Eurozone Crisis

Lord Sassoon Excerpts

Tuesday 17th January 2012 Lords Chamber

[Lord Barnett]

To ask Her Majesty’s Government whether HM Treasury is developing contingency plans for use in the event of a Eurozone collapse.

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

My Lords, as my right honourable friend the Chancellor of the Exchequer made clear in the Autumn Statement, the Government, including of course the Treasury, are undertaking extensive contingency planning to deal with all potential outcomes of the euro crisis.

[Lord Barnett]

Thanks for that very informative reply. I hope that there will never be a need to use the contingency reserve, because, as the Chancellor has said, it would be devastating for the UK economy if there was a collapse in the eurozone. We already have a near recession—if not an actual one—forecast without such a collapse. I gather that the Government are more amenable to the new draft treaty that has been promoted for the next summit. In those circumstances, and given the risk of jeopardising the slightest chance of preventing that collapse, would he not agree that it would be very foolish to veto that summit as well?

[Lord Sassoon]

My Lords, first of all I welcome the compliment paid to my Answer by the noble Lord, Lord Barnett. He asked me a yes or no Question. I gave him a very full Answer and some extra things he did not ask about, so I am glad that he appreciates that. I am not going to speculate on our negotiating position because this is all very fast moving. All I can reiterate is that we are working very hard with our European partners to see a resolution of all aspects of the crisis. They have invited us to be at the table to discuss the arrangements that the eurozone countries are making among themselves and we are active and positive participants when we are invited to be there, as we are at those discussions.

[Lord Higgins]

My Lords, does the Minister agree that it is very much easier, technically, for a country to join the single currency than to leave it? Does he accept that the contingency plans which he mentioned—and which are welcome—need to be designed to ensure that, for anyone leaving, the process is completed as soon as possible? It is not just a question of having the notes and coins available but of having an extensive programme, including provision for exchange controls. I welcome my noble friend’s reply but stress that this is a very complex question.

[Lord Sassoon]

My noble friend makes some interesting and relevant points. I shall not speculate on what precise aspects the Government are looking at in their exercises but, as he points out, none of this, under a range of scenarios, would be at all simple.

[Lord Campbell-Savours]

Has the Treasury carried out internally an inquiry into the level of exposure of British banks to banks within the eurozone that might collapse?

[Lord Sassoon]

My Lords, of course the FSA, in the course of its normal work, continually examines the exposure of the financial sector to a whole range of issues, including to the eurozone. The Europe-wide stress tests which were done, and done again, and finally done on a much better basis, looked at that matter last year.

[Lord Forsyth of Drumlean]

Will my noble friend confirm that in these contingency plans there is no question of the Government providing money for eurozone states to bail them out while the underlying problem of lack of competitiveness within the euro remains unresolved and unaddressed?

[Lord Sassoon]

My Lords, of course I can confirm to my noble friend that we work extremely hard to make sure that the competitiveness of the EU and the eurozone is not lost in the discussions. It is encouraging—they are only early signs, but they are encouraging—that in the Merkel-Sarkozy discussions on 10 January there was specific reference to growth-enhancing policies for prioritising EU spend towards growth and competitiveness. We look forward to the letter which I think they are likely to write to President Van Rompuy ahead of the next Council meeting.

[Lord Grenfell]

My Lords—

--- Later in debate ---

[Lord Grenfell]

My Lords, given the unrest on the Conservative Benches in the other place, I was tempted to ask whether the Prime Minister had contingency plans for the full recovery and strengthening of the eurozone, but I have a more serious point to make. Does the Minister agree with me that it is extraordinary that the rating agencies disclaim all responsibility for the impact on borrowing costs of their downgradings when a Government like Italy’s are doing their best to solve their problems, and when an institution such as the European Financial Stability Facility—which was downgraded yesterday by Standard & Poor’s—is trying to maintain its lending capacity in advance of the creation of the new ESM, which will take some time? Do these unaccountable agencies just not care whether the impact of what they do is likely to hamper and jeopardise the eurozone recovery?

[Lord Sassoon]

My Lords, the credit rating agencies have a useful and important part to play in the good working of the financial markets. Your Lordships produced a report in committee on aspects of the regulation of the credit rating agencies on which we had a good debate before Christmas. There are issues about the performance of the credit rating agencies in respect of the financial crisis, but their record generally on sovereign ratings has been perfectly acceptable in most people’s judgment. However, I am not going to comment on their individual judgments in the past couple of weeks.

[Lord Pearson of Rannoch]

My Lords, is it not now clear that there are really only two ways forward—either full fiscal union, which does not look as though it will be accepted by the peoples of Europe, or a return to national currencies? On the latter alternative, have the Government seen the research from Bank of America Merrill Lynch which suggests that an orderly return to national currencies need not be nearly as traumatic as the political class would have us believe?

[Lord Sassoon]

My Lords, there is a whole range of views about the effect of the eurozone breaking down in any way. All I can say is that 40 per cent of our trade goes to Europe, and we want to see a strengthened and healthy eurozone. That is fundamentally in the interests of the UK. A crisis in the eurozone presents the most imminent threat to growth in this country.

[Lord Peston]

My Lords—

--- Later in debate ---

[Lord Newby]

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

[Lord Sassoon]

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

[Lord Peston]

My Lords, using the immortal words of the noble Lord, Lord Henley, will the Minister give me a lesson in economics and explain why the Government still do not forthrightly support the maintenance of the euro? What possible benefit is there to us in the Government seeming to drag their heels when dealing with this matter?

[Lord Sassoon]

My Lords, as I have repeatedly made clear this afternoon and on other occasions, the UK Government want to see a strong and dynamic eurozone and European economy. But it is for the eurozone countries to take the lead in supporting the euro as a currency.

[Lord Lawson of Blaby]

My Lords, there is only one thing as worrying as the collapse of the eurozone, and that is the continuation of the eurozone. It has been demonstrated to be fundamentally flawed and is the cause of all these problems. Is the noble Lord, Lord Campbell-Savours, not right that at the heart of the thing that we need to address is the risk of a banking meltdown? Will the Minister give an undertaking that should it prove necessary for the United Kingdom Government to rescue any British banks, they will do so on much tougher terms than the ludicrously soft terms on which the previous Administration went in to save banks?

[Lord Sassoon]

My Lords, we have a lot to learn about the softness with which the previous Administration went about a lot of things. One of the key lessons for this crisis is that we must stick to a deficit reduction programme that is firm and fair, and keep this country isolated from the worst of the problems that are all around us.

Taxation: Inheritance Tax

Lord Sassoon Excerpts

Wednesday 21st December 2011 Lords Chamber

[Baroness Gardner of Parkes]

To ask Her Majesty’s Government whether, in the light of the Law Commission’s Report Intestacy and Family Provision Claims on Death, they intend to review inheritance tax law.

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

My Lords, there are no plans to review inheritance tax law in the light of the Law Commission’s report. The first £325,000 of every estate is exempt from inheritance tax. Inheritance tax is not usually paid on transfers of assets between spouses or civil partners. Only 3 per cent of estates are expected to have an inheritance tax liability in 2010-11.

[Baroness Gardner of Parkes]

The Answer does not surprise me but does disappoint me. Perhaps we do not need to look as far as the whole inheritance tax law situation. My concern is about people who live together long-term as carers or sisters—there is the famous case of the Burden sisters—and yet on the death of one, they are often forced to sell their home. Would it not be possible, even for the Chancellor in his Budget, to agree that under such circumstances there should be no obligation to sell the family home? To make people homeless at the present time, when things are pretty desperate for many people, would perhaps cost the Treasury more in the social benefits that they will require than exempting the home in which they have lived for so many years.

[Lord Sassoon]

My Lords, it would be nice to come to the House bearing gifts in answer to the final Question before the Christmas Recess. However, I think noble Lords would be surprised if a Treasury Minister, of all people, came here to give some good news on this or much else. I say to my noble friend that I hear—

[Noble Lords]

Oh!

[Lord Sassoon]

If we want good news, the borrowing figures announced today for November are ahead of market expectations. I can bring good news, but not gifts. Seriously, I hear very loudly what my noble friend says. Indeed, the Law Commission report, which has just come out and to which the Government will reply within 12 months, addresses the question of co-habitants. I see that the report at paragraph 8.52, which my noble friend may have seen, notes that concerns were raised about the use of the word “couple” in our provisional proposal in that it was too broad and ambiguous a term and might not be sufficiently precise to exclude, as we intended, those who share a home but do not have an intimate relationship. Indeed, this is not an area that is covered in the Law Commission’s work.

[Lord Campbell-Savours]

My Lords, does the Minister not accept that an inheritance can completely undermine incentives in recipient generations? Is that not an argument for increasing the take from inheritance taxes?

[Lord Sassoon]

My Lords, the Government keep all tax matters under review, but we have no plans, as I have said, to change the law on inheritance tax.

[Baroness Trumpington]

Although there is to be no review, in the old days I simply signed a piece of paper and gave it to my son to give him power of attorney but now I am told that I have to do it through a lawyer, which will cost me a lot of money. Is that relevant to the review that has just taken place?

[Lord Sassoon]

My Lords, I do not believe it is relevant to this review, but my noble friend Lord McNally is sitting alongside me and is no doubt listening very hard to the point that my noble friend makes.

[Lord Borrie]

My Lords, the Minister said that it will take up to six months for the Government to reply to the Law Commission’s report. Why should it be necessary to take so much time? As the noble Lord knows only too well from recent events, there is a new procedure for getting Law Commission reports through this House if legislation is required. Will not the Government’s delay make that so much more difficult?

[Lord Sassoon]

My Lords, I understand that there is a protocol between the Government and the Law Commission that says that the Government have up to 12 months to give a provisional response to a Law Commission report.

