Financial Services Bill
Lord Phillips of Sudbury Excerpts(12 years, 2 months ago)
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Lord Eatwell
My Lords, I shall speak also to Amendments 2 and 201. Before addressing the amendments, I crave the indulgence of the Committee in making a few general comments on the Bill and our procedures.
This is a very important Bill. Yet, as we know, it is a dog’s breakfast of amendments to earlier legislation and is, accordingly, extraordinarily and disproportionately difficult for the House to assess properly. The Treasury Committee of the other place has objected to the current construction and argues that there should be a new Bill to replace earlier legislation. Only then can that committee and, indeed, the regulated community gain a proper overview of the full import of the measures before us.
Most importantly, the Bill as currently drafted severely limits effective scrutiny by this Committee. Not only is there the question of excessive complexity in drafting but many of the most important debates on Bills take place on the Motion that Clause “X” stand part of the Bill. As this Bill is constructed, this is just about impossible, as failure to agree, say, that Clause 3 or Clause 5 stand part would not only wreck the entire Bill but render it completely meaningless by taking about 40 pages out of it. The drafting is a mess.
Secondly, there are fundamental problems with the overall structure of the Bill, identified by the Joint Committee and the Treasury Committee, which could better be addressed by proper redrafting rather than by piecemeal amendment.
Lord Phillips of Sudbury
I apologise to the noble Lord, Lord Eatwell, for interrupting at this early stage. I am sympathetic to the point that he has just made, but is not the problem one of standing orders rather than the drafting of the Bill?
Lord Eatwell
I think the answer is no. The issue is the straightforward drafting of the Bill. The problems, as I said, could be better addressed by proper redrafting rather than by piecemeal amendment. For example, the appropriate structure of the governance of the Bank of England in the 21st century, a matter to which the Treasury Committee paid particular interest, should be dealt with by a full rewrite of the Bank of England Act 1998 rather than by the cumbersome and opaque clauses before us.
Thirdly and most importantly, the Treasury Committee of the other place has raised a number of major objections to the content of the Bill with respect not only to Bank of England governance but to a number of other crucial issues of economic management, especially at times of crisis. Before today, few of these had been taken on board by the Government, although we will consider their proposal of an oversight committee later today.
I was delighted to read in the Financial Times yesterday that amendments derived directly from the Treasury Committee’s report of 24 May have been tabled by my noble friend Lord McFall, a distinguished former chair of the Treasury Committee, and by the noble Baroness, Lady Noakes, perhaps the most tenacious opposition speaker on Treasury affairs for many a long year—my noble friend Lord Myners has the scars to prove it. Your Lordships’ House has a fundamental responsibility to pass those amendments so that the other place has the opportunity to consider amendments proposed by its own committee. This is a valuable constitutional innovation.
I recognise that a fundamental rewrite of the Bill would take some time, but the Treasury Committee has faced up to this issue, too, arguing that the legislation is proceeding with undue haste. I agree. I recognise that the planning blight that hangs over the FSA is causing problems, but the performance of the shadow committees and authorities has already been such as to give us confidence that delay will not be disproportionately damaging.
All this adds up to the fact that the Bill as drafted is a barrier, not an aid, to effective macroprudential regulation. This is not a party political issue. I say with all due respect that the noble Lord, Lord McFall, and the noble Baroness, Lady Noakes, are not natural political allies. This is about getting the legislation right, which is what we on this side will endeavour to do.
The noble Lord, Lord Sassoon, and I worked well together to improve the Bill that established the Office for Budgetary Responsibility, and I hope that we can work well together to improve this Bill, although I would not start from here. When the Minister first speaks, I think he owes the Committee an explanation as to why the Government have consistently ignored the advice of the Joint Committee and the Treasury Committee on the structure of this legislation.
I turn—to the relief of the Committee, I am sure—to the amendments in this first group. Their fundamental objective is, I hope, clear: to set in train a wide-ranging restructuring of the governance of the Bank of England. The Bill gives the Bank remarkable new powers in macroprudential and microprudential regulation and in the assessment and management of financial crises. The structure of governance and levels of accountability should be appropriate to these new powers.
A key element in the structure of governance of the Bank is the court. As many commentators have noted, the current constitution of the court, its powers and resources are simply not up to the job. The Treasury Committee has paid particular attention to the role of the court, which is currently responsible for managing the Bank of England’s affairs other than monetary policy. The committee’s evidence sessions have exposed doubts, expressed by many witnesses, as to the court’s fitness for purpose as presently structured. A distinguished former member of the Monetary Policy Committee, in evidence to the Treasury Committee, described the court as,
“an historical legacy institution that now serves no useful purpose and creates the appearance or illusion of accountability or oversight where none exist”.
These concerns are especially important because of the role that the Financial Services Bill, as currently drafted, envisages for the court with respect to determining the UK’s financial stability strategy. In the context of monetary policy, where the Bank of England’s objective is to maintain price stability HM Treasury is required to write to the Monetary Policy Committee at least once a year to specify price stability and the Government’s economic policy. The annual Treasury remit letter fleshes out the concept of price stability in practical operational terms while avoiding undue rigidity. It strikes a balance between operational independence and democratic accountability.
A quite different model is proposed for financial stability. It is envisaged that the primary responsibility for determining and keeping under review the strategy for achieving the financial stability objective will reside with the court, although the court will be required to consult the Financial Policy Committee and the Treasury, and the Financial Policy Committee can, at times, make recommendations.
However, here we have a crucial difference in views—given the court’s role in determining the financial stability objective—on whether the court is up to the job. The view that the court should be abolished and replaced by a supervisory board was advanced by the Treasury Committee. In the face of the powerful arguments advanced by the Treasury Committee, the Government replied that they were not,
“at this time, minded to pursue the more radical changes to Bank of England governance recommended by the TSC, including the replacement of Court with a supervisory board. In general, the Government considers that the governance of the Bank should primarily be a matter for the Bank itself”.
This is astonishing. Indeed, it is nonsensical. As the Treasury Committee points out, the Government are the sole shareholder of the Bank, and many of the Bank’s responsibilities, functions and powers are defined by legislation. The Government do not regard the governance of private sector companies as a matter just for those companies. They really cannot wash their hands of this central issue.
Finally, the Bill grants major new powers to the person of the governor. It is important that the governor is backed up by a powerful supervisory committee to which he is accountable and is not an individual exposed on his or her own, so why a supervisory board? What is in a name? The whole point of this proposal is to recognise this necessary break with the past if we are to have a modern, effective structure of governance at the Bank of England. In the convoluted context of amendments to this Bill, we have been able to present only a sketch of what we on this side of the House have in mind, but we shall return to the matter on Report.
By accepting this amendment, the Government would acknowledge that the new Bank, with its new powers, would have a board to whom the executive is responsible and that is capable of performing an effective supervisory function. That should be its job: to supervise, to set strategy, to advise and review, not to run the Bank on a day-to-day basis and certainly not in the context of a crisis. These amendments are a signpost towards the new Bank with a new regulatory structure, and hence towards a truly effective regulatory system. I beg to move.
Lord Phillips of Sudbury
My Lords, I would like to make one comment on the amendment moved by the noble Lord, Lord Eatwell, and then make some comments on the remarks of the noble Lord, Lord Peston. On the way in which the amendment is drafted, I am not at all clear about how the notion of a supervisory committee fits with the language of new Section 9B of the Bank of England Act 1998 in Clause 3(1), which talks about the Financial Policy Committee being,
“a sub-committee of the court of directors of the Bank”.
I am a very long-in-the-tooth lawyer, and the normal language of sub-committees is to make them clearly subsidiary and subject to not just the oversight but the decision-making of the body of which they are a sub-committee. I put that to the Minister because we have enough confusion in the Bill already and, as has been mentioned, the name “supervisory committee” has many connotations from other jurisdictions that frustrate his desire to make this clearer.
Given that the issue of clarity and comprehensibility has been raised by the noble Lord, Lord Peston, and others, this is probably the only chance I have to add to that and ask my noble friend if he will take profoundly seriously the way in which the Bill is being put to us. I venture to suggest that not one Peer in 50, however learned or experienced they are, will be able to get their head around these 168 pages. It is not just those pages, of course, since they cross-refer to hundreds and hundreds of other pieces of statutory legislation and instruments.
