EU: Credit Rating Agencies

Lord Sassoon Excerpts

Monday 3rd October 2011 Lords Chamber

[Lord Foulkes of Cumnock]

To ask Her Majesty’s Government what discussions they have had with other European Union Governments about the role of private credit rating agencies.

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

My Lords, the Government have discussed the role of private credit rating agencies with other European Union Governments in numerous meetings. These include the Financial Services Committee, the Economic and Financial Committee and ECOFIN, attended by Economics and Finance Ministers. The Government have also discussed this issue in depth with your Lordships’ EU Sub-Committee on Economic and Financial Affairs, and International Trade during its recent inquiry on sovereign ratings.

[Lord Foulkes of Cumnock]

My Lords, I am grateful to the Minister for a full reply, but does he recall that these credit rating agencies actually promoted the sub-prime mortgages which precipitated the crisis? They have been accused of a conflict of interest as they vary the ratings of both banks and countries, which exacerbates the crisis and can advantage the owners of these agencies? I asked in a previous Question whether the Minister would consider promoting an intergovernmental agency to take on this role. If he is not prepared to do that for ideological reasons, will he, with his EU colleagues, at least ask the competition authorities within the European Union to see what they can do to curb the excesses of this cartel and break up what has become an insidious oligopoly?

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[Lord Sassoon]

My Lords, there are quite a number of points wrapped up in that question. The first point to recognise is that the credit rating agencies plainly got it wrong when it came to the structured products which were at the heart of the financial crisis. On the other hand, their record in other respects during the financial crisis, and particularly the sovereign debt crisis, has been reasonably good, and all the evidence shows that. Having said that, I completely agree with the noble Lord that competition is very much what the Government would like to see, but the way to introduce competition is absolutely not to have any publicly funded or publicly sponsored credit rating agency. Indeed, Mr Barroso himself recognised this recently by opposing any suggestion of a European publicly funded agency. I agree with the noble Lord that we want to see competition, but not through setting up a government sponsored agency.

[Lord Bilimoria]

My Lords, to follow on from the noble Lord, Lord Foulkes, surely the Minister agrees that these credit rating agencies were instrumental in causing the credit crunch and financial crisis by rating what ended up being worse than junk bond instruments as triple-A? They were allowed to get away with being funded by the people they were reporting on. Is there moral hazard with the banks? This is moral hypocrisy. Is enough being done to address it?

[Lord Sassoon]

My Lords, I have already said that the credit rating agencies got it completely wrong when it came to the rating of structured products. As a result of that, there have already been two regulations, so-called CRA1 and CRA2, out of Europe since the crisis and a third set of proposals is expected in November this year. The first two sets of proposals address the matters which the noble Lord raises. There is now a system of registration. There are new regulations around conflicts and how to handle them, as well as around transparency and disclosure. I agree that the issues he raises are serious, but they are very much the ones which the European regulations have addressed.

[Lord Hamilton of Epsom]

My Lords, does my noble friend accept that there are great shortcomings among the credit agencies when it comes to derivatives and so forth, but that that does not extend to their rating of sovereign debt? Does he further accept that when Standard and Poor’s downgraded American debt, that debt then became cheaper and bonds went up?

[Lord Sassoon]

I agree with my noble friend. I know that he was a member of your Lordships’ sub-committee which produced an excellent report published in July. Among its conclusions is that:

“The criticism that credit rating agencies precipitated the euro area crisis is largely unjustified; their downgrades merely reflected the seriousness of the problems that some Member States are currently facing”.

[Lord Eatwell]

My Lords, the noble Lord, Lord Sassoon, has made it clear on several occasions that appeasement of the private credit rating agencies is a central plank of government policy. What reconsideration of that policy have the Government undertaken, given the point just raised by the noble Lord, Lord Hamilton? When the United States was downgraded, the rate of interest in the US did not rise, which the noble Lord, Lord Sassoon, on several occasions predicted would be the relationship between credit rating and interest rates; quite the contrary, interest rates in the United States fell.

[Lord Sassoon]

If the noble Lord means by appeasement what the Government want to do in terms of reducing the over-reliance of the market on credit rating agencies, getting away from being hardwired into arrangements that drive the debt markets, and what we want to do through increasing transparency and disclosure by the credit rating agencies, increasing competition and seeing more new entrants into the market, that is what I mean by appeasement, but I do not think it is what he means by it. We want a much more healthy market. We are going about it through a series of practical suggestions in discussion with our European partners in advance of the next proposals from Brussels.

Sovereign Grant Bill

Lord Sassoon Excerpts

Monday 3rd October 2011 Lords Chamber

Moved by

[Lord Sassoon]

That the Bill be read a second time.

[Lord Shutt of Greetland]

My Lords, I have it in command from His Royal Highness the Prince of Wales to acquaint the House that his Royal Highness, having been informed of the purport of the Sovereign Grant Bill, has consented to place his prerogative and interest, so far as they are affected by the Bill, at the disposal of Parliament for the purposes of the Bill.

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

My Lords, I am pleased to have the opportunity to introduce this important Bill and I look forward to our debate. It was clear from debates in another place that there is wide recognition of Her Majesty the Queen’s long and conscientious contribution to public life. It is vital that we continue to provide the Queen and the Royal Household with the finances to perform her official duties with dignity, but it is equally important to take this opportunity to modernise the current system for supporting the Royal Household.

The sovereign grant will replace the current three-grant system with a single consolidated payment. It will provide the household with flexibility to prioritise its use of resources in the most effective way. The level of the grant will usually be equivalent to 15 per cent of the profits made by the Crown Estate in the financial year two years earlier. That is, profits in the current financial year, 2011-12, will determine the level of the sovereign grant in 2013-14, the first year the new calculation method will be used. Of course, we cannot say with certainty what that profit will be, but the Crown Estate has indicated that it expects profits to be broadly the same as last year. That would mean a 2013-14 sovereign grant of about £34 million. That is in line with Royal Household expenditure in the five years between 2006 and 2010, which averaged about £34 million per year. However, that can be only a projection, so there are safeguards to ensure that the sovereign grant can be kept on a sustainable path.

First, the Bill would establish a sovereign reserve fund. Any unspent sovereign grant will be paid into the sovereign reserve at the end of the year, and could then be called upon in a subsequent year to cover a shortfall. Importantly, there will be a target limit on that reserve to avoid it rising above about half of the total expenditure in that year. If the sovereign reserve were to exceed that level, the royal trustees could intervene to reduce the sovereign grant to an appropriate level.

Secondly, the Bill provides for regular reviews to determine whether the percentage used in the formula, initially 15 per cent, remains appropriate. My right honourable friend the Chancellor of the Exchequer has already accepted the principle of some of the Opposition’s amendments on this matter. In response to those, the Bill now provides for the first review to happen in 2016 rather than 2019, as previously envisaged, and reviews will take place every five years thereafter instead of every seven. Any increase in the formula would require agreement from Parliament by affirmative orders.

Thirdly, there will be a cash underpin that will go some way to protect the monarch from dips in the profit of the Crown Estate. It is important to note that the royal trustees may override this underpin should there be sufficient funds in the reserve.

Because the sovereign grant is being brought into the Treasury estimate, it will be treated like other central government bodies. The Treasury will apply in-year controls on public expenditure to avoid waste, seek value for money and prohibit spending ahead of need. At the same time, we are improving accountability to Parliament for the spending of public money. From 2012, the National Audit Office will have full access and will become the statutory auditor for all the Royal Household’s use of the sovereign grant and the sovereign reserve. This is a significant step that should be welcomed.

The Bill is also an opportunity to modernise other aspects of current legislation. For example, under current arrangements, only a Duke of Cornwall receives financial support from the Duchy of Cornwall. The Bill will enable the Treasury to provide a grant to heirs to the throne who are not the Duke of Cornwall, to ensure that they can be supported to similar effect. A significant result of this modernisation is that, in effect, it enables female heirs to benefit from the Duchy of Cornwall.

In addition, the Bill repeals a number of parliamentary annuities that are currently payable to other members of the Royal Family to relieve expenditure incurred in connection with their official duties. These annuities have for many years been reimbursed on a voluntary basis to the Exchequer by Her Majesty from her Privy Purse. The Bill puts an end to this anachronism. Noble Lords will be aware that Her Majesty intends to continue to provide for these annuitants from her Privy Purse. Those arrangements were set out in a letter from Sir Alan Reid, Keeper of Her Majesty’s Privy Purse, to my right honourable friend the Chancellor of the Exchequer, which was placed in the Library on 30 June. There is no change to the parliamentary annuity paid to the Duke of Edinburgh, which will continue to be payable from the Consolidated Fund. I am sure that the House will welcome this simplification.

The Sovereign Grant Bill provides for a system of royal support that is modern, efficient and accountable. I beg to move.

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[Lord Sassoon]

My Lords, I thank all noble Lords who have contributed to an interesting debate this afternoon. I am particularly grateful to the noble Baroness, Lady Royall of Blaisdon, for her confirmation of the Opposition’s support for the Bill. Any time that she would like to oppose me on further Treasury Bills, she is very welcome. She does not need to apologise or explain.

I am also grateful for the support from the experts on what I will now come to think of as the Household Bench. I knew of the concept and of the existence of the Household box at Ascot; I had not realised that there was a Household Bench in the Lords. Every time here I learn something and that is what I have learned this afternoon.

More seriously, this is an important Bill. Her Majesty the Queen has provided exemplary service to this country throughout her reign. The Queen and other members of the Royal Family will continue to play a vital role in representing and promoting the UK and the Commonwealth. I am sure that we all particularly look forward to the Diamond Jubilee celebrations next year. It is only right that we provide the Queen and the Royal Household with the sufficient support to continue these services to the country and do so in a way that provides greater transparency, accountability and value for the taxpayer. As the noble Lord, Lord Luce, pointed out, the expenditure forming the sovereign grant is only equivalent to some 50 pence per person per year, a remarkably low price to pay for the Royal Family’s profound contribution to public life.

Let me respond to some of the points that have been made in the debate. First, on the numbers themselves, there were questions from the noble Baroness, Lady Royall, and the noble Lord, Lord Luce, about the projections. Let me be clear about the numbers: the sovereign grant itself in 2011-12 is £30 million. It will rise to £31 million next year because of the one-off special bonus of £1 million for the Queen’s Diamond Jubilee. In 2013-14 and 2014-15 it depends on the profits of the Crown Estate but the numbers are forecast or projected to be £34 million and then £35 million. As the noble Lord, Lord Luce, pointed out, in real terms this represents, in 2010-11 prices, a decline in expenditure from £34.9 million in 2011-12 to £31.5 million in 2014-15. These projections do not run away in any sense at all.

The noble Baroness quoted from something that I think the Crown Estate said about profits rising exponentially. It is important to realise that that just applies to the renewable profits, which themselves make up only a very small percentage of the Crown Estate. It was not a reference to the profits as a whole. My noble friend Lord Newby also referred to offshore wind—and rightly said that that is a question for another day. There are of course lots of questions about the way that the offshore wind market will develop in future years because it is a very new market.

There were a number of questions and comments about the review of the level of income, both within the year and from one year to the next. Without repeating all that I said in opening, it is perhaps worth stressing that in-year, normal Treasury controls on public expenditure will apply in future. The accounting officer of the Royal Household, the Keeper of the Privy Purse, will be guided by the key publication, Managing Public Money, which among other things prohibits spending ahead of need and counsels against waste and extravagance. I think a proper balance will be struck between my noble friend Lord Newby’s encouragement to put in place proper repairs and a normal regard for control of public expenditure.