[Lord Newby]

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

[Lord Sassoon]

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

[Lord Eatwell]

I think that everyone is in agreement that the structure of inheritance tax at the moment is unsatisfactory, as illustrated by the data that the Minister presented in his Answer. It has stimulated a large avoidance industry and it contains perverse incentives. In the spirit of the season, may I offer the Minister the gift of a constructive proposal? We should cease to levy inheritance tax on estates and instead should levy it on recipients. That would significantly reduce avoidance and would incentivise the wider distribution of wealth.

[Lord Sassoon]

My Lords, as I said, we have no plans to review the law, but we are always interested in constructive suggestions, wherever they come from.

[Lord Pearson of Rannoch]

My Lords, perhaps I may rely on noble Lords' generosity at Christmas and dare ask what the latest position is with the proposal from Brussels to harmonise inheritance tax across the whole European Union. Does that prospect not make this debate somewhat superfluous, and what will the position be under the proposal? Will there be majority voting or will we be able to veto it if we do not like it?

[Lord Sassoon]

My Lords, tax proposals from the European Commission require unanimity.

Economy: Private Capital Investment

Lord Sassoon Excerpts

Tuesday 20th December 2011 Lords Chamber

[Lord Empey]

To ask Her Majesty’s Government what additional fiscal measures they will take to encourage private capital to invest in manufacturing or tradable services in the United Kingdom.

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

My Lords, the Autumn Statement announced several measures which encourage private capital investment: an above-the-line research and development tax credit from 2013, ensuring that the relief continues to attract large-scale investment in innovation; 100 per cent capital allowances for six enterprise zones; and a new seed enterprise investment scheme in 2012 to help early-stage companies. The draft Finance Bill also set out further steps in wider corporation tax reform.

[Lord Empey]

I am sure that the Minister will agree that the best way of achieving long-term financial and strategic security for the United Kingdom is to strengthen our international trading position. A significant increase in our manufacturing capability is one of the best ways of achieving this. Can the Minister tell the House whether the Government have any plans to offer increased fiscal incentives to encourage businesses, especially SMEs, to invest in R&D spending? Can he further advise whether any additional fiscal incentives are being considered that will create sufficient confidence in the private sector to boost investment in manufacturing?

[Lord Sassoon]

My Lords, the first thing to remind the House is that the changes already made in corporation tax and the capital allowance regime will in total, in 2015, contribute an extra £700 million in reduced taxes to the manufacturing sector. For example, £1 billion of R&D relief was claimed in 2009-10, including by 7,400 SMEs. So this Government are indeed taking considerable targeted action to support our manufacturers, including SMEs, whether by way of encouraging R&D or through other aspects of the corporation tax regime.

[Lord Barnett]

My Lords, the Question asked what additional facilities the Government have provided. In practice, would the Minister agree that there are no additional facilities outside the deficit reduction plan? Indeed, the measures that he has already mentioned were well taken care of when the OBR reported that growth will be down to 0.7 per cent, which is hardly helping. In the light of the current economic situation, will the Government consider real, additional facilities outside the deficit reduction plan?

[Lord Sassoon]

My Lords, to be clear, the three measures that I mentioned in my opening Answer were indeed new and additional measures, the costings of which are given in the Autumn Statement.

[Lord Lawson of Blaby]

Does my noble friend expect that the important changes in the relationship with the Royal Bank of Scotland that the Chancellor of the Exchequer announced yesterday might lead to more lending by the Royal Bank of Scotland to small and medium-sized enterprises?

[Lord Sassoon]

My Lords, that is a very interesting question. The board of RBS has made it clear that it is going to concentrate its business on its corporate and personal banking and therefore, certainly relative to its total business, it will indeed achieve that.

[Lord Anderson of Swansea]

My Lords, will the new enterprise zones be wholly or mainly limited to the manufacturing sector?

[Lord Sassoon]

My Lords, the enterprise zones are not limited to any particular sector.

[Baroness Kramer]

My Lords, the Minister will be aware that the banking industry is not serving this aspect of investment particularly well and that barriers to entry are limiting new banks. Is he therefore observing the growth of peer-to-peer lending and will he give us some assurance that those new lenders entering the market will be appropriately regulated but not to the point of being stifled?

[Lord Sassoon]

My Lords, we are very interested in anything that keeps credit flowing. However, although my noble friend is very good at reminding us of that issue, we are getting a bit far away from fiscal measures.

[Lord Eatwell]

My Lords, I am sure that the Minister will agree with the noble Lord, Lord Empey, that, however low interest rates may be and whatever fiscal incentives may be in place, ultimately investment is determined by business confidence. Is he aware that the Institute of Chartered Accountants in England and Wales produces an index of business confidence? In its latest report, it says:

“The Confidence Index has suffered its largest quarterly decline since the survey began”.

The survey began in 2004. Is it not clear that the destruction of business confidence is the main outcome of the Government’s economic policies?

--- Later in debate ---

[Lord Sassoon]

My Lords, the best measure of the expected effects of the fiscal measures that I outlined in my first Answer is what business organisations have had to say. For example, the EEF, the engineering employers organisation, has said that the R&D tax credit,

“will send a powerful signal that government intends to make the UK the number one choice for R&D investment and is another step on the road to making the UK the most competitive tax system in the G20”.

I could give the noble Lord similar quotes from the CBI and others.

[Baroness Wheatcroft]

My Lords, large companies are sitting on almost unprecedented amounts of cash rather than investing it. Would the Minister consider means of encouraging those companies to invest in smaller companies and nurture them?

[Lord Sassoon]

My Lords, we are always open to new and imaginative suggestions. Large companies have been talking to us positively about how to develop the supply chain and encourage their smaller suppliers.

[Lord Brookman]

As one of those turkeys not voting for Christmas, I ask the Minister to put to bed for ever a comment made to me some years ago. I come from manufacturing, as many of us on these Benches do, but I was told that it was dead and we were going to sustain our future by banking, the service sector and finance. Will the Minister confirm that manufacturing has a future in this country?

[Lord Sassoon]

Indeed, and I am very happy to say it and say it again. We have a manufacturing sector in the UK that is close in size to that of France. We have exporters that have grown their exports by 15 per cent since the election. Manufacturing and exporting are alive and well in this country.

Consumer Insurance (Disclosure and Representations) Bill [HL]

Lord Sassoon Excerpts

Tuesday 20th December 2011 Lords Chamber

Moved by

[Lord Sassoon]

1: Clause 2, page 2, line 9, leave out subsection (5)

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

My Lords, I beg to move Amendment 1, which leaves out Clause 2(5). This subsection was added to the Bill following acceptance of an amendment in Committee. I will also speak to Amendment 2, which proposes an alternative and—I hope that the House will agree—improved approach to addressing the Committee’s concerns about renewal of insurance contracts. Having considered the amendment accepted by the Committee, we felt it was necessary to come forward with alternative drafting to achieve what noble Lords had in mind through the original amendment.

Taken together, these two amendments will mean that insurance companies are expected to have to show that they told their policyholder that answering questions on renewal was important. However, they also avoid some unintended consequences of including this requirement in its current form as part of Clause 2.

These amendments address something which the Bill Committee touched on extensively in its deliberations. There was much discussion of the implications of the Bill for consumers renewing insurance. Renewal involves entering into a new contract and consumers are therefore under the same obligation as when first purchasing their policy—that is, they must take reasonable care to answer the insurer’s questions, or the insurer may be entitled to refuse a later claim. Noble Lords were concerned that consumers might not recognise the significance of questions asked on renewal, as they may not understand that it is a new contract, and as a result might not take sufficient care to answer these questions.

The Government agree that insurers should take measures to ensure that their consumers are aware of the importance of responding to questions which they are asked at renewal. However, as I mentioned, to ensure that the effect of this change to the Bill reflects the wishes of noble Lords, we felt that it was necessary to come forward with alternative drafting. There are some relatively small drafting points.

The inserted text splits subsections of the current clause which need to run together, and the phrase “make clear” may be a difficult standard. However, most importantly, it leaves no remedy for an insurer who has not included the right wording, even if the consumer’s failure to reply was a deliberate or reckless misrepresentation. I am sure that the Committee did not intend to give consumers a “get out of jail free card” in circumstances where they knowingly and deliberately deceived their insurer. The amendment therefore removes the drafting accepted in Committee stage and substitutes an alternative in Clause 3. That explicitly adds to the list of factors that a court may take into account, when determining whether a consumer acted reasonably, whether the insurer communicated the importance of answering questions on renewal. Both the Association of British Insurers and the Investment and Life Assurers Group agree that that is a more suitable approach.

There are many ways in which an insurer may communicate the importance of answering questions at renewal. The Committee discussed whether wording which explicitly told the consumer that they were entering into a new contract would achieve that. That is indeed one way in which an insurer may communicate the importance of answering questions as required by the amendment.

It might be helpful if I set out for noble Lords current market practice at renewal and the effects of the amendment in this context. An insurer will often send the consumer a letter to say that their insurance is up for renewal. Market best practice is usually to send a list of the facts that the consumer told them the last time. The consumer is asked to read and consider the list, and to contact the insurer if the facts have changed.

In motor insurance, it is common practice for insurers to renew the policy even if the consumer fails to reply. It is now a criminal offence for a motorist to allow their car insurance to lapse without notifying the Driver and Vehicle Licensing Agency and we therefore welcome any practice which makes renewal a simple process for the consumer. If nothing has changed, there is no need for the consumer to reply, but if something has changed and the consumer fails to respond, this is capable of being a misrepresentation. As my noble friend Lady O’Cathain stated during the last Committee sitting, it may be that nothing has changed in relation to your car insurance. Alternatively, you may have been convicted of a new driving offence which you should tell your insurer about. As a result of this amendment, the insurer should clearly communicate the importance of mentioning such changes. If the letter is poorly laid out or in very small print, or if it fails to tell the consumer that failing to mention changes may lead to claims being refused, then a consumer may act reasonably in overlooking it.