I hope that my noble friend will take back the undertaking that I thought I got two years ago to the effect that where we had a Bill of this nature with, as I say, constant cross-references, those of us who wanted to get our heads around it would be given the legislation that was amended by the Bill, with the amendments shown on the face of that legislation so that we could relatively quickly—I use the word “relatively” advisedly—get our head around it. I have to tell noble Lords that if they go to the Library and pull down the 1998 statute, they will find that subsequent amendments have not been incorporated into it and they will have to go off elsewhere to find them. The whole thing is totally counterproductive to the work of this House. Most of us have neither secretaries nor research assistants of any sort. It really is scandalous—I use that word—that as legislators we are not assisted as far as possible to do our job effectively.
If the Minister is having sleepless nights, I urge him to look at subsections (1), (4) and (5) in new Section 9B, where the language is so—I nearly used an Anglo-Saxon expression, which would have been much more colourful—hyper-complicated. New Section 9B(1) says that this particular sub-committee is to be called,
“the ‘Financial Policy Committee’”.
However, new Section 9B(4) says,
“The court of directors must keep the procedures followed by the Committee under review”.
Given that the Bill has just said that the way to describe the new sub-committee is as the “Financial Policy Committee”, which committee is meant in subsection (4)? Then new Section 9B(5) says that:
“The court’s function under subsection (4) is to stand delegated to the sub-committee”,
which is not supposed to be referred to as that at all, so perhaps that is another sub-committee that we have not heard of and which is defined 63 pages later. And so it goes on. I do not know about anyone else, but I think that I have spent eight hours so far in trying to understand Clauses 5 and 6. I may be becoming an old f—no, I may be losing my sharpness, but I urge the Minister, not only with this Bill but with so many other Bills that we are called upon to deal with, to make the task for us legislators as readily accessible and easy as possibly can be.
Baroness Liddell of Coatdyke
My Lords, I am delighted that cleverer people than me have found this Bill incomprehensible, because I have real fears that we will get very lost in the detail of this Bill, and we will certainly get lost in the alphabet soup of acronyms contained within the Bill. However, I will return to the substantive issue.
The Bank of England is to be the pre-eminent financial services regulator. A regulator has to be transparent, consistent, and readily understood internationally. I would be delighted if, when the Minister replies, he will explain to us why it is necessary to vest such untrammelled power in the Governor of the Bank of England. The governor becomes much more powerful than the Prime Minister, who is, after all, only primus inter pares. The governor becomes completely unchallengeable. That is why the idea of a supervisory board in the amendment proposed by my noble friend is sensible.
I will not get tied up on titles. The court concept is anachronistic, and it is not readily understood by our main competitors. I am much more interested in the substance of supervision. One of the key elements of the work of the Bank of England as financial regulator will be to insist upon the best kind of corporate governance that we can get in our financial institutions. It should, therefore, be an example in itself in how it is governed. I have no confidence that that level of modern, transparent, corporate governance is in the model that is outlined in this Bill, as I understand it.
If people are tied up with the history of the Bank, which is long and distinguished, we can still have chaps running around in pink coats, and we can still have a wonderful collection of silver. However, at the end of the day, if we, as a nation, are to remain a leader in the financial services industry, we have to have a system of governance of our financial regulator that stands up to very tight scrutiny. I therefore urge the Minister, when he replies to this amendment, to give us some explanation as to why the Government have not come up with a model of corporate governance that gives that kind of confidence.
We will come to other elements when we talk about the role of the governor. I am extremely concerned about a repetition of what happened in the run-up to the run on Northern Rock. Some ill advised, perhaps unintentional, comments by the governor contributed to the run on that bank. We cannot allow ourselves to get into a situation where something like that could happen again.
Lord Sassoon
It is something that used to exist and the concept is still out there in the ether, but it has fallen out of common use over the past 20 years. For this Bill, there is no Keeling schedule but there is the 658-page, fully amended version of FSMA, which is accessible on the Treasury website. It serves the purpose of a Keeling schedule and does more than that.
Lord Phillips of Sudbury
I am reluctant to intervene on the Minister again, but it is important that even if he does not provide a print-off of this labour of love, hard copies of this mammoth work should at least be available in the Library. Some of us find that the time that it takes to run off 658 pages on our clapped-out machines is itself unnecessary.
Finally, the Minister may find that a Keeling schedule is exactly what has been done by the Treasury in this regard. That is my understanding of a Keeling schedule.
Lord Sassoon
My Lords, it may be the largest Keeling schedule ever known to this House. I will certainly make sure that the Library is aware of where to find the amended version of FiSMA, and I am sure that it will print copies off on request in the normal way.
I turn now to the substance of this clause. The amendments put forward by the noble Lord, Lord Eatwell, seek to convert the court of directors into a supervisory board. We will discuss in detail later—as has already been identified by the noble Lord, Lord Burns, and others—government Amendment 13 and related amendments which, I suggest, address all the points of substance behind the amendments of the noble Lord, Lord Eatwell, by creating a statutory oversight committee. I will have a lot more to say about that when we get to Amendment 13.
The only substantive difference, as the noble Lord, Lord Eatwell, has said, between the Government’s amendments and those in his name appears to be in the name of the Bank’s governing body. The noble Lord’s amendments do not seek to change the structure or membership of the court; it is simply, as he identified, that he does not like the term “court”. I agree with other members of the Committee that simply changing the name is not what we should be focusing on. The name of the Bank’s governing body is largely irrelevant. It is important that it is a body that is fully equipped and prepared to fulfil its role in the new structure effectively and that the non-executives on the court have a clear and explicit remit to oversee the Bank’s performance, both in policy terms and operationally. We will come on to why the Government believe the amendments to the Bill that we have put down are needed.
In answer to the questions about why we put the amendments down when we did, I listened very carefully to all the points on governance and other issues that were made at Second Reading and have come forward, at the earliest practicable date, with amendments ahead of discussion in Committee rather than after it, both in relation to oversight and growth. I make no apology, but your Lordships will appreciate that there was not much time between Second Reading and today to get some important amendments sorted out in detail. I hope that explains what we have done.
Baroness Liddell of Coatdyke
My Lords, I support Amendment 7. Looking at this amendment the casual observer might wonder why it is necessary. It makes perfect sense that you would not leave governance of the Bank of England—and therefore governance of the economy and our financial institutions—to a bunch of interested amateurs. Frankly, however, we have occasionally seen that happen with some of our financial institutions—we need only look at the trails of chaos over the years from banks such as Barings and onwards to the catastrophe of Lehman Brothers. If noble Lords wish to read a horror story they should read Michael Lewis’s The Big Short. I confess that I did not understand some of the complex derivatives being talked about until I read The Big Short, and I have spent most of my life in and around the world of economics.
It is critically important that there is a balance of knowledge, experience and expertise on the supervisory board, or whatever we choose to call it. It will need people with a wide range of competence, with experience ranging from macroeconomics to prudential regulation. It is a wide mix to put together.
The other side of the coin—a matter to which my noble friend referred—is diversity of opinion. In this case, as he pointed out, we are not talking about gender or ethnic diversity, although that would be very good to have. We heard an exchange within the past hour between two distinguished economists—my noble friends Lord Peston and Lord Eatwell—and there will undoubtedly be differences of view among any number of economists. I would love to throw behaviouralists into the mix of any supervisory board of the Bank of England. Quite apart from behavioural economics, it is how people react that can bring economic chaos.
The amendment may seem unnecessary because it is a no-brainer that you would seek to do this anyway. We have learnt along the way, however, that it is better to get such things written down. Then you will have a wee bit more of a chance of achieving them. I therefore support Amendment 7.
Lord Phillips of Sudbury
My Lords, I am afraid to say that I agree with the final remarks of the noble Baroness—it is a no-brainer.
I speak as a weary lawyer who is tired unto death of our legislation getting more and more prescriptive and complex as well as longer. If we cannot trust the Chancellor of the Exchequer to exercise sensible judgment in a matter of this kind then, frankly, he or she should not be Chancellor of the Exchequer. If, as it says in the amendment, the member has to add to diversity, what about integrity and independence? You could go on and on adding to and subtracting from the characteristics. I know that that is reflected in other parts of the 1998 Act but the amendment, for all its good intentions, is unnecessary and potentially disruptive.
If you want to play legalistics with this, you might ask what will happen if you have a full diversity of opinion on your board or court. Do you still have to add further diversity when you have got a full hand of diversity? As the provision is drafted here, you would. It is unpoliceable. For all those reasons, and despite its excellent intentions, I am against the amendment.
