Office for Budget Responsibility

Lord Sassoon Excerpts

Wednesday 6th July 2011 Lords Chamber

[Lord Barnett]

To ask Her Majesty’s Government what further discussions they have had with the Office for Budget Responsibility regarding their central growth forecast for 2011.

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

My Lords, there is a memorandum of understanding which sets out a framework for co-operation between the Office for Budgetary Responsibility and HM Treasury. It states that they are expected to meet regularly to scrutinise forecasting assumptions. The OBR will publish a list of contacts with Ministers, special advisers and their private offices shortly after each autumn and Budget forecast. All credible forecasters are clear that the UK economic recovery will continue. The OBR will publish a new economic forecast later this year.

[Lord Barnett]

My Lords, I thank the Minister. Paragraph 3.6 of the OBR’s economic and fiscal outlook states that,

“there is considerable uncertainty around all the forecast judgements we make”.

I know that the Chancellor cannot introduce a plan B because it would kill plan A. When the BBC last week gave him an alternative, the Chancellor said that “flexibility” was written into his plan. What does he mean by flexibility? Is it the Treasury’s special reserve? If so, can he remind us how much is in it and how much is left after expenditure on the MoD, Libya and other departments? Is that what he meant? If so, can he exceed it with the permission of the House of Commons? Therefore, is that a sort of plan B?

[Lord Sassoon]

I would love to be able to tell noble Lords what was in the mind of Robert Peston or whoever was being quoted, because it certainly was not the Chancellor. It was somebody interpreting the mind of the Chancellor.

Of course, there are certain ways in which there is flexibility within the numbers, because the automatic stabilisers operate as the economy fluctuates. In that sense there is flexibility, but I have no idea otherwise what that particular commentator had in mind. It certainly had nothing to do with use of the reserve.

[Lord Higgins]

My Lords, has my noble friend noted that the recent report of the IMF on the UK economy suggests that the Chancellor’s plan A, as the noble Lord referred to it, is on the right course? However, is not the growth forecast referred to in the Question none the less pretty disappointing? Is this not a reflection to a considerable extent of the slow rate of growth in the money supply? Given that that is so, is there not a case for considering a further extension of quantitative easing?

[Lord Sassoon]

My Lords, I am grateful to my noble friend for pointing out the IMF’s recent assessment that endorses the deficit reduction plan, as has the Governor of the Bank of England and just about every other commentator I can think of. That is the plan to which we stick. The third Question this afternoon is on matters related to the Monetary Policy Committee and maybe it would be better to talk about monetary matters then.

[Lord Peston]

My Lords, does the noble Lord look every month as I do at an admirable document published by his own department which is a survey of all the independent forecasts made every month by the leading forecasters in this country? Is he aware that their latest figures show that the economy will grow by 1.5 per cent this year, not exactly the greatest performance ever; it is predicted to grow by 2.1 per cent next year and the medium-term forecast is approximately 2.3 per cent for the three further years? Is he aware therefore that alleged independent Office for Budget Responsibility, in the document quoted with great approval in the Budget Statement this year, predicted that for the three medium-term years the economy would grow at 2.8 to 2.9 per cent? When will he or his right honourable colleague the Chancellor go back to this alleged Office for Budget Responsibility and ask it how it managed to get the three most important numbers it was talking about wrong?

[Lord Sassoon]

My Lords, I recognise the numbers that the noble Lord, Lord Peston, quotes from the excellent monthly publication that the Treasury produces averaging out the independent forecasts. The Office for Budget Responsibility last published a forecast in March. It is obliged to put out forecasts at least twice a year. We can look forward to another one in the autumn and we will see what it has to say then. As to the extraordinary charge of the alleged independence of the Office for Budget Responsibility, I was pleased to see, only within the past couple of weeks, that the noble Lord, Lord Burns, has been appointed as one of the first two non-executive members of the office, which is a sure sign that its independence is going to be very safely guarded.

[Lord Jones of Birmingham]

How on earth do this Government intend to meet their growth forecast if they do not rebalance the economy through a quality manufacturing strategy and if at the first whiff of gunshot they still buy German trains and not those made in Derby?

[Lord Sassoon]

My Lords, first, it is not our forecast. These are the forecasts of the independent Office for Budget Responsibility. Secondly, what is very heartening in the economy is the growth of manufacturing output and the growth of exports. Since last May, manufacturing output has been 4.2 per cent higher than in the same period in the previous year. Since last May, volumes of exports to the rest of the world have been nearly 13 per cent higher than in the same period a year earlier. The private sector has created 520,000 extra jobs in the past year and that is three-and-a-half times the number of jobs by which the public sector has contracted. I really do not think that noble Lords should get pessimistic. We always said that the recovery was going to be choppy but the manufacturing side of the economy is doing very well to rebalance, which is what the economy needs.

[Lord Eatwell]

My Lords, it is very helpful for the noble Lord to introduce the idea of rebalancing. Will he confirm that a vital component of the coalition’s policy to rebalance the economy is growth in business investment? Indeed, the OBR budget forecast contains a projected growth rate of 6.7 per cent for business investment. Will he confirm that latest figures show that business investment is not growing at all, but falling by more than 3 per cent a year?

[Lord Sassoon]

My Lords, I do not know where the noble Lord, Lord Eatwell, gets his figures from. Since last May, businesses have invested £91.4 billion across the economy and that is 9 per cent higher than in the same period in the previous year. That is very positive confirmation by business of what it sees as the prospects for this economy.

Monetary Policy Committee

Lord Sassoon Excerpts

Wednesday 6th July 2011 Lords Chamber

[Lord Spicer]

To ask Her Majesty’s Government whether they will maintain the inflation target as the primary criterion of the Monetary Policy Committee.

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

My Lords, the Bank of England Act 1998 states that the objectives of the Monetary Policy Committee of the Bank of England are to maintain price stability and, subject to that, to support the economic policy of the Government. The Chancellor reaffirmed in Budget 2011 that the MPC will continue to target 2 per cent inflation as defined by the 12-month increase in the consumer prices index.

[Lord Spicer]

I thank my noble friend for that Answer—and take it as a yes. In the light of that, what response are the Government giving to the stream of letters of apology from the Governor of the Bank of England for not meeting the inflation target?

[Lord Sassoon]

My Lords, it is part of the discipline of the way in which the Monetary Policy Committee operates that it is required to write letters to the Chancellor when inflation is outside the target range. The most recent exchange of letters was in May 2011, in which the Chancellor recognised the factors driving short-term inflation, including, particularly, the very high commodity prices. However, it is important to recognise that the MPC’s mandate enables it to look through short-term movements in prices towards a medium-term target.

[Lord Myners]

My Lords, as the Minister said, the Bank of England has two monetary policy objectives: to deliver the inflation target, currently set at 2 per cent, and to deliver growth—and to be accountable to the Treasury and Parliament for doing so. On which of those two objectives does the Minister think the governor and the Bank of England are doing best?

[Lord Sassoon]

I would always hesitate to hold up and criticise the characterisation of the Bank of England MPC’s target by the noble Lord, Lord Myners. However, as I have made clear, it has one primary target—to maintain price stability, with the target that I have already confirmed—and it is doing a fine job in extremely difficult circumstances, when oil prices are 40 per cent higher than they were at the end of last year and agricultural prices are 60 per cent higher than a year ago. Against that background the MPC is doing a fine job in very difficult conditions.

[Lord Higgins]

Having not got an answer on the first Question, I shall try again. Would my noble friend agree that much of the problem is that the present inflation is imported rather than domestically generated, and that needs to be taken into account in making these decisions? None the less, the MPC also has responsibility for growth. Given the low rate of growth, and the low rate of growth in money supply, is there not a further case for more quantitative easing?

[Lord Sassoon]

I apologise to my noble friend for cutting him off earlier, but I am glad that he has got in now. It is certainly a bit of a puzzle that there is continued weakness in broad money growth at a time when nominal GDP is growing. I am no macroeconomist, but when I look at the tables I see that, among other things, the velocity of the circulation of broad money is increasing. I cannot see behind me to see whether my noble friend is nodding, but I think he is, so I am all right on that one. Any question of additional quantitative easing or withdrawal of quantitative easing will be decisions for the MPC whenever it sees fit.

[Lord Eatwell]

My Lords, would the Minister agree that increases in commodity prices and oil prices affect the economy of France, Germany and the United States just as much as they do of Britain? Why then is Britain’s inflation rate more than twice that of France, twice that of Germany and significantly greater than that of the United States?

[Lord Sassoon]

My Lords, the really important thing here is that the inflation expectations remain very low. All the range of forecasters is predicting that inflation will come down to the range of 2 per cent to 2.1 per cent in 2012 and beyond. That is the critical challenge for the MPC, in which it has the market’s confidence, and that is what underpins the very low interest rates that we continue to enjoy. We suffer, inherited from the last Government, a deficit the size of Portugal’s, but we have interest rates at the level of Germany’s.

