved with the development and costing of government programmes. As the draft charter states,

“The Government will have full and timely access to information and assistance from the OBR”.

A very obvious manifestation of the resultant ambiguities is that the Treasury is planning to retain forecasting skills in order that Ministers may make informed judgments on the impact of various policies. As the noble Lord made clear in Committee, this may lead to the extraordinary situation in which the Treasury could reject the official forecast. Such paradoxes are the inevitable outcome of the peculiar, ambiguous status of the OBR.

Given this peculiar status, it has been the objective of this side of the House to reinforce the independence of the OBR wherever we might. After all, if there is not widespread confidence in that independence, the legislation will have failed. To that end, I am pleased that the Government have—in the form of Amendments 1, 2 and 4—accepted our argument that the non-executive members of the OBR should be given clear roles, including, most importantly, that of guardians of the independence of the OBR and, as we shall see in later amendments to be considered by the House, that of securing third-party monitoring of the OBR’s performance. We are pleased to support Amendments 1, 2 and 4.

There are two other important amendments in this heterogeneous group—I am sure that, listening to the Minister introducing the amendments, noble Lords might have been rather puzzled about why they are in a single group. Following suggestions made by this side and by the noble Lord, Lord Newby, Amendment 11 clarifies the previously obscurantist Clause 5(3). Will the Minister confirm that Clause 5(3) as amended will ensure that the evaluation of the relevant government policies will essentially be part and parcel of all the OBR’s work, including the work outlined and defined in the charter?

Amendment 12 is an acceptance of our argument that it is preposterous that the Treasury should, via the charter, be able to qualify the meaning of the requirement for the OBR to perform its duties “objectively, transparently and impartially”. I am delighted that the amendment will remove that nonsense. Will the Minister make it clear that the remaining requirement—which is, so to speak, all that is left—in Clause 6, which provides that the charter

“may include guidance to the Office about how it should perform its duty under section 4, including (in particular) guidance about … the time at which it is to prepare any forecast, assessment or analysis”,

can now refer only to the time at which the OBR should perform its duties under Clause 4? Do any wider, unspecified powers of direction remain? It would helpful if the Minister could clarify that, since Clause 6 will now have been changed to such an extent that it is not entirely clear what subsection (3) now refers to when it refers back to subsection (1).

Finally, in Amendment 13 the Government have responded to our criticism about the lack of adequate parliamentary scrutiny of the charter by requiring that a draft of any modification be published 28 days before the charter is laid before Parliament to be approved by resolution of the House of Commons. This is an important improvement on what went before, but even so—as the noble Lord, Lord Newby, said in Committee—the charter is subject only to vestigial parliamentary scrutiny. The important word in this context is “vestigial”.

That raises an important issue mentioned in the notes distributed with the amendments for the Report stage. Noble Lords will recall that several elements of the charter came in for stiff criticism in Grand Committee, yet the notes that accompany this stage declare that the revised charter will be published only after the Bill has received Royal Assent. That cannot be right. The failure to provide a revised charter deprives Members of another place of the opportunity to relate the charter in the Government’s preferred form to their substantive discussion of the Bill. In effect, this is the Government stifling debate on the charter. Will the Minister give me an assurance that this underhand way of going about things will be rescinded and that the revised charter will be published in good time for its consideration by another place?

[Lord Newby]

These government amendments are welcome because they recognise the discussions held in Committee. The Minister has a gone a long way towards responding to the concerns that were expressed.

I am particularly pleased with Amendment 11 because we spent a lot of time on this issue. Clearly, the original drafting was inadequate. Pride of authorship means that I am unhappy that the words that I suggested in Committee are not being used, but the wording in Amendment 11 will do exactly the same job, so I welcome that.

I also welcome Amendment 13 for the reasons suggested by the noble Lord, Lord Eatwell. I have some sympathy with his last point. I cannot see why the charter cannot be presented in its final form before the Bill goes through another place. I cannot believe that there will be much to change—the charter is not a very long document—so, for the reasons given by the noble Lord, that would be an improvement on what is currently proposed.

I want to make a final comment on what the noble Lord, Lord Eatwell, said about the Treasury retaining its own forecasting ability and what would happen if there was a dispute with the OBR. We discussed at some length in Committee why it was essential that the Treasury should retain it own forecasting abilities While it would clearly be a major source of embarrassment if the Treasury disagreed with the OBR forecast, the one good thing about the new system is that, presumably, any such disagreement would be transparent because the Treasury would have to explain that it has disagreed with the OBR and give reasons why, and there would no doubt be a huge row about it. Although that might be uncomfortable for the Government, that will at least expose all the issues that are in dispute. In the interests of transparency, surely that is a good thing.