In relation to the basic link to the Crown Estate, I am sorry that the overall package gets only a nine out of 10 rating. However, I take it that a nine out of 10 rating from a former Permanent Secretary to the Treasury is about as good as it gets. The noble Lord, Lord Turnbull, is nodding, so I am relieved about that. The noble Lord, Lord Janvrin, really answered the point as well as I could in referring to the historical appropriateness of the link to the Crown Estate as well as the practical basis for a long-term settlement, which it gives.

I hope that that deals briefly with the main points that have been raised. The Bill will, in summary, put funding for the Royal Household on a sustainable footing and provide for it to be fully accountable to Parliament and to the public. These are necessary reforms, and I ask the House to give the Bill a Second Reading.

Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time and passed.

Independent Commission on Banking

Lord Sassoon Excerpts

Monday 12th September 2011 Lords Chamber

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

My Lords, I shall now repeat a Statement that has been made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:

“Mr Speaker, I should like to make a Statement on the final report of the Independent Commission on Banking. The report is an impressive piece of work—broad in scope, incisive in its analysis and clear in its recommendations. The commission has done what we asked it to do. It has come up with an answer to the question of how Britain can be the home of successful international banks that lend to families and businesses without exposing British taxpayers to the massive costs of those banks failing. Frankly, it is a question that should have been asked and answered a decade ago.

We should all thank Sir John Vickers and the other members of the commission—Clare Spottiswoode, Martin Taylor, Bill Winters and Martin Wolf—for a job well done. But this commission and this report have not come about by accident. It was set up by this coalition Government to learn the lessons of what went so catastrophically wrong: a decade long debt-fuelled boom that ended in a dramatic financial crisis, a deep recession and a debt overhang that is still holding back our economy; a regulatory system that totally failed to spot enormous imbalances building up and proved incapable of dealing with the crisis when it first broke; and, most importantly in the context of this report, huge global banks that turned out to be “too big to fail”, so that taxpayers were called upon for many billions of pounds in order to prevent a financial meltdown. We still do not know, and may not know for many years, how much of that money will ever be recovered, despite irresponsible promises made at the time that not a penny would be lost.

We are fundamentally changing the system of regulation and tackling the debts but this bailout for banks is the element of the crisis that has, justifiably, caused the most anger. It is an affront both to fairness and to the very principles of a market economy. It is not available to any other sector of the economy, and nor should it be. It breaks the principle that those who take risks should face the consequences of their actions and, as a result, it played an important role in encouraging the excessive risk taking that caused this crisis.

Of course, taxpayer bailouts did not only happen in this country. An international regulatory response to the crisis is now emerging, with the new Basel rules and the anticipated new additional requirements for systemic banks, but here in Britain we cannot rely only on the international reform process to make our banking system safe. The scale of the challenge we face and the risk for our taxpayers is on a different scale from most other countries.

The balance sheet of our banking system is close to 500 per cent of our GDP, compared to just over 100 per cent in the US and around 300 per cent in Germany and France. Only Iceland, Ireland and Switzerland had larger banking systems relative to their GDP, and they have now all taken action that goes well beyond new international standards. As the report says,

‘part of the challenge for reform is to reconcile the UK’s position as an international financial centre with stable banking’.

This is what I have called ‘the British dilemma’—how to remain a successful global centre of finance without asking taxpayers to bear unacceptable risks or put the broader economy at risk. We set up the Banking Commission to help us solve the British dilemma. Let me set out its recommendations and how we propose to respond.

The first proposal is the introduction of a ring-fence around retail banking. The Government have welcomed this recommendation in principle. As the report says,

‘the objective of such a ring-fence would be to isolate those banking activities where continuous provision of service is vital to the economy and to a bank’s customers’.

In other words, the provision of key domestic retail banking services, such as taking deposits from individuals and small businesses or providing them with overdrafts. The central benefit of a ring-fence is not to end large universal banking groups but to make them more easily resolvable in a crisis. The costs should fall on shareholders and the wholesale debt holders, not small depositors or taxpayers. A successful ring-fence will be able to ensure the continuation of vital payment services that are crucial to preventing an economic collapse. This directly addresses the perceived implicit taxpayer guarantee which is at the heart of the too-big-to-fail problem.

The commission has also proposed a more flexible ring-fence. In terms of its scope, it says that,

‘domestic retail banking services should be inside the ring fence, global wholesale/investment banking should be outside, and the provision of straightforward banking services to large domestic non-financial companies can be in or out’.

Many will see this as sensible and it will reduce inefficiencies resulting from any mismatch between customer deposits and business lending within an individual bank.

On the strength—or height, if you like—of the ring-fence, it recommends that the retail subsidiary should have what it calls ‘economic independence’. In other words, it should meet regulatory requirements on a stand-alone basis and its relationships with other parts of the group should be arm’s length and regulated in the same way as relationships with third parties. A great deal of detailed work will now be required to see how that principle can be put into practice.

Secondly, the commission has also made important recommendations to ensure that banks have bigger cushions to withstand losses. These are that the large retail ring-fenced banks should have equity capital of at least 10 per cent. It also recommends that retail and other activities of large UK banking groups should have primary loss-absorbing capacity of at least 17 per cent to 20 per cent, including long-term debt that can be written off, so that, unlike last time, both shareholders and bondholders bear losses, not the taxpayer. Within this, it recommends some regulatory discretion about the composition of this loss-absorbing capacity. Again, many will see that as sensible.

Thirdly, the commission recommends the introduction of depositor preference. I repeat again that the Financial Services Compensation Scheme covers 100 per cent of eligible deposits up to the new European limit of €100,000. The depositor preference proposals would bolster this scheme by ensuring that other bank creditors are subject to losses first when a bank goes bust, minimising the cost to the FSCS and ultimately to the taxpayer.

The fourth set of recommendations relates to competition in the banking sector. They have not got as much attention as the other recommendations, but they are as important to families and businesses. I agree with the commission that the best way to ensure a reliable and affordable supply of lending to our families and businesses is through competition. The collapse of banks such as Bradford & Bingley and the merger of Lloyds and HBOS, welcomed by the previous Government, mean that there is too little competition and switching bank accounts remains difficult. I welcome the recommendations to change this. On the divestment of the Lloyds branches, the commission has said that the key test should be the emergence of a strong and effective new challenger bank. I agree that that would be very much in our country’s interest.

Those are the recommendations. Let me now turn to the implications for the wider economy, the implications for Britain as a global financial centre and the timetable for the Government’s response. The report is clear that the right solution, implemented properly and to the right timetable, will help our economy, not hinder it. Let us remember that the mistakes made by poorly regulated banks ended up costing the economy many many billions of pounds. The commission notes that some of its recommendations could reduce the profitability of some banks’ investment banking operations. That is largely because we would be removing the subsidy that comes from any perceived implicit taxpayer guarantee. We should not confuse the interests of bank shareholders with those of British taxpayers. It is also critical that reforms of this kind do not lead to a worsening of credit conditions in the economy. Indeed, Vickers says:

‘Banks with more robust capital, together with the creation of the ring-fence, would provide a secure and stable framework for the supply of credit to businesses and households in the UK economy’.

Indeed, the commission believes that its proposals could help to rebuild the culture of relationship banking that has been so sadly lost over the past decade and would help banks understand the credit needs of their customers better.

Let me turn to the UK’s role as a global centre for finance and banking. I will be very clear. This Government want Britain and the City of London to be the pre-eminent global centre for banking and finance. We want universal banks headquartered here, with all the advantages that that brings. The Vickers report explicitly addresses this issue, and for those investment banks with credible recovery plans, it has not recommended higher equity requirements than those agreed at an international level. This would mean that the global investment banking operations of UK banks can continue to be as competitive as any in the world. We will continue as a Government to keep the City as a whole internationally competitive, as was clear last week when we welcomed, with the Chinese Government, the development of the offshore renminbi market in London.

Let me end by explaining to the House how we will now take forward the commission’s report. We welcome the recommendations in principle. They would require far-reaching and complex changes. John Vickers is the first to say that they cannot be delivered overnight. The detailed work will start immediately. We will consult on the costs and benefits of the most appropriate way to implement these changes. We will provide a response by the end of this year, so that there is no uncertainty hanging over the industry.

We will legislate in this Parliament to put the needed changes into law. We will consider which changes can be in the existing Financial Services Bill and which will need a new Bill, and we will discuss these changes with international partners to ensure consistency with international agreements and EU law. We will follow the advice of the independent commission and ensure that any changes to the British banking system are fully completed by 2019. This is a sensible timetable that fits with the international regime. As Vickers himself said this morning,

‘short-termism got us into this mess and we need long-termism to build a more stable system for the future’.

The question of how Britain can be the home of successful, global banks that lend to British families and businesses but do not have to be bailed out by British taxpayers should have been answered a decade ago, but it was not even asked—and that failure means this country is still paying the price for that failure. Billions of pounds have been spent and hundreds of thousands of jobs have been lost as a result. It is this Government who set up the banking commission—not just to ask the questions but to provide the answers. Today represents a decisive moment when we take a step to a new banking system that works for Britain. I commend this Statement to the House”.

My Lords, that concludes the Statement.

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[Lord Sassoon]

My Lords, I was never a boxer, so I have never understood the concept of leading with the chin, but I really think that we have seen the noble Lord, Lord Davies of Oldham, doing exactly that this afternoon. I am pleased that he recognises the importance of this report; but how he has nerve to stand up and tell this Government that we should be addressing the report with urgency, I simply do not know. I do not want to make cheap points this afternoon when there are much more important things to say.

[Noble Lords]

Oh.

[Lord Sassoon]

Well, should I or not? Perhaps I will. This is important because it exemplifies what this Government are doing and what the previous Government did not do. There were 18 months between the collapse of Lehman Brothers and the general election in which work such as that which we commissioned could have been commissioned by the previous Government. There were two and a half years after the appalling events following the collapse of Northern Rock in which the previous Government could have looked at the structure of banking, but they did nothing. There were more than 10 years in which they presided over the debt-fuelled boom that led to this disaster that we are now mopping up. So I really do not think that we need lectures about urgency on the follow-up. We are taking the timetable suggested by the independent commission, and that will be our guide.

I apologise if my droning on with a 2,000-word Statement means that not every sentence or paragraph can be picked up. However, as the noble Lord asked about the use of the existing Financial Services Bill and the international dimension, I remind him that both points are addressed in the same paragraph of my right honourable friend’s Statement, which I will read out again:

“We will consider which changes can be in the existing Financial Services Bill and which will need a new Bill, and we will discuss these changes with international partners to ensure consistency with international agreements and EU law”.

So I completely agree with the noble Lord, Lord Davies of Oldham, on these two points, which is why my right honourable friend has addressed them in his Statement. I look forward to any more constructive thoughts that he and his noble friends may be able to come up with as we go forward discussing these very important matters.

[Lord Newby]

My Lords, on these Benches we welcome the report and the Government’s response to it. We also welcome the degree of urgency with which the noble Lord, Lord Davies of Oldham, wishes the report to be implemented, not least because some of us had to put up with withering scorn from the Labour Benches during the previous Parliament when we suggested exactly the proposals that are now in this report.

The report says that while the full implementation of the proposals might take a number of years, there is much to be gained by moving quickly to set the framework in place so that the banks know what they are up against. The Minister has already mentioned that the Government will look at the extent to which the financial services Bill might be a vehicle for doing that. As we now have a Joint Select Committee on the Bill, of which I have the privilege to be a member under the chairmanship of Peter Lilley MP, would he accept that this offers Parliament a golden opportunity to take evidence quickly on the principal issues that the Vickers report raises and to move with some determination? I am sure that the vast bulk of rule-making that will be required to implement this series of proposals will not need primary legislation but will need FSA regulation or secondary regulation, and that the legislative framework in primary legislation should be relatively short and straightforward.