--- Later in debate ---

[Lord Newby]

My Lords, does the noble Lord agree that at a time when real incomes are falling, if the Bank of England Monetary Policy Committee were to raise interest rates now the principal effect would simply be to reduce growth and increase unemployment?

[Lord Sassoon]

Yes, I completely agree with my noble friend.

[Lord Maples]

My Lords—

--- Later in debate ---

[Lord Stern of Brentford]

Would the Minister agree that we are fortunate that the Bank of England has taken account of the fragility of output and employment in the UK economy, and will he assure us that the Government will also take account of that fragility in setting their own policy?

[Lord Sassoon]

My Lords, I can confirm the first part of what the noble Lord, Lord Stern, says. What the Government will do is to stick to a very firm, clear deficit reduction plan as the background against which the Monetary Policy Committee can make its decisions with confidence.

[Lord Desai]

My Lords—

Banking: Northern Rock

Lord Sassoon Excerpts

Thursday 30th June 2011 Lords Chamber

[Baroness Turner of Camden]

To ask Her Majesty’s Government what are their plans for the future of Northern Rock, in view of its status as a major employer and provider of financial services in the North-East of England.

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

My Lords, on 15 June my right honourable friend the Chancellor of the Exchequer announced that a sales process for Northern Rock should commence, following a recommendation from UK Financial Investments. Prospective acquirers will be asked to provide a view on the impact of their acquisition on competition. UKFI also expects prospective acquirers to lay out their plans for the company’s headquarters and branches.

[Baroness Turner of Camden]

I thank the Minister for that response. Since tabling the Question, I have been visited in this House by representatives of the workforce, whose chairman and organiser came to see me. They are still very worried people, although they appreciate the sympathetic response that the Minister gave on 16 June when this question was originally raised. On the other hand, they are very concerned because of the employment situation there and very keen on mutualisation, which they believe would be much better from the point of view of employment and as far as the community is concerned. Would the Government give serious consideration to that?

[Lord Sassoon]

My Lords, the Government, through UKFI, will consider all options for the disposal process, including stand-alone remutualisation. However, it is important to recognise that the Chancellor believes that a sales process is most likely to generate the best value for the taxpayer, and that is why that is being explored as the lead option. Of course, the Government are committed to promoting mutuals and we very much welcome bids from mutuals as part of the sales process that is to start.

[Lord Shipley]

My Lords, does the Minister agree that the staff of Northern Rock have, in the past three and a half years, done a magnificent job to recover the status of the bank? Does he agree that maintaining a headquarters function for the bank in the north-east of England remains important? In that context, could it be a condition of sale that the Northern Rock Foundation, the largest charity in the north of England, should continue to have support from whoever buys the bank in order to maintain the good work of the Northern Rock Foundation?

[Lord Sassoon]

My Lords, first of all, it is right that Northern Rock is now a highly liquid and well capitalised strong bank, which is why UKFI has been able to recommend the start of a sales process to the Treasury. Incidentally, for all the very significant reductions in the number of employees that there have been, the bank still has a footprint of some 75 branches—little changed since before the collapse of the bank. As for its commitment to the foundation, the bank has a signed agreement with the foundation, signed in March 2011, under which Northern Rock plc agrees to donate 1 per cent of pre-tax profits to the foundation under a covenant with an initial expiry date of December 2012. It will be very much in the interest of prospective purchasers to make clear, if they want the support of people in the north-east, what their plans are for the headquarters, for their support for the foundation and for other matters.

[Lord Borrie]

I wonder whether the noble Lord could show a little more enthusiasm for mutualisation as a most desirable method of organising and purveying financial services. That would give the Government a chance to distance themselves from the sad period of the 1980s, when far too many building societies moved away from mutualisation, with a lot of risky business being pursued thereafter.

[Lord Sassoon]

I have made clear on this and previous occasions that the Government regard mutualisation as a desirable model. It would be wrong to say that it is the best model, as the noble Lord has suggested, but, indeed, we want to see variety of provision of financial services in this country by organisations with different models, of which mutualisation should be one.

[Lord Hamilton of Epsom]

Will the noble Lord explain how we can have mutualisation and the taxpayer get his money back at the same time?

[Lord Sassoon]

My Lords, the overarching aim of any sales process, as well as getting a clear exit, is to obtain best value for the taxpayer. There are of course tensions between that objective and certain methods of sale, and that is precisely what the experts conducting the sale will assess.

[Lord Myners]

Will the Minister confirm that best value will not have been achieved if Northern Rock is sold for less than the assets of the bank shown in its accounts?

[Lord Sassoon]

No, I will not confirm that to the noble Lord. The best value will be obtained for the taxpayer by conducting an exemplary sales process that explores all the options out there for the bidders. In the light of a transparent and competitive process, the best value will be obtained.

[Baroness McIntosh of Hudnall]

My Lords, going back to the question of the Northern Rock Foundation, I am certainly no expert on the sale of banks but I know how important the foundation is in the north-east. I was slightly troubled by what the Minister said about the commitment that has been made so far, because it appears to be a very short date. Could he perhaps be a little more enthusiastic, to use the word used by my noble friend Lord Borrie, about the importance of the foundation and put it more firmly on the agenda when it comes to issues of sale?

[Lord Sassoon]

My Lords, I am sorry if I cannot work up enough enthusiasm at 11am on a Thursday morning. The first thing to say is that not only has the foundation done good work in the north-east but its footprint covers Cumbria. We must not forget Cumbria. The previous Government agreed that Northern Rock would donate £15 million per annum to the foundation for a three-year period, 2008-10, and that commitment was honoured. Yes, the new agreement has an initial expiry date of December 2012, as I said, but it has the potential for a rolling one-year extension by mutual consent, to be agreed under certain terms. The door is open there, and it will be one of the things that I am sure prospective purchasers will want to take into account.

[Lord Eatwell]

My Lords, in the determination of best value for the taxpayer, how will the Government balance the short-run cash return from the sale with the long-run benefit to the taxpayer of there being a stable and successful mutual?

[Lord Sassoon]

The noble Lord makes a presumption there about the form of sale. We will be guided by the experts who have been appointed to conduct the sale, who will give advice on these matters to the Treasury.

Banking: Lloyds and RBS Shares

Lord Sassoon Excerpts

Thursday 30th June 2011 Lords Chamber

[Lord Barnett]

To ask Her Majesty’s Government whether they plan to transfer some shares of the Lloyds TSB and RBS banks to taxpayers, as suggested by the Deputy Prime Minister.

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

My Lords, UK Financial Investments manages the Government’s shareholding in financial institutions. UKFI’s objective is to dispose of the investments in an orderly and active manner, with an overarching objective of protecting and creating value for the taxpayer. The Treasury and UKFI continue to assess all potential options to realise value for taxpayers through the disposal of these shares.

[Lord Barnett]

My Lords, there is a well known saying by a famous American tennis player: “You cannot be serious”. Does the noble Lord himself believe what has been said, given that that would achieve nowhere near best value? If you wanted to have an administrative scheme that was absolute nonsense, you could not find a better one. Given that the Government manage potential sales, is the Minister seriously suggesting that the Chancellor is looking at that proposition? If so, what would be the eventual cost in loss of expected revenue in due course from the sale of Lloyds and RBS shares?

[Lord Sassoon]

My Lords, what I said is that we are considering all options for the disposal of the shares in RBS and Lloyds Banking Group. My right honourable friend the Deputy Prime Minister has asked the Treasury to consider a particular disposal option, and that is what UKFI and the Treasury are doing.

[Lord Lawson of Blaby]

Will my noble friend tell the Treasury that there is no need to consider this tired old suggestion for long? It was fully considered in 1979 when we embarked on the original privatisation programme and I am sure that his officials will be very pleased to give him all the old papers showing that it bristles with practical difficulties, not least the precise method of allocation, quite apart from the point made by the noble Lord, Lord Barnett. Will my noble friend also bear in mind the wise words of that great radical, Thomas Paine:

“What we obtain too cheap, we esteem too lightly”.

--- Later in debate ---

[Lord Sassoon]

On the one hand, I might say to my noble friend that sometimes the old ideas are the best ones and it is good to dust them off. I recognise that the idea of free distribution of shares is not new but it is perfectly serious. However, the difficulties that my noble friend rightly puts up and some of the questioning from the noble Lod, Lord Barnett, are issues that must be properly considered.

[Lord Skidelsky]

My Lords, noble Lords will be aware that the Government have promised to set up a green bank with a capital of £3 billion. Does the noble Lord agree that a more constructive version of the Deputy Prime Minister’s suggestion might be to sell the shares in Lloyds TSB and RBS, as convenient, and use part of the cash thus raised to increase the capitalisation of the green bank? If in addition the bank was allowed to borrow, could that not be a powerful instrument for economic recovery and long-term development by mobilising shares for which there is no present business use?