Lord Turnbull
My Lords, I direct this question to the noble Lord, Lord Eatwell. Does he regard Amendments 122 and 123—which were tabled by the noble Lord, Lord McFall, and refer to persons representing the constituent parts of the United Kingdom —as helpful or unhelpful to his cause? Are they helpful because they may add to diversity, or unhelpful because you would be choosing people on the basis of their geographical representation rather than their professional expertise?
Lord Sassoon
My Lords, it may be helpful if I speak early in this group because there are substantial government amendments here. The Treasury Committee’s report last November concluded that the increased responsibilities given by this Bill to the Bank of England warranted another look at the Bank’s governance arrangements. The Bank’s Court of Directors has been statutorily responsible for managing the Bank’s affairs since nationalisation in 1946, albeit with some modernising changes brought in by the Bank of England Act 1998 and the Banking Act 2009. I expect the court, as it has done over the decades, to adapt and evolve to the Bank’s changing role, which was brought in by this Bill to enable it to continue to operate as an effective governing body.
However, we should not—and I am already clear from our Second Reading debate that we do not as a House—underestimate the court’s task. It must effectively oversee the transition to the new arrangements, ensure that the Bank is adequately resourced to meet its new responsibilities, and at the same time provide a vital link of accountability to Parliament.
Recognising this challenge, in January the court published its response to the Treasury Committee’s recommendations, proposing the creation of a new oversight committee made up of the court’s non-executive directors. The court accepted the Treasury Committee’s recommendation for retrospective reviews of policy, proposing that the oversight committee commission these reviews from expert external bodies. The court also accepted that an ex-post review or reviews be published, subject to the need to maintain appropriate confidentiality. In line with the Treasury Committee’s proposals, the court proposed to give the oversight committee the papers from the meetings of the MPC and FPC.
Some hours ago, the noble Lord, Lord Eatwell, somewhat mischaracterised the Government’s approach to governance. The Government’s position has been that governance is in the first instance for the Bank itself, but we have not sought to distance ourselves. We listened to the Treasury Committee’s and then to the Bank’s response and have come forward, in the light of those responses and the Second Reading debate, with these amendments.
Subsequent to both the Treasury Committee’s and the court’s response, the Chancellor agreed with the governor and the chairman of court that the oversight committee’s remit would be extended to encompass the commissioning of internal reviews of the Bank’s policy performance. Finally, as part of our response to the Treasury Committee and the Joint Committee that scrutinised the Bill in draft, the Government committed to considering further whether the proposed reforms ought to placed on a statutory basis.
My honourable friend the Financial Secretary to the Treasury restated this position in another place. As I said during Second Reading, the Government have now determined that that should be done, and we are tabling these amendments.
Amendment 13 writes the new oversight committee into the Bill, simplifying the governance structure of the Bank by subsuming the role and responsibilities of the existing committee of non-executive directors—the so-called NedCo—into the new oversight committee.
Subsection (2)(a) of new Section 3A provides that the oversight committee will be responsible for keeping under review the Bank’s performance in relation to its objectives and strategy. This includes both monetary policy and financial stability, including the responsibilities of the MPC and the FPC.
Subsections (2)(b) and (c) give the oversight committee responsibility for overseeing the Bank’s financial management and internal financial controls, and subsection (4) lists a number of additional responsibilities in relation to the procedures of the MPC and the FPC and the terms and conditions and remuneration of key posts within the Bank. I hope that when we hear from the noble Lord, Lord Eatwell, he will accept that that provision fulfils the purpose behind his Amendment 29, which would make the non-executive committee of court responsible for overseeing the activities as well as the procedures of the FPC.
The oversight committee will be made up of all the non-executive directors of court, but in some cases it may be inappropriate for particular directors to have an active role in certain of the oversight committee’s functions. For example, a director of court who is also an external member of the FPC—as is the case with Michael Cohrs at present—should not have a role in directly overseeing the FPC’s performance. Subsection (4) of new Section 3B therefore allows the oversight committee to delegate any of its functions to two or more of its members.
New Sections 3C and 3D give the oversight committee an express power to commission and publish external and internal performance reviews. I hope that that satisfies the noble Lord, Lord McFall of Alcluith, whose Amendment 11 is also intended to implement the Treasury Committee’s recommendation for retrospective reviews of the Bank. In fact, in a number of respects, government Amendment 13 in the names of the noble Lord and my noble friend Lady Noakes goes further than that. Amendment 11 relates only to reviews carried out by the court itself; whereas Amendment 13 provides for reviews to be commissioned from an external person, such as an academic or independent expert, or from an officer or employee of the Bank itself.
I also note that Amendment 11 is limited to reviews of past conduct; whereas government Amendment 13 allows reviews of current practice to be carried out that may be appropriate to the functions of the oversight committee in the financial management and internal financial controls of the Bank.
Consistent with the Treasury Committee’s recommendations, subsection (5) requires the oversight committee to ensure that sufficient time has elapsed before commissioning any review, to allow it to be effective and to avoid impeding the ability of the Bank to continue to operate effectively while the review takes place.
In line with the Treasury Committee’s recommendation and the amendment tabled by the noble Lord, Lord McFall of Alcluith, new Section 3D would require the oversight committee to publish its reviews, unless publication would be against the public interest. Published reviews will also be laid before Parliament. Where publication of all or part of a review is delayed, the oversight committee must keep that decision under review and publish that material as soon as the sensitivity has reduced.
New Section 3E requires the oversight committee to monitor the Bank’s response to the report and ensure that it fully implements recommendations that it accepts. That gives the oversight committee an explicit role in ensuring that reviews translate into real action, and that the Bank fully takes on board the lessons learnt.
The Treasury Committee recommended that non-executives have access to all papers considered by the MPC and the FPC. New Section 3F implements that recommendation and goes even further by allowing members of the oversight committee to attend all MPC and FPC meetings in order to observe their discussions.
The remainder of the new clause and government Amendments 28, 30, 33, 91 to 96, 98, 99 to 101 and 145 to 147 make consequential amendments to implement the new oversight committee, and I do not intend to take up the Committee’s time by making any further reference to them.
In conclusion, the Government fully recognise the importance of strong lines of accountability for the Bank, given its expanded responsibility and powers. The amendments represent the most significant legislative reform of the governance arrangements of the Bank of England since nationalisation, and on that basis I hope that the Committee will support them.
Lord Phillips of Sudbury
My Lords, in the provisions setting up the oversight committee, which obviously has a hugely important and wide-ranging job to do, my noble friend mentioned the right of delegation in new Section 3B, but that is limited to two or more of its members. He mentioned under new Section 3C the right of delegation of a review to a person whom the committee can appoint. May there be wisdom in having a slightly wider power of delegation, so that one could under new Section 3B have an outside person or persons as part of that sub-committee and, in new Section 3C, more than one delegated reviewer? There may be occasions when that would be helpful.
Lord Sassoon
My Lords, I think I have covered the point but perhaps I can reflect on that and respond to it, because I suspect that the Committee might want me to respond to other points after we have heard the debate.
Lord Burns
My Lords, I, too, support the burden of this amendment. It is a subject that a lot of us spoke about during Second Reading, and this is an important part of strengthening the governance of the Bank of England, which we have been speaking about for much of the afternoon. The things set out here have the ability, over time, to change quite substantially the relationship between the non-executives and the executives at the Bank. I think we all agree that that will provide a better balance, given the wide-ranging powers that the Bank of England will have. The proposed new section sets out some of the important issues about making reviews of policy performance, which lie at the heart of this, and the engagement of the non-executive directors in what has been happening from a policy perspective within the Bank. The suggestions about publication and handling recommendations would also be extremely helpful.
The very same question raised by the noble Lords, Lord Flight and Lord Hodgson, also came to my mind. Why does one need a separate oversight committee for this, rather than handling it within the board itself? I have sat on a lot of boards by now and I have never found a problem with engaging with this kind of activity. Within a unitary board, people know the occasions when they must remain silent or absent themselves and who is in a position to do that. It is very much about commissioning reviews, as set out here. It is not as if one is suggesting that the directors themselves would be conducting the reviews, but they are going to be commissioning them, either from inside or outside the Bank.