In circumstances where the consumer fails to respond because they did not understand the implications, the insurer would be expected to show that they told the consumer how important it was to respond to the questions at renewal time. The insurer would know that it could not just point to the consumer’s oversight. This last important point was teased out in Committee and was, I believe, noble Lords’ real intention. I believe that the amendment addresses the concerns raised by noble Lords during those discussions.

[Lord Eatwell]

My Lords, as I have stated throughout our proceedings, we on this side of the House fully support the Bill as a measure which makes a major improvement to the relationship between insurer and insured in consumer insurance. We have sought to improve the Bill, making clear elements of the drafting which were unclear or which, on careful examination, did not correspond to the declared intentions of the Law Commission and therefore required amendment. Accordingly, in Committee I proposed the amendment to which the noble Lord has referred and which in due course the Committee passed almost unanimously, the only dissenting voice being that of the Minister himself.

Before dealing with the substance of the Minister’s amendments, I first ask him whether he consulted the Companion before tabling them. Paragraph 8.133 states that,

“an issue which has been debated and voted on in committee can be reopened, provided that the relevant amendment is more than cosmetically different from that moved in committee”.

When we look for the meaning of “cosmetically different”, earlier in the same paragraph it is stated that amendments must not be identical or of identical effect. Consequently, the Minister cannot argue that this amendment has identical effect. If he does, he must withdraw the amendment.

[Lord Sassoon]

I wonder whether it would be helpful at this stage to confirm that the government amendments have been drafted in full recognition of what the Companion says. As I tried to explain in setting out the rationale for the amendment, I do not believe that it has the same effect because it provides greater clarity and, I believe, delivers what, in Committee, noble Lords wanted to achieve. My understanding of the process is that, if there had been a problem with the technical raising of the amendment, the Public Bill Office would have raised questions on it. Therefore, I believe that both in substance and in form the right things have been done.

[Lord Eatwell]

I think that the noble Lord is contradicting himself. He said that it was what noble Lords wanted to achieve when they voted on the amendment in Committee, yet he says that it is not identical in effect. That does not seem consistent. However, let us move on.

Turning to the substance of the amendment, I accept that its placement in the Bill is superior to that which I proposed in Committee, and for that I am grateful. However, the intention of the Committee was that insurers would be required to make clear to consumers that when a policy was renewed, it would in fact be a new policy, and consequently the importance of questions asked would be of the same order as when new business was written. As many noble Lords argued in Committee, they were not aware of this—indeed, I believe that the Minister himself admitted that he was not aware of it—and they could well understand a consumer failing to be aware of it too. This lack of awareness might result in the consumer taking insufficient care in answering questions posed by the insurer.

The Government’s amendment does not refer explicitly to the fact that a renewal is a new contract and hence this is not of identical effect. Instead, it proposes the vague test of,

“how clearly the insurer communicated the importance of answering those questions (or the possible consequences of failing to do so)”.

That is a very vague rendition of what was intended by the amendment in Committee. Instead of being explicit, the matter is now to be left to the courts to decide. However, I note that the Minister stated that explicitly telling the consumer that they were entering into a new contract would be “one way” in which the insurer could communicate the importance of the questions asked at renewal. I fully expect that the ABI and the ILAG will draw this passage in Hansard to the attention of their members and that it will form a background to any subsequent court proceedings. On that basis, I shall raise no objection to the government amendment.

Finally, I would be grateful if the Minister would clear up the matter raised in Committee by the noble Lord, Lord Goodhart, and not subsequently resolved. That is the relationship between Clause 5(1) and Clause 5(3). As the noble Lord, who is in his place, pointed out, they seem to duplicate one another and hence, potentially, they are a source of confusion. As we still have a chance to sort this out at Third Reading, perhaps the Government could enlighten us about the reasoning behind this dual oddity of drafting.

--- Later in debate ---

[Lord Borrie]

My Lords, I share the view of the noble Lord, Lord Goodhart, and, therefore, share the view of my noble friend Lord Eatwell today in raising again the duplication that there seems to be in Clause 5. I do not think that anyone wants to press the point. In addition to the thank you to the Law Commission and the usefulness of this Bill, to which the noble and learned Lord, Lord Lloyd, has just referred, I express thanks for the excellence of the chairmanship of the noble and learned Lord.

[Lord Sassoon]

My Lords, thank you for that short and focused discussion. On the specific point about the interlinkage of Clause 5(1) and Clause 5(3), I think that my noble friend Lord Goodhart has answered the question. Frankly, if the amendment had come forward again, in the Christmas spirit I and the Government might have accepted it. For goodness’ sake, I hope that it is now too late to table a handwritten amendment, but it was a fine bit of drafting either way.

I would rather stay with the noble and learned Lord, Lord Lloyd of Berwick, in welcoming the importance of this small but targeted measure. I echo my thanks to him as chairman of our committee under this special procedure, to the Law Commission, and in particular to the commissioner, David Hertzell. I will not say that I wish I did not have to deal with more Law Commission matters because your Lordships may have seen the fourth, topical Question tomorrow morning, which touches on recent Law Commission work on intestacy. As the Question refers to inheritance tax, it is down to me, so I cannot escape Law Commission matters even this week.

Amendment 1 agreed.

--- Later in debate ---

Moved by

[Lord Sassoon]

2: Clause 3, page 2, line 31, at end insert—
“( ) in the case of a failure to respond to the insurer’s questions in connection with the renewal or variation of a consumer insurance contract, how clearly the insurer communicated the importance of answering those questions (or the possible consequences of failing to do so),”

Public Service Pensions

Lord Sassoon Excerpts

Tuesday 20th December 2011 Lords Chamber

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

My Lords, I will now repeat a Statement made earlier today in another place by my right honourable friend the Chief Secretary to the Treasury.

“Mr Speaker, with permission, I would like to make a Statement on the reform of public service pensions. Seven weeks ago, I reported to the House that in an effort to secure agreement, the Government were making a new offer to public service workers. Despite some unnecessary interruptions, scheme negotiators have been working hard to reach detailed heads of agreement by the end of the year deadline that we set.

It has not been an easy task, but this Government have demonstrated that they will not shy away from taking difficult long-term decisions in the nation’s long-term interest. We wish to see pensions for public service workers that are fair, sustainable, provide dignity in retirement and are affordable to both those workers and to taxpayers. That is why we committed in the coalition agreement to establishing an independent commission to bring forward proposals for reform. Lord Hutton’s magisterial report did just that. We have stuck closely to the recommendations of the former Labour Work and Pensions Secretary throughout this process.

The case for reform is self-evident. The average 60 year-old today is living longer now than they did in the 1970s. It means people are living in retirement longer—the life expectancy of a 60 year-old was 18 years in the 1970s, but has risen to 28 years today. As a result the costs of public service pensions have risen to £32 billion a year, an increase of one-third over the past 10 years. We have already made some changes that deal with short-term pressures, including changing the basis of pension uprating to CPI, and increasing member contributions by 3.2 percentage points, phased over three years.

Next year’s contribution increase is almost identical to that planned by the previous Government. The precise details of next year’s increase have been set out by departments—all are tiered by income to protect the lower-paid. The Government will review the impact of next year’s increases, including on opt-outs and equality, before taking final decisions on how future increases will be delivered. Interested parties will have the opportunity to provide evidence and views to the Government.

I know that many Members of the House will be concerned about pay and conditions of our Armed Forces. Let me be clear. Members of the Armed Forces will continue to make no contributions towards their pensions and will be exempt from the increases announced at the spending review.

From the beginning of this process, we have committed to ensuring that public service schemes continue to offer a defined benefit pension based on the size of workers’ salary—not dependent on the market performance of a fund, and not available to most people in the private sector. From the beginning, we have been clear that all accrued rights will be protected, in full; and that the taxpayer needs to be properly protected from future risks associated with further increases in life expectancy by linking scheme normal pension age to state pension age.

In November, we improved the offer to a one-60th accrual rate, an increase of 8 per cent that is available only in the event of agreement being reached, together with protection for those 10 years from retirement. I would like to pay tribute to the Minister for the Cabinet Office, the TUC and the scheme negotiators on both sides for their efforts to reach agreement.

I am pleased to report that heads of agreement have now been established with most unions in the local government, health, Civil Service and teachers’ schemes. It will of course now be for union executives and memberships to decide their response. These heads of agreement deliver the Government’s key objectives in full, and do so with no new money since our November offer. In future, scheme pension ages will match the state pension age, future schemes will be on a career-average basis, and all the agreements are within the cost ceilings I set in November and will save the taxpayer tens of billions over the decades to come.

Because heads of agreement have been reached, the better offer I made in November has been secured by trade unions for their members, including the no-change guarantee for workers 10 years from retirement. The heads of agreement also deliver a number of the key objectives set out by the trade unions during the talks. Negotiations on these heads of terms are now concluded. We and the unions agree that this is the best outcome that can be achieved by negotiation. This is the Government’s final position and we will bring forward legislation to the House. The full details of the heads of agreement in each scheme are today being set out in Written Statements by each department.

The key changes made are as follows. In the Civil Service, we have agreed to revalue each year’s contribution by CPI rather than earnings, allowing an accrual rate of 44ths to be offered. This costs the same as our original offer, but with a configuration preferred by the trade unions. As a consequence, the new scheme will be very similar to the nuvos scheme already available within the Civil Service, except that in future the normal pension age will be linked to the state pension age as it rises. It is therefore disappointing that the PCS has rejected the heads of agreement and walked away from the talks.

I have previously made the point that the local government scheme must be treated differently because it is a funded scheme. The Local Government Association and the trade unions have agreed that the pension age in the new scheme will be linked to the state pension age, and that their preference is to deliver a career-average scheme. Further discussions will take place over the next three months to agree the details. In health, we have agreed to a revised revaluation factor of CPI plus 1.5 per cent. This allows the accrual rate to be improved to one-54th. In education, we have agreed to a revised revaluation factor of CPI plus 1.6 per cent, allowing for the accrual rate to be improved to one-57th, along with modest improvements to early retirement factors.