[Lord Sassoon]

My Lords, we have been very clear about our plans for capitalising the green investment bank, as the noble Lord says, with £3 billion. I see no particular link between that and the question of disposal of the bank shares.

[Lord Peston]

My Lords, bearing in mind the immense damage that the Government’s fiscal policy is doing to the economy, is not the explanation of the hare-brained scheme from the leader of the Liberal Democrats simply an attempt by the Government to distract the public’s attention from that damage?

[Lord Sassoon]

My Lords, I do not know what constitutes language that is not permissible in this House but I do not accept one iota of that analysis. The reason why we have an enormous monetary stimulus through the interest rates—last night, 10 years were at 3.33 per cent—is precisely because we are sticking to the plan to reduce the deficit. Otherwise nothing else would be possible in terms of growth for the economy. Indeed, one of the potential downsides of handing shares out free is that it would have a negative effect on the public finances, which is one of the issues that must be considered.

[Lord Newby]

Would the Minister accept that technology has moved on since 1979 and whatever might have been in the papers at the time in terms of doing something then is wholly irrelevant to the costs of doing something today? Can he see the strength of the argument that once the Treasury has its money back, best value for the British people might best be served by giving them some cash in their pockets to decide for themselves the best way of spending the upside of the privatisation of the banks?

[Lord Sassoon]

Of course I agree with my noble friend that IT has progressed significantly over the past couple of decades, but that does not mean to say that it would be easy to create an IT database of the sort that would be required for this operation. While that is one of the issues to be considered, there are other questions—of distribution, of the impact on the banks’ own funding, of share overhangs and so on. All of these things would have to be looked at.

[Lord Grocott]

Does the Minister think that the Deputy Prime Minister’s proposals for the banks are better or worse than his proposals for constitutional reform?

[Lord Sassoon]

My right honourable friend the Deputy Prime Minister is always full of interesting, constructive and important ideas that deserve very serious consideration.

Undertakings for Collective Investment in Transferable Securities Regulations 2011

Lord Sassoon Excerpts

Wednesday 29th June 2011 Lords Chamber

Moved By

[Lord Sassoon]

That the draft regulations laid before the House on 10 June be approved.

Relevant document: 24th Report from the Joint Committee on Statutory Instruments, considered in Grand Committee on 27 June.

[Lord Eatwell]

My Lords, I wish to bring to the attention of the whole House some aspects of these regulations that are a source of grave concern. During the discussion on the regulations in Grand Committee on Monday, it became evident, to me at least, that the Government have seriously misjudged the regulations’ importance, notably in their potential impact on the savings of British families and on UK consumers of financial services in general.

These regulations are the latest stage in the programme to establish throughout Europe a single market in transferrable financial instruments, where Europe is defined as the EEA—the European economic area. The programme began in 1988. An important component of that process has been to give fund managers in non-member states the ability to passport their services into another member state. Today—29 June—this is done by complying with various requirements of the regulator in the jurisdiction in which the funds are to be marketed. For example, the FSA typically requires fund management companies to establish a legal presence in the UK that can be regulated and supervised by the FSA. As of this Friday—1 July, when these regulations come into force—that will no longer be the case. Instead, the so-called simplified notification procedure established by these regulations removes the rights of national regulators to vet funds before they are marketed. Thereby, British savers will be relying on the regulator in, say, Iceland, Romania or Malta to ensure that their savings are adequately protected.

This is a fundamental change. It is not, as the noble Lord, Lord Sassoon, argued in Grand Committee,

“a sensible piece of tidying-up”.—[Official Report, 27/6/11; col. GC 145]

In fact, the European authorities have recognised some of the potential dangers and, by means of the same regulations, have introduced two measures to attempt to protect consumers. First, there is to be a simplified prospectus—a key investor information document—and, secondly, there is to be improved supervisory co-operation across member states. Of course these are desirable measures, but it has for many years been a fundamental tenet of financial regulation in this country that caveat emptor is not a satisfactory doctrine in the complex world of financial instruments. However well informed the buyer might be, the seller always has the upper hand. Moreover, having sat on the boards of various national financial regulators of the past 20 years—I sit at present on the board of a regulator outwith the European Union—I assure noble Lords that exchange of information between regulators is often imperfect and sometimes downright misleading, particularly where sensitive national interests are involved.

In the Treasury's own assessment of the impact of the regulations, it is conceded that the new management company passport,

“may cause some operational and supervisory difficulties which could reduce consumer protection”.

Having apparently recognised the problem, the Government have decided to do nothing about it, over and above what they are required to do by the European regulations themselves. The safeguards built into the regulations are significantly inferior to those enjoyed by British consumers today; they will lose those safeguards on Friday.

I have just one question for the Minister: what additional measures of consumer protection will the Government introduce on Friday to compensate for the erosion of UK consumer protection by the regulations?

--- Later in debate ---

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

My Lords, I am continually surprised by things that come up in this House that I was not expecting but, on a totally non-contentious piece of European legislation, I am surprised that the noble Lord, Lord Eatwell, pronounces that such horrific things are allegedly to happen.

For the benefit of noble Lords, perhaps I should explain that the statutory instrument implements an EU directive which is concerned with the sale of collective savings products. It is the third amendment to a directive that dates back to the late 1980s. It is a directive which is pro-consumer—it gives greater protection to consumers than exists today. It helps to complete the single market in fund management. It is supportive of UK-based financial services businesses.

At a time when lots of contentious matters come from Brussels which we rightly debate at length in your Lordships' House, it is remarkable that the Opposition seek to find fault with something which has been endorsed by consumer and business interests. I do not know whether the noble Lord, Lord Eatwell, talked to his noble friend Lord Davies of Oldham who, in a Written Ministerial Statement laid in this House on 4 June 2007, said that the UK supported the commission's proposals for reform of the UCITS framework. Those are the proposals which we consider this afternoon. He may or may not have talked to his colleague, Mr Chris Leslie, who in another place this Monday said, among other things, that the regulations are generally uncontentious. That seems remarkably at odds with the position taken by the noble Lord, Lord Eatwell.

Unless noble Lords would like me to, I do not want to prolong debate on what is, as I said, a very good piece of legislation proposed by the Commission which has had the UK's full support over the past three years. In answer to the noble Lord’s specific question and contentions, he is wrong in what he says about the passporting of funds. It is true that incoming funds can start accessing the UK market as soon as a complete notification is received, but the FSA does not believe that that will significantly change the processes by which it monitors incoming UCITS today. The funds will still be required to comply with UK law, and the FSA will be able to direct its operator to suspend the promotion of the scheme if it contravenes those laws.

I do not believe in the premise from which the noble Lord, Lord Eatwell, starts. Indeed, in answer to his question, we will be bringing in tighter protection for consumers on 1 July, because that is precisely what, among other things, the instrument does. It improves and simplifies investor disclosure, making it easier for investors to understand the risks involved in what they are buying.

I could go on, but I think that I have detained the House long enough.

Motion agreed.

Undertakings for Collective Investment in Transferable Securities Regulations 2011

Lord Sassoon Excerpts

Monday 27th June 2011 Grand Committee

Moved By

[Lord Sassoon]

That the Grand Committee do report to the House that it has considered the Undertakings for Collective Investment in Transferable Securities Regulations 2011.

Relevant document: 24th Report from the Joint Committee on Statutory Instruments.

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

My Lords, these regulations transpose into UK law the updated fourth EU directive on Undertakings for Collective Investment in Transferable Securities—UCITS IV—and are supplemented by new FSA rules. I will give a little background on the UCITS framework before explaining why the Government are seeking to introduce the new regulations.

The UCITS directive sets out a common set of cross-EU rules for how eligible investment funds should be run. The rules emphasise transparency and consumer protection, which means that UCITS funds are designed particularly for retail investors. However, they are frequently used more widely, including by pension funds and insurance companies. UCITS funds account for roughly three-quarters of funds under management across Europe.

The UCITS framework is very important to the UK fund management industry and to investors. For investors, the directive ensures strong consumer protection—for example, through clarity in marketing—and integrates the EU market, which gives investors a wider and more diversified set of funds to select from. UCITS has been a key contributor to the growth of UK asset management firms. The directive brings down barriers, allowing them to market across the EU based on authorisation by the FSA. The UCITS brand is recognised worldwide and EU fund managers market it globally. There are now some £500 billion of UCITS assets under management in the UK. This is the third update to the UCITS directive since it was introduced in 1988. It is intended to ensure that the market can operate more efficiently, bringing further industry and consumer protection benefits.