[Lord Sassoon]

I am very grateful to my noble friend. We will work as hard and as fast as we can now to take forward consideration of the detail. As I have stressed, we have accepted the recommendations of the report in principle, but there is a lot of potential devil in the detail and we need to do a full cost-benefit assessment. Indeed, we need to work through what would be appropriate to introduce into the financial services Bill and what would need a stand-alone Bill. I have no idea how the committee may want to proceed, but it now has the Vickers report in front of it and we will get on with sorting out all these issues as quickly as possible. However, we should not underestimate the amount of work for officials and the amount of consultation needed to get the detail right.

[Lord Barnett]

I welcome the Statement and I note that, in its recommendations, the commission talked about the short-term report being dealt with as soon as possible, although it would take until 2019 to deal with the full action that needs to be taken. I would like to clarify this with the noble Lord. He talked about some of the points and he repeated part of the long Statement about what will happen, but could he clarify how soon he expects the banks to be in a position to do the kind of reform recommended in this report, which is so strongly supported by the Chancellor? Is not the real current danger that, if the eurozone banks collapse, as, regretfully, seems all too likely—recently the Chancellor said that that would not just be disastrous for Europe but for us as well—we could be bailing out banks long before 2019, whether we are in the eurozone or not and we may have to bail some out in the very near future? How would that fit in with the reform in the short term that will enable the actions which are strongly recommended by the report to be carried out?

[Lord Sassoon]

I am grateful to the noble Lord, Lord Barnett, for welcoming the Statement. Clearly, there is a series of different sorts of recommendations in the report. Some of them relate to ring-fencing and the adequacy of capital, where the date of 2019 fits in with the move to implementation of Basel III. So there is a clear logic for making sure that the construct that we are putting in place here is targeted at the same date as the related international recommendations in the same area. On the other hand, of course there are recommendations in areas such as competition, connected, for example, with the ongoing disposal of Lloyds branches, where the timetable is rather different and where the commission, quite rightly, is looking to see action on a shorter timescale. We need to look at the pacing of some of the reforms in relation to 2019, that being the date of Basel III implementation, and others in relation to the individual merits of the case. That is the approach we will take.

[Lord Higgins]

This is certainly a massive and comprehensive report which is rightly welcomed by the Government. I have two questions. First, there is certainly a point of view which says that the right answer is to have complete separation of investment and retail banking. The commission has not come down in favour of that but in favour of ring-fencing. The danger is that there are loopholes in the ring-fence. Could my noble friend say in what circumstances resources might flow from one side of the ring-fence to the other, thereby continuing, albeit perhaps in a more limited form, the dangers which arise if there is a degree of connection between investment and retail banking?

Secondly, as far as timing is concerned, I understand the point my noble friend is making about Basel. However, it has also been suggested that, given the state of the economy, it would be dangerous to implement these changes too quickly, because it would inhibit the continued recovery. Would my noble friend agree that it is right to review that aspect of timing as we go along, and not set in concrete the idea that we should wait until 2019 before going ahead with the ring-fencing proposals?

[Lord Sassoon]

My Lords, I regret that I may fail to satisfy my noble friend Lord Higgins in my answers. On his first point about the design of the ring-fence, and whether there are loopholes, the commission has been quite clear in relation to one or two major structural elements of the ring-fence. It has recommended that discretion should be allowed to the banks as to whether the lending business to large industrial companies should be on one side of it or the other. That will be the first of a number of detailed issues that need to be looked at in the design work. I would not wish to pre-empt that work, other than noting that my noble friend’s question of loopholes and how they might come about will be, I am sure, very much in the minds of those doing the detailed work.

On the speed of implementation, I do think it is important—as it was with the Basel III work, and the European directive that flows with it—that the banking industry, taxpayers and all those who deal with the banks have a clear understanding of what the end position will be. There is a separate question as to what the appropriate implementation timetable will be. I am sure that the commissioners thought very carefully about this when they put forward the date of 2019. I repeat that—as my noble friend will know—it is the same date as the Basel implementation. I am sure they thought about that very hard.

[Lord Forsyth of Drumlean]

My Lords, I draw the House’s attention to my entry on the register as a director of MBNK, which is seeking to establish a new bank.

I congratulate my noble friend and the Chancellor on the way in which they have gripped this difficult subject, by appointing the Vickers commission, which has done an outstanding job. Some of us may not agree with all of the report, but it is a careful and sensible analysis. Some people have argued that this will damage the competitiveness of the City of London, but does my noble friend not agree that the City of London will benefit from having certainty? The fact that the Chancellor has the courage to take this on will help with the process and help our competitiveness.

I suggest that if my noble friend is thinking of giving a Christmas present to the noble Lord, Lord Davies of Oldham, he might buy him a copy of the right honourable Alistair Darling’s memoirs, in which he will find why it is not a good idea to look to the previous Government’s behaviour in this area. May I remind the House that it was the previous Government who gave Sir Fred Goodwin his knighthood for services to banking?

[Lord Sassoon]

I am very grateful to my noble friend Lord Forsyth for welcoming this report. It is a fine piece of work that has been done under a lot of time pressure. The commissioners have developed the analysis very considerably from their interim report, and I share my noble friend’s conclusion that by coming out now with these reforms to strengthen our banking system, we will place our banks and the City of London in an even better position to compete globally, as the Government want them to be able to do.

[Lord Elystan-Morgan]

My Lords, I appreciate that it is wholly necessary that there should be an effective firewall between retail and wholesale banking, and that the detail of that remains to be determined. However, perhaps the Minister will accept that the seriousness of the situation is illustrated in this way. Section 6 of the Theft Act 1968 defines theft as occurring in circumstances where a person uses the property of another as if that property were his to dispose of, irrespective of the rights of the other. In that way, the revelations of 2008 show quite clearly that in many instances there was moral theft, if not actual legal left.

--- Later in debate ---

[Lord Sassoon]

I am certainly no lawyer, so whether there was legal theft I will leave to lawyers to sort out. On the question of moral theft, I look to the Bishops’ Benches for guidance. The noble Lord makes the serious point that these events were deeply shocking and needed the sort of serious response that the Government and the commission have given. That is why we will drive through the recommendations that we accepted in principle today.

[Baroness Ford]

My Lords, I have a slight disagreement with the noble Lord, Lord Higgins. I particularly welcome the flexibility around the ring-fence, which is a very intelligent response to the dilemma of separation that clearly reflects the reality of modern Treasury management. That is greatly to be welcomed. However, given that a huge component of the problems that we have experienced concerns the misallocation and mispricing of risk, and the failure of regulation, will the Minister say whether, in line with the changes that the commission set out today and that Basel III will introduce, the Government have any proposals for further strengthening the regulatory framework in this country? Banking systems in other countries such as Canada did not fail. I declare an interest: I worked for a Canadian bank in that period. One of the distinguishing features of the Canadian system was the strength of regulation. Are there any plans for further strengthening the regulatory framework in this country?

[Lord Sassoon]

I am grateful to the noble Baroness for pointing out the good sense with which the commission addressed the question of the ring-fence. Clearly it has thought about the arguments that have been put over recent months. In respect of the failure of regulation, on which I completely agree with her, the overhaul of the regulatory structure, which is coming forward in the financial services Bill, is very significant. It puts the primary responsibility for looking at the risk in the entire system where it ought to be: that is, with the central bank. That is a fundamental change. The new Financial Policy Committee of the Bank of England is up in effective shadow mode, ahead of the legislation going through. It is able to address—and is addressing—risk issues as we speak, and I am sure that it will take note of whether there is anything further in the report that it ought to pick up on.

[Baroness Kramer]

My Lords, I join others in welcoming the Government’s enthusiastic acceptance of the report, and particularly of ring-fencing, which is much harder to erode than changes in regulation. However, I am sure that the Minister will agree that those who have suffered the most from the failure of the banks and the depth of the economic crisis that followed have been among the most vulnerable and disadvantaged, along with the smallest businesses. Would he be willing, as he looks to introduce a new bank that will provide more high street competition, to encourage banking services that will address the micro and the very small business, and which will reach out to the economically disadvantaged, who currently get a basic bank account offered with ill grace and very few services?

[Lord Sassoon]

I am grateful to my noble friend Lady Kramer for bringing us back to one of the constituencies most affected by the state of our banking system. That is why I welcome the discussion in the report about issues concerning the ability of individuals to switch accounts. There are important recommendations about the Lloyds Bank disposals, which make the point that this is not just a numbers game, of counting the branches that must be disposed of, but about creating another competitor out there. Therefore the report addresses critical aspects of the challenges that she poses, but in addition—whether it is looking at mutual models, credit unions or all the other aspects of a rich and varied banking system—there are significant other channels which the Government continue to address.

[Lord Flight]

My Lords, I draw attention to my entry in the register indicating that I am a director of Metro Bank, one of the new banks.

I would like to make three points while generally welcoming the recommendations. First, I remember over 10 years ago, following what I believed then to be the mistaken collapse of Barings, talking to the then Governor of the Bank of England about changes to the lender-of-last-resort doctrine, which had stood this country’s banking system in very good order for nearly 100 years. It changed by it being said that it was available only to larger banks, walking straight into the moral hazard problem whereby very large banks were of the belief that they could not be allowed to fail, which was the case, and smaller banks were not able—if there were a banking run—to get lender-of-last-resort support. That is why a whole lot of them wound up. It is very important in achieving competition that, broadly, the lender-of-last-resort doctrine is restored to what it was.

Secondly, I am slightly worried that increasing banks’ capital may be brought forward too quickly. I draw noble Lords’ attention to the very convincing writings of Professor Tim Congdon to the effect that if we increase capital requirements very speedily, we will end up shrinking the money supply, which is the last thing we want to do when the country is trying to struggle its way out of recession.

Finally, one banking system, Lebanon’s, escaped all the problems because the governor of the central bank of Lebanon had the wisdom to spot what was coming, to warn the banks and to keep them out of it. There is nothing more important than having a really good central bank governor who actually knows what is going on and blows the whistle in good time.

[Lord Sassoon]

All I can say is that my noble friend Lord Flight makes three important and interesting observations which we need to dwell on as we take all this work forward.

[Baroness Noakes]

I declare my interest, as recorded in the register, in particular as a director of the Royal Bank of Scotland, although my views are and always have been entirely my own.

My noble friend the Minister will be aware that there remain concerns, not least from organisations such as the CBI, about the impact of these proposals on the availability and cost of lending to smaller businesses. There are also concerns about the impact of the proposals on the strength of our financial services industry, which is and will remain a significant contributor to the economy. I therefore welcome the emphasis in my right honourable friend the Chancellor’s statement on cost-benefit analysis being carried out before implementation. Will my noble friend say a little more about when this cost-benefit analysis will be undertaken?

[Lord Sassoon]

I am grateful to my noble friend Lady Noakes. We will get on with all the consideration of the detailed recommendations and the cost-benefit analysis as soon as possible. I cannot be more specific than that, but as my right honourable friend said, it may be that some things can be brought forward for the financial services Bill, which is an indication of the speed with which we will go at this.

Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2011

Lord Sassoon Excerpts

Wednesday 7th September 2011 Grand Committee

Moved By

[Lord De Mauley]

That the Grand Committee do report to the House that it has considered the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2011.

Relevant document: 27th Report from the Joint Committee on Statutory Instruments

[Lord De Mauley]

My Lords, the purpose of this order is to ensure that the regulation of the sale and rent-back market will operate as originally intended and deliver appropriate consumer protections. To set it in context, I hope that your Lordships will allow me to give a little background on the sale and rent-back market.

These schemes allow consumers to sell their property to a public or private sector organisation and then rent it back. This allows a consumer to stay in his or her own home and avoid the distress and expense of repossession. In 2008, the Office of Fair Trading published a study of the market. It found that it was not working well for consumers and recommended that the Treasury should introduce regulation by the Financial Services Authority. This was deemed necessary because the sale and rent-back market suffers from an imbalance in the relationship between those consumers considering taking up a sale and rent-back agreement and those selling the schemes.