All these heads of agreement are within the cost ceiling I set out in November, but in a configuration preferred by the unions. Discussions on police, Armed Forces, judiciary and fire service schemes have been a separate process from the start, and proposals will be brought forward in due course.

Let me turn to some other aspects of these deals. All of these agreements include a cap on taxpayer costs at 2 percentage points above or below the scheme valuation. This cap is symmetrical, so employees will benefit if costs fall. As Lord Hutton made clear, with the other aspects of reform now agreed, there is no reason to believe that under normal circumstances this cap will be used. It is there as protection for taxpayers and for workers if extraordinary, unpredictable events occur. In the course of all these talks, unions have stressed the importance of ensuring that their members will continue to be able to receive the benefits of these schemes if they are outsourced. This is the purpose of the fair deal policy, the future of which we have been consulting on. Because we have agreed to establish new schemes on a career-average basis, I can tell the House that we have agreed to retain the fair deal provision and extend access for transferring staff.

The new pensions will be substantially more affordable to alternative providers and it is right that we offer workers continued access to them. In addition, the Government will consider what practical options might be available to reform the terms of access to the NHS pension scheme, in particular for NHS staff who move to a non-NHS “any qualified provider” delivering NHS services. At the same time, by offering transferred staff the right to remain members of the public service scheme, we are no longer requiring private, voluntary and social enterprise providers to take on the risks of defined benefit that deter many from bidding for contracts in the first place.

Replacing so-called bulk transfers of pensions with continued access to public sector schemes means that we continue to protect public service workers’ pensions, manage the risk to the taxpayer and forge ahead with our ambitious plans on public sector reform. I have committed that these reforms will be sustained for at least 25 years. The Government intend to include provisions in the forthcoming public service pensions Bill to ensure that a high bar is set for future Governments to change the design of the schemes.

What does this deal really mean? For our workforce, it means they will continue to receive the best quality pensions available in this country—and rightly so. These pensions could be bought in the private sector only at the cost of one-third of salary. This is a proper reward for a lifetime’s commitment to serving the public. This new scheme is fairer to women too. By moving to career average, we will be giving a better pension in future to those, mainly women, who have low or steady salaries throughout their careers.

The Government have been clear that, because we are living longer, public service workers must work a bit longer and pay a little more for their pensions but, in return, we have also made an important commitment: that at retirement, those on low and middle incomes will get at least as good a pension as they do now. I can confirm today that we have met that commitment. For people who depend on our public services, it means that most unions will be asking executives to lift the threat of further strike action while work is done to conclude the final agreement, and I hope that the remaining unions do the same. For the taxpayer, it means that tens of billions of pounds extra that would have been spent on unreformed pensions over the next 30 years is now available for other pressing demands.

These are reforms that significantly improve the long-term fiscal sustainability of this country and reinforce the credibility of our fiscal stance. The Office for Budget Responsibility will provide a forecast of these savings in its next fiscal sustainability report. For industrial relations, I believe this shows that it is possible to reach agreement through negotiation in good faith, based on clear objectives. That is the right way to approach relations between government and the trade unions. In these difficult times, it is important to show that people can come together to achieve genuine reform, preserving the best of the past but recognising the realities of the future. This is a fair deal for public service workers, an affordable deal for the taxpayer and a good deal for the country. I commend this Statement to the House”.

My Lords, that concludes the Statement.

--- Later in debate ---

[Lord Sassoon]

My Lords, I am sorry that the noble Lord, Lord Eatwell, does not welcome the deal that the Government have come to today with the great majority of unions in the public sector. The Government must get a grip on the significant increases in the cost of providing public sector pensions that have simply arisen from the fact that people are living longer. That is why we asked the noble Lord, Lord Hutton of Furness, the Work and Pensions Secretary in the previous Government, to look at the current position and identify whether further reform was required. The noble Lord, Lord Hutton, set out an overwhelming case for reform, saying that,

“the status quo is not tenable”,

and that,

“Future costs are inherently uncertain”,

and that at present,

“the … public cannot be sure that schemes will remain sustainable in the future”.

It is based on his recommendations that we have reached an agreement with the unions today.

It is a good deal. It ensures that public service pensions will remain among the very best available. If members retire later, as most of them will, most of them will not see a reduction in the pension that they receive at retirement; indeed, many of them will get more than they would now. I do not think that the noble Lord, Lord Eatwell, recognises that. The deal delivers on our objectives to ensure that most low and middle earners working a full career will receive pension benefits at least as good as, if not better than, what they would get now.

I turn to the specific questions that the noble Lord asked me. On the increases in contributions, the scheme-by-scheme contributions for 2012-13 are set out on the respective departmental websites. They follow on from separate consultations that were held over the summer. The average is a 3.2 per cent increase over three years, with 40 per cent of that increase falling in the first year and 40 per cent in the second, building up to the full increase in the third and final year. The projections are that anyone with earnings below £15,000 will face no increase and that those between £15,000 and £21,000 of earnings will have their contributions increased by only 1.5 per cent over the three years. Individual schemes have worked out other particular protections; health, for example, has protected those earning up to £26,000 by having no increase in the first year.

On the question of part-time workers, it is the case that all public service scheme members, whether full-time or part-time, are included, apart from those within 10 years of retirement who are, as I have explained, protected. The lower-paid will not pay more for their pensions. The pension benefits themselves are based on full-time equivalent earnings and it is appropriate that the contributions are calculated, as are benefits, on the same basis. There are approximately 350,000 part-time workers in local government, where alternatives to contribution increases are being considered, and a further 150,000 part-time workers would be partially protected as their full-time earnings are less than £21,000.

On the question of opting out, the general point to make is that there is no reason why members should do so. There will remain a strong economic rationale for them to remain in their schemes, and it is important that all employees in the public sector hear that message clearly. Beyond that, we have committed to reviewing the impact of opt-outs following the increase in members’ contributions. We will do that before final decisions are taken on how future increases are made. It needs to be borne in mind that it would cost a member around 30 per cent of their earnings to purchase equivalent benefits in the private market.

I turn to the question of the increase in pension age and the effect of that, particularly on those in physically demanding jobs. For the armed services, firefighters and police, the noble Lord, Lord Hutton of Furness, recommended an earlier retirement age of 60, and we accept that recommendation. For the other schemes, we have agreed that the retirement age will be the state retirement age, the same age when other citizens will receive their state pension. It will be for employers to review the appropriateness of certain jobs for older employees and to make appropriate arrangements for staff possibly to move into alternative roles as necessary. The NHS, for example, has already agreed to set up a tripartite review involving the department, NHS employers and the NHS trade unions which will look at addressing the impact of working longer in the NHS, with particular reference to staff on the front line and in physically demanding roles, including emergency services. I accept that this is an important point but it is one which is already being addressed.

On the final questions of the noble Lord, Lord Eatwell, around how the Government will be able to deliver a commitment on no further reform for 25 years, the critical point here is that we have set out a position that is not only fair and sustainable for those who work in the public sector but is a reform that is sustainable in terms of the public finances. I reiterate the point that, as the Government address the very difficult fiscal position that we inherited and as we compare ourselves with countries in Europe and elsewhere, this is an important reform that will underpin the fiscal sustainability of the public finances for many years to come. Therefore, I believe that no further reform should be necessary for 25 years. To give substance to this, we intend to include provisions on the face of the forthcoming primary legislation to ensure that a high bar is set for future Governments to change the schemes, as I said in repeating the Statement.

[Lord Prescott]

My Lords, having listened to the Minister claiming the support of the noble Lord, Lord Hutton—the architect of the scheme—for his interpretation, and then having listened to my noble friend Lord Eatwell give a different interpretation, I am all the more sorry that the noble Lord, Lord Hutton, is not here to give his interpretation. I wish to ask the Minister a question, as in 2008 I negotiated pension agreements with local government workers. That is a different pension scheme from the state one as it is funded by the employers and the employees. We made major changes in that pension agreement which I do not have time to explain. We did that with a struggle but we did not have the strikes that we have witnessed on this occasion. We have learnt that there is a heads of agreement with the unions, and we hope that they will move to some sort of agreement. The Minister mentioned this in his contribution. However, tonight we learn that another letter has been written by the Secretary of State for the Environment, Mr Pickles, who is well known as the rogue elephant in the Cabinet, which states that the limits to be placed on the employers’ contribution are quite different from what the Treasury is saying. Will the Minister say which letter is operating in these negotiations? I am told that the letter I have mentioned has been withdrawn. Is Mr Pickles in charge or the Treasury as regards the difference between the two schemes? Will the Minister explain that to us?

[Lord Sassoon]

My Lords, I am happy to try to clear up any misunderstandings on this. As the DCLG has made clear this afternoon, it is in discussion with the unions to resolve any misunderstanding and reassure them that the intentions of the department and of the Government have not changed. It would seem that the unions have read more into the letter that was issued today than was intended by the DCLG. No new conditions are being imposed by the department. In order to iron out any ambiguity, the department will be issuing a new letter to make clear that there is no ambiguity, there is only one deal and there are no conditions. Therefore, I am confident that this can be resolved quickly, but as noble Lords will understand, there have been many deals with a lot of unions and several departments. We must clear up this ambiguity that has slipped in on one particular aspect.

[Baroness Kramer]

My Lords, the Government and the unions that have signed the heads of agreement deserve congratulations on having achieved this in this day and age, given the immediate financial pressures and the reality that we will all live much longer and therefore need pensions for a much longer period in our lives. They have achieved an agreement that retains defined benefit schemes—when the private sector has essentially abandoned that and gone on to defined contribution schemes—and have provided protection for those approaching retirement and for those on the lowest incomes. That is a real achievement by both sides and we ought to acknowledge it.