UCITS IV addresses four widely recognised shortcomings. The first is the difficulty that fund management companies face in establishing UCITS funds in other member states. UCITS IV removes this barrier by streamlining the way UCITS funds are notified in other member states. Funds can access the market without delay once their fund manager has notified the domicile’s regulator.

The second shortcoming relates to investor disclosure. UCITS rightly emphasises clear and transparent disclosure to retail investors so that they can easily understand the information about the fund that they are considering investing in. In practice, the requirements have led to prospectuses that are too long and complex and do not allow investors to make effective comparisons between UCITS funds. UCITS IV improves investor disclosure, replacing the required prospectus required with key investor information that will be contained in a simple document and will give key facts to investors in a clear and understandable manner.

Thirdly, European funds are often not taking advantage of economies of scale and are generally smaller than their American counterparts. Again, this has led to increased costs for investors. The directive addresses this in two ways. For the first time, UCITS will allow master feeder structures to be marketed across Europe. For example, feeder funds in different domiciles across the EU will be able to invest in the same master fund located, for example, in the UK. This will allow a single portfolio of assets to be offered across jurisdictions and for different types of investor. The directive also introduces a framework to allow UCITS funds to merge across borders, again removing a barrier to the creation of larger funds.

The final criticism made of UCITS is that it prevents specialisation. All the most important activities associated with a fund’s management have to be located in one member state as only the fund can be passported. So, in practice, even though much of the investment management activity may be carried out in the UK, funds not based in the UK would have to establish extra fund management companies in the domiciles of each of their funds. That has pushed up the administrative costs that ultimately have to be borne by the investor, and prevents gains from scale and specialisation.

UCITS IV introduces an effective management company passport. This allows a management company to operate a fund in a different member state without the need to be established in the member state of the fund. To support this, UCITS IV requires improved co-operation between UCITS regulators, particularly when they are supervising a UCITS management company and fund established in different member states.

The new UCITS regime has been warmly welcomed by the UK industry, which considers it a further opportunity to grow, while serving investors better. The Government are taking all available means, within the current fiscal constraints, to maintain and build on the UK’s lead as a centre for asset management, and that includes capitalising on UCITS IV.

In particular, the Government want the UK to be a home for new master funds. To achieve that, we are working with industry to develop the most suitable vehicle to meet the real demand for a tax-transparent vehicle in Britain. This year’s Budget announced that the Government will legislate to introduce a tax transparent fund, from 2012. We are amending tax law to accommodate the conditions introduced by the management company passport, removing any risk that a foreign UCITS fund may become taxable in the UK as a result of having a manager resident in this country.

I hope that the Committee will support the making of these regulations today. I hope that this brief speech has reassured noble Lords that the regulations will bring considerable benefits to both the UK industry and consumers, and that they will therefore gain their support.

[Lord Eatwell]

My Lords, I do not like this legislation, because it is moving in exactly the wrong direction with respect to regulatory responsibility in a multijurisdictional context; namely, it is legislation that empowers the home regulator, not the host—and this when recent events, particularly in international banking, have shown beyond all reasonable doubt that power should be flowing in the opposite direction, towards the host regulator.

I understand that one of the ultimate objectives of the programme to create a single market in financial instruments in Europe is to make the home-host distinction irrelevant. That can be done only by the development of a regulatory regime in which the domain of the regulator is the domain of the market—that is, there is effectively a single regulator for the entire market space. However, that is not the case in the EU, or the EEA, and will not be in the foreseeable future; indeed, I rather suspect that the Government hope that it will not be the case. Therefore, the Government must face up to the fundamental weakness of home-based regulation—that it encourages regulatory arbitrage.

It may be argued that one of the purposes of these regulations is to encourage the adoption of common standards, to which the noble Lord referred, particularly in conduct of business regulation, and that that will tend to reduce the potential for arbitrage. We hope that that is true, but arbitrage will not be eliminated. For example, different enforcement standards can provide rich pickings for mobile and perhaps not entirely respectable firms. That is evident even in the much more coherent financial space that is the United States of America. It is far more likely in the somewhat less coherent European Union.

I was surprised that I could find nothing in the Treasury’s impact assessment that refers to the impact of regulatory arbitrage. Nor could I find any reference to the role of the new European Securities and Markets Authority, the successor to CESR, which might be seen as a medium-term solution to the single-regulator problem. What is the Treasury’s assessment of the impact of this legislation on regulatory arbitrage? Is the Treasury content that regulatory arbitrage is in the best interests of UK consumers? If not, what steps is the Treasury taking to discourage regulatory arbitrage, and more generally, what are the costs and benefits of such arbitrage for the UK, as will be encouraged by these regulations? What will be the role of ESMA in the definition of procedures to be followed in the UK both in the short and medium term?

A key element enhancing the likelihood of regulatory arbitrage is the simplified notification procedure to which the noble Lord referred. This removes the right of national regulators to vet funds before they are marketed. Is that not a regulatory weakness at a time when the need for the efficient and effective regulation of financial instruments has been clearly demonstrated? Why are we giving up our right to vet instruments marketed to UK consumers? The FSA or any successor organisation will now have a significantly diminished capacity to ensure that new fund managers seeking to enter the national market will conform to our standards.

This leads to the vexed question of consumer protection. The impact assessment, in considering the role of the Financial Ombudsman Service, states:

“We have also asked whether … FOS referral rights should be made available in: Scenario 3—a UK management company operating a UCITS authorised by a regulator in an EEA member State other than the UK, on a cross-border services basis”.

The assessment apparently asks the question, but unfortunately does not tell us the answer, so could the Minister tell us now? Will UK consumers have access to the FOS in such circumstances and, if so, what authority will the ombudsman have with respect to activities authorised in another jurisdiction? When answering these points, perhaps the Minister would like to consider whether his answer would be the same were the relevant authority to be, say, Romania or Malta. That is not a criticism of those states; rather, it is a reflection on their capacity to manage complex instruments. So the crucial question, as yet unanswered, is: what extra measures are Her Majesty’s Government taking to protect UK consumers once UCITS IV is agreed?

Finally, I turn to the question of the review of the impact of this legislation. The Explanatory Memorandum states that:

“The Treasury will review the operation and effect of the Regulations within five years”.

However, the European Commission plans to make further reforms regarding the roles and responsibilities of UCITS depositories and expects to publish proposals later this year. There are therefore no plans to have a post-implementation review until these further changes have been developed and proposed. Is that wise? Are we not likely to get into something of a muddle as to the impact of various changes layered upon one another over time? The changes about to be implemented have significant ramifications for the regulation of fund managers in national markets and on the options available to consumers. Would a review of the current changes not be in order sooner, regardless of other changes being proposed, to ensure that any problems are identified and addressed before they develop?

While this legislation will undoubtedly increase consumer choice by easing the market access of UCITS managers throughout the EEA, I cannot but feel, despite all the warm words on exchange of information between regulators and the introduction of the key investor information document, that it represents a significant diminution of consumer protection. That, to say the least, is unfortunate.

[Lord Sassoon]

My Lords, I thank the noble Lord, Lord Eatwell, for his contribution to the discussion, but I am sorry that he does not seem to see much of merit in what should be a sensible piece of tidying-up of a regime in Europe which has been in place since 1988. It has taken with it the interests of not only the industry but also the consumer groups as it has been developed successfully through three amendments—and now the fourth—to the directive. We have transposed the directive by way of copy-out without any gold-plating. It rather surprises me that the noble Lord takes this basic stance to a framework which has stood consumers across Europe very well for a considerable number of years and not to date raised any of the concerns that he suggests that this series of amendments might raise.

I shall go through those concerns. I hope that the noble Lord agrees that there is considerable work to be done to complete the single market, whether it is fund management, other parts of financial services or business services more generally. In areas of completing the single market, consumer protection has to be taken seriously but I would interpret that, as a starting position, as not wanting to help complete the single market. That is protectionist in its import if not in the intention, given how the noble Lord, Lord Eatwell, spells it out. That is an unfortunate starting point. We should be looking at ways to sensibly advance what is a well worked regime and to see how we can enable both consumers and the financial services industry to take advantage of sensible further development and the opening up of the single market.

On the noble Lord’s specific concerns, there are two aspects to the question of regulatory arbitrage. First, in the regime, the directive leaves little room for member states’ discretion. It is not that the UK will be transposing these rules in one way and other member states in a radically different way. I know that this is probably not the main thrust of the charge that the noble Lord made on this but it is important to be clear that it is not the rules themselves that will give any significant scope for regulatory arbitrage. Beyond that, it is of course important that we ensure in the UK that funds passported into the UK are suitably regulated. Broadly speaking, that is what has happened under UCITS to date. There are already a good number of funds passporting into the UK under the UCITS directive. The FSA has powers to regulate their marketing activities. This is not opening up some completely new avenue here.

[Lord Eatwell]

The noble Lord is quite wrong. It certainly is new. The whole point of the new regulation is that funds can be passported into the UK without the prior agreement of the FSA. That is entirely new.