Sale and rent-back agreements are extremely complex contracts. The OFT study showed that consumers entering into these agreements are often vulnerable people with low levels of financial understanding. They are often already in debt and believe that their financial situation is out of control. They are unlikely to seek independent financial advice, probably because they do not know where to go. Conversely, the sellers of sale and rent-back agreements are professional salespeople, who in some cases may also play on the emotional aspects of a sale and rent-back agreement—for example, the consumer’s attachment to the family home. This results in two significant impacts on the consumer. First, there is financial loss to the consumer through a distressed sale. Evidence suggests that most sale and rent-back providers pay between 70 per cent and 90 per cent of the market value of the property. Secondly, there is a lack of security over tenure for the consumer, who may believe that they cannot ever be evicted from their home, whereas in reality, many consumers suffer rising rents or, indeed, eviction.

Following the OFT study, an interim system of FSA regulation was introduced in July 2009. This was replaced by a full regime in June 2010. Today’s order amends the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 to make clear that any provider of a sale and rent-back agreement, unless they are closely related to the consumer, will be regarded as doing so by way of business and will therefore need to be FSA-regulated.

Currently, the FSA’s regulation captures only those firms that meet the strict “by way of business” test. That test is intended to include firms who carry out the specified activity as a business arrangement but exclude those who carry it out for other purposes, such as arrangements with immediate family members. However, some providers have misunderstood whether they are entering into a regulated activity, while others, dare I say it, have chosen to interpret the rules such that they are not acting by way of business and thereby have avoided FSA regulation

The order clarifies the position. Everyone who enters into a sale and rent-back agreement, unless they are closely related to the consumer, will be regarded as doing so by way of business and will therefore need to be FSA-regulated. About 80 per cent of sale and rent-back transactions are still taking place outside regulation, despite the intention of the original regime, so the sale and rent-back market continues to generate a high level of consumer concern. In the 12 months from April 2010 to March 2011, citizens advice bureaux received more than 1,000 inquiries about sale and rent-back providers. In March this year, a report by Which? highlighted cases where a number of firms were acting outside FSA regulation. In July this year, there was an investigation by Channel 4’s “Dispatches” into sale and rent-back providers. Citizens Advice, Shelter and Which? have all publicly supported the Government’s work to address this genuine gap in the regulatory architecture and make it clear to providers when they are acting by way of business.

The costs and benefits of the order were set out in the impact assessment. The order will ensure that FSA regulation of sale and rent-back agreements operates as originally intended, when the costs were expected to be incurred at the time of the original legislation. The benefits of the order will be felt by those individuals who sell and rent back in their houses through fairer sale prices and fairer tenancy agreements. The FSA’s regulation of the sale and rent-back market attempts to address those issues through, for example, pre-sales disclosure and rules on terms and conditions of tenancy agreements.

The option for a consumer to avoid repossession and have the choice to enter into a sale and rent-back arrangement, and remain in his home when it is financially viable to do so, is important, but it is equally important that appropriate consumer protection is in place. The order is scheduled for debate in another place next week.

I hope that I have reassured your Lordships that the order merely clarifies the intent of previous efforts to address issues in that market and that the Committee will therefore give its support.

Public Expenditure: Deficit Reduction

Lord Sassoon Excerpts

Tuesday 6th September 2011 Lords Chamber

[Lord Barnett]

To ask Her Majesty’s Government how much public expenditure has changed in the Chancellor of the Exchequer’s deficit reduction plans through the use of the flexibility built into his plans.

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

My Lords, the Government’s fiscal mandate targets a cyclically adjusted aggregate to allow some fiscal flexibility at a time of economic uncertainty and to allow the automatic stabilisers to operate in full. Automatic stabilisers are those features of the tax and spending regime, such as unemployment benefits, that vary with the economic cycle and so act to stabilise the economy. The forecast for total managed expenditure by 2014-15 increased from £737.5 billion in Budget 2010 to £743.6 billion in Budget 2011.

[Lord Barnett]

The noble Lord forgot to mention that he apologised recently for having denied that the Chancellor had said in terms that he had flexibility built into his plan. I assume that he is now admitting, despite all the figures that he has just given us, that that is the case. Therefore, should the Chancellor not be using that flexibility in the current economic circumstances? He said recently:

“The break-up of the euro would be economically disastrous, including for Britain”.

That seems all too likely at the moment. Given the lack of growth in the United States and Europe, is this not a good time to use that flexibility, rather than all that stuff that he does not believe in himself?

[Lord Sassoon]

I do not know to which “he” the noble Lord is referring, whether it is me or my right honourable friend the Chancellor, but we all believe in it and we are sticking to it. However, as I have explained, the cyclically adjusted nature of the mandate which the Chancellor has set means that, in times of economic uncertainty, factors such as varying levels of employment and inflation feed through so that the economy benefits, for example, from increased social security benefits and we do not in some slavish way have to cut back on other expenditure. The flexibility is there for very good reasons and it is operating.

[Lord Renton of Mount Harry]

My Lords, could I ask my noble friend perhaps a rather simpler question? Despite the dreadful headlines in today’s newspapers, to what extent does the Chancellor of the Exchequer feel that he is on course in deficit reduction?

[Lord Sassoon]

My Lords, I remind noble Lords, lest they forget it, that we have introduced an independent Office for Budget Responsibility so that we can no longer keep fiddling the numbers and restating the cycle like the previous Government did. The Office for Budget Responsibility’s latest numbers, produced at the Budget, confirmed that we are on track to meet the Chancellor’s fiscal mandate on the rolling five-year period.

[Lord Howarth of Newport]

My Lords, does the Minister really believe that the automatic stabilisers will do the trick? Is it not a mark of leadership to be able to admit that you have got it wrong? Is it not now time for the Chancellor and the Prime Minister to acknowledge that their strategy of drastically reducing public expenditure cannot enable the UK economy to revive when there is no sign anywhere else on the skyline of demand for what the UK economy is able to offer?

[Lord Sassoon]

I am not quite sure who should admit what they got wrong, but the former Chancellor, Alistair Darling, made a complete mea culpa when he said, “We got it totally wrong, raising national insurance and putting a tax on jobs”. He said that there was no credible economic policy at the last election, which is why Labour lost.

We have introduced a policy that is on track to get the economy growing. It is the underpinning of the economy by a clear fiscal plan on which we can build. The Chancellor and the Prime Minister are working very hard on the growth of the economy, which is founded on the stabilisation of the deficit that we inherited.

[Lord Newby]

My Lords—

--- Later in debate ---

[Lord Sassoon]

To generate growth the Government are, first—in answer to the charge on tax—lowering tax in critical areas, such as corporation tax, by increasing the tax allowances for those starting new businesses through, for example, the EIS scheme. We are insisting on a much cheaper and simpler planning system than the one which has been holding back business investment in this country for the past 50 years. We are also significantly increasing the number of apprenticeships—by 250,000 places compared to the previous Government’s plans over the spending review period. I could go on but we need time for other questions. We are working fundamentally on the growth agenda.

[Lord Newby]

My Lords, does the Minister agree that one of the keys to growth will be increased expenditure on infrastructure? It does not bring growth of itself but in the short term it brings many more jobs. When do the Government intend to bring forward the legislation to introduce the green investment bank, and when does the Minister expect that bank to make its first loans?

[Lord Sassoon]

I completely agree with my noble friend that capital and infrastructure expenditure is one of the keys to growth, which is why we were able in the spending review last year to increase the plans that we inherited—to increase, I say again, the spending plans that we inherited from the previous Government —by up to £2.3 billion a year. That is an additional £8.5 billion on capital expenditure in the review period. I therefore agree with my noble friend. As for the green investment bank, it is on course to start the first phase of operation in April 2012. Legislation will be brought forward as soon as the state aid approvals have been forthcoming from Brussels.

[Lord Davies of Oldham]

My Lords, the Minister referred to the predictions and forecasts of the OBR but those were produced nearly six months ago and forecasted 1.7 per cent growth at that stage. Ever since, everyone else’s predictions have been somewhat lower. In circumstances where the American economy is clearly in difficulty and we have crisis in Europe, are the Government going to continue to pursue a strategy which will take us headlong into recession, with the price being paid by middle England and low-income families if that occurs?

[Lord Sassoon]

It has never been on such a strategy, and therefore there is no question of it continuing on such a strategy.

Living Standards

Lord Sassoon Excerpts

Monday 5th September 2011 Lords Chamber

[Baroness Lister of Burtersett]

My Lords, in the absence of my noble friend Lord Rooker, and at his request, I beg leave to ask the Question standing in his name on the Order Paper.

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

My Lords, the Resolution Foundation report finds that the share of national income going to the bottom half of workers in the form of wages has shrunk over the past 30 years. While this has been a long-term trend in most advanced economies, the Government are committed to the UK having a better educated and more flexible workforce within a more balanced economy and to ensuring fairness, with all individuals rewarded for entering and progressing in work.

[Baroness Lister of Burtersett]

My Lords, I thank the Minister for that Answer and for drawing attention to that key finding. However, the other key finding of the report is that the main reason for the falling proportion of national income going to those on low and middling wages is rising wage inequality, particularly at the top. Will the Minister please advise your Lordships' House what the Government plan to do to reduce wage inequality both before and after tax, particularly at the top end of the wage distribution?

[Lord Sassoon]

My Lords, I declare an interest as a former member of the advisory board of the Resolution Foundation, whose work I very much admire. The report talks about wages before the effects of tax and benefits. Indeed, the noble Baroness is right that about two-thirds of the effect which it identifies results from growing wage inequality. However, it is interesting that the report’s tables point out that, at one extreme, the wage inequality results in those within financial services on the 90th percentile of earnings earning 6.2 times the amount earned by somebody on the 10th percentile, whereas in manufacturing the differential is only 3.3 times and has hardly changed over the past decade. Therefore, we need to see a much better balanced economy; balanced growth is what we want to see. In the previous decade, manufacturing’s contribution to the economy halved and that of financial services increased very significantly. The starting point has to be a more balanced growth in the economy.

[Lord Newby]

My Lords, does the Minister agree that one of the findings of the report is that the increase in taxes, particularly national insurance contributions, among lower income wage earners was a contributory factor to the growing inequality? Does he therefore agree that the decision taken by the Government on the national insurance contribution threshold and the decision to increase the income tax threshold will go some way towards addressing the problem which the report mentions? Does he agree that the Government should proceed quickly to increase the income tax threshold in particular as quickly as possible?

[Lord Sassoon]

Indeed, I agree with the points that my noble friend makes. The Government are working on other initiatives to help address this problem, such as driving through the entire package of tax and welfare reforms, introducing the universal credit from 2013-14 and making it pay to work. It is a terrible state of affairs that everything earned by a lone parent who works part time for 10 hours a week is immediately taken off that person through changes to their tax and benefit. Therefore, the introduction of the universal credit and driving through our reforms to tax and welfare are critical to making inroads into this problem.

[Lord Lea of Crondall]

Does the Minister recall that Mr David Cameron, during the election campaign, expressed regret about growing inequality in this country? Of course, that inequality has now accelerated. Does he not agree that the time has come for remuneration committees, which are mutual admiration societies that have been going higher and higher above the upper quartile, should be subject to a reformed company law structure, with supervisory boards and multi-stakeholders to make sure that these people cannot just go on paying themselves a fortune without any regard to the principle of greater equality?

[Lord Sassoon]

Just to be completely clear, inequality increased under the previous Government. The latest data show inequality coefficients to be flat, but it is too soon to see what the trends are under this Government. However, inequality increased under the previous Government—and that was in a decade when 40 per cent more in real terms was put into working-age benefits and tax credits, so this is a very difficult problem to crack. However, I agree with the noble Lord that it is important that informed and active shareholders make sure that they consider the split of rewards within companies between shareholders and employees—and that is precisely why it is high up the agenda of my right honourable friend the Business Secretary, who is considering proposals as we speak.