It seems to me that the only argument arises from the scepticism that we have heard from many noble Lords about the entrenched position of the executives relative to the non-executives of today. Therefore I understand why the Government might think that this is a way of bringing confidence to this process. However, over the long term, I hope that it could be done within the remit of the board as a whole, because that gives confidence within a unitary board; confidence between the executives and non-executives that, together, they can review what has happened in the past and can learn the lessons of the past so that an attitude of confrontation does not develop between one set of people reviewing the performance of another set. However, I understand why it might be right at this point.
Lord Phillips of Sudbury
Is the noble Lord not assuaged in his point about the unitary board by the fact that it explicitly says here that the oversight committee is a sub-committee of the court?
Lord Burns
The committee consists only of the non-executive directors; the executive directors will be there, in a sense, only in attendance. It can work. Normally within a board, if it was doing this kind of review, it would be the non-executive directors who were in the lead and making the running. I have found from experience that one should do everything one can to keep the executive and non-executive directors together when one is handling these kinds of issues and trying to learn lessons from the past. We do not want a situation where one part of the board feels that it is being picked on by another. However, given the level of distrust that we have heard this afternoon from many noble Lords about this, I can understand the concerns that, if the Government had brought forward the proposal in the sense that a number of us suggested, they would have come up against the pressure of saying, “Well, it will simply be controlled by the executive directors, in the end, if it is done that way”. Over time, however, a well functioning board should be able to handle these kinds of policy reviews within the whole of the board. That is the best way of learning longer term lessons from these experiences.
Lord Turnbull
My Lords, we have a great deal of common interest here that would advance the position of the court. We have two rival schemes, one in Amendment 11 in this group, the other tabled by the Government. We can mix and match here. The sense is that we prefer the Amendment 11 reference to the court, but we prefer the amendments in the government group, particularly about whether these amendments are made using internal or external resources, or whatever. If we put these two things together, we have a rather good scheme.
Lord Phillips of Sudbury
My Lords, I want to enlarge on the question I asked my noble friend just before he sat down. The point has been made from different quarters of the House about the desirability or otherwise of having yet another committee. However, whichever way that argument goes—and I note the rather odd situation that this oversight committee is to be a sub-committee of the court, and the composition of the court and the composition of the oversight committee are precisely the same—
Lord Phillips of Sudbury
I see:
“There is to be a sub-committee of the court of directors … consisting of the directors of the Bank”.
It is not all the directors, some of the directors. I have got you.
Lord Sassoon
I have been restraining myself from clarifying a number of other points, but I think that there is perhaps a point that will help the Committee. A director, as defined, is a non-executive director, so the executive members—the governor and the deputy governors—do not, under the definitions here, count as directors. It is only the non-executive directors, which may help my noble friend.
Lord Phillips of Sudbury
I am grateful for that, and I apologise for the error. However, I want to reinforce the importance of extending the power of delegation under new Section 3B. That could be very important to the work of the committee and strengthen it because it would bring in outside voices and give strength to its deliberations. I hope, therefore, that the Government may review this and decide to extend the power of delegation, not just to members but to outsiders as well. Subsection (3) already provides that outsiders can attend and speak at meetings of the committee, but to be members of a delegated body is crucial, as, indeed, in the review structure under new Section 3C, it would be helpful on occasions to have more than a single person appointed to conduct a review. If it is a complex review, there could be a lot of point in having a small team of three. At the moment that is not permitted by the wording of new Section 3C.
Lord Eatwell
My Lords, I welcome Amendment 11, which is the Treasury Select Committee amendment, put down by my noble friend Lord McFall and the noble Baroness, Lady Noakes. I also welcome the government amendment, which is taking us forward on this vexed issue of the governance of the Bank of England. I regard that as a general welcome, notwithstanding any criticisms or questions I may later have about some particulars of the amendment.
However, before getting into the discussion of Amendments 11 and 13, I reiterate the question raised by the noble Baroness, Lady Kramer, with respect to Section 241 of the Banking Act 2009, where it appears that the chair of the court is in the gift of the Chancellor of the Exchequer. There is nothing in that clause to suggest that the chair must be one of the non-executive members.
Lord Sassoon
I am grateful to the noble Lord because I think that we are getting into very detailed drafting points. I will certainly have a look at those points and write to the noble Lord and copy the letter to others who have spoken in this debate, just to check that nothing has gone astray in the drafting here. We will take that on board.
Lord Phillips of Sudbury
I hope that my noble friend agrees that the noble Lord, Lord Burns, had quite a point. It harks back to earlier discussions about the complexity of drafting. It is the fact, as I hope my noble friend will confirm, that the definition of Court of Directors in Clause 1 of the Bill includes the four executive directors and “not more than 9” non-executive directors—which makes 13. The interplay of the phrase Court of Directors and the new body that is the subject of the government amendment makes for extraordinary complexity in understanding. One thing that my noble friend might consider for the next stage is that when the Bill and his amendment refer to non-executive directors they say non-executive directors, because there are four executive directors—the governor and three deputy governors. They are directors too.
Lord McFall of Alcluith
I thank noble Lords for their contributions. It has been a very interesting debate. I had more of an idea what things are about at the beginning of my speech than I did at the end and whether it is the oversight committee or the court. Perhaps the Minister could just clarify whether the chair of the court will chair the oversight committee and whether the oversight committee will be composed of non-executives, with no officer of the Bank on the oversight committee. I cannot see that detailed in the Bill.
I agree with noble Lords in asking why we need another committee. The reason why I asked the Minister questions earlier was that the Treasury Committee in another place is very firm that this proposal does not plug the gap. In the light of the debate, there needs to be a review from the Government and they need to come back to us on Report so that we can get some clarity when it goes back to the other House. The core of this is corporate governance. If we get good corporate governance on the court, there will be no need for the oversight committee at all.
The noble Lord, Lord Turnbull, had a very good suggestion. Why do we not combine my amendment with the Government’s amendment and then we can come back to this matter, look at it and, I hope, all agree? I beg leave to withdraw my amendment.
Banking: Accounting Standards
Lord Phillips of Sudbury Excerpts(12 years, 5 months ago)
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Lord Sassoon
Again, this is an important issue. The Government have taken significant steps to increase both the transparency and the FSA rules around the payment of bonuses. However, we should be careful about this. First, it is worth noting that under UK GAAP, before IFRS was introduced, banks were required to account at fair value for their trading portfolios. Of course, accounting at fair value requires assets to be marked both up and down. It is certainly the case that under IFRS there were certain portfolios that previously would not have been counted as trading portfolios, which now are. However, we have to be very careful about attributing all that went on with banking bonuses to the accounting requirements. If I may suggest so, that was a small part of what was undoubtedly a series of inappropriate behaviours at the heart of the industry.
Lord Phillips of Sudbury
My Lords, given the importance of the matters to which my noble friend has alluded in answering this Question, might he put a plain Peers’ guide to the intricacies of the various bodies he has enumerated in the Library?
Lord Sassoon
My Lords, I will see what I can do. I have mentioned everything this afternoon from the G20 through to the Bank of England, the FSB and the FRC. I will see what I can do, but it is a big ask.
Taxation: Avoidance
Lord Phillips of Sudbury Excerpts(12 years, 7 months ago)
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Lord Phillips of Sudbury
My Lords, it is perhaps a measure of how the subject of this debate is viewed that only around 10 Members of the House are present, apart from the speakers. I fear that the whole issue of tax avoidance or evasion—I do not see the difference—is of the most fundamental importance to this country at this time. Some of the greatest traditions of our country revolve around integrity and equality before the law. In the legal profession that I started in, in 1957, there was no tax evasion or avoidance industry. It is a creature of the last 30 or 40 years. Indeed, the lengths of tax avoidance would have been to tell your farmer client that he had better give away some land at least seven years before he died, so that he did not have to pay inheritance tax. In the 1970s, we had the growth of what one would call highly artificial tax schemes. Some may remember the name Rossminster. That was the start of what has become an international industry.
There are tens of thousands of lawyers and accountants who do nothing but avoid tax for their highly paying clients. While the vast majority of British accountants and lawyers try to play fair and will not stretch the rules beyond reasonability, they are under pressure because an increasing number of professionals will stretch the law beyond reasonability and will take artifice to byzantine and ludicrous lengths. We had a little hint of that when Mr Diamond gave evidence to the Select Committee and purported not to know how many subsidiary companies Barclays used in avoiding tax in this country. I believe that it paid only 1 per cent of its gains in tax in the UK. Someone was able to inform the committee afterwards that there were literally hundreds and hundreds of subsidiaries spread across the various tax havens, which enabled that state of affairs to come about.