--- Later in debate ---

[Lord Sassoon]

My Lords, it is completely possible—it is done widely now—to passport funds into the UK or other European member states. What is new is that, for example, there will not have to be a multiplicity of management companies set up, so that the passporting in will happen on a much more flexible basis. That is why in UCITS IV there is the introduction of enhanced supervisory co-operation measures between European regulators, precisely to take account of this point. The noble Lord may shake his head and tut-tut but this is what the directive introduces, precisely to address the sorts of concern that he has.

For example, if the FSA has concerns that an inwardly passporting fund is not being managed in accordance with the directive, it is laid out how it can raise the matter with the home state regulator, which must take appropriate action and inform the FSA of the outcome. While I accept that not all regulators will necessarily have the same capacity round Europe, the fact that the FSA or other host regulators will have those sorts of powers gives adequate protection given the sort of regime that we are talking about. We are not talking about bank capital or things that go to the heart of financial stability. Therefore, it is important that the proposed regime is proportionate. The points the noble Lord raises are very reasonable but they have been thought about and are accommodated in the regime.

Arrangements regarding access to the FOS and to compensation arrangements for foreign funds passported into the UK are covered by FSA rules. The FSA rules require that EEA UCITS management companies that passport into the UK in order to operate a UK-authorised UCITS fund will have to contribute to the FOS and FSCS levies so that they are treated equivalently to UK-authorised firms carrying on the same activity. If a claim arises against such an EEA firm under the FSCS rules, it will be met from the general levy on firms in the fund management subclass. We believe that that is appropriate and justifiable because of the need that the noble Lord properly identifies to protect eligible UK investors.

I hope that I have addressed the two main issues which the noble Lord raises on this regime. As I have said, the regulations will work alongside FSA rules to implement the fourth UCITS directive. If they are approved by this House, it is intended that they will come into force on 1 July 2011. The Government will in parallel continue to develop the tax and regulatory landscape to ensure that the industry is able to take full advantage of new opportunities provided by the directive, and to maintain—the noble Lord may not want to see this but the Government do—the UK’s position as a major centre of fund management activity in Europe.

[Lord Eatwell]

My Lords, I am very keen that the UK fund management industry should develop, grow and be successful; whether this piece of legislation will contribute to that only the future will tell. My main concern is consumer protection. I also asked when the regulations would be reviewed.

[Lord Sassoon]

The noble Lord is often one step ahead of me; I was coming to exactly that point. One of the best answers to the charges that the noble Lord puts is review. It should be good regulatory practice to review any regulation or directive of this kind. Indeed, the Commission is required to review the UCITS IV directive two years after its implementation. The Government will, of course, continue to monitor the UCITS framework and engage constructively with the European review. We do not anticipate the noble Lord’s worst fears being justified but if that is the case a review is indeed built into the structure to address anything that arises.

I hope that I have addressed the noble Lord’s concerns on the directive. Having heard that those concerns are already addressed in the directive, I hope that the Committee will support the making of these regulations.

Motion agreed.

Greece: Default Contingency

Lord Sassoon Excerpts

Monday 20th June 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 honourable friend the Financial Secretary to the Treasury. The Statement is as follows:

“Honourable Members will be aware of the recent developments in Greece. There has been considerable media speculation about what this means for the Greek adjustment programme and potential market reactions. I am not going to engage in speculation on what may or may not happen, but give the House an account of the facts as they currently stand.

Let me begin with some background on Greece and the financial assistance package. The international financial assistance package for Greece was agreed in May 2010. The package is composed of two elements: a loan of €30 billion from the International Monetary Fund, and €80 billion of bilateral loans from euro area member states. Although they were created at a similar time, neither the EFSM, which is backed by the EU budget, or the euro area-only EFSF contributed to the package for Greece. The adjustment package requires Greece to undertake significant adjustment efforts.

There are some very difficult questions that Greece has to address now, because of the assumption when the package was put into place that Greece would be able to access market funding again in 2012, which looks unlikely in current market conditions. The House will also be aware of political developments in Greece and that a new Cabinet has been appointed; the Government will soon be subject to a vote of confidence in the Greek Parliament. The Greek Parliament will also be voting on a medium-term fiscal strategy, which is a key element of the conditions attached to the current adjustment programme, later this month.

Against this backdrop, the euro area member states have been discussing next steps. The euro group released a statement today calling on,

‘all political parties in Greece to support the programme’s main objectives and key policy measures to ensure a rigorous and expeditious implementation’.

The statement also said that Ministers will,

‘define by early July the main parameters of a clear new financing strategy’.

This is a statement from the euro area member states. Let me be clear: the UK has not been involved in those discussions. We are not participating directly in the May 2010 package of support for Greece and there has been no formal suggestion either of UK bilateral loans or for use of the European financial stabilisation mechanism, which is backed by the EU budget. The UK only participated in the May 2010 package for Greece through its membership of the IMF. So the burden of providing finance to Greece is shared between the IMF and euro area member states, and we fully expect this to continue. Our position on this is well understood in the euro area.

The UK believes that the international community needs a strong International Monetary Fund as an anchor of global economic stability and prosperity, and over the past few years we have seen how important that role can be in times of crises as the IMF has taken swift and decisive action to support the global economy. There is of course no room for complacency. The Treasury, together with the Bank of England and the FSA, is monitoring the financial system, including the euro area, on an ongoing basis. Many scenarios are considered as part of the normal policy development process, but honourable Members will agree that it would not be appropriate for me to be discussing the detail of those scenarios. May I also remind honourable Members that UK banks have little direct exposure to Greece?

The continuing uncertainty in the euro area is also a reminder of the benefits of taking early action to stabilise and recapitalise the banks, as the UK has done. The UK banking system has developed a strong capital position, which has allowed it to become more resilient and will help insure it against future risks. UK banks have made good progress in sourcing funding despite difficult market conditions.

The difficulties faced by eurozone countries such as Greece and Portugal reinforce why it is right to pursue the course we set last year to tackle the deficit. The House should reflect that our deficit is larger than that of Portugal, but our market rates are similar to those of Germany. The action we have taken to strengthen the country’s finances stands us in good stead during this period of instability in the eurozone. No one on either side of this House should lose sight of the importance of these decisions in protecting the UK economy”.

My Lords, that concludes the Statement.

--- Later in debate ---

[Lord Sassoon]

My Lords, I shall try to respond to the noble Lord’s questions one by one. First, he asked about the exposure of UK banks to Greece—not only the direct exposure but the wider exposure. It is important to recognise that the exposure of the UK banks to Greece is modest relative to that of other countries. For example, the exposure of the UK banks to the Greek public sector is $4 billion, which compares with the $22.7 billion exposure of the German banks to the Greek public sector. The total exposure of the UK banking system to Greece, including other credit commitments, is of the order of $19.2 billion. To put it into context, that compares with outstanding credit commitments to Portugal of more than €30 billion and to Ireland of the order of €180 billion.

I will not comment on what the ripple effects might be. In repeating my honourable friend’s Statement that the Treasury, the Bank and the FSA are running a whole range of scenarios against which we test the resilience of the UK system at any one time, I refer the noble Lord, Lord Eatwell, and other noble Lords to the financial stability report—the regular six-monthly report—that will be forthcoming from the Bank of England within the next few days, which will no doubt give an updated assessment in the wider context of how the Bank sees these matters.

On the question of contingency measures, the critical issue here is that the UK banks have been recapitalised and have been through stringent stress tests. They continue to be subjected to the appropriate stress tests by the FSA. They are in a strong position. The Merlin agreement has been signed. It is a much more comprehensive agreement than anything that the previous Government had to ensure the continuing flow of credit, particularly to small and medium-sized enterprises. I agree with the noble Lord that this is a critical issue. There is absolutely no suggestion that any of the events that we are talking about in Greece will have a direct impact on the ability of the banks to rise to the commitment they have made in the Merlin agreement.

The other thing that is absolutely critical here is that the UK continues to retain the utmost confidence of the international markets. The fact that interest rates on the 10-year benchmark gilt are this evening standing at 3.22 per cent, with spreads that have narrowed against the benchmark German bund since the general election, shows the confidence that the international markets have in the strong position of the UK. Those low interest rates enable the banks to fund themselves and to lend on to British small and medium-sized enterprises in order to underpin the recovery of the economy.

That takes me directly to deficit reduction. I am very grateful to the noble Lord for feeding me the lines which make the critical points, because it is only as a result of sticking to the deficit reduction plan that we have the low interest rates that mean that our businesses can be supported by the banks in this very difficult international climate. If we were doing what the shadow Chancellor proposed last week—unfunded tax reductions which would cost £51 billion over the lifetime of this Parliament—we would very soon lose the confidence of the international markets, our interest rates would zoom upwards and our banks and, indeed, individual lenders would be in a very serious position. Therefore, we will stick to our deficit reduction plan, as recently endorsed by the IMF in its latest report.