--- Later in debate ---

[Lord Eatwell]

On Amendments 8 and 10, the noble Lord, Lord Higgins, will have to suffer the possibility of inconsistent forecasts because that is, in a way, embodied in the independence and separation of the Bank of England. The whole point of an independent Bank of England, and the way the Labour Government set up the independent status of the Monetary Policy Committee and the Bank of England, is that it should be allowed to take an independent view. That independent view will be informed by its own research. This can lead not just to forecasting inconsistency but to policy inconsistency, but that is the price we are going to pay if we think this is an appropriate policy mix. The very distinguished late economist Sir James Meade pointed out many times that this separation could lead to serious policy inconsistency, and he was entirely opposed to its, none the less, that is the way we have constructed policy-making in this country, and that separation will bring with it the possibility—indeed, the probability—of some forecast inconsistency. However, we should note that recently the Governor of the Bank of England has been making many statements about fiscal policy, which is not his territory. That is very unfortunate. He seems to have encouraged the Prime Minister to make comments on interest rates, which are not his territory either. If this separation is deemed to be a good thing by our Parliament and policy-makers, I hope that the governor and the Prime Minister will respect it.

The problem I have with Amendment 10, tabled by the noble Lord, Lord Higgins, is that I do not think the output gap is a precise notion which can be believed if you say it is 2.5 per cent or something like that. In the Budget debate and in the debate on the comprehensive spending review, I argued that it is a statistical construct. It has embedded within it a series of statistical assumptions. It was quite striking that in the first OBR report, the definition of the structural deficit was changed, to the benefit, I might add, of the Government’s arguments. Therefore, I do not want too much credibility to be put on what is a useful indicative statistic. The weight put on it can be taken too far.

I strongly support the Government’s amendments both on transparency of assumptions and consideration of the risks to which the economy might be exposed. The latter issue, with the OBR now being required to talk about the risks to which the economy is exposed, is very important. For example, let us suppose that we had had an OBR of 2006 vintage. That OBR could have expressed concerns about the fiscal risk the economy was subject to by being dependent on such a high proportion of tax revenues coming from just one sector of the economy, that of financial services. It would have had the opportunity to say, in facing that risk, that some diversification of revenue sources might be desirable. Similarly, in defining the sustainability of the public accounts, the OBR should take into account the risk to sustainability generated by the foreign balance and by the savings and spending behaviour of the private sector, and their interactions with the public balances. Providing these insights into the risks of public sector financial management would extend the debate about the public finances in a very useful way and would ensure that the debate is far better informed than it has been in the past. So I would like particularly to add the support of this side for government Amendment 9.

[Lord Newby]

I would like to echo the noble Lord, Lord Eatwell, in two respects; first, in his comments on Amendment 9, which I will not repeat, and secondly, in his comments on Amendment 10. I am dubious about the value of giving enhanced status to an assessment of the output gap or when the economic cycle is likely to end for reasons largely already given by the noble Lord, Lord Eatwell. The output gap is not an absolutely firm context and figure that is easily grasped and measured. As we saw with the previous Government, a lot of weight was put on the economic cycle because the golden rule about government expenditure and borrowing depended on it. The problem was that whenever a difficulty arose, lo and behold, the definition of the cycle changed to push the difficulty back. It proved to be a far more elastic concept than we thought, and the old Ricardian economic cycle that depended on grain crops just does not obtain in quite the same way today. So while I am sure that the Office for Budget Responsibility may well wish to opine on these matters, and it will be quite interesting to know what it thinks, it is of secondary importance in setting government policy. Indeed, because of its somewhat nebulous nature, I would not want us to put too much weight on it again.

Budget Responsibility and National Audit Bill [HL]

Debate between Lord Newby and Lord Eatwell

Wednesday 1st December 2010 Grand Committee

[Lord Newby]

Everybody agrees on the substance. The problem is that the Minister is trying to turn words that are inelegant and the wrong way round to mean what we all agree on. Without wishing to claim the fee of a parliamentary counsel, it seems to me that we could deal with this simply by redrafting subsection (3) to read: “The office must perform that duty, taking account of any government policies that are relevant to the performance of that duty. It may not consider…”

[Lord Eatwell]

Absolutely. We have just heard clarity provided from this incredibly obscurantist piece of drafting. This subsection is a negative. It says:

“Where any Government policies are relevant … the Office may not consider”.

You are taken to the negative. The verb with operational significance in that sentence is “may not”. The noble Lord, Lord Newby, has hit the nail on the head. If one really wants to achieve what we are all trying to achieve, this subsection should be split into two with Clause 5(3) saying, “Take these things into account” and a new Clause 5(4) saying, “Don’t mess around looking at other people’s policies”.

Budget Responsibility and National Audit Bill [HL]

Debate between Lord Newby and Lord Eatwell

Monday 29th November 2010 Grand Committee

[Lord Eatwell]

I introduced the charter into this in the sense that Clause 1 refers to the charter for budget responsibility and we have the draft before us. I do not think that it will be subject to parliamentary scrutiny. It will be placed before Parliament but will not be subject to scrutiny. I was therefore taking advantage of the Committee because, as the draft charter has been published, we have the opportunity to discuss it.