However, I wish to ask the Minister two questions. Can he clarify for us where the negotiations now stand with the PCS? The experience that has been described tonight demonstrates that negotiation has to be the way forward, not strikes. The Minister said that the PCS had walked away. The newspapers used the phrase, “not invited to future talks”. Can he clarify what he sees as the progress that can be made in that regard—preferably progress which does not inflict any more strikes on the long-suffering British public?

Secondly, can the Minister expand a little on an area I find most intriguing: namely, the position of staff transferring from the public service to the voluntary or private sectors or to social enterprises who will retain access to a public service pension? I cite the example of the NHS in that regard. Should we see that in narrow terms, or are we moving towards an arrangement which will allow a much more flexible structure for future public services as technology and demand change, creating the opportunity for movement in and out of different organisational arrangements? Is this the first building block of something larger, or is it just something to be seen narrowly within the terms of this negotiation?

[Lord Sassoon]

My Lords, I am grateful to my noble friend for welcoming this deal. She rightly points out that it means that public sector workers have among the best pensions available in this country, including defined benefit schemes which are not now generally available to people entering private sector schemes. Therefore, I endorse entirely her comments in that respect.

The PCS has not agreed to put the final design of the Civil Service scheme to its executives. It is important to remember that the PCS represents fewer than 5 per cent of the members of the public service schemes and discussions will continue without it. We believe that the final deal—it is a final deal—is a good one and that the remaining unions will recommend it to their members. We are clear that what has been set out today is the Government’s final position.

My noble friend asked about the ability of members exiting a public sector employer to remain in the pension scheme under the “Fair Deal” provision. Implicit in her question was the notion that this may have wider implications. I certainly think that this opens up all sorts of possibilities, whether in relation to the mutualisation of services or the ability of people to come in and out of the public sector.

[Lord Lea of Crondall]

I echo the opening remark of the noble Baroness, Lady Kramer, in referring to the constructive nature of the recent negotiations, albeit at the eleventh hour. I hope that the Minister will take care in saying who represents 5 per cent of what. One minute he is talking about the total public sector negotiation and the next minute he picks out a statistic which is to do with the Civil Service. We ought to be very careful not to pick and mix in that particular way.

I hope that the Minister will comment on a general point: namely, now that we have reached where we have got to, it would be very useful for all of us to discourage people from going in for rhetoric such as many Members of the Minister’s party, both in this House and in the Commons, have indulged in. Their slogan can be summarised as, “Private sector employment is productive; public sector employment is unproductive”. It is not just the Daily Mail, the Daily Express, the Daily Telegraph and the Murdoch newspapers that say that—it is members of his own party in this House and the other House. I do not mean that anyone in this House tonight has said that, but it has been said on other occasions. Such comments are quite ridiculous. People will think that nurses and teachers are unproductive, and that hedge fund managers and second-hand car dealers are productive. Is it not time that, in a modern social democracy or mixed capitalist economy—I do not mind what you call it—we agreed that that is a ludicrous way of dividing people up?

That leads to the point that we must get on with improving pension provision in the private sector. The Adair Turner report on auto-enrolment has been stymied to some extent. Is it not important that we do not have a race for the bottom as regards pensions? I am glad that we have drawn back from that to some extent.

Am I not right in thinking that CPI has been selected instead of RPI because CPI has been growing more slowly in recent years? Would the Government have preferred CPI to RPI if it had been growing faster? I have been around for long enough to know that that is exactly how the Treasury thinks. I ask the Minister whether he agrees with me that there is a position in the final set of correspondence which refers to CPI plus 1.5 per cent or 1.6 per cent, and that that is the rationale for some of the arithmetic, which—understandably, given the Government’s predicament—is based on getting more in for the Treasury, hence the 3 per cent take-away.

Finally, is this not also the time to say, given the huge growth in pension pots for the top 0.1 per cent of people—which is scandalous and is getting up the nose of everyone in the country, apart from that 0.1 per cent—that the idea that we are all in this together is a bad joke, unless that issue is also addressed?

[Baroness O'Cathain]

My Lords—

[Lord Sassoon]

I am sorry—I thought there was a new and welcome procedure whereby Back-Benchers could answer questions on my behalf. That is an excellent idea, but it might require discussion before we do something so radical.

I should first be clear about the interesting analysis of the noble Lord, Lord Lea of Crondall, on how we have got to this point and what else we should be doing. When he talks about an eleventh-hour deal, it is worth reminding the House that the final deal was put on the table by the Government on 2 November. The agreement today is entirely in line with what was put on the table then, well ahead of the strike action on 30 November.

The question around CPI and RPI broadly relates to the nature of the deal whereby individual negotiations were carried out, scheme by scheme, around the level of benefit accrual and indexation rates. That is why we allowed considerable flexibility for the unions to vary the balance of factors within the total cost caps that were set. That is why a variety of different approaches was taken. There was considerable flexibility within the overall parameters set by the Treasury.

As to the question of what people in the private sector should be doing, perhaps we had better stick to public sector pensions, which are very important and should be what we are talking about.

[Baroness O'Cathain]

I must apologise to my noble friend for jumping up. It is just that I was slightly goaded by the noble Lord, Lord Lea of Crondall. I want to come back to him about the CPI versus RPI issue, because I have a pretty long memory, too. In the early stages of the Monetary Policy Committee and the Labour Government, there were endless discussions every month about the RPI. One of the reasons that the statisticians wanted to move to the CPI was so that they could get month-by-month comparisons with mainland Europe—the EU. That is exactly why it happened, and then it all started to go wrong. We should have a discussion off the Floor of the House and go to the Library to look at all that. It was fascinating stuff, and an enormous number of people wanted to go for the CPI, as opposed to the RPI.

--- Later in debate ---

[Lord Lea of Crondall]

I am quite entitled to come in for a second time within the 20 minutes. I have been asking a question. Is there not a case for looking at which index should be used, based on considerations other than which one is likely to increase more slowly than the other?

[Lord Sassoon]

My Lords, this was a negotiation between the unions and the employers. It was a choice regarding accrual rates and indexation, and the unions have expressed a preference for going for that measure of inflation, essentially as a way of funding better accrual rates. That was just the nature of the negotiations.

Independent Commission on Banking

Lord Sassoon Excerpts

Monday 19th December 2011 Lords Chamber

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

My Lords, I shall now repeat a Statement made in another place today by my right honourable friend the Chancellor of the Exchequer.

“Mr Speaker, the Government are proposing the most far-reaching reforms of British banking in our modern history. Our objective is to make sure that what happened in Britain never happens again, that taxpayers are protected and that customers get a better service.

Last year the Business Secretary and I set up the Independent Commission on Banking to look at what I called the ‘British dilemma’: how Britain can be home to one of the world’s leading financial centres without exposing British taxpayers to the massive costs of those banks failing. In the years leading up to the financial crisis, a failure of regulation contributed to the build-up of a debt-fuelled boom. Banks borrowed too much and took on risks they did not understand. When the bubble burst these banks turned out to be too big to fail and the previous Government had to spend billions of pounds bailing them out.

Of course, major financial institutions in other countries were bailed out by their taxpayers, but the British bailouts were on a different scale. The Royal Bank of Scotland bailout was the biggest in the world. The FSA’s recent report into the failure of RBS attributed this to ‘poor decisions made by the RBS management and Board’ against a backdrop of a regulatory regime that failed to stop them. The politicians responsible are named in the report.

This Government are determined to do better at protecting British taxpayers from the cost of failing banks while at the same time acknowledging the importance of the financial sector to our country. Britain should remain home to one of the world’s leading financial centres and the home of global banks. However, the strength of this industry is also a potential weakness to the economy if not properly regulated. The sector supports nearly 1.4 million jobs, not just in the City but across the whole of the UK. The balance sheet of our banking system is close to 500 per cent of our GDP, compared to 100 per cent in the US and 300 per cent in Germany and France. So while a European and international regulatory response to the crisis is important, we cannot rely on this response alone to make our banking system safe.

We in this Parliament have to take action, and under this Government, we are. We are putting the Bank of England back in charge of prudential regulation. We have created the Financial Policy Committee to look at risks across the financial system. I also welcome today’s report from the Joint Committee on the Draft Financial Services Bill. I wanted proper pre-legislative scrutiny. That has happened, and we will respond in the new year so that we improve the legislation. We have also introduced a permanent bank levy on wholesale funding, and we have introduced the toughest and most transparent pay regime of any major financial centre in the world. However, we also need to address the structure of our banks. That is why the coalition Government set up the Independent Commission on Banking. I want to thank Sir John Vickers and the other members of the commission—Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Wolf—again for their impressive report.

The commission made three main recommendations: first, that everyday high-street banking services should be separated from wholesale and investment banking activities, and that this be done via a ring-fence; secondly, that banks be required to have bigger cushions to absorb losses without recourse to the taxpayer; and thirdly, that competition in the banking sector be strengthened by increasing the number of banks on the high street and the power of customers to switch accounts. When its final report was published in September, I made it clear that I welcomed these recommendations in principle, and would return to the House by the end of the year. Today I fulfil that commitment.

Let me now set out in detail how the Government plan to respond and invite further views before we publish a White Paper next spring. First, the Government will separate retail and investment banking through a ring-fence. It is important to know that this ring-fence will not prevent banks failing, but it does mean that if banks get into trouble, those elements of the banking system that are vital for families, businesses and for the whole economy can continue without resort to the taxpayer. So the following will be in newly ring-fenced banks: the deposits of individuals; their overdrafts too; and the deposits and overdrafts of small and medium-sized businesses. They will all be kept separate from riskier wholesale and investment banking—which will have to be outside the ring-fence.