The noble Lord referred to our position in Europe and our contribution to the debate. Noble Lords who were present for our very interesting debate on Thursday of last week on your Lordships’ European Union Committee’s report on EU economic governance will have heard me explain at length how we are fully involved at every stage in discussions to make sure that the eurozone arrangements strengthen fiscal governance and that we drive forward the wider market reforms of the 2020 vision. The UK is absolutely central to discussions ensuring that what we need in Europe to get us out of the weak situation that others are in—this applies inside or outside the eurozone, but particularly within it—are the market reforms that will bring sustainable growth and ensure that we do not have these sorts of Greek problems into the future.

[Lord Hamilton of Epsom]

My Lords, would my noble friend like to comment on press reports that Standard Chartered Bank is ceasing to be involved in short-term interbank transfers with European banks? Does he believe that to be true? Is it happening with other British banks? If so, what are the implications?

[Lord Sassoon]

My Lords, I am not going to comment on what is going on in the markets and with individual banks at all, and I am sure that my noble friend would not expect me to. However, I would make the point, which was also made in the Statement, that UK banks have been able, in very tough market conditions, to improve their funding position very considerably over the past year and more. The overall situation of the interbank market is far better—although we should not take any of these things for granted—than it has been at points during the financial crisis. It is therefore important, as my noble friend reminds us, that confidence within the banking system enables there to be liquidity. As I say, we are in a much better position in that respect than we were during the financial crisis itself.

[Lord Myners]

My Lords, I start by congratulating the Minister on taking longer to answer questions than he did to repeat the Statement given by his honourable friend in the other place. One might suggest that the reason we have low interest rates and banks are not lending is more to do with the fact that the economy is moving back towards recession than for the reasons that the Minister gave. Let me ask three short questions that I think can be answered by short and quite factual answers. First, have the Government absolutely ruled out any use of the EFSM in support of Greece or any other European nation, over and above the commitments already made? Secondly, has the Bank of England accepted Greek sovereign credit as collateral for loans made by the Bank of England to the European Central Bank, and therefore for loans on which the Bank of England is exposed? Thirdly, are we as a country exposed to the need to recapitalise the ECB should Greece default on its sovereign debt?

[Lord Sassoon]

On the role of the EFSM, I would refer the noble Lord to the words of the French Finance Minister, Christine Lagarde, when recently interviewed on the BBC. She talked about the package for Greece being one of bilateral loans, and she saw the likelihood of any future support for Greece as a continuation of that bilateral arrangement. So there has been no question of using the EFSM in the context of Greece. As for the question on the Bank of England, I am certainly not going answer for what the Bank of England does or does not take in—nor would the noble Lord, Lord Myners, for one minute begin to think that I would start answering questions about the bank’s collateral policies. As to the capitalisation of the ECB, that is an entirely hypothetical question, as the noble Lord knows full well.

[Lord Higgins]

My Lords, is it not apparent that the Greek economy cannot become competitive in the foreseeable future at its present exchange rate? Greece will be condemned to an endless succession of deflation and bailout unless it leaves the euro. Is it therefore not extremely important that discussions by the British Government and in the European Community should take place on how to minimise any collateral damage should that come to pass?

[Lord Sassoon]

My Lords, I am not sure that I entirely accept my noble friend’s starting premise. The position is that Greece is a member of the eurozone, and the eurozone will continue to be the eurozone. We want to see the strengthening of fiscal and economic discipline within that zone. When the IMF put together and led the programme that Greece signed up to—which had elements of fiscal consolidation, structural fiscal reform and wider structural reform—it was done precisely in the context of Greece continuing to be a member of the eurozone, and that is the continuing position. The package has been put together and the new Government have some decisions to take. The IMF is coming up to its regular review before the next drawdown of the package, but that is entirely in the context of Greece being able to finance itself on an ongoing basis within the eurozone.

[Lord Lamont of Lerwick]

Has my noble friend seen the extraordinary anti-German graffiti and the slogans being shouted by the crowds in Athens? Does that not illustrate what Professor Martin Feldstein, the Nobel prize-winning economist at Harvard, has always said—that the euro, far from bringing countries together, increases tensions between them? Can my noble friend also explain what sense there is in Ireland and Greece borrowing more money to lend to Portugal, and Ireland and Portugal borrowing more money to lend to Greece?

[Lord Sassoon]

My Lords, I have not been on the streets of Greece or seen what is going on in Athens, but clearly it is regrettable if anti-German sentiments are being expressed on the streets there. However, I have not been following the detail of the riots. The main thing is that we need to support the Greek Government and encourage them, as the eurozone Ministers have done in their statement today, to progress their package and enable the IMF to complete the upcoming assessment. As for the second-order effects of who needs capital where in order for loans to flow, my noble friend reinforces the point that this is a very interconnected system and the ongoing work on the short-term and medium-term stability of the eurozone has to be mindful—as we have been reminded already this evening—of the interconnectedness of the systems at every level.

[Lord Davies of Stamford]

My Lords, is it not the case that this is not a euro crisis, as many commentators have been trying to pretend, but a Greek funding and fiscal crisis caused by excessive borrowing by the Greeks, irresponsible lending and mispricing of risk by lenders? It is not the first time that we have seen that in the past year or two. Does the Minister agree that this would have arisen irrespective of the currency that Greece happened to have? It would have happened whether Greece had been in the dollar zone or the pound sterling zone or still had the drachma. Secondly, to avoid the risk of a considerable panic, is not a renegotiated package for Greece necessary, providing for an orderly restructuring of its debts, a credible series of repayments and a set of definite figures for offsets and provisions by Greece’s creditors? Is it not time that we began to think in those terms? Thirdly, is it not the case that Greece leaving the euro or a Greek devaluation is the opposite of what is required? If Greece went back to the drachma, it would of course greatly enhance the value of its euro debts—and its debts are primarily in euros—but that would increase the burden on Greece and increase the portion of Greek assets that overseas lenders and investors would have to write off. Such a move would be counterproductive and damaging from our point of view as well. Moreover, devaluation never works as a stimulus to growth unless wage bargainers are under monetary illusion and cannot tell the difference between nominal and real wages and do not ask to be compensated for the reduction in real purchasing power. That is a most unlikely situation for Greece at the present time.

[Lord Sassoon]

I agree with the noble Lord, Lord Davies of Stamford, that if the UK continued with the excessive deficit policies of the previous Government, we would be in a terrible mess in this country. Whether you are in or out of the euro makes no difference, and the UK would be experiencing considerable problems if we had not gripped the deficit. I agree with the implication of his analysis on that point. On the second question about sustainable financing, that is precisely where the IMF starts its assessment of debt sustainability. The critical first plank of sustainability for Greek debt hinges on Greece sticking to its agreed fiscal consolidation path. All else flows from that. As for the Greeks or anyone else leaving the euro, that is a hypothetical question and not one that we should spend any time on.

[Lord Newby]

Does the Minister agree that it is critical not just for Greece but for the UK economy that there is not a disorderly Greek default? In that circumstance, does he agree that the least worst option in what is a difficult situation is to agree an orderly re-profiling of Greek debt? If so, will the Government support moves by the eurozone Finance Ministers to bring about such a re-profiling?

[Lord Sassoon]

I certainly agree with my noble friend that the last thing anyone wants is disorder, whether default or anything else. As I made clear, the next steps are, first, a question for the eurozone itself. We are not directly involved in the eurozone discussions. To address my noble friend’s point, the statement from the euro group today reads:

“Ministers agreed that the required additional funding will be financed through both official and private sources and welcome the pursuit of voluntary private sector involvement in the form of informal and voluntary roll-overs of existing Greek debt at maturity for a substantial reduction of the required year-by-year funding within the programme, while avoiding a selective default for Greece”.

As I said, that is a matter for the eurozone Ministers, but I think that they are addressing the issue in the way that my noble friend suggests.

[Lord Lea of Crondall]

Would the Minister care to remind the House of the percentage of, first, the euro area, and, secondly, of the European Economic Area, of which we are a part, which is constituted by the Greek economy? I would not say that it is peanuts, but is it not a rather low percentage? If Europe wished to, could it not help to restructure the Greek economy—with stringent terms, by the way? Would not the whole House stand behind that policy agreed around Europe and say that we want it to work—God’s speed, we want it to work? Are there not some Members of the House who do not want it to work?

[Lord Sassoon]

I am happy to confirm that Greece is a relatively small part of the euro area but, as we have already identified this afternoon, Greece is interconnected, as are all the European and global financial markets. Therefore, one should not in any way trivialise the Greek situation and the capacity for difficulties in the markets.