[Lord Newby]

Just as a point of clarification for the noble Lord, Lord Eatwell, Clause 1(7) states:

“The Charter (or the modified Charter) does not come into force until it has been approved by a resolution of the House of Commons”,

so it has at least vestigial parliamentary scrutiny.

Budget Responsibility and National Audit Bill [HL]

Debate between Lord Newby and Lord Eatwell

Monday 8th November 2010 Lords Chamber

[Lord Newby]

My Lords, I, too, welcome the Bill. When the proposal first came forward for the Office for Budget Responsibility, I regarded it as a gimmick. However, a number of things since then have persuaded me that I was wrong. First, when we discussed the statistics Bill several years ago, we discovered that only 17 per cent of the population believe any government statistics. Whether that is a rational view is irrelevant; the way in which politicians down the years manipulated official statistics left them with no credibility whatever. Therefore, a number of things needed to be done. Fortunately, the new structure of the Office for National Statistics is improving that figure, but it was a salutary reminder that, whereas we may take statistics seriously, politicians and Ministers have fallen so low in public regard that we are atypical.

Secondly, it became clear, not least from reading the book of the noble Lord, Lord Mandelson, that the previous Prime Minister and Chancellor believed that growth figures were a matter for political manipulation. It is absolutely clear that that is what Gordon Brown sought to do. This gives me another reason to believe that we have to take that power and oversight away from the Treasury. During Gordon Brown’s chancellorship, we had the delightful business of the golden rule and the way in which it was stretched, expanded and diminished to fit the requirements of the Chancellor. It is fascinating to hear the huge support of the noble Lord, Lord Eatwell, for these principles of independence. He shows all the zealotry of a convert. Certainly, while his party was in government, nothing was done to promote the principles that lie behind those parts of the Bill. That does not necessarily mean that his criticisms—

[Lord Eatwell]

My Lords, would the noble Lord like to make it clear that the independent structure of the Office for National Statistics was implemented by the Labour Government?

[Lord Newby]

My Lords, the structure was implemented by the Labour Government but, if it had not been for this House, the body would have been emasculated. The current structure is miles away from the feeble structure that came before your Lordships’ House. It required a cross-party coalition of former senior civil servants and Members from other parties to change virtually every aspect of that Bill, so that when it left your Lordships’ House it was almost unrecognisable. That is why the noble Lord is right to want to subject this Bill to careful scrutiny about whether it will achieve the aims that have been set for it.

Three areas deserve the scrutiny that the noble Lord has set out. It is important that the structure, the people and the role are right. First, the structure is slightly odd in some respects. The role of the chair and the way in which that person is appointed by a transparent appointment procedure obviously make sense. The other two members of the office are being scrutinised by the Treasury Select Committee and clearly must have relevant experience. Their roles are relatively clear, although it is not clear to me whether the Government envisage that these will be full-time or part-time roles. I find the context of the other non-executive directors strange in relation to this body and I am not sure what their role will be. I was slightly surprised by the use of the phrase “at least two”. If the chair decided that he would like half a dozen, would that be acceptable? More important, what role will they play? They will not be technical people, but much of the work of the office will be intensely technical. Will their role be to protect the independence of the office in some way and to proselytise about the role of the office? It would be helpful to have further clarification from the Minister on that.

Secondly, three positive aspects of the way in which the top people will be appointed will be crucial to the success of the body. First, they will be in place for five years, which is a long time. Secondly, unlike for members of the MPC, for example, the recruitment process will be open. It will not be a matter of the Chancellor ringing up someone on a Sunday evening and saying, “I’d like you to take this job and, by the way, I need to know by Monday morning”. Thirdly, the role of the Treasury Select Committee is important as regards the quality of the people involved. The Government have made a good start by their appointment of Robert Chote as the first chair of this body.

The third area where the noble Lord, Lord Eatwell, has demonstrated that there is room for further discussion is the remit and how it will work. I do not think that the word “independent” appears in the Bill, which is slightly surprising. There is some ambiguity about where the independence of the body starts and stops. We know from many other areas of public life that, if you give the Treasury an inch, its inclination is to take a mile. I look forward to discussions in Committee, where, I hope, we can clarify that slightly.

I do not think that the Government would be sensible to take up the generous offer of the noble Lord, Lord Eatwell, of a hugely long period of scrutiny on this. This body is of great significance and there has been a lot of public debate on it already. We have the opportunity in your Lordships’ House to debate all these technical issues carefully, as we always do, and so will those in another place. We need to get the formal infrastructure on to the statute book now, without further considerable delay. With those caveats, I am looking forward to the Committee stage and I support the Bill.