[Lord Davies of Oldham]

My Lords, the House will have appreciated the Minister’s customary lucid answers to these questions, but the country will be more interested in the obvious question. How is it that after the banking failure of three years ago banking practices in terms of remuneration are being restored to their customary outrageous level?

[Lord Sassoon]

Unlike the mess that the previous Government left behind in banking—we really do not need a lecture on this—the Merlin agreement put in place by this Government is making sure not only that credit is delivered by the banks to our hard-pressed industry but that bankers’ remuneration was less in 2010 than it was the year before and is less than it would have been without that agreement in place. This Government are therefore very much on the case with bankers’ remuneration, as with so many other aspects of this very difficult inequality challenge.

Global Economy

Lord Sassoon Excerpts

Thursday 11th August 2011 Lords Chamber

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

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

“Mr Speaker, people will be concerned about the turmoil in the world’s financial markets and what it means for economies here and across the globe. I want to use the opportunity of the recall of Parliament to update the House on what we are doing to protect Britain from the storm and to help lead a more effective international response to the fundamental causes of this instability.

As of this morning, after heavy losses yesterday, markets in Asia and Europe are calmer. But over the past month, the Dow Jones index has fallen by over 14 per cent, the French market is down 23 per cent and the Nikkei by 11 per cent. It is striking that the German market is down 24 per cent and even Chinese equities are down 20 per cent since November. Bank shares in all countries have been hit particularly hard, with French banks the latest in the firing line. Many sovereign bond markets, too, have been exceptionally volatile, with market rates for Italian and Spanish debt soaring before falling back in the last three days.

Sadly, Britain is not immune to these market movements. In the last month, the FTSE 100 is down by 16 per cent and British bank shares have also been hard hit. However, while our stock market has fallen like others, there has been one striking difference from many of our European neighbours. The market for our government bonds has benefitted from the global flight to safety. UK gilt yields have come down to around 2.5 per cent—the lowest interest rates in over 100 years. Earlier this week the UK’s credit default swap spread, or the price of insuring against a sovereign default, was lower than Germany’s. This is a huge vote of confidence in the credibility of British Government debt and a major source of stability for the British economy at a time of exceptional instability. It is a reminder of the reckless folly of those who said we were going too far too fast. We can all see now that their approach would have been too little too late, with disastrous consequences for Britain.

It is not hard to identify the recent events that have triggered the latest market falls. There has been the weak economic data from the US and the historic downgrade of that country’s credit rating. The crisis of confidence in the ability of eurozone countries to pay their debts has spread from the periphery to major economies such as Italy and Spain. But these events did not come out of the blue. They all have the same root cause—debt and, in particular, a massive overhang of debt from a decade-long boom when economic growth was based on unsustainable household borrowing, unrealistic house prices, dangerously high banking leverage and a failure of Governments to put their public finances in order. Unfortunately, the UK was perhaps the most eager participant in this boom, with the most indebted households, the biggest housing bubble, the most over-leveraged banks and the largest budget deficit of them all.

History teaches us that recovery from this sort of debt-driven, financial balance-sheet recession was always going to be choppy and difficult. We warned that that would be the case. But the whole world now realises that the huge overhang of debt means that the recovery will take longer and be harder than had been hoped. Markets are waking up to this fact. That is what makes this the most dangerous time for the global economy since 2008. I think we should be realistic about that. I think we should set our expectations accordingly.

As the Governor of the Bank of England said yesterday, and as the head of the Office for Budget Responsibility has also noted, the British economy is expected to continue to grow this year. Some 500,000 new private-sector jobs have been created in the past 12 months—the second highest rate of net job creation in the G7. But instability across the world and in our main export markets means that, in common with many other countries, expectations for this year’s growth have fallen.

This is what our response must be. First, we must continue to put our own house in order. I spoke again yesterday to Sir Mervyn King and I can confirm that the assessment of the Bank, the FSA and the Treasury is that British banks are sufficiently well capitalised and are holding enough liquidity to be able to cope with the current market turbulence. We have in place well developed and well rehearsed contingency plans. We must also continue to implement the fiscal consolidation plan that has brought stability to our bond markets.

I believe that events around the world completely vindicate the decisions of this coalition Government from the day they took office to get ahead of the curve and to deal with this country's record deficit. While other countries wrestled with paralysed political systems, our coalition Government united behind the swift and decisive action of in-year cuts and the emergency Budget. While other countries struggled to command confidence in their fiscal forecasts, we have created an internationally admired and independent Office for Budget Responsibility. These bold steps have made Britain that safe haven in the sovereign debt storm. Our market interest rates have fallen while other countries’ have soared, and the very same rating agency that downgraded the United States has taken Britain off the negative watch that we inherited and reaffirmed our triple-A status. This market credibility is not some abstract concept. It saves jobs and keeps families in their homes. Families are benefiting from the lowest-ever mortgage rates and companies are able to borrow and refinance at historically low rates thanks to the decisions we have taken. Let me make it clear not only to the House of Commons but to the whole world that ours is an absolutely unwavering commitment to fiscal responsibility and deficit reduction. Abandoning that commitment would plunge Britain into the financial whirlpool of a sovereign debt crisis at the cost of many thousands of jobs. We will not make that mistake.

The second thing we need to do is to continue to lead the international response in Europe and beyond. In the G7 statement agreed between finance Ministers and central bank governors this week, we said that we would take all necessary measures to support financial stability and growth. In the eurozone, there is now a growing acceptance of what the UK Government have been saying, first in private and now in public, for the last year—that they, too, need to get ahead of the curve. Individual countries must deal with their deficits, make their economies more competitive and strengthen their banking systems. Existing eurozone institutions need to do whatever is necessary to maintain stability, and I welcome the ECB interventions through its securities markets programme this week to do just that.

But this can only ever be a bridge to a permanent solution. I have said many times before that the eurozone countries need to accept the remorseless logic of monetary union that leads from a single currency to greater fiscal integration. Many people made exactly this argument more than a decade ago as a reason for staying out of the single currency—and thank God we did.

Solutions such as euro-bonds or other forms of guarantees now require serious consideration and they must be matched by much more effective economic governance in the eurozone to ensure that fiscal responsibility is hardwired into the system. The break-up of the euro would be economically disastrous, including for Britain, so we should accept the need for greater fiscal integration in the eurozone while ensuring that we are not part of it and that our own national interests are protected. That is the message that the Prime Minister has clearly communicated in his calls with Chancellor Merkel, President Sarkozy and others this week. I have done likewise with individual finance Ministers, in ECOFIN and in the G7 call at the weekend, and will do so again at the September ECOFIN and G7 meetings.

But this is a global, as well as a European, crisis. At this autumn’s meetings at the IMF and the G20, we need far greater progress on global imbalances. We need an international framework that allows creditor countries such as China to increase demand and debtor countries to make the difficult adjustments necessary to repay them. Everyone knows what needs to be done, but progress so far has been frustratingly slow, with lengthy disagreements on technical definitions, let alone on any concrete actions. The barriers are political not economic, so it is up to the world’s politicians to overcome them. There are no excuses left.

Finally, the UK, like the rest of the developed world, needs a new model of growth. Surely we have now learnt that growth cannot come from yet more debt and government spending. Those who spent the past year telling us to follow the American example with yet more fiscal stimulus need to answer this simple question: why has the US economy grown more slowly than the UK’s so far this year? More spending now, paid for by more government borrowing and higher debt, would lead directly to rising interest rates and falling international confidence that would kill off the recovery not support it. Instead, we have to work hard to have a private sector that competes, that invests, that exports. In today’s world, that is the only route to high-quality jobs and lasting prosperity.

In the developed countries, and especially in Europe, that means making the difficult structural reforms needed to restore competitiveness and improve the underlying performance of our economies. Internationally, we have the greatest stimulus of all sitting on the table in the form of the Doha round—a renewed commitment to free trade across the world—that should be taken up now. Here in Britain, The Plan for Growth has set out an ambitious path. Twenty-three of the measures in it have already been implemented and another 80 are being implemented now. On controversial issues, such as planning reform, we will overcome opposition that stands in the way of prosperity. On tax, we have already cut our corporation tax by 2p, with three more cuts to come over the next three years. In welfare and education reform, we will continue to pursue a radical reforming agenda.

There is much more we can do and much more that we must do if we are to create a new model of sustainable growth. All of us in the House must rise to that challenge in the months ahead and confront the vested interests. They are the forces of stagnation that stand in the way of growth. In these turbulent times for world markets, we will continue to lead the international response, redouble our efforts to remove the obstacles to growth and stick to our plan that has made Britain a safe haven in the global debt storm. I commend this Statement to the House.”

My Lords, that concludes the Statement.

--- Later in debate ---

[Lord Sassoon]

My Lords, I am grateful for the opening remarks made by the noble Lord, Lord Eatwell, but subsequently I heard little that I could recognise as a coherent alternative or even critique of the Government’s policies. On the one hand, the noble Lord talks about the austerity imposed by this Government, which seems to imply that he would like more spending; on the other hand he complains about the dangers of a rising deficit and the forecasts of a rising deficit.

The noble Lord says we should be spending more. Well, if we did not have to spend £120 million a day on debt interest we could be spending it on more police, schools, hospitals—you name it, we could have it. It is precisely because of the record debt, the largest deficit, that we inherited from the previous Government that we are in the bind that we are. That is the answer to his first question about why the UK growth performance has been so weak. We are struggling under the massive burden of debt that was inherited.

The noble Lord challenges the comparison that my right honourable friend made between the stronger performance of the UK economy in recent months compared with the US economy. I give him another statistic: in the UK we now have unemployment of 7.7 per cent, while in the US it is 9.2 per cent. Again, the idea we can somehow look at some mythical way of stimulating the economy to get us out of the bind that we are in is the stuff of dreams.

There were one or two things on which I agreed with the noble Lord, Lord Eatwell. We share an agreement that the eurozone needs to strengthen its institutions. As my right honourable friend the Chancellor said in his Statement, we would welcome the strengthening of the eurozone’s institutions to have real bite in the fiscal co-ordination that there needs to be. If strengthening the eurozone’s management of its fiscal affairs requires treaty changes among eurozone members, we will look sympathetically at that. But as my right honourable friend made clear, that is for the eurozone; the UK will be supportive of its efforts but we will not directly be part of them.

On growth, the noble Lord quoted various things from the Bank of England’s report. The critical thing in yesterday’s report—this is consistent with the Office for Budget Responsibility’s analysis—is that the Bank of England’s forecast for UK growth is 1.5 per cent this year and 2.1 per cent next year, rising to 2.6 per cent in the year after. Although the economic and market conditions are very difficult and fraught with danger, we must not forget that, provided we hold to our plan, provided we remain the safe haven that the UK has become, provided we continue to give our householders and holders of mortgages the benefits of very low interest rates and we continue to give businesses the ability to refinance their debt at those low interest rates, it is that that will underpin the confidence that business needs to invest and individuals need to spend their hard-earned money. That is the fundamental basis on which growth will come.

As my right honourable friend has said, we had a significant plan for growth six months ago. Within the past six months the Treasury has published a progress report to show how far we are getting, including tackling some of the most difficult issues such as the planning rules in this country. We will come forward with more growth-supporting measures this autumn, and that is what will enable this country to get out of the mess that we inherited from the previous Government.

[Lord McNally]

My Lords, I remind the House that we will now go to a 40-minute session that will follow the precedent of the previous Statement. There will be no immediate answers from the Front Bench but a response at the end. I suggest that we start with my noble friend Lord Oakeshott and then circulate as usual. Forty minutes, even for economists, should be okay.