That said, it is also important to be clear about the lines around whether the UK should or should not be involved in these matters. We are not a member of the eurozone; we are not going into the eurozone; and we are not going to make any preparations to enter the eurozone in the lifetime of this Government, this Parliament. We must make sure that, on the one hand, we are not part of any ongoing and permanent support mechanism for the eurozone; at the same time, we have to play a full part to ensure that the eurozone economic governance is fit for purpose.

[Lord Flight]

Does my noble friend agree that if relatively less or more successful countries or economic areas are to share a currency, there is a requirement for substantial ongoing transfer payments, as is the case within the US and even within the UK? Secondly, does he by any chance know roughly what proportion of Britain's exports to the eurozone are to what I would call hard northern Europe, compared to softer southern Europe?

[Lord Sassoon]

I am not able off the top of my head to break down the analysis of our exports, and I am not quite sure where my noble friend would draw the line between hard and soft. The critical point here is that more than 40 per cent of our exports go into the eurozone. Of course, they are generally distributed in relation to the size of economies, with Ireland, as we discussed in relation to the Irish package, having for historical reasons a disproportionately large share. My noble friend makes the point that it is absolutely in the UK's interest to ensure that the eurozone economies are successful, because that is where the largest part of our exports go.

[Baroness Noakes]

Does my noble friend think that a new set of arrangements made within the euro area by the IMF for Greece will work this time? It did not work last time. Unless there is some confidence that new arrangements made to support Greece will work, in the sense that they can restore the Greek economy—there is very little sign that the Greeks are able to take any medicine which would restore it to health—would we not be better served by working within Europe to help our European friends understand that letting Greece remove itself from the eurozone and take the default that it clearly is in is in everybody's interest?

[Lord Sassoon]

My noble friend Lady Noakes asks a very good question. It is inevitable that people will ask: was the package appropriate? One should take comfort from the fact that the IMF has a long and successful record of implementing restructuring programmes. The IMF programme for Greece was put in place in market conditions and with a market outlook somewhat different from that which Greece and the eurozone subsequently encountered. The first requirement is for the Greek Government to be encouraged to get back on track, to stick to the agreed fiscal consolidation path. Beyond that, it is for the IMF to see what needs to be done. The key thing is for the original plan to be back on track. I therefore think that we should not at this point second-guess whether the plan is or is not appropriate.

I will not be drawn into whether the Greek situation would be better in one hypothetical scenario or another.

[Lord Tugendhat]

My Lords, does the noble Lord agree that, however brave the Greek Prime Minister is —he has shown extraordinary guts and determination—and however much a new Greek Government might wish to pursue the austerity programme and the conditions being laid down, there must be room for doubt whether any Greek Government can secure the degree of self-discipline within the country that would enable them to meet the conditions of the IMF and of the other European countries? That being the case, does the noble Lord not agree that the great interest of the United Kingdom Government lies in co-operating as closely as possible with our eurozone partners in putting together contingency plans to meet whatever eventuality may occur, because the Greek Government are extremely unlikely to be able to live up to their promises?

[Lord Sassoon]

My Lords, I am not going to be drawn by my noble friend Lord Tugendhat into giving a commentary on Greek politics, which I am not qualified, in any case, to do. However, the Greek Parliament will hold a vote of confidence on the new Government very soon—I believe that it may be tomorrow. Critically, the Greek Parliament will vote on a medium-term fiscal strategy consistent with the agreement into which they have entered. That vote in the Parliament is expected to be later this month. I think that it would be wrong to question the commitment of the Greek Government and Parliament to the package. On contingencies and close co-operation, I can only confirm that, either in terms of what is being done by the authorities in the UK or in co-operation with our European partners, we will certainly look at a wide range of contingency plans and scenarios.

EUC Report: Economic Governance

Lord Sassoon Excerpts

Thursday 16th June 2011 Lords Chamber

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

My Lords, I thank the noble Lord, Lord Harrison, and all the members of the sub-committee for their work on this issue and their excellent and timely report. I learn new things about the way in which this House operates on almost every occasion when I stand at the Dispatch Box. After seeing how the topics had been parcelled out and questions were fired at me from left, right and behind, I now understand what effective committee work is all about. In the brief time that I have, I will not be able to give detailed answers to all the questions. I thank all noble Lords who have contributed to this debate, in which the usual degree of repetition was absent; we have covered a very wide range.

The euro area has had and continues to have a very tough time. The weak economic growth of the euro area is a symptom of the fundamental problem that is faced: weak economic governance. That is the starting point that the noble Lord, Lord Woolmer of Leeds, and other speakers have drawn attention to. In answer to the noble Lord’s question about the current situation—there were also other references to restructuring packages—the Government’s position on possible further bailouts for Greece is unchanged, and, incidentally, is the same as that of the French Finance Minister, Madame Lagarde: we do not want to be part of any second European assistance package for Greece. Indeed, no such proposal has been made. In answer to the broader question asked by the noble Lord, Lord Harrison, it would be wrong to rule in or out the participation of the private sector in any package for Greece or anywhere else. This important issue continues to be debated, though, and it should be.

I was interested in and pleased by my noble friend Lord Marlesford’s discussion in this area, reminding us of what we are doing in this country, particularly with the proposals that the Government are bringing forward today to ensure that we have mechanisms in place to identify systemic risks and deal with them effectively. I thought for a moment that I had fallen asleep, it was 4.30 pm and we were already talking about the financial regulatory structure in the UK, which we will be doing later today. Following last year’s EU economic task force and in the context of the ongoing difficult situation, the Commission brought forward six draft pieces of legislation on fiscal and macroeconomic surveillance that aimed to strengthen current monitoring mechanisms and to give early warnings of economic problems in member states. It proposes tough sanctions for euro area countries that step out of line. I will come back to sanctions in a minute.

I stress that we are not part of the single currency but, as the committee’s report notes, a stable eurozone is firmly in the UK’s interests, as is ensuring the success of measures to bring it to economic stability. I trust that there is no doubt about that. I am sorry that the noble Lord, Lord Liddle, thinks there is anything Janus-faced about it; we are working hard and co-operatively to ensure that the measures are appropriate.

Many commentators agree with the committee that the euro area’s problems were caused by tensions between centralised monetary policy and decentralised spending decisions. The proposed legislation seeks to address that through increased co-ordination. In broad terms, the Government welcome the pragmatism of the proposals. We support the refinements to the stability and growth pact that will help to prevent countries from running unsustainable deficits in good times. As the committee report notes, a gradually escalating system of sanctions will mean that member states think twice before breaching the pact.

The noble Lord, Lord Haskins, rightly noted that the most effective sanctions will and must come from the market. A number of questions were nevertheless properly raised about sanctions. We agree that a limited use of reverse qualified majority voting should ensure that member states cannot avoid sanctions through political deal-making at ECOFIN of a sort that was seen from member states in the past. On the questions asked by my noble friends Lord Hamilton of Epsom and Lady Maddock, we think that reverse QMV is one way to address the sanctions question. There should be limits to the use of reverse QMV. We do not think that it would be right to remove voting rights more generally. That would require a treaty change, and the UK would have the right to veto any such proposals.

I reassure the House, specifically my noble friend Lady Maddock, that the UK is not subject to sanctions under the stability and growth pact. The treaty is clear that they apply only to euro area countries. In addition, the UK’s opt-out protocol that was negotiated at Maastricht is clear that we are exempt from such fines.

Another issue that my noble friend raised was the extension of sanctions in the next financial perspective. I assure her that the Van Rompuy task force report clearly stated this with regard to sanctions under the stability and growth pact and under the next financial perspective. Sanctions may be rolled out for other euro area member states but not applied to the UK, so I hope that the position is clear.

I should perhaps clarify a point regarding the fiscal proposals. The noble Lord, Lord Liddle, asked about this. The Government did not disagree with the principle of a benchmark for assessing the pace of public debt reduction. Getting debt on to a downward path is of course essential for the eurozone members just as it is for the UK. However, we had concerns that the original Commission proposal was too rigid and might not take sufficient account of debt dynamics that are beyond a member state’s control. I am pleased to report that we have sought amendments in council to clarify that the benchmark really will be a benchmark rather than a concrete rule.

The Government agree with the committee’s view that while fiscal discipline is important, it will not be enough to prevent or manage future crises. That will require the EU to have the right macroeconomic warning mechanisms to identify them and the right tools to manage them. Economic imbalances are already monitored under the broad economic policy guidelines and the Europe 2020 initiative, but that has lost momentum in recent years. The Commission proposes a more systematic way of identifying economic imbalances through a scoreboard of economic indicators. I am sure that noble Lords will agree that transparent analysis of member states is important, and these indicators will help to achieve that.