Larger corporate deposits and lending, and private banking, can either be in the ring-fence or outside. The ring-fenced bank will be legally and operationally independent. It will be able to finance itself independently, have its own board and there will be limits on the amount it can lend to the rest of the group. The commission’s interim report proposed a de minimis exemption for small banks that were clearly not systemic and we invite opinion on whether to proceed with this.

Our objective is clear. We want to separate high street banking from investment banking to protect the British economy, protect British taxpayers and make sure that nothing is too big to fail.

Secondly, we will make sure that banks have bigger cushions, so they are better able to withstand losses. The international Basel III requirement—which the UK was instrumental in negotiating—requires banks to hold minimum equity capital of 7 per cent, and there is a top-up for systemically important banks. We will go further. Large ring-fenced retail banks will be required to hold equity capital of at least 10 per cent. There will also be a minimum requirement for the loss-absorbing capacity of big banks of at least 17 per cent. This requirement will apply to the UK operations of British banks. It will also be applied to the non-UK operations of UK headquartered banks, except where they can demonstrate they do not pose a threat to the UK taxpayer.

I can also confirm that this Government will introduce the principle of depositor preference. In other words, the principle that unsecured lenders to banks, who are better placed to monitor the risks that banks are taking on, should have to take losses ahead of ordinary depositors. We seek further views on the best way to implement this principle. This comes on top of the guaranteed protection that the Financial Services Compensation Scheme offers, which covers 100 per cent of eligible deposits up to £85,000.

All these proposals on loss absorbency will also strengthen the European single market. One of the greatest distortions to the single market in banking is the perceived implicit taxpayer guarantee for all European banks. Through these proposals the UK is setting out a plan to remove this distortion for UK banks. The European Commission has indicated plans to consider what it can do to reconcile that distortion at an EU level. I welcome that, and the UK will engage actively in the debate.

This House and other member states have objected to the European Commission's proposals to impose maximum standards for bank capital. These proposals undermine efforts we and others are making to improve financial stability and the single market. In the view of bodies like the IMF, the European Commission's proposals also water down the international Basel III agreement, giving exemptions to globally active banks in certain European countries. We will be seeking, with others, changes to ensure that the EU faithfully implements international agreements.

Thirdly, the Government will take action to increase competition in the banking sector. The disappearance of banks such as Bradford & Bingley and the decisions taken by the previous Government on the merger of Lloyds and HBOS mean the banking sector is dominated by a handful of large banks. Last year, just four banks took 70 per cent of the market share. We need new banks to enter the market to provide consumers and businesses with more choice. The Government announced the sale of Northern Rock to Virgin Money last month, creating a new competitor in our retail banking sector.

In the coalition agreement, we made clear we wished to foster diversity in financial services, including promoting mutuals. We welcome last week’s announcement that Lloyds has identified the Co-op as preferred bidder for the divestment of more than 600 branches to create a strong challenger in the high street. We will also make it easier for people to switch their current accounts. This recommendation from the commission has received less attention from the media, but could be of huge benefit to millions of customers. The idea is that individuals and small businesses can switch to another bank within seven days and all the direct debits and credits will be switched for them at no cost. The Government have secured the banking industry’s agreement that it will implement these proposals by September 2013.

We will also support the Treasury Select Committee’s proposal to bring the Payments Council within the scope of regulation and I can confirm that our financial services legislation next year will specify that one of the objectives of the Financial Conduct Authority is to promote effective competition in the interests of consumers. A new statutory competition remit will provide the FCA with a clear mandate for swifter, more effective action to address competition problems in financial services. So within months of the ICB report, legislation to bring this change into force will be introduced.

This brings me to timing. Some have questioned whether the Government will seek to delay implementation of these reforms—questions that come from people who never even contemplated reform when they were in office. In fact the reverse is true. On the advice of Sir John Vickers and others, I will be bringing forward separate legislation to implement the ring-fence. The Government’s intention is that implementation should proceed in stages, with the final changes related to loss absorbency fully completed by the beginning of 2019 in line with the Basel agreement. But I can confirm to the House today that primary and secondary legislation related to the ring-fence will be completed by the end of this Parliament in May 2015 and banks will be expected to comply as soon as practically possible thereafter. The Government will work with the banks to develop a reasonable transition timetable.

Of course, there are both costs and benefits to these reforms. The Government estimate the total costs to UK banks to be between £3.5 billion and £8 billion, broadly in line with the commission’s estimate. Most of this reflects the cost to them of removing the subsidy that comes from any perceived implicit taxpayer guarantee, which is precisely what we intended. The cost to GDP is estimated by the Government at just £0.8 billion to £1.8 billion—slightly lower than the commission’s estimate. These are far outweighed by the benefits of the ICB’s recommendations. Even a relatively modest reduction in the likelihood or impact of future financial crises would yield an incremental economic benefit of £9.5 billion per year. Such is the cost of financial crises to the economy. Since the wholesale arms of non-UK banks would be unaffected by these reforms and the principal recommendations relate to UK retail banking, the competitiveness of the City of London as a location for international banking will not be affected.

We are fixing the banking system to protect taxpayers in the future. But we also need to clear up the mistakes of the past. I have already mentioned Northern Rock and Lloyds but the biggest call on the taxpayer was the bailout of RBS. The FSA’s recent report was a damning indictment of all that went wrong in this crisis. Those responsible are clearly identified in it. We need to deal with the mess that they created.

Despite promises from the previous Government that taxpayers would profit from the RBS bailout, the Government’s shareholding is now worth around £27 billion less. We are already reforming the regulatory structures that allowed these catastrophic failures to occur. Bonuses are a fraction of what they were four years ago. Early this year we placed a limit of £2,000 on cash bonuses for RBS and Lloyds. We have made it very clear that the bonus pool next year must be lower again and more transparent. We are also clear that at a time like this the Financial Policy Committee’s advice should be followed—that bank earnings should be used to build capital levels, not pay out large bonuses.

RBS itself has also made significant changes since 2008, including reducing the size of its investment bank by half. But I believe RBS needs to go further and the management agrees. We are the largest shareholders. Let me set out our view: RBS has already announced that it will further shift its business strategy towards its personal and SME customers and its corporate banking business which serves UK and international companies. We believe that RBS’s future is as a major UK bank, with the majority of its business in the UK and in personal, SME and corporate banking.

Investment banking will continue to support RBS’s corporate lending business but RBS will make further significant reductions in the investment bank, scaling back riskier activities that are heavy users of capital or funding. RBS should emerge a stronger, safer bank, able to maintain lending to businesses and consumers, and which in time can be returned to full private sector ownership.

The British people are angry about what happened in our banks and angry at the politicians who let it happen. This coalition Government see two parties working together to clear up the mess of the past and to create a banking system that protects taxpayers and serves customers better. Today, we present the most far-reaching changes to banking in our modern history so we can build an economy that works for everyone. I commend this Statement to the House”.

My Lords, that concludes the Statement.

--- Later in debate ---

[Lord Sassoon]

My Lords, I suppose I should be grateful that we got one cheer from the noble Lord, Lord Eatwell, who is a hard man to please. I am sorry that he finds serious flaws in the ICB’s analysis where most other commentators have not found flaws with what is widely recognised as an impressive and important analysis and one that is being looked at well outside the UK for the light that it sheds on continuing issues that other countries have around their banking systems.

I shall take a number of the noble Lord’s many questions. First, he asked about risk weights and the loss-absorbing capacity. The ICB did a detailed analysis of almost 40 banks. Its key chart is picked up in the Government’s document today. Of the 40 banks that suffered significant losses that the ICB looked at, the noble Lord, Lord Eatwell, highlighted the Anglo Irish Bank as the only one where the loss exceeded the 17 per cent—I think he referred to 10 per cent—loss absorbency which the ICB recommends for big banks. As my right honourable friend the Chancellor of the Exchequer made clear, this is not about making sure that no banks will fail but about a combination of things, including loss absorbency, that will make our banking system much more resilient in the face of the range of losses that are likely.

The noble Lord also asked whether the Government have accepted all the ICB’s proposals on the ring-fence. A detailed discussion of ring-fencing issues takes up one chapter, or some 15 pages, of our response today. A number of outstanding technical considerations are clearly set out in the discussion. As I have already said in repeating the Statement, this is the first round of a sequence of consultation and draft legislation, both primary and secondary, to get this right. I make no apology for not having answers to all the very detailed questions at the moment. We are putting out this 70-plus-page document today as the start of the discussion that must go on.

The noble Lord then questioned what activities should be inside and outside the ring-fence. On the question of where the ring-fence is located, he picked up on the adjective “flexible”, which is advisedly used in the Government’s response document. The key driver about what should be inside and outside the ring-fence in the ICB’s analysis is whether it is an essential banking service, the interruption of which would cause great difficulty. For individual and SME deposits and overdrafts it is quite clear that interruption of normal banking activity would cause hardship whereas large corporates and private banking are clearly categories of banking consumer much better able to look after themselves for a period in those circumstances. That is what has determined in principle where the ring-fence should be. On this flexibility, in order to have an efficient banking system, it is quite right that the banks should be able to decide on a one-off basis whether their large corporate activity should be inside or outside the ring-fence so that they can match up their activity on the lending side with the structure of their deposit base.

The noble Lord, Lord Eatwell, then raised questions about the situation of branches of a European bank in this country. It is certainly the case, as he recognises, that branch activity of a European bank would not fall within the provisions of this ring-fence. They cannot and should not do so under the arrangements for the single market. However, in relation to branch activities in this country, the supervisors—the FSA and, in future, the Bank of England—will of course have regard to subsidiarisation in relation to the scale of activities that are carried out through foreign bank branches.