--- Later in debate ---

[Lord Sassoon]

My Lords, I do not pretend to be an economist. I am sure that if I was sitting an exam paper now, I would fall well short of the mark that the noble Lord, Lord Eatwell, would get. The problem is that we do not live in a pure economics world. A lot of what we are struggling with now is where the world of economists meets the world of markets.

I am not sure where to start with the many interesting interventions that we have had. I go back to the question about the deficit reduction plan: there were some concerns about the size of the deficit rising and others expressed the opinion that we should be investing more and driving borrowing up. It is worth getting a little bit economicsy about this and remembering that there are things called automatic stabilisers, which mean that if the economy does not grow as fast as anticipated there will be additional payments in areas such as welfare, for example. It is worth remembering that the deficit goes up and down. Within the Chancellor's fiscal plans, more money gets pumped into the economy—crudely put—if growth is lower. We should always bear that in mind. There is no absolute rigorous number at which we shoot that does not vary as economic circumstances change.

On the point raised by my noble friend Lord Oakeshott and others about interest rates, of course low bond yields themselves are not a guarantee of growth. Germany has been mentioned, and I will come back to that. Yes, it would be great if we had a deficit as low as Germany and bond yields as low as it does, but the fact is that we have a deficit as high as Greece but interest rates as low as Germany. They are not in themselves a guarantee of growth, but if we divert from the basic course we could very well find ourselves with both a very high deficit and very high interest rates. In those circumstances, growth would be choked off very quickly. That is fundamentally why we have to stick to our plan. My noble friend also talked about tax cuts. To remind noble Lords, the coalition is set out on a track which is significantly raising, and already has raised, the starting level of tax for those at the bottom end of the income scale. That is an important part of the whole rebalancing of the tax and welfare package to get people back into work. Equally, at the other end, my right honourable friend the Chancellor has made it clear that, over the medium term, a top rate of tax of 50 per cent is not conducive to an economy growing consistently and driven by entrepreneurial activity.

My noble friend Lady O’Cathain reminded us of the very big picture and questioned the chances of getting agreement to action on the imbalances. She was right to say that it will be for the autumn meetings of the G7, the G8 and the G20 to make further progress on that. Although there has been considerable frustration about turning good words into action, the latest statements from Ministers are, let us say, modestly encouraging, but it requires a big push this autumn. My noble friend then moved from the very big picture to more micro matters, with the question of regulation and how difficult it is for businesses that want to grow. That is precisely why we have a moratorium on new regulation for micro businesses in the period up to 2014 and that new tests under the “one in, one out” rule are being applied to all new proposals for regulation from Ministers.

[Lord Pearson of Rannoch]

My Lords, what about the regulations that come from our friends in Brussels? The Government’s Answer to me recently said that a majority of all our business regulation comes from Brussels, and we can do nothing about it.

[Lord Sassoon]

If the noble Lord will be a little patient, I will get back to Europe in a moment.

It was nice to have confirmation from the noble Lord, Lord Radice, that we are all on the same side when it comes to wanting to strengthen the eurozone, even if he questions the motives of some of us in wanting to do so. It really is very important that this happens, and we should give it all our support.

On the other European matters raised by the noble Lord, Lord Pearson of Rannoch, his main questions were around the cost of this country’s contribution to Europe. He makes that contribution £25 million a day. I cannot calculate things that quickly, but the fundamental difference between that £25 million a day and the £120 million a day of debt interest that I referred to earlier is that the £25-million-a-day contribution to Europe buys us value for money. Of course we believe that Europe needs to get its budget in hand, that there needs to be much greater fiscal discipline in Brussels and that the proposals for a great expansion of the European budget are unacceptable. Nevertheless, we have to bring ourselves back to the main point that this country gets considerable value from its membership of the European Union, and that that is fundamental to making sure that we have good strong markets for our exports. Yes, there is a burden of regulation from Brussels, and we must make sure that Brussels starts to apply the disciplines that we are applying in this country before it brings forward yet more regulation.

A number of questions were asked by my noble friends Lady Kramer and Lord Cotter and the noble Lord, Lord Harrison, about access to various domestic and European funds. All I say as a general point is that I hear very loudly what is being said. The Government’s objective is to make sure that in direct lending by the banks and in other finance—the most reverend Primate reminded us that the banks are far from blameless in the situation that we are in, and my noble friend Lord Oakeshott and other noble Lords reminded us of the importance of the banks—there is a whole range of financing channels. We have the critical Merlin agreement and European funds such as the regional growth fund—

[Lord Harrison]

Would the noble Lord be kind enough to write to me on the regional growth fund and update the House on what has happened to it with regard to helping small businesses?

[Lord Sassoon]

I will take away the noble Lord’s question. Forgive me, but I cannot now remember when we are committed to making regular updates, and it may be that we should wait until the next regular update. I will see whether any more can be said, but maybe we should be patient. I understand that he would like a quiet bilateral discussion, but I cannot promise him early information. The important point that he and other noble Lords make is that we have to work very hard to ensure a suitable range of channels for access to both debt and equity finance.

Incidentally, on the other point made by the noble Lord, Lord Harrison, I was taken away from some European-related reading yesterday. I had just got to the chapter in Edward Heath’s biography on the first negotiations for our European entry, so I have a few years to go before I get to the latest report from your Lordships’ committee. If I am allowed to go back on holiday, I will get there as quickly as I can.

The most reverend Primate the Archbishop of York raised another critically important point, which was about inflation. Clearly, inflation makes an enormous difference to the spending ability of individuals and has a significant effect on the costs for businesses. As we have discussed in this House on many occasions recently, it is critical that the Monetary Policy Committee continues to have free rein and is not constrained by the Government in any way in meeting its mandate. I commend to the most reverend Primate the words of the Governor of the Bank of England in his latest report, issued this week, in which he acknowledges that inflation may go over 5 per cent in the short term but says that he expects inflation to moderate in the medium term and to come down to slightly below the target that the Chancellor has set of 2 per cent. As my noble friend Lord Oakeshott will know, in the context of that discussion the governor made some interesting remarks about the possibility of quantitative easing. No doubt when the MPC’s minutes next come out we will look to see what was discussed at its last meeting, but clearly this is a live topic.

My noble friend Lord Flight gave a perceptive analysis of the markets. I do not think that he asked me a question in that, but I agree with a lot of his analysis.

The noble Lord, Lord Lea of Crondall, raised questions about the UK and Germany and made reference to BMW. All that I would ask him is why BMW has announced in recent months a further massive investment, of hundreds of millions of pounds, in its car manufacturing in this country. I suggest that that is because the best of our manufacturing is at least as good as and in some cases significantly better than the best of manufacturing in Germany, fine manufacturing economy though it is. We have in this country—Mini exemplifies this absolutely—design skills that are second to none. If the noble Lord would like to fire off at me another Written Question or three, I will be happy to try to answer better next time his points on relative added value, but I do not think that we have anything to be ashamed of—far from it—in a comparison between the best of our industry and the best of German industry.

[Lord Foulkes of Cumnock]

My Lords, will the Minister try to answer the question—I know that it is a difficult one—that I asked about credit rating agencies, which was also raised by the noble Lord, Lord Oakeshott, and by my noble friend Lord Harrison? I know that the Minister has travelled a long way to answer the debate, but I have travelled a long way to ask just the one question, so I would appreciate an answer.

[Lord Sassoon]

I am happy to answer the question that the noble Lord, Lord Foulkes, asks. I do not believe that nationalised institutions of any kind, including nationalised credit rating agencies, are the best way to go. Europe and the international organisations are looking at the appropriate form of regulation for credit rating agencies. That is ongoing business and it is quite proper that it should be done. Others question whether the whole rating system should be completely liberalised and say that one should not have a small number of institutions running the show. I recognise that that is an important debate and both Europe and the G20 continue to look at the issue.

I am conscious that I should wind up. I just go back to some of the fundamental points that underlie the interesting debate that we have had this afternoon. Noble Lords are well aware that when the coalition Government came into office we inherited the UK’s largest ever peacetime deficit. Tackling that deficit has been and continues to be our number one priority. The recent events that we have been discussing this afternoon vindicate that approach. It is by securing Britain’s AAA rating and the very low bond yields that we now have that we underpin the prospects of recovery. As the Governor of the Bank of England highlighted yesterday, 500,000 UK jobs have been created by the private sector over the last year. We should not forget that.

We have always said that recovery will be choppy but both the bank and the Office for Budget Responsibility forecast growth to continue through this year and the next. The decisive action taken by the Government to deal with the nation’s debts and restore private sector growth has meant that the UK has been in a better position to withstand the very considerable global uncertainties. Abandoning our plans would be disastrous, resulting in rising interest rates, falling international confidence and undermining the recovery.

House adjourned at 3.40 pm.

Finance: Eurozone

Lord Sassoon Excerpts

Tuesday 19th July 2011 Lords Chamber

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

My Lords, the Chancellor of the Exchequer regularly discusses the situation in the euro area with his European Union colleagues, including in bilateral meetings and at the Economic and Financial Affairs Council. The most recent ECOFIN meeting on 12 July, which the Chancellor attended, covered the situation in the euro area, and a number of previous ECOFIN meetings have also discussed this. The Treasury continues closely to monitor financial developments in the euro area.

[Lord Barnett]

My Lords, the Chancellor was quoted as saying—I hope that the noble Lord does not mind me quoting him—that they should try to obtain a settlement whereby banks are more heavily capitalised. That was a very sensible suggestion, although it might be difficult to achieve. I hope that the noble Lord is not complacent that, if the crisis really hits the eurozone, simply because we are not in the scheme we will be all right since it will not cost us any euros. We would not have to bail out European banks, but we would have to bail out UK banks that got into serious trouble. Does he accept that it would be sensible for the Chancellor to be much more positive about trying to achieve a deal? Indeed, if he can get a sustainable deal that is recognised internationally, he should go as far providing guarantees because that would be a sensible move which would safeguard UK taxpayers from tens if not billions of euros.

[Lord Sassoon]

My Lords, the Government are not the least complacent about the very serious situation in the eurozone, as evidenced by not only the continuing discussions around the next stage of the programme for Greece but also the situation of Italy as regards the capital markets and its interest rates recently. The most constructive things we can do are, first, to make sure, as the FSA and the Bank of England are doing, that the UK banks are subjected to stringent stress tests; and secondly that they continue to build up, as they have done satisfactorily so far, their capital liquidity positions. In his discussions with the eurozone, my right honourable friend the Chancellor has made it quite clear how supportive the UK is not only of the short-term measures in which we are not directly involved—the Eurogroup discussions around Greece—but also through ensuring that Europe presses ahead with the structural adjustments that are needed to bring sustained growth to Europe. At the same time, we also make it abundantly clear that it is for the eurozone itself to finance further bailouts and that the UK, as has been agreed in the context of Greece, is not going to be a direct participant in these bailouts.

[Lord Lamont of Lerwick]

My Lords, is it not clear, as the noble Lord, Lord Barnett, has pointed out, that while we all obsess about Rupert Murdoch and News International, there is a much more serious crisis actually brewing on the European continent? Is it not clear that two paths are open to the eurozone? One is to recognise a default by Greece now; or if that is judged too risky to the banking sector, for the eurozone then to come up with what it has always promised, which is to do whatever is necessary to stop the bickering among the 17 Governments, to stop the arguments for the European Central Bank and to come up now with a comprehensive solution rather than delay it until the autumn, which will be immensely damaging to Italy and not least to other countries both inside and outside the eurozone?

[Lord Sassoon]

I certainly agree with my noble friend about the relative seriousness of different crises that are going on at the moment, and I repeat that the crisis in the eurozone is extremely serious. As to prescriptions and questions about what the eurozone would do, my noble friend speaks words of wisdom. However, it would not be appropriate for a UK government Minister to lecture the eurozone as to what to do. We shall look with considerable interest at what the meeting of eurozone leaders over the next two days comes up with. It is important that they make further considerable progress.