What sort of society is it in which the CEO of Barclays this year, last year or the year before can earn £22 million with his bonus and earn more in a day than a state-registered nurse on an acute ward in one of our hospitals earns in a year? That is so contrary to any concept of a fair or decent society that I put it to the House that the issues that we are talking about run to the very roots of our society, its culture and nature.
When I started again in the law, solicitors and accountants were what were called pillars of the community. For a complex of reasons, I am afraid that that is no longer the case. There is a quite staggering disconnect between those who work in the City of London and civic society at large. Very few indeed contribute anything to civic society, except their taxes. I believe with a passion that we need to have a renaissance of citizenship in this country, a restoration of a sense of community, national and local, because as a lawyer I have to tell the House that you cannot legislate for virtue. We have already gone a long way down the road of regulation in trying to stop loopholes, as they are called. The statute book has got more and more complicated and, with a great irony, has removed even further from the minds of professionals in this world the sense that they should play fair and have some sort of civic justice in the work they do.
The limited company, too, has been a great engine of demoralisation, to use that word in its literal sense. How few board members these days feel able to say, “I’m sorry, I think that’s wrong—I don’t think this company should be doing that.”? Indeed, a friend of mine whom noble Lords would know, who is a chairman of public companies, made this point around the board table not long ago in relation to some new tax scheme thought up by the company’s advisers. The board concurred, but the next day he had a visit from the company secretary, who said, “You know, you acted illegally yesterday in rejecting out of hand the scheme that was put up”. That is but one small instance of a demoralised corporate world.
Where amorality rules, it is not able to withstand for long the creep towards immorality when the gains are big enough. I shall give an example, although it is probably unfair to KPMG, because all its competitors have their own dark secrets. In 2006-07, KPMG was exposed in the US as having been party to fraudulent tax schemes that enabled its clients fraudulently to avoid paying $2.5 billion of US tax. In a plea bargain, the partners managed to avoid being individually criminally prosecuted, as in my view they should have been, by agreeing to pay penalties of $450 million. This is a great firm reduced to ignominy because there is no longer any culture of integrity sufficiently strong to withstand the huge pressures and temptations of the tax avoidance industry. And of course the voice that says, “If we don’t do it, our competitors will”, is a powerful one.
What can we do about it? I am convinced that we have to do something about it, because I am convinced that we are destroying the very seedbed of our proud civic traditions in this country. To whom do ordinary young people look as good examples these days? Unless we do something about this, we will find more of the statistics revealed yesterday by the University of Essex, which did some long-term research on attitudes of the public to honesty. The university has now established a centre for the study of integrity on a longitudinal, cross-departmental basis. That research revealed that the 20 to 25 age group has a radically different view of honesty from the 60 to 65-year age group. The graph is a straight stairway. The evidence is complicated and difficult to interpret, but it is that the standards of probity and attitudes to honesty in our great country are in decline. I am sure that everyone here today still feels proud, because we still have standards of probity in public life that are the envy of most countries. However, when standards are in head-long decline, it behoves us in this place most of all to recognise it and do something about it.
Of course, the great stain on our escutcheon was the extensive expenses fraud in both Houses. We suffer from that—and the reckoning of the evidence from the University of Essex is that 91 per cent of the public feels that the politicians in this country are fairly corrupt. They do not trust us—and trust and fairness are the pillars of a good society. Without either of them you cannot have a good society. I am sure that all of us feel passionate about trying to bring about a good society as far as we can.
I end by restating my conviction that there is a strict limit to what we in Parliament can do. Far too much of the time, the citizens of this land look to us to put things right, and far too much of the time we pretend that we can. In this broad matter of honesty in taxation, it is down to individual people and businessmen to assert their moral autonomy for the public good.
Lord Eatwell
My Lords, the issues raised by the noble Lords, Lord Dykes and Lord Phillips, have recently been the subject of two important reports. First, the report of the Public Accounts Committee into tax disputes, published on 20 December last year, revealed what can only be described as a scandal. It demonstrated a quite extraordinarily cosy relationship between HMRC and major companies, particularly international companies, in the determination of tax liabilities. It also demonstrated a failure to follow proper procedures in the resolution of tax disputes, and a consistent bias towards the favourable treatment of large companies compared with small companies and the ordinary taxpayer.
Everyone in this country who is settling their tax assessment this month, knowing that they will incur a fine and interest charges if they do not pay up on 31 January on the dot, will be astonished to discover that large companies may be given 10 years to settle their tax obligations. They will also be furious that up to £20 million in interest has been lost because of HMRC errors, while, for reasons that are still not clear, the department decided it would not reopen negotiations with the relevant company—a decision that it appears was taken without legal advice. The PAC report says that,
“the Department did not even take the most basic step of making its own note of meetings with the company concerned, relying instead on the record kept by the company”.
To compound this record of complacency and connivance, the department failed to be open with the PAC investigation and was,
“less than clear and consistent in the evidence”,
given to the PAC and to the Treasury Select Committee in another place.
It is important to remember that HMRC is, quite rightly, a non-ministerial department, thereby removing Ministers from any suspicion of involvement in individual taxpayers’ affairs, but this scandal goes beyond matters that can be remedied at arm's length by more effective management and the appointment of extra Revenue commissioners. It strikes at the very heart of the fair and impartial management of the tax system. It reveals systemic failures that have resulted in unfair and partial treatment verging on favouritism, and it demands the exercise of ministerial responsibility, for it undermines public confidence in the probity of government and the integrity of the Revenue.
If the failings exposed by the PAC were an isolated set of events—an aberration—the measures taken so far by HMRC to put its house in order just might be regarded as sufficient. Regrettably, this is not the case. As we have heard from the noble Lords opposite, it is a widely held view that tax avoidance is rife in this country, and that wealthy individuals and large companies that can afford sophisticated tax advisers can avoid attacks by abusive means.
The term “abusive means” has been defined by Mr Graham Aaronson QC as,
“contrived and artificial schemes which are widely regarded as an intolerable attack on the integrity of the UK’s tax regime”.
This quotation is taken from a report entitled A Study to Consider whether a General Anti-Avoidance Rule should be Introduced into the UK Tax System, published in November last year, which was authored by Mr Aaronson and commissioned, to give them due credit, by Her Majesty’s Government. I applaud the initiative. Mr Aaronson concludes that a general anti-avoidance rule should be introduced, and proposes practical means by which this might be done. In his report, he argues that certainty in the tax system makes an important positive contribution to the economic and business environment. The presence of tax loopholes, and their exploitation by the unscrupulous, undermines that certainty. Moreover, competitive pressure forces firms to adopt more and more elaborate tax avoidance measures.
Competitive advantage can be gained by companies that go down the tax-abusive route, and hence firms that attempt to take a high moral stand, as the noble Lord, Lord Phillips, points out, are placed at a competitive disadvantage and may be eliminated from the marketplace. All must join the race to the bottom. Tax avoidance by businesses therefore undermines certainty, forces firms to adopt the tax-avoidance policies of the lowest common denominator, undermines any perception of fairness in the tax system and imposes a dead-weight loss on the economy by spawning a socially useless tax avoidance industry. It is damaging not just to the Revenue, but to the performance of the economy as a whole.
The source of this pernicious burden on our economy, the foundation of the tax avoidance industry, is the complexity of the tax system. It is complexity that by its very nature creates the exceptions and loopholes that can be legally exploited by the enthusiastic, well resourced tax avoider. If we are to tackle the disease rather than the symptoms, complexity should be the target. An important reason for the complexity of the tax system is that Governments attempt to manipulate behaviour via tax allowances and reliefs to incentivise people to behave in a particular way—to invest in new businesses or to undertake more R&D, or to recycle waste, or whatever. What is remarkable is that years of academic study have demonstrated that very few of these incentives actually work. Tax allowances to stimulate investment, for example, do not tend to result in more investment. Instead, they are a subsidy to investment that would have taken place anyway.