Lastly, the noble Lord asked about implementation and timing. As I have said, both the primary and secondary legislation will be completed in the course of this Parliament. The final part of the proposals in line with the ICB’s timetable—on loss absorbency and with regard to capital—will be in place on the same timescale as the Basle III implementation in 2019, but between now and then we expect to see the ring-fence itself put in place. As I have said in repeating my right honourable friend’s Statement, we will work with the banks on what is judged by the Government to be a practical implementation timetable. That, I emphatically say, will, along with all the rest of it, be a decision for the Government and, where appropriate, for the legislation that will come before Parliament in due course. We have been fast on the case to respond to what has been an enormously detailed report and, as I say, we will get the legislation through in the course of this Parliament.

--- Later in debate ---

[Lord Sassoon]

My Lords, I am grateful to my noble friend for welcoming the Government’s response to the ICB. On his question about timing, I cannot go further than what I said already: that we will bring out a White Paper in the spring, followed by the draft legislation and that we will get all the draft legislation, primary and secondary, through in this Parliament. There is a detailed table in the response document published today of all the ICB recommendations and whether they require legislation or could be put in place by regulatory action. There are other things which are already proceeding, particularly on competition, and there are other matters where regulatory action can take place.

I was grasping to think what my noble friend’s second question was. I can indeed confirm what he said about the Government’s firm intention regarding bonuses for this year.

--- Later in debate ---

[Lord Sassoon]

My Lords, I well recognise the consistency, firmness and clarity with which my noble friend has held his views on separation from very early on in this debate; we discussed it three years ago. However, the Government agree with the ICB that full separation is not the route to go down. I say to him that having independent directors on the boards of the ring-fenced banks will go a long way towards making up for, as he puts it, possible deficiencies of top management and their ability to get around these things. Having independent directors of ring-fenced subsidiaries is a model that has worked well in utility companies. As he says, it is right that the Bank of England will be watching this in its new role of supervising the system.

[Lord McFall of Alcluith]

My Lords, when Sir John Vickers appeared before the Draft Financial Services Bill Joint Committee, it was clear that his report would not solve the “too big to fail” issue. What was required was a good regulatory structure, and no regulator globally succeeded in that.

In the draft Financial Services Bill report there were a number of issues relating to the governance of the Bank of England, and I should like an assurance from the Minister that the Government will take these all-party proposals very seriously. As a previous speaker said, culture is more important than architecture. I think that will be one of the main recommendations of our report.

The Minister mentioned the issue of switching current accounts. Will he accept that the portability of current account numbers is the key? That revolutionised the mobile phone industry. Only with the portability of current account numbers will we see a revolution in switching accounts in the banking industry.

[Lord Sassoon]

My Lords, I can confirm to the noble Lord, Lord McFall of Alcluith, that the Joint Committee’s report, which was published only today, will be taken very seriously on governance and all the other matters that are contained in it. As to switching accounts, I hear what he says about number portability, which is not at all an easy issue, as he well knows. All I would say is that the ability for seven-day switching, including all direct debits, credits and standing orders—which we now have the banks’ agreement will be implemented by September 2013—is a significant advance that will help millions of consumers.

[Lord Higgins]

My Lords, the report by the ICB is very large, comprehensive and detailed. It says that it would be desirable for the Government to express a view on it as soon as possible, which they have done. However, the Statement appears also to include one or two items that—I think I am right in saying—are not in the report. In particular, I understood my noble friend to say that there would be a tightening up of the Basel proposals, or that the Government would propose that. Secondly, he said that there would be depositor preference, which does not appear in the report unless I am mistaken. Will that require primary legislation and, if so, when are we likely to have that? Overall, it seems that we have just had another Statement, which has become available only recently. When will we have an opportunity to debate it? We have not really had any opportunity to comment on it now, since it appeared only a few moments ago.

Finally, on timing, there are two things. I agree very much with my noble friend Lord Lawson about the timing of the legislation. The banks need to know what is in the legislation. We should get that through the House at the earliest possible moment. Saying that we will do it in the course of this Parliament means that it will take far too long. Waiting until 2019 for the overall implementation is absurd. To suppose that there will be no financial crisis that is related to these proposals until 2019 would be the height of optimism. We have to get it through before then.

[Lord Sassoon]

My Lords, on the tightening up of Basel III, as my noble friend puts it, the provisions around loss absorbency of 17 per cent and the bailing provisions are items that go beyond Basel. They are welcomed on a global basis. We now have to make sure that the way in which the EU implements Basel III is not only compatible with Basel III itself but allows the UK to go further for as long as the global community is entirely comfortable with that. Depositor preference requires primary legislation. In relation to primary legislation, discussion of all this and the process, the next major stage will be a White Paper, setting out in greater detail how the remaining important detailed matters will be handled in the draft legislation. The draft legislation will then come. I believe that there will be plenty of opportunity, in a staged way, for noble Lords to consider all the detail.

[Lord Lea of Crondall]

My Lords, is this what one might call the final stage in a number of statements about reform of the banking industry, following what has happened over the past four years? Is the Minister aware of the concern about this up and down the country? I welcome the Statement, with the sort of qualifications given by my noble friend Lord Eatwell.

There is great concern about accounting standards which led to false accounting regarding the state of many banks. While no one is suggesting that any senior banker should be shredded in front of his family, the fact is that there seems to be a total black hole as regards anyone taking any responsibility in the banking industry. Is that not something that still needs to be corrected?

[Lord Sassoon]

My Lords, the report today is a response to the Vickers commission’s work on the structure of banking. I fully accept the noble Lord’s reference to other matters, particularly accounting standards. The committee of this House did some extremely important work in that area. I do not pretend that we are solving everything today and accounting is another issue that I am sure Members of this House will not forget as we go forward.

[Lord Stewartby]

My Lords, will my noble friend say something about supervision and where it fits into this very complicated arrangement of new committees and authorities? The report of the Joint Committee, which was published only today, states that it is planned that microprudential regulation will be done through a new subsidiary body called the prudential regulatory authority. However, regulation is not a micro-activity. Supervision is a micro-activity, but regulation is not. If microprudential regulation is meant to refer to supervision, it would be better to say so and not to put it in that form of verbiage.

[Lord Sassoon]

My Lords, I am sure that there will be other occasions and places in which to discuss the Joint Committee’s important report on the Bill, so I do not want to get dragged too far into doing that. I recognise that, even for those of us who have been involved in the banking industry, confusing “regulation” and “supervision” can sometimes be a trap into which it is easy to fall. Supervision will be the responsibility of the Bank of England in the new structure, if the Bill is passed by Parliament.

[Lord Newton of Braintree]

My Lords, I have two quick questions. First, is there any estimate or expectation of a rise in the costs of retail banking as a result of these proposals? It seems to me that that must be a possibility. Secondly—I declare an interest as a 55-year long customer of Lloyds TSB bank in Harwich, Essex—given that the Minister has welcomed the sale of some Lloyds branches to the Co-op Bank, what will happen if we immediately use our switching rights to go back to another branch of Lloyds Bank if we are sold like a commodity?

[Lord Sassoon]

My Lords, the ICB estimates that the increased cost of borrowing could be of the order of 0.09 per cent to 0.16 per cent as a result of implementing these proposals. That is a very modest additional cost which is well within the smallest ever incremental change to the bank rate introduced by the Bank of England. I will not speculate about what might happen to bank customers where they are sold from one bank to another, but I believe that it is completely right that we should make it easier in all circumstances for bank customers to be able to switch their accounts. That is what the banking system is going to deliver.

[Lord Hamilton of Epsom]

My Lords, like my noble friend Lord Lawson, I shall sleep at night only when retail banks and investment banks have separate shareholders. Will the noble Lord answer my noble friend’s point about the ingenuity of those who run banks to find a way round the ring-fencing, thereby enabling retail banks to continue to back investment banks?

[Lord Sassoon]

My Lords, as I have said, the way that the governance will work is that the ring-fenced subsidiary will have to have independent directors in the way that, for example, regulated utilities have to have directors who are independent of the holding company’s board. That is the principal protection in these circumstances.

[Lord Hollick]

My Lords, I welcome the Government’s response. It is an important step, but only a first step, to what surely must be full separation of the banks. That is the logic of the Vickers report and is, I should point out, the logic of the Government’s response, which states:

“The Government believes that the ring-fenced bank should not be dependent on the financial health of the rest of its corporate group for its solvency or liquidity”.

If that is to be achieved, the treasury function, which is right at the heart of banking, would need to be split and there would need to be two treasury functions. Similarly, loan capital would have to be provided separately from the high street bank. That would simply leave the question that my noble friend Lord Eatwell raised: what happens to the capital in the event that the holding company goes under? Surely, the logic of this is to separate these two completely. Can the Minister confirm that banks would be required to separate the treasury function, whereby loan capital will have to be raised separately for the high street bank?

[Lord Sassoon]

First, I do not accept that the Government’s logic drives towards complete separation any more than the ICB itself argued for it. The ICB and the Government believe that there are efficiency and other benefits in allowing banks to keep the two parts of the business together under one holding company. However, the principal protection in the areas to which the noble Lord refers is that there will be limits on the exposures of the ring-fenced bank to other parts of the group. That is what, in particular, will deal with the noble Lord’s concerns.

[Lord MacGregor of Pulham Market]

My Lords, in the recent hearings of the Select Committee on Economic Affairs, the banks accepted that the Vickers report is more or less a done deal but argued that the costs would be considerably higher than those that Vickers calculated and the costs that the Government have estimated today. If in the forthcoming negotiations there is a major dispute about costs and their possible effect on customers, will the Government keep reminding the banks that there is still more to be done to contain costs on bonuses, salaries and other payments?

[Lord Sassoon]

I agree with my noble friend’s sentiments on costs and I have stressed in the Statement that the position of the Bank of England, at this time in particular, is that banks should be using profits they generate to rebuild their balance sheets rather than pay out bonuses. However, to differ a little from my noble friend, I do not see this as representing any negotiation with banks over the costs. The ICB carried out an analysis, and the Treasury made a separate analysis that has resulted in different figures. We have used the input of the banks and their modelling in order to arrive at those numbers. We have come up with numbers for the costs that were higher in some areas than those originally estimated by the ICB. They are very much based on a lot of numbers that the banks themselves have modelled. I do not see a negotiation to be had in that area.