[Lord Pearson of Rannoch]

My Lords—

[Lord Peston]

My Lords, is the Minister aware that some of us do not believe in exaggerating the problems of the eurozone or using the word “crisis”, which is immensely damaging and should not be used by Her Majesty's Government? Is he aware that, overall, the eurozone has been a great success? A vast amount of eurozone paper is held willingly throughout the world and ever more trade is being carried out in euros. Is it not about time that Her Majesty's Government took at long last a more positive attitude both to the eurozone and to Europe in general?

[Lord Sassoon]

My Lords, we take as a Government a very positive and pragmatic attitude towards Europe and the eurozone. It is after all where 40 per cent or more of the UK’s exports go. We wish the eurozone success. In the ways that I have sketched out and we have discussed on other occasions, we will be supportive, particularly on completing the single market and putting in place structural reforms. At the same time, it is right for countries to make their decision as to whether they want to be in or out, and the UK has made and continues to make the right decision about where we are.

Finance: Off-exchange Trading Venues

Lord Sassoon Excerpts

Monday 18th July 2011 Lords Chamber

[Baroness Kramer]

To ask Her Majesty’s Government what assessment they have made of the risk to financial markets of off-exchange trading venues commonly known as “dark pools”.

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

My Lords, the Government strongly support ongoing initiatives at the European and international levels to improve transparency in financial markets. The International Organisation of Securities Commissions, IOSCO, has recently agreed a set of principles for regulating dark pools that will help inform the European Commission’s ongoing review of the markets in financial instruments directive, MiFID.

[Baroness Kramer]

I thank the Minister for that Answer. He will be aware that Andrew Haldane of the Bank of England, in a speech a week ago, pointed out the dominance of dark pools and their high-frequency trading in many financial markets. Does the Minister agree that the lack of transparency, the price differential suffered by small investors, the implications for corporate governance of nanosecond share ownership and, above all, Andrew Haldane’s concern that liquidity could disappear rapidly in times of stress all point to a serious risk to financial stability? Will he continue to follow the issue and look at more action by the British Government, not just at the European level?

[Lord Sassoon]

My Lords, we should distinguish—as I am sure my noble friend Lady Kramer does—between the two issues of dark pools and high-frequency trading, both of which I am sure noble Lords are very familiar with. Dark pools are akin to what used to be called “upstairs trading”—off the floor of the Stock Exchange. We need to make sure that the benefits of being able to trade in such an environment, such as competition and choice for investors, do not impinge in any way on the transparency and the price-discovery ability of markets. The FSA has done work on that and is content that the price-discovery mechanism is not being damaged.

High-frequency trading is a very new and slightly separate area, although I agree that it is related, and it is one on which the Government are doing considerable work. A research project led by the Government Office for Science is looking at the possible evolution of computer-generated trading and its implications, and will produce up to 20 papers on the subject during 2011.

[Lord Peston]

Are dark pools the same as dark matter, which the astrophysicists tell us permeates the universe but which no one can observe? Is not the problem that for a considerable period banks and other financial institutions marketed paper assets that had no real assets behind them, and that that is what led to the financial crisis? Is it not more worrying that the banks cannot wait to get up to the same tricks again, and will do so if something is not done to regulate them properly?

[Lord Sassoon]

My Lords, I am no great expert on dark matter and black holes, but I think the distinguishing point about dark pools is that they are a venue for trading that enables confidential orders to be submitted and matched using a reference point that comes from a transparent market. As soon as the trade is done, the details are reported publicly. Therefore, there is confidential trading and then full reporting, which is the critical feature of the market. Various platforms are available for the market, which accounts for something of the order of 7 per cent of UK and European equity trading. It is not a dominant part of the market by any means, but it is one that we are watching.

[Lord Bilimoria]

My Lords, one of the best moves in the mid-1990s was the creation of the alternative investment market, AIM, which has been a great success. I was a director of an AIM company that is now a FTSE 250 company. However, the biggest problem with AIM was always liquidity. Liquidity is an also issue outside the FTSE 250 on the main market. Can the Government do something to improve liquidity? Should more be done or are they happy with the situation?

[Lord Sassoon]

My Lords, I certainly agree that mechanisms that help liquidity such as dark pools, which are run by investment banks, multilateral trading facilities or independent operators, are indeed aids to liquidity if they form a proper part of the market. The proponents of high-frequency trading, too, cite them as an aid to liquidity. I completely agree with the noble Lord, Lord Bilimoria, that the last thing we want for example the European Commission to do is to restrict sensible increases in liquidity in our markets without looking at the evidence base that needs to be assembled.

[Lord Pearson of Rannoch]

Does the noble Lord agree that we can all relax on this question, because we surrendered supervision of our financial services—

[Lord Pearson of Rannoch]

Yes, my Lords, and to the biggest black hole of them all in the shape of the European Commission. Do the Government agree that we can surely rely on this body to come up with an honest solution to any problem, if only because it has not been able to get its own accounts signed off by its internal auditors for the last 16 years?

[Lord Sassoon]

My Lords, I certainly do not think we should relax on the issue of high frequency trading. We only have to think back to the events of 6 May 2010. I do not need to remind your Lordships that there were two crashes on that day: one was the crash of the outgoing Government; the other was the so-called flash crash in which the Dow Jones index plummeted in a number of minutes by 9 per cent but fortunately, unlike the Labour Government, recovered by 9 per cent a few minutes later. We certainly take this issue very seriously but we need to continue to do the work and see where this leads us.

[Lord Davies of Oldham]

My Lords, I think the country should be on its guard when euphemisms such as “black pools” are used. I agree with the noble Lord that they are an aid to liquidity but he will know—and I am grateful to him for identifying that the Government are expressing some anxiety in this respect—that they restrict transparency in the marketplace. We all know the price that we have paid for a lack of understanding of what has gone on in the world of finance and the importance, therefore, of the Government being concerned to get as much openness and transparency as they can.

[Lord Sassoon]

My Lords, if they were black holes as the noble Lord suggests, we would be worried, but for dark pools, IOSCO, the international regulatory organisation, has recently laid down six principles to guide the operation of the regulatory framework of dark pools, and the FSA’s assessment is that the UK and the EU are fully compliant.

Finance (No. 3) Bill

Lord Sassoon Excerpts

Monday 18th July 2011 Lords Chamber

Moved By

[Lord Sassoon]

That the Bill be read a second time.

[Lord De Mauley]

My Lords, 21 speakers have signed up for the debate on the Second Reading of the Finance (No. 3) Bill and the report on the Finance Bill 2011. If Back-Bench contributions to the Bill are kept to seven minutes, the House should be able to rise this evening at around the target rising time of 10 pm.

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

My Lords, as noble Lords are aware, this Government have taken difficult decisions in our two Budgets to tackle an unenviable inheritance—the largest peacetime deficit on record and an economy struggling to recover from the financial crisis. We have taken the necessary decisions to eliminate our structural current deficit over the coming four years and stimulate a private sector recovery. One is the vital precondition of the other, and our approach has been endorsed by the IMF, the OECD, the European Commission, credit-rating agencies and businesses across the UK. This Government have set the agenda on using the tax system to encourage growth.

The Plan for Growth, published in March, set out a range of supply-side reforms to improve the UK business environment. At the heart of that plan is an ambition to create the most competitive tax system in the G20 through our corporate tax reductions, reform of controlled foreign company rules and simplification of the tax system. We want to make the UK the best place in Europe to start, finance and grow a business by reducing the regulatory burden on business and ensuring that credit flows to businesses. We want to encourage investment and export as a route to a more balanced economy by investing £200 billion over the next five years in UK infrastructure, setting up 21 new enterprise zones and entrenching a green recovery. We also want to create a more educated workforce that is the most flexible in Europe by providing 50,000 additional apprenticeships, an additional 80,000 work experience placements and expanding the university technical colleges from 12 to at least 24 new colleges by 2014.

The Bill boosts our international competitiveness by reducing corporation tax by a further 1 per cent this year and to 25 per cent next year, towards a rate of 23 per cent by 2013—the lowest rate in the G7 and the 5th lowest in the G20. It encourages growth by doubling entrepreneurs’ relief to £10 million, increasing R&D tax credits for SMEs to 200 per cent and cutting the small profits rate to 20 per cent. The Bill also ensures fairness for all by increasing personal allowances by £1,000. Together with the increase to £8,105 announced at the Budget, this will remove 1.1 million people from income tax altogether. The Bill also introduces a supplementary charge on profits from oil and gas exploration in the North Sea, which allowed us to cut fuel duty by a penny on Budget day, and introduces a bank levy to discourage risky behaviour by banks, the proceeds of which will fund the £250 million investment in the Firstbuy scheme for new homes.

I turn now to the Economic Affairs Committee’s report into the 2011 Finance Bill. First, I thank the committee for its comments in recognising the substantive changes that we have made to the way that tax policy is developed, communicated and legislated. The committee considered the Government’s new approach to tax policy-making, which sets out the principles that the tax system will be more predictable, more stable and simpler to understand.

Last autumn, we published the majority of the Finance Bill legislation to provide the opportunity to develop and refine our proposals. We received over 200 responses to the consultation and many of the clauses were changed as a result. This is just the first year of this new approach, as the Committee noted. Many interested parties have expressed their pleasure with an approach that puts emphasis on consultation and this process has worked extremely well, as in the cases of corporate tax reform and pensions tax relief changes. Indeed, these specific examples were noted by members of the committee. Of course, we will continue to learn lessons and make improvements for the future and, in doing so, HMRC and the Treasury will take into account the recommendations of the committee.

We have also taken steps to address the web of tax reliefs and exemptions that complicate our tax system. The Office of Tax Simplification, set up last summer, has already provided its first series of recommendations and this Bill takes the first steps towards simplification by removing seven tax reliefs from the system. We will be bringing forward further abolitions next year after a period of consultation. The Government are committed to greater consultation on tax policy changes. However, it will not always be appropriate or proportionate to consult at all five stages for each tax policy change, as set out in the tax consultation framework. The Government will always need to retain some flexibility on tax policy. Generally speaking, the Government cannot and will not consult on rate changes or where consultation would otherwise present a risk to the Exchequer.

Your Lordships’ committee, as well as witnesses and other interested parties, has taken particular interest in the disguised remuneration legislation. I remind noble Lords that this legislation tackles the practice whereby well-paid individuals disguise their remuneration as loans which are never repaid, resulting in a loss to the Exchequer. This is a significant measure, raising over £700 million a year, and was the first substantial piece of anti-avoidance legislation introduced under the new approach to tax policy- making. There are valuable lessons to learn from the experience.

The committee has asked HMRC to look at alternatives to the disguised remuneration legislation. HMRC has already carried out a review of alternative approaches as part of the policy-making process, which concluded that the approach taken is the most effective in the long run. HMRC will, however, continue to review the effectiveness of this legislation as is normal procedure in maintaining tax policy. It should also be noted that HMRC’s new anti-avoidance strategy, which was published alongside the Budget, sets out how the department will prioritise and allocate resource to make the right decisions about how to respond to avoidance risk.

In its report, the committee has also highlighted tax evasion. HMRC recognises the significant risk to the Exchequer of tax lost through evasion and already has in place a business strategy allowing it to develop a thorough understanding of its customers. This approach helps HMRC ensure that compliance efforts and interventions are focused where they will have the greatest effect. The Government have underlined their commitment to tackling tax avoidance and evasion with a £900 million reinvestment in HMRC over the spending review period. This will transform HMRC compliance activities and bring in additional revenues of £7 billion a year by 2014-15, on top of the £13 billion additional revenues to which HMRC was already committed.