Another important source of complexity is a government belief that it is appropriate to differentiate between revenues from different sources, so that benefit deemed to derive from capital gains, or, more scandalously, from carried interest, is taxed differently from benefit derived from income. The treatment of interest on debt as a cost, and hence being tax deductible, is a major factor distorting the funding of business in this country. All this is a rich source of tax avoidance. Then of course there are the tax benefits handed out to specific social groups with the most powerful lobbying voices—the non-doms come immediately to mind.
Whether it derives from good intentions, perceived policy objectives, or mere cowardice and/or patronage in the face of the powerful and well funded, complexity is the fundamental source of avoidance. Without tackling complexity, the avoidance industry will never be significantly reduced. I therefore applaud the establishment by the Government of the Office of Tax Simplification and look forward, in hope rather than expectation, to its efforts bearing fruit. In the mean time, while we wait for the simplified promised land, Mr Aaronson concludes that all current approaches to curb tax avoidance,
“are not capable of dealing with some of the most egregious tax avoidance schemes”.
He might have added, if he had had the PAC report before him, that all attempts to limit tax avoidance are undermined if there exists the cosy relationship between the HMRC and big business identified in the PAC report.
With the PAC report and Mr Aaronson's report before him, the Minister must address a number of questions. First, when did Ministers first know of the matters identified in the PAC report? Were they fully informed, or have they made further investigations? What have their investigations, if any, revealed about further abuse and, if so, what sort of abuses? What action do the Government intend to take to correct the systemic deficiencies in the HMRC? Is it not time for a full investigation into the practices and substance of the taxation of large companies, in order to re-establish public confidence in the probity of government and of the Revenue? Secondly, do the Government accept the conclusions of Mr Aaronson's report? When do they intend to introduce a general anti-avoidance rule, with the institutional support outlined by Mr Aaronson? Thirdly, when can we expect a report from the Office of Tax Simplification that deals specifically with business taxation and tax avoidance?
Confidence in the tax system is, as noble Lords opposite have said, fundamental to our democracy. If confidence in the fairness and probity of the state is lost, effective revenue raising is undermined—colourful examples, perhaps from the Mediterranean, can be imagined. The issues identified in the Public Accounts Committee report and in Mr Aaronson’s report demand an urgent response. I hope we will hear from the Minister today the concrete steps that the Government intend to take to curb abusive behaviour towards the tax system. If practical steps are not forthcoming, the Government will have some explaining to do to this House and to the British people.
Lord Phillips of Sudbury
The noble Lord raised some extremely pertinent points about HMRC, but does he agree that the Government reducing the staffing at HMRC over the next few years by 12,000 is scarcely likely to increase the effectiveness of tax collection?
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, I am grateful to my noble friend Lord Dykes for giving us an opportunity to discuss the important issue of tax avoidance and to remind the House of what the Government are doing to clamp down on it. However, we should put the whole subject into perspective. It is an important topic. There have been few speakers, but a considerable degree of heat has been thrown at the topic that may occasionally have obscured the light.
We must remember what we need to achieve in this area, particularly in the current economic situation, when we are faced with reducing the largest peacetime deficit on record. It is of course more important than ever and fair that everyone, whether businesses or individuals, pays their fair share of tax, but we have to remember that we must keep this country competitive. We are competing in a global economy, so we have to have a tax regime that is competitive for businesses, is fair for individuals and incentivises individuals to get off benefits and into work. Yes, the tax-avoidance question is critical, but we have to remember the wider context in which it operates.
A fair tax system means closing the tax gap and ensuring, as I have said, that businesses and individuals pay in full what they owe. My noble friend Lord Dykes asked questions about the size of the tax gap and whether we really understand its make-up. The figures for 2009-10 are that the tax gap was estimated at 7.9 per cent of liabilities, £35 billion in cash terms, which means that HMRC collects over 90 per cent of all the tax that is theoretically due. We have to do better. HMRC has to do better and it is working on that—I shall come on to that shortly—but, if someone heard this debate in isolation, they might think that the performance of HMRC was much worse. It collects over 90 per cent of all the tax that is theoretically due, or £468.9 billion in revenue in 2010-11. We should also remind ourselves that the latest figures show an overall decrease in the overall net tax gap of £7 billion from 2008-09 to 2009-10.
We should therefore be cautious about the methodology, but the 8 per cent tax gap in the UK compares well with other economies. For example, the USA’s tax gap is 14 per cent and, to take a country in Europe that is widely regarded as a model of fiscal rectitude, in Sweden the tax gap is 10 per cent.
The Government’s approach to tackling avoidance builds on HMRC’s anti-avoidance strategy. There are three core elements to that approach: prevention, detection and counteraction, with a clear focus on preventing avoidance before it can occur. I say “avoidance”; I do not of course share my noble friend Lord Phillips of Sudbury’s contention. I know that it is nothing new that he feels strongly that avoidance and evasion are the same thing.
Over the past 20 months we have demonstrated real progress. In answer to the challenge from the noble Lord, Lord Eatwell, about the concrete actions that we are taking, in the most recent Finance Act we closed down a range of avoidance schemes to bring in yields of around £1 billion a year over the course of this Parliament. Only this month, we acted quickly to stop a particularly significant avoidance scheme aimed at artificially exploiting an income tax relief. That scheme posed a significant risk to the Exchequer, and our quick action ensured that this risk did not materialise. That is the sort of concrete action that we will take.
In answer to the questions about whether HMRC has the capacity to deal with the threat of avoidance, the Government have underlined our commitment to tackling avoidance with the reinvestment in HMRC, which I am sure noble Lords are aware of, of over £900 million, which should bring in around £7 billion each year by 2014-15 in additional tax—again, concrete additional targeted action.
Lord Phillips of Sudbury
Can my noble friend then reassure the House on the figure about which I asked earlier and say that the reduction in staffing of 12,000 will not affect the front-line effort to reduce tax avoidance/evasion?
Lord Sassoon
My Lords, as I am sure my noble friend would recognise, all government departments are having to tighten their belts; otherwise, the deficit is not going to be tackled. I hope to reassure him by explaining where HMRC is focusing its efforts. The recruitment of over 1,200 staff in new posts to tackle non-compliance is significantly upping HMRC’s efforts in this area and will bring in significant additional revenue in each tax year, so the answer to his question is yes.
The customer relationship model that HMRC uses has considerably improved its ability to identify risk and to handle these issues. The report by the National Audit Office on HMRC’s 2010-11 accounts, which underlay one of the reports referred to by the noble Lord, Lord Eatwell, noted that HMRC’s high-risk corporate programme has brought in a yield of over £9 billion and that it contributed to reduced avoidance activity by major companies. The investment is there. On another point made by my noble friend Lord Dykes, we do not forget the cash economy in those efforts.
I am grateful to the noble Lord, Lord Eatwell, for drawing attention to the question of the general anti-avoidance rule, the GAAR. We are exploring that option to see whether such a rule could help to deter and counter tax avoidance in a fair way. Attention has been drawn to the work of Graham Aaronson and his colleagues and their report. We received the report in November last year. We will be considering it and are actively discussing its implications with businesses and tax professionals. We will respond to the report at the Budget and set out our plans if appropriate. We have said clearly that we would not introduce a GAAR without a further formal round of public consultation, so that is very much work in progress.
I am also grateful to the noble Lord, Lord Eatwell, for applauding the introduction and the work of the Office of Tax Simplification. The complexity of the tax system has been much remarked on, and I can echo many of the remarks made by noble Lords on that. The OTS has started its work and published recommendations on tax relief, avoidance legislation and IR35, as well as an interim report on small business tax. More is coming down the pipeline and this ongoing work will be an important part of what we all want to see: a simpler tax system that is easier for individuals to comply with. I may disagree with the emphasis of my noble friend Lord Phillips of Sudbury on some things, but I certainly agree that this is fundamentally about individuals doing what they are required by the law to do.
Another critical component of preventing avoidance is the way in which HMRC engages with the largest taxpayers proactively to identify and tackle avoidance. We do not have the time to go into the detail of this but, in response to some of the somewhat one-sided interpretation and selective quoting of the recent Public Accounts Committee report, I draw the attention of the House to HMRC’s detailed rebuttal on many factual points in the conclusion of that report. In brief, to be clear, this effort with large businesses is not in any way HMRC being soft on large business or on those with complex tax affairs. HMRC treats all taxpayers even-handedly and does not allow them to settle for anything less than the full amount due. It is through its engaged and intelligent approach to tax avoidance that the additional revenue to which I have already referred is coming in.