Open-Ended Investment Companies (Amendment) Regulations 2011

Lord Sassoon Excerpts

Monday 19th December 2011 Lords Chamber

Moved By

[Lord Sassoon]

That the draft regulations laid before the House on 21 November be approved.

Relevant document: 34th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 12 December.

Motion agreed.

Economy: Deficit Reduction

Lord Sassoon Excerpts

Thursday 15th December 2011 Lords Chamber

[Lord Barnett]

To ask Her Majesty’s Government what evidence they have that their deficit reduction plan is working.

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

My Lords, tackling the deficit is necessary to supporting sustainable economic growth. The Government’s consolidation plan has restored confidence in the UK’s fiscal position, preserving our AAA credit rating and leading Standard & Poor’s to move the UK’s rating from negative outlook to stable. In May 2010, the spread of UK gilts to German bunds was in line with Italy and Spain; since then, UK rates have fallen by over 150 basis points but Italian and Spanish bond yields have risen by over 100 basis points.

[Lord Barnett]

In the midst of all that, the noble Lord forgot to answer the Question. As I am sure he will recall, the Prime Minister said that the deficit would be eliminated in 2015 and his own Office for Budget Responsibility has said that it will be 2017. Why was he not willing to say that? Is there something wrong in telling the truth that he has to give me a long, wordy Answer? However, it is even worse than that—and some very respected forecasters are forecasting that it could be even worse. Would he not accept that if the circumstances change, through no particular fault of the Government, changes in policy should take place? For example, we might do something to stop the unemployment figures announced yesterday being even worse. What does he have in mind in the event of some kind of major change in circumstances?

[Lord Sassoon]

My Lords, the Government are on track to meet the fiscal mandate which was set by my right honourable friend the Chancellor. The mandate requires the Government to bring the cyclically adjusted current balance into balance at the end of five years. The Opposition may not like it but that fiscal rule means that there is an ability for us to be flexible in the face of very difficult economic conditions; it means that we can preserve the infrastructure expenditure, which is so important, to underpin long-term growth; and it means that the automatic stabilisers can operate. If the noble Lord, Lord Barnett, is suggesting that we should abandon all of that, I wonder what his policy would be.

[Lord Blackwell]

My Lords, does my noble friend accept that the primary reason for our current deficit is the fact that public expenditure as a percentage of GDP grew from less than 40 per cent to close to 50 per cent in the first 10 years of this century? Will he confirm that the Government’s primary focus is therefore to get public expenditure back down below 40 per cent, where it can be supported by an affordable level of taxes?

[Lord Sassoon]

I certainly agree with my noble friend that we inherited the worst peacetime deficit situation that this Government have ever known, and that getting the budget back into balance is indeed the priority of this Government.

[Baroness Kramer]

My Lords, I am sure that the Minister will agree that access to bank credit for smaller microbusinesses will be essential for economic growth and elimination of the deficit. Will the Government therefore take a look at the extraordinary barriers to entry of new potential banks into exactly this field, the FSA having now become so utterly risk-averse that it has lost any sense of balance?

[Lord Sassoon]

My Lords, it is very important that credit flows to SMEs, which is why we announced a package of £21 billion at the autumn Statement, and it could go higher if the demand is there. I take my noble friend’s point about the importance of diversity and new entrants into our banking system. That is something that both the FSA and the Government keep under review.

[Lord McFall of Alcluith]

My Lords, given that the stability message has failed, is it not time now for a growth strategy? Given the appalling figures on unemployment for both young people and others in the country, is there not hope to be given to people? Given that the Government can borrow, with the low interest rates, at a rate less than the private sector, is it not time to invest in infrastructure projects so that we come out of this recession and not make it a depression?

[Lord Sassoon]

My Lords, that is exactly what we are doing: we are investing in infrastructure projects. Indeed, as was announced at the autumn Statement, we are targeting an additional £20 billion of private sector money coming into infrastructure from long-term UK investors. As to the policy mix, I can only refer back to the IMF’s latest assessment which said that the case for relatively tight fiscal and relatively loose monetary policy is strong.

[The Lord Bishop of Blackburn]

My Lords, surely the question for most ordinary people not schooled in economics is whether the Government’s programme for rapid deficit reduction is actually a price worth paying. Could the Minister tell us how the Government propose to quantify the cost of deficit reduction in terms of the impact on people and communities?

[Lord Sassoon]

The right reverend Prelate is absolutely right. The end objective here is not a balanced budget but sustainable growth, to bring down unemployment and increase employment in this economy. So what is really important, whether it is infrastructure spend, the fundamental reform of the welfare system or our education system, is that in the end we get a better balanced economy with more sustainable employment over the long term.

[Lord Eatwell]

My Lords, the Minister has made it clear to the House today that the Government’s deficit reduction strategy is based on sand. It is always five years ahead. He has told us today that the target is to balance the budget by 2017; next year it will be 2018, the year after that 2019 and, like old age, it will simply retreat before us. Given that the Government’s strategy has been pushed off track and is failing to meet its deficit targets, why in the autumn Statement did they not cut expenditure more and raise taxes more to put the deficit reduction strategy back on track?

[Lord Sassoon]

My Lords, first, the deficit reduction strategy, as the OBR confirms, is absolutely on track. If the noble Lord is suggesting that we should cut expenditure and raise taxes, is that the policy of his party?

[Lord Dykes]

My Lords, did the Minister notice that the credit rating agencies and the American-dominated $16 trillion debt system gave AAA ratings to all the hedge funds and banks that collapsed in the United States and elsewhere in the world just about a week or a few days before they actually did collapse. Are they really so reliable?

[Lord Sassoon]

My Lords, the track record of the credit rating agencies as far as sovereign debt is concerned speaks for itself. It is quite different to the mistakes that they have made in other sectors.

Financial Restrictions (Iran) Order 2011

Lord Sassoon Excerpts

Wednesday 14th December 2011 Lords Chamber

Moved By

[Lord Sassoon]

That the order laid before the House on 21 November be approved.

Relevant document: 34th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 12 December.

Motion agreed.

Open-Ended Investment Companies (Amendment) Regulations 2011

Lord Sassoon Excerpts

Monday 12th December 2011 Grand Committee

Moved By

[Lord Sassoon]

That the Grand Committee do report to the House that it has considered the Open-Ended Investment Companies (Amendment) Regulations 2011.

Relevant documents: 34th Report from the Joint Committee on Statutory Instruments.

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

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

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

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

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

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

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

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

[Lord Newby]

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

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

[Lord Tunnicliffe]

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

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

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

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

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

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

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

[Lord Sassoon]

My Lords, again those questions were short, sharp and to the point. Let me go straight to trying to answer them.

First, my noble friend Lord Newby asked about the interaction with Europe and what else is coming from Europe. The main thing that I see is an up-side opportunity in the link to the UCITS directive and the push to make sure that UK and other fund managers are able to sell products safely on a pan-European basis. I am not aware of any particular threats, but I am aware that, given the ongoing work that is looking again at the UCITS directive, there is further opportunity to complete the single market. UCITS 4 has just been implemented, and the UCITS 5 proposals that are expected from the Commission in 2012 are likely to include consumer protection measures on, for example, the use of depositories, so these regulations are part of a piece. As my noble friend said, these regulations are certainly pro-competitive but, as I touched on in my opening remarks, they also act to protect investors—they work for both the provider and the user of these products. Just to be absolutely clear, the regulations are being introduced not as a reaction to some disaster or something having gone wrong but because there is an untidiness and lack of clarity that we should tidy up ahead of the game.

I will answer the questions of the noble Lord, Lord Tunnicliffe. First, on new Regulation 11A(4), this refers to assets and liabilities which belong to the sub-funds; they do not belong to the umbrella company but have been billed to it for practical or legal reasons. They then have to be pushed down to the sub-funds. For example, there are certain generic costs such as Companies House fees and VAT for which the umbrella company, as the only entity with legal personality, is responsible but then needs to attribute to the sub-funds. It is put in there not as a means of driving a coach and horses through; it is there to deal with appropriate liabilities in particular, which have to be allocated down below the umbrella.

There was then a question about the transition period. The Government certainly recognise the importance of clarity for consumers. This is one reason why the protected cell regime will become mandatory after the transition period. In that transition period, the FSA rules require OEICs that are unprotected to make this clear in their prospectuses. Once an OEIC has converted, it will declare that it is protected. The FSA considers this approach to be proportionate and appropriate, given the low risks involved.

Lastly, there was a question about the impact assessment and the comment on page 10 about the UK regime being “viewed as less favourable”. Incidentally, this was not an impact assessment that I signed off myself so I had the pleasure of reading it afterwards. I am sure that when the noble Lord, Lord Tunnicliffe, mentioned junior people signing it off, he was referring not to my honourable friend the Financial Secretary or the officials who draft these things but to the authorship. The authorship is every bit as expert as is needed. It is great, anyway, to know that some people read the fine print. This is a long preamble to answering the noble Lord’s question.

The other major reasons why people might see the UK regime as less favourable concern perceived tax treatment of funds. The Government are taking steps to address this. For example, only last week the Government announced that they intend to improve the operation of the tax regime for property-authorised investment funds. This will mean that under some circumstances, investors may exchange their units in a dedicated PAIF feeder fund for units in the PAIFs, and vice versa, without incurring a charge to tax on capital gains at the time of exchange. This was a specific response to industry representations and will improve the competitiveness of the UK funds regime. We are responsive to other issues out there, which are generally around taxation.

I hope that that deals with the Committee’s questions. This is legislation that strengthens investor protection in a way that brings considerable benefits to the competitiveness of the UK as a domicile of funds. I therefore commend these regulations to the Committee.

Motion agreed.