The third area that the committee considered was the approach to corporate tax reform. As I have already said, a competitive tax system is at the very core of our plan for growth. Last year we published our corporate tax road map, setting out our plans for reform over the next five years and the principles underlying them. This gives businesses the certainty they need and the confidence to invest. This Bill takes the first steps on this road by introducing changes to foreign branches and controlled foreign companies rules. Corporate tax reforms will reduce the cost of new investment and incentivise activity across the economy. I welcome the committee’s comments on the corporate tax road map, which noted:

“It should promote the stability, consistency and certainty which many of our witnesses saw as so important”.

The committee also expressed some concern around the timing of reviews of tax reforms. I assure the House that we recognise the value of monitoring and evaluating tax policy. HMRC and the Treasury are currently looking at ways in which evaluation can be better embedded in the policy-making cycle.

Regarding policy development within the Treasury and HMRC, we have noted the committee’s comments about the policy partnership. I can tell the House that the Treasury and HMRC continue to look at all aspects of their work. It is vital that both departments consider how they engage with taxpayers and how their partnership can be strengthened to achieve better engagement. There is a senior governance group in place between the departments to oversee and monitor allocation of resources to policy work in the partnership. This new governance group is also looking at how best to raise the level and effective use of skills and experience across the partnership, another area that was of particular interest to the committee. We fully recognise the importance of incentivising and retaining the best talents in the tax policy field. The establishment of a new tax academy in HMRC will improve the focus on raising skills standards. That academy will engage with stakeholders to identify shortcomings and put in place measures to address them. It will use and build on the existing range of tax training available to improve skills across the board.

This Bill sets out changes to improve our competitiveness, encourage investment and support our businesses through the recovery. Of course, we have always said that recovery would be choppy, but the last year has given us cause for cautious optimism. Output is growing and half a million new private sector jobs have been created, the second-highest rate of net job creation in the entire G7. However, there is no room for complacency, and our plans necessarily incorporate a degree of flexibility. On this point, I would like to confirm that this flexibility refers to the automatic stabilisers that allow government spending to move up and down with the economic cycle. I apologise to the noble Lord, Lord Barnett, for the confusion that arose on this point in response to his Question on 6 July. I can confirm that he correctly quoted my right honourable friend the Chancellor of the Exchequer on this issue.

To conclude, this Bill builds on the progress that the Government have made to date to help families, help business and support economic growth. I look forward to hearing this evening’s speeches, particularly the maiden speech of my noble friend Lord Magan of Castletown, and I commend this Bill to the House.

--- Later in debate ---

[Lord Sassoon]

My Lords, we have had an interesting debate this evening, and I thank all the noble Lords for their contributions. In particular, I congratulate my noble friend Lord Magan of Castletown on what was—to echo the words of the noble Lord, Lord Davies of Oldham—a masterly tour d’horizon of the economic scene. I have to say that it was about the one thing on which I agreed with the noble Lord, Lord Davies, but let me come back to that.

As I said in my opening remarks, the Government welcome the constructive comments of the Economic Affairs Committee, and we will take these into account as we entrench a more predictable, stable and simple tax system. This year’s Finance Bill, the third of the current Session, has come through an unprecedented degree of consultation and engagement, and implements many of the changes announced at the Budget.

As we said at the Budget, and as we said last year, we are committed to growth through investment, through private sector recovery, and not through unsustainable deficits. This Bill moves us forward on that path to stability and recovery. It promotes our international competitiveness by cutting corporation tax by a further 1 per cent and by reforming our controlled foreign company rules. These are key steps to creating the most competitive tax system in the G20.

The Bill encourages growth by supporting our entrepreneurs and SMEs, by doubling entrepreneurs’ relief, increasing R&D tax credits and cutting the small profits tax rate. It embodies fairness by lifting hundreds of thousands of people out of income tax, and by ensuring that other sectors of society make a fair contribution to cutting the deficit and restoring sustainable growth. It provides for a better environment by incentivising investment in cleaner sources of energy. I am pleased to say that these points were picked up in different ways by a number of noble Lords in this debate.

Let me first take what I might call the pessimist tendency. The debate did not get off to a cracking start given the tone set by the noble Lord, Lord Myners, and followed up by the noble Lord, Lord Barnett, so let me talk to the pessimists for a moment. This is an economy in which the private sector has generated over 500,000 new jobs in the last year. Manufacturers are talking to me about shortages of skills; about the need for more engineers; about welcoming the Government’s apprenticeship schemes; and all the noble Lord, Lord Myners, does is talk down the prospects for the economy. To be fair to him, he recognises that the economy is in the difficulty it is in because his Government did not deal with the structural deficit when they could have done. I certainly applaud his frankness, but it is a frightening challenge; and a legacy which the previous Government left.

I am, however, encouraged. On Friday, I was in Manchester, the old stamping ground of the noble Lord, Lord Barnett, an area where the rebalancing from the public to the private sector is as challenging as anywhere. The latest quarterly survey from the Greater Manchester chamber of commerce points out encouraging signs. I think that some noble Lords need to get out and about around the country more.

On the specific point which the noble Lord, Lord Barnett, raised about reserves, it is a little late at night to go into details about this. However, I know that it is a point that bothers the noble Lord considerably so I will write to him.

[Lord Barnett]

Don’t bother.

[Lord Sassoon]

The noble Lord says “Don’t bother” so I will not. I do not know whether other noble Lords heard; as he tells me not to write, I will not, but I have made the offer.

As to the extraordinary speech from the noble Lord, Lord Myners, which continually came back to praise the former Chancellor, Mr Darling, I can only think that he read in the Sunday newspapers, as I did, that Mr Darling is coming close to finalising his memoirs. I assume that this was a late play to make sure that Mr Darling looks favourably on the noble Lord, Lord Myners, and his part in the previous Government, but we shall see. We then got away from the pessimists but came back to one or two a bit towards the end. I am sorry that the noble Lord, Lord Haskel, joined in by talking about the Government transferring debt to the citizens. The trouble is that the government debt is the debt of the citizens and that attitude, I fear, underlay so much of what the previous Government did. They completely failed to recognise that it is the citizens who, at the end of the day, have to pick up the debt.

In terms of unrealistic ways to go about getting us out of the challenge we are in, I have to say to the noble Viscount, Lord Hanworth, that one way in which we will absolutely kill growth is if we raise further the top rate of income tax from a level which is not one that this Government wish to see in the medium term. We desperately need to encourage entrepreneurship and growth and the one thing we should not think of doing is further raising the top rate of tax. I am pleased to see the noble Lord, Lord Myners, nodding in approval.

I do not recognise the picture which the pessimists paint. However, I recognise that there are a lot of serious challenges out there, which noble Lords pointed to throughout the debate. I cannot deal with them in detail but my noble friend Lord Newby was the first—and virtually the last—speaker to refer to the European dimension, which is very difficult, while my noble friend Lord Higgins again pointed out the real challenges that there are in analysing the monetary situation and taking lessons from it.

The noble Lord, Lord Desai, raised the question of the savings rate and I completely agree with the challenge that that poses. I am delighted that the noble Lord appears to have lost none of his vigour even though it appears that Delilah may have got at Samson. It was a great reassurance that he is still on fine form. My noble friend Lord Ryder of Wensum was also on fine form. He raised a lot of points but, yes, regulation and employment are very challenging. I would point out to my noble friend that we are in the process of putting 21,000 regulations on the Red Tape Challenge website. We will indeed eliminate significant quantities of regulation while on employment law, another key area, we have already made moves on unfair dismissal to right the balance between employers and employees. My right honourable friend the Chancellor has identified five other areas where we are looking at employment regulation at the moment.

The noble Lord, Lord Watson of Invergowrie, talked about the protection that is important to lower-paid public sector workers. The Government have indeed made the £250 payment for all those within central government and are encouraging all other public sector bodies to abide by that.

[Lord Watson of Invergowrie]

On that point, the Minister mentions all other public bodies but I mentioned that local authorities have been allocated resources for this specific purpose, yet the Government appear to be allowing them to spend the money on whatever they see fit. Surely, that defeats the Government's purpose in regard to the £250 that the Minister mentioned.

--- Later in debate ---

[Lord Sassoon]

My Lords, as I have said, and as the noble Lord recognises, the money is available and the Government are encouraging not just local authorities but all public sector bodies to stick to the rule that has been applied to central government employees.

The noble Lord, Lord Sheldon, drew attention to another important area; that of an ageing population and its complexities that cut both ways, as he explained. My noble friend Lord Northbrook brought us back to one of the key points, for which I am grateful to him, on the Budget that has pro-business tax changes as central to it.

In the middle of the debate, we had an interesting sub-debate around the importance of marriage and the family. Points were raised by the noble Lords, Lord Anderson of Swansea and Lord Browne of Belmont, and my noble and learned friend Lord Mackay of Clashfern. We are keen to send a clear message that family and marriage matter and that strong and healthy families help to create a strong and healthy society. In a little over a year, this Government have proved their determination to tackle the wider issues that can affect family stability. We have made great strides in improving outcomes for families, particularly those on low and middle incomes, through our work on welfare reform. Furthermore, the universal credit will ensure that people will generally keep more of their earnings for themselves and their families than is currently the case. However, we need to be realistic. It is not fiscally practical to introduce a transferable personal allowance for married couples at this stage. Having said that, our commitment remains clear.

We then had some interesting discussion referring specifically to the Economic Affairs Committee report, and I am grateful to my noble friend Lord, MacGregor of Pulham Market, not only for chairing the committee but for drawing out some of the critical points from the report. I am grateful to him and to my noble friend Lord Tugendhat for their general welcoming of the Government’s new approach to policy-making. I shall respond to a couple of areas that were specifically raised, such as disguised remuneration. HMRC had indicated through its Spotlights publication, in particular, that these schemes were generally not effective. The Government decided to publish draft concert legislation for consultation at the same time as introducing proportionate anti-forestalling rules, with effect from 9 December 2010, because we saw that as the best way of combining the necessary tackling of an exceptional situation, to take the phrase of my noble friend Lord Tugendhat, with an ability to consult on the rules.

I am grateful to the various noble Lords who talked about the road map on corporation tax. The noble Lord, Lord McFall of Alcluith, drew attention to it, and I agree with him that corporation tax reform is not just about cutting the headline rate, which is why in the broader package we are looking at such critical things as the patent box, the treatment of intragroup dividends, and so on. Also in the report, the question of evasion came up a number of times from my noble friend Lord MacGregor of Pulham Market. The noble Lords, Lord Bilimoria and Lord McFall, welcomed the £900 million of additional resources. HMRC is taking this very seriously. The noble Lord, Lord Davies of Oldham, is incorrect in his understanding. HMRC is increasing staff to tackle avoidance, evasion and fraud by around 2,500 full-time equivalent staff by 2014-15. It will consider the benefits of publishing a more detailed document, setting out its approach to evasion later in the year. It is getting late and I should and will conclude.

As noble Lords are aware, this Government came to power inheriting the largest peacetime deficit in the nation’s history and an economy on its knees. We have taken difficult decisions in our two Budgets to date to tackle this dire inheritance, eliminate our structural current deficit over the coming four years and stimulate a private sector recovery. This strategy has been endorsed by the IMF, the OECD, the European Commission and UK business organisations. Of course, we have always said that recovery would be choppy. Our plans necessarily incorporate a degree of flexibility through the automatic stabilisers to allow government spending to move up and down with the economic cycle.

This Bill further delivers our commitment to improve our competitiveness, encourage investment and support our businesses. At the same time it removes hundreds of thousands of individuals from income tax and helps reduce the cost of living for families across the country, and it makes these changes in a way that is fairer and more consultative than any previous Finance Bill. I commend the Bill to the House.

Bill read a second time. Committee negatived. Standing Order 46 having been dispensed with, the Bill was read a third time and passed.