Fraud: Staffing Levels
Lord Phillips of Sudbury Excerpts(13 years, 3 months ago)
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Lord Phillips of Sudbury
To ask Her Majesty’s Government what assessment they have made of the staff levels at Government agencies dealing with financial, banking and tax fraud.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the Government are determined to step up the fight against fraud. This important work is done by both government and non-government bodies, including the Serious Fraud Office, Her Majesty’s Revenue and Customs, the Serious Organised Crime Agency and the Financial Services Authority. Ensuring that staff levels are adequate is a matter for each individual body, but I understand that the SFO expects to be able to adjust its numbers as necessary to meet its business needs, and that HMRC will be increasing the number of staff tackling fraud and tax avoidance.
Lord Phillips of Sudbury
I am grateful to the Minister for his reply, but he must be aware that HMRC will suffer massive cuts over the next three years, and that the current level of tax fraud and avoidance, on its own estimate, is £40 billion a year. Will he therefore look urgently at that state of affairs and have regard to the position of the Serious Fraud Office, which has lost roughly half its most senior personnel in the past few months to American law firms and banks, which makes its role in tackling complex fraud super difficult?
Lord Sassoon
My Lords, this is an extraordinarily difficult area. As my noble friend says, the level of tax fraud and uncollected tax receipts is extraordinarily large. That is precisely why, within a tight settlement for HMRC and every other department, HMRC has been allocated an additional £900 million over the spending review period. That will take up the number of full-time equivalent staff dealing with fraud and other tax avoidance matters from 20,000 at present to some 23,000 by 2014-15. That adjustment has already been planned for. As far as the SFO is concerned, we are clearly not talking about remotely the same order of magnitude of numbers of people, as that body has fewer than 400 people. The new management of the SFO has taken enormous strides since 2008, when the management changed. For example, the average time taken over its investigations has dropped from an average of five years on pre-2008 cases to some 15 months on newer cases, and the conviction rate has significantly increased, so the SFO is very much showing how it has become more effective with less resource.
Financial Crime: Legislation
Lord Phillips of Sudbury Excerpts(13 years, 5 months ago)
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Lord Phillips of Sudbury
My Lords, I should start with a sort of disclaimer. This is, I think, my 53rd year full-time in the law as a solicitor—although I am not doing very much these days. Like a previous speaker, I have to say that, in the whole of that time, no one has offered me a bribe—I feel a bit resentful of that—and only twice have I been asked to do something corrupt by a client. I suspect that there is no other jurisdiction in the wide world where someone of my longevity could say that, and I have spent a lot of that time in the commercial world.
However, let us not kid ourselves: standards of probity and integrity are falling with a rapidity that should give us all cause for pause and alarm. If you look at the statistics of crime, you see that the incidence of financial fraud is on the increase in all respects in all quarters of our society and none is exempt. There is no way of denying that corruption is highly infectious. It is a bit like spiritual dry rot. Once you have crossed the threshold of corruption, it is very difficult to go back and very easy to go forward.
Nor should we overlook or consign to the past, as Mr Diamond wants us to do, the astonishing events of the past two or three years in the City—in effect, the partial collapse of the banking system, which would have collapsed totally but for the putting-into-the-pool of trillions of pounds of funds from here, from America and elsewhere. At the root of that—again, let us not deceive ourselves—was an increased level of straightforward corruption: insider dealing, concert parties rigging the markets long enough to get in and out and make a killing, and so on.
I have practised more than 40 years in the City of London. Anyone who you know well who is deeply involved in the City will privately tell you that it is unfortunately true that corruption is on the increase everywhere. The more globalised the market becomes, and the greater the diversity of nationalities, with little common cultural cohesion, the more the corruption spreads. That is why this debate, for which I thank my noble friend Lady Williams, is of such importance.
I shall touch briefly on the role of legislation, because “the United Kingdom’s record on legislation” is in the title of the debate. Legislation can be an impediment to integrity. Too much of it plays into the hands of the smart boys, the lawyers and the accountants. For people who are involved in the different aspects of the City, it reduces their sense of their own moral autonomy, their own ability to distinguish right from wrong and to do good rather than bad.
You have only to look at the statistics. We legislate between 200 per cent and 400 per cent more than any legislature in the democratic world. Forty per cent of our tax legislation is anti-avoidance. If you were to stuff all our tax legislation into a single volume, you would not be able to carry it. For example, the Charities Bill, a consolidation Bill, which has just had its First Reading in this House, is longer than the entirety of the legislation of 1905—charities, for God’s sake. There is no substitute for individual moral integrity, and I have to say that the huge corporations are not great encouragers of that.
I have some proposals. I entirely agree with what the noble Lord, Lord Haskel, said in relation to the Bill just introduced in the other place by Caroline Lucas. If companies domiciled or paying tax here had to disclose year by year where else they were operating, what the turnover was, how many employees they had there and what tax they paid, it would be a huge disincentive to the ludicrous exploitation of tax havens. Let us look at Barclays. It has admitted to some 150 subsidiaries in tax havens—I think that the true figure is more than 300—and that is true of so many organisations. There is no morality or sense of fairness in corporate tax-paying in so many instances. So let us have that.
Let us have principles-based tax law, because we are disappearing out of sight with trying to block one loophole after another. I accept that there are difficulties about principles-based tax legislation in terms of certainty, but with the support for and confidence in our courts that people have, it would be a far preferable solution to the problem of tax.
Next, I suggest that any contractor with any state agency should not be allowed to bid for a contract unless they have a clean tax record over the previous five years. Lastly, we cannot hope to deal with corruption, bribery and all the rest of it unless we have the people to do the job. The Serious Fraud Office has only around 300 staff and I am told by someone in there that it is losing some of its best people right now. The Inland Revenue is scheduled to lose 40 per cent of its entire staff over the next three years. What sense can that make if we are trying to implement the laws we have? The failure to implement tax legislation in particular is devastating. On official estimates, we lost £42 billion of tax that should been paid last year for want of the people to enforce the law.
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, we have had an excellent debate and I thank all noble Lords who have spoken. I particularly thank my noble friend Lady Williams of Crosby, who comes at this whole subject from a position of great authority.
The noble Lord, Lord Davies of Oldham, has pointed out the challenge that I face in attempting to respond to the huge number of points that have been made. This has been a more than normally physically challenging debate to sit through. It is one thing to watch a tennis match that is being played out in front of me, but it is even more challenging to watch one that at times has been played out intensively behind me. However, it has been a fascinating debate.
I start by reminding noble Lords that Britain is, and continues to be, a great trading nation. This Government are committed to encouraging British business to seize opportunities around the world. We all know that globalisation brings huge opportunities not just for businesses themselves but for all those who work in those businesses and for the consumers of goods. However, there are significant threats and risks in this globalised world. We have discussed some of the most insidious threats that jurisdictions around the world face. My noble friend Lady Williams talked about the most serious issues. I certainly agree that some of the most insidious threats are those posed by bribery, corruption and money-laundering. I shall take in turn bribery, tax avoidance, corruption, if I have time, and money-laundering, which were the main areas covered in the debate.
I make it absolutely clear that the Government are committed—lest anybody doubts it—to implementing the Bribery Act. We are determined to ensure that it is implemented in a way that tackles corruption while not imposing unnecessary cost and uncertainty on legitimate business and trade. Bribery should not be considered an acceptable way to win business. It distorts free markets and causes immense damage in developing and emerging economies. The Government believe that the Bribery Act will have positive benefits for UK business through an enhanced reputation for ethical standards, reduced costs incurred in doing business and a clearer business framework. The Act will contribute towards a level playing field internationally. The UK stands alongside our partners, whether in the OECD, the UN, the EU or the Council of Europe, in recognising that bribery needs to be met with robust criminal offences. Indeed, the Act modernises and clarifies the existing law, which has rightly been criticised as complex, fragmented and out of date. However, I hope that the main issue concerns not the Government’s commitment to implementation but when the Act will be implemented and whether there has been unreasonable delay, as some have painted it.
I fully respect the views on both sides of the argument. On the one side, we had the pithy intervention of my noble and learned friend Lord Mackay of Clashfern and the contributions of my noble friends Lord Thomas of Gresford, Lord Marks of Henley-on-Thames, Lord Goodhart and Lady Williams. I very much appreciate their sentiments. However, I find it slightly harder to accept the criticism of the noble Lords, Lord Eatwell and Lord Davies of Oldham, on the timetable for implementation given, as we have been reminded, that it took until 2009 for the previous Government to introduce the relevant legislation.
On the other side of the discussion, we have heard powerful and relevant interventions from my noble friends Lord Hodgson of Astley Abbotts, Lady Wheatcroft and Lord Eccles—the noble Lord, Lord Hannay of Chiswick, also recognised this—regarding some of the difficulties for business in this area. We should not minimise those. There was a depressing lack of mutual appreciation by the two camps in this debate, with one notable exception. I am grateful to my noble friend Lord Newby for his contribution, to which I listened with interest. He recognised that two distinct interests are involved in implementation that need to be reconciled and that the implementation of the Act will indeed—certainly, in the short term—impose costs on business.
One of the questions asked by my noble friend Lady Williams concerned responsibility. Responsibility for implementation is with my right honourable friend the Justice Secretary, who is concerned to ensure that the Act is implemented in a way that tackles bribery effectively but avoids imposing costs or uncertainty on business and certainly does not make this another gold mine for lawyers advising on either implementing or picking up the consequences of the Act. It is the intention of my right honourable friend and the Government to publish guidance shortly. Implementation of the Act will follow publication after three months, in order to give businesses time to prepare themselves. On the other question about responsibility, I can confirm that enforcement of the legislation will be a matter for the Serious Fraud Office and the police.
Lord Phillips of Sudbury
Is it fair or unfair of me to ask my noble friend what his answer is to the circumstance enunciated by the noble Lord, Lord Hodgson of Astley Abbotts, where a business is faced with either compliance with the Bribery Act or losing a valuable order?
Lord Sassoon
My Lords, that is a perfectly fair question, but I am not going to stand at the Dispatch Box—no Minister would—and suggest that anyone should break the law. I hope that that is a clear answer to the question.
The point that I wanted to make about implementation was that I know that my right honourable friend the Justice Secretary has been speaking regularly to the secretary-general of the OECD, because there has rightly been reference to the OECD’s important contribution to driving forward standards in this area. My right honourable friend has been speaking regularly, including this week and last month, to the secretary-general to keep the OECD informed and updated on our plans for implementation.
My noble friend Lord Phillips and the noble Lord, Lord Eatwell, mentioned the fall in the UK’s ranking. The noble Lord, Lord Eatwell, leads with the chin, but it is interesting to note that that fall in the ranking happened under the previous Administration. I hope that implementation of the Bribery Act will contribute to the UK’s ranking increasing again.
I acknowledge the point made by my noble friend Lord Hodgson about SMEs. In all that the Government are doing in the regulatory space, we need to be sensitive to the particular needs of SMEs. It is the intention to publish a quick-start guide, as it will be called, that focuses particularly on the needs of small businesses. UK Trade & Investment and overseas posts will be geared up to provide guidance and support on managing risks of corruption in particular export markets.
Lastly in this area, questions relating to extractive industries were raised by the noble Lord, Lord Hannay of Chiswick, and my noble friend Lord Newby. It is a topic that my right honourable friend the Chancellor has recently addressed. He drew particular attention to it at the February G20 Finance Ministers’ meeting in Paris, where he raised the issue of new international rules; he believes that this was the first time that that has happened. My right honourable friend, along with my right honourable friend the Business Secretary, will be arguing for a European agreement that matches the new standards set in the US in this area. This is very much on our agenda.
Let me turn now to the issue of tax avoidance. For the avoidance of doubt—I am sure that the noble Lord, Lord Haskel, has no doubt, but he raised the question—let me say again clearly that the Government are fully committed to making sure that everyone contributes to reducing the deficit by paying their fair share of tax. Tax avoidance and evasion damage the ability of the tax system to deliver its objectives. They impose additional costs on all taxpayers and undermine the tax system.
The noble Lord, Lord McFall of Alcluith, and others raised a number of questions about HMRC resources. I was grateful to the noble Lord for drawing attention to the announcement last year that more than £900 million will be made available to HMRC over the spending review period to raise additional revenues by tackling non-compliance. This is expected to bring in around £7 billion in additional tax each year by 2014-15. However, I recognise that the noble Lord bracketed, as did other noble Lords, recognition of that approach by HMRC with concerns about its resources more generally. That point was mentioned in particular by my noble friends Lord Newby and Lord Phillips of Sudbury. It is the case that HMRC workforce levels are projected to reduce. That reflects continuing improvements in the underlying efficiency in the way in which HMRC conducts its business. I should point out that, since the 2005 merger between the Inland Revenue and Her Majesty’s Customs and Excise, a reduction in headcount has had no negative impact on revenue flows. As with many other parts of the public sector, although there is a big challenge on management and implementation, HMRC has recently proved that it is able to rise to that challenge.
The noble Lords, Lord McFall and Lord Parekh, and others drew attention to the size of the tax gap, which is estimated to be around £42 billion, but I was pleased that there was recognition for some of the important steps that the Government are taking in this area, including the specific case to which my noble friend Lord Palmer of Childs Hill referred on the arrangements with Liechtenstein. That was the best answer to some of the concerns raised by my noble friend Lord Dykes. The steps that are being taken are very practical and raise considerable sums of money. In respect of Liechtenstein, the facility will run until the end of March 2015 and it is forecast that it will raise £940 million. These are considerably important initiatives to make sure that we tackle offshore financial centres and repatriate tax revenue to this country.
I recognise the questions around tax transparency. My noble friend Lord Goodhart touched on this area, but I will not repeat the names of all noble Lords who mentioned it. In the past year, we have seen unprecedented progress on tax information exchange. More than 500 tax information exchange agreements have been negotiated to the international standard. This means that there are fewer and fewer places for evaders to hide their money.
The noble Lord, Lord Haskel, raised the question of Caroline Lucas’s Bill in another place. My understanding is that the Second Reading of that 10-minute rule Bill is scheduled for June. The Government will decide at that stage whether to support it. I understand its import.
In my final couple of minutes, I will deal with the remaining two issues that were raised. The noble Lord, Lord Hannay of Chiswick, raised the issue of corruption. At the risk of stating the obvious, I stress that the Government recognise that corruption is bad for development, bad for people in developing countries and bad for business in those countries. As we maintain our aid budget, looked after by DfID, there will be great focus on raising standards of governance. It is very much on the agenda of my right honourable friend the Secretary of State.
I turn lastly to money-laundering. I am grateful to my noble friend Lady Williams for recognising that the Government have been assiduous on asset freezing. I say to the noble Lord, Lord Hannay, that we should not rely too much on reports in the newspapers. As my noble friend Lord Howell of Guildford said in the House a couple of days ago, we are investigating and watching carefully to see what links there may be between pirates and terrorism in the region linked to Somalia. However, as he said, we have no firm evidence of particular patterns of transactions, although we recognise that there may be personal, entrepreneurial or other links between groups. The noble Lord is right to emphasise that we need to be on the case, as we are. The noble Lord, Lord Parekh, raised general concerns in this area. As we discussed in the House recently, particularly in the context of Libya but also of other countries, the Government have been and continue to be at the forefront of calling for and implementing asset freezes against corrupt regimes.
My time is up. I have attempted to answer as many points as possible. It has been a very stimulating debate in which important questions were asked. I end by thanking my noble friend Lady Williams of Crosby for stimulating such an interesting two and a half hours.
Credit Unions
Lord Phillips of Sudbury Excerpts(13 years, 5 months ago)
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Lord Sassoon
My Lords, that is exactly what we are doing by bringing forward the various reforms that I have described, which will help to modernise and drive forward the credit union movement—a movement that now numbers some 760,000 members in Great Britain. In Northern Ireland, where the movement has a different history, it has some 400,000 members. We wish to see the total in the United Kingdom growing, which is why the measures that we are bringing forward will promote this area of financial activity.
Lord Phillips of Sudbury
My Lords, is it not the case that the Governor of the Bank of England, Mervyn King, less than a week ago drew attention to the exploitation by the clearing banks of what he called unsuspecting and unsophisticated depositors through their wholly unethical manipulation of interest rates? Should the strictures that the noble Minister has placed on loan sharks not be somewhat directed at the clearing banks as well?
Lord Sassoon
My Lords, we are talking about credit unions this afternoon. I have explained what an important and growing role they have to play in the diversity and choice of our financial services sector in the UK. That is what we should work to promote.