I understand the note of caution that the committee has sounded in its report. Yes, the success of this monitoring will depend heavily on the degree of political will in council, but ECOFIN will now be forced to consider the evidence from the indicators on the scorecard. The Government agree with the committee’s recommendation that the composition of the scoreboard should be subject to regular review, and we are negotiating to achieve that. The Government also agree with the committee that all these systems must be intelligently interlinked. We want to see Finance Ministers having realistic discussions of policy problems, drawing on evidence from Europe 2020, the stability and growth pact and European Systemic Risk Board recommendations, if necessary. We want clear, frank recommendations for member states, and help and support for them when they act to improve their economic position and boost growth.

Finally, the proposals for a euro area crisis resolution mechanism, or European financial stability mechanism—the ESM—as it is known, are being debated in parallel to these legislative discussions. The need for them was stressed by my noble friend Lord Hamilton of Epsom and the noble Lord, Lord Woolmer of Leeds. The Government very much support the ESM, which will provide euro-area countries with the financial equivalent of a parachute. We agree with the committee’s view that conditionality is vital and that there must be no question of this being free money for fiscally irresponsible member states. Like the committee, we welcome the explicit recognition that the IMF will play a technical and advisory role in all future uses of the ESM.

The Hungarian presidency wants to finalise this package of legislation by the time that presidency ends on 30 June. My noble friend Lady Hooper pressed me on the details of this. I regret to say that the ECOFIN discussion on this was at an informal dinner earlier this week that was not minuted. There are some difficult issues, of which my noble friend is clearly aware, which need to be resolved. The Hungarian presidency is working on them, and the European Parliament intends to schedule a vote on the package next week.

I emphasise again the importance to the UK economy of achieving lasting economic stability within and beyond the eurozone. This is the central aim of this legislative package. Throughout the negotiations, the Government have striven to achieve genuine strengthening of economic governance while preserving this Parliament's sovereignty over all aspects of economic and financial policy. I am satisfied that we are on track to achieve those objectives and that the report of your Lordships’ European Union Committee has made a most useful contribution to that process.

Regulatory and Banking Reform

Lord Sassoon Excerpts

Thursday 16th June 2011 Lords Chamber

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

My Lords, I shall now repeat a Statement made in another place by my honourable friend the Financial Secretary to the Treasury. The Statement is as follows.

“It is now well known that the tripartite system set up by the previous Government failed spectacularly in its mission to maintain stability. The decision to divide responsibility for assessing systemic financial risks between three institutions meant that in reality no one took responsibility. The crisis dramatically exposed this flaw and cost the taxpayer a vast amount of money.

We cannot allow another crisis such as the one we have just witnessed. Shortly after taking office, we set in train a consultation on reforming our system of financial regulation. Today, after two extensive rounds of consultation, I am presenting to the House a White Paper, including draft legislation, setting out the blueprint for a completely new system of regulation. Let me summarise the main proposals.

A permanent financial policy committee will be established inside the Bank of England. Its job will be to monitor overall risks in the financial system, identify bubbles as they develop, spot dangerous interconnections and stop excessive levels of leverage before it is too late. It has already started operating on an interim basis and is having its first formal meeting today. Subject to legislative progress, the permanent body will be in place by the end of next year.

We will abolish the Financial Services Authority in its current form and transfer its significant prudential functions to a new prudential regulatory authority that will sit in the Bank of England. The prudential regulatory authority will focus on microprudential regulation. It will bring judgment to the vital task of regulating the soundness of individual firms that manage risk on their balance sheet, particularly banks and insurance companies. But we recognise, of course, that these types of firms engage in very different types of business, which is why we propose to provide the PRA with a specific statutory objective for its insurance responsibilities.

We are bringing a new approach to protecting consumers. A new financial conduct authority will oversee the conduct of financial services firms, the operation of markets and the protection of consumers, with new powers to ban the sale of toxic products. I can confirm that as an integral part of its mission to secure better outcomes for consumers and investors, this authority will also have a new duty to promote competition. Judgment, discretion and proactive intervention will be the hallmark of our new regulators.

We are bringing forward this draft Bill for pre-legislative scrutiny, for which a Joint Committee of both Houses will shortly be convened. We are seeking valuable input from Members on both sides of this House. It is in all our interests to get this right.

Last year we also established under Sir John Vickers an Independent Commission on Banking to resolve the debate around the structure of the banking sector in the UK. I am sure the whole House will join me in paying tribute to Sir John and his fellow commissioners for the excellent job they are doing.

The commission’s interim report put forward two particularly important proposals: bail in, not bail out, so that private investors, not taxpayers, bear the losses when things go wrong; and a ring-fence around better capitalised high street banks to make them safer and protect their vital services to the economy if things do go wrong. I can confirm that the Government agree in principle with both these proposals.

Of course, we will await the commission’s final report, but I can tell the House that any reforms will need to meet the following principles: all banks should be allowed to fail safely without affecting vital banking services, without imposing costs on the taxpayer, through reforms that are applicable across our whole banking industry and in a manner consistent with EU and international law. I can also confirm today that we welcome the commission’s recommendations on increasing competition in retail banking and we are working closely with it to achieve this aim.

We are also taking the first steps towards normalising the Government’s involvement in the financial sector. One legacy of the crisis is that today’s taxpayers have a direct interest in several banks through large-scale guarantees and shareholdings. We do not believe the Government should be a long-term investor in financial institutions. It will take some time, possibly several years, before we can make a complete exit from our investments in the banks.

Today I can confirm the start of that process. On the advice of UK Financial Investments, we have decided to launch a sale process for Northern Rock. This follows extensive work over the past three months to consider potential options for returning Northern Rock to the private sector, while generating the best possible taxpayer value. The sale process will be open and transparent and in line with state aid rules. I have already written to the chair of the all-party parliamentary group on mutuals to reassure him that any interested parties can bid for it, including mutuals. This reaffirms the Government’s commitment to actively promoting the mutuals sectors. This does not mean that other options to return Northern Rock plc to the private sector have been ruled out. However, I believe that at this point in time a sale process is most promising.

I also want to make the House aware that, following an application by the Bank of England to the High Court today, Southsea Mortgage and Investment Company Ltd, a very small bank, has been placed into the bank insolvency procedure. This follows a decision by the FSA that Southsea no longer satisfied the FSA’s threshold conditions for operating as a deposit-taker. As such, the Financial Services Compensation Scheme has been triggered and eligible depositors with balances up to the limit of £85,000 are safeguarded. Eligible depositors with amounts in excess of the insured limit of £85,000 may be entitled to receive a share of their savings above this limit as part of the insolvency process.

Finally, I would like to update the House on the ongoing negotiations on international financial regulation. When I was in Brussels yesterday, my message was clear. We must learn the lessons of the crisis and create the foundations for stable and sustainable growth without fragmenting global markets. That is why global standards are strongly in our national interest. Much of the debate has focused on the implementation of the Basel III accord and we have been busy making the case for implementing it in full right around the world, including here in Europe. Last week’s IMF assessment supported our arguments for minimum standards here in the EU, with discretion for national authorities to increase them where necessary.

When the coalition Government came into office, questions were asked about the future of banking and regulation, but they had not been answered. It has been our job to resolve them. Our goal should be a new settlement between our financial system and the British people—a new settlement where the banks support the people, instead of the people bailing out the banks. This Statement today sets out the progress we have made towards building this new settlement and the actions we are taking to complete it”.

My Lords, that concludes the Statement.

--- Later in debate ---

[Lord Sassoon]

I am grateful to the noble Lord, Lord Eatwell, first, for making a clear admission that the tripartite system failed and therefore something needed to be done about it, and, secondly, for welcoming various of the other aspects of what we are doing, including our approach to bank failure and pre-legislative scrutiny. However, the fact that he starts with bracketing together a recognition of the failure of the tripartite system and then questioning the approach taken by my right honourable friend the Chancellor and others of us who are now in the Treasury and what we did in the past is remarkable. We got on to the case in opposition immediately the crisis hit and started to work practically on learning the lessons.

I completely agree with the noble Lord that fine work of analysis was done by the noble Lord, Lord Turner, particularly in his FSA report, and others, but the previous Government had a couple of years in which they signally failed. If they recognised the failure of the tripartite system, they certainly did not tell us then. They had two years in which they could have established an independent commission to look at banking. They could have done the work to analyse what would be a better system but they did none of that. Instead, my right honourable friend the Chancellor, when in opposition, commissioned work from people, including myself. We did a considerable amount of work that put us in a good position, so that when we got into office we launched the rounds of consultation that have led to today’s White Paper. It is not therefore a question of hindsight being a fine thing but of getting on, learning the lessons and starting down the track of implementing a better system.

The noble Lord, Lord Eatwell, went on to question the powers of the FPC. I appreciate that the White Paper is a long document to have absorbed in the past few hours and point to the discussion in it about the possible tools and powers that the FPC may have. In order to move forward on that, we have asked the FPC to come forward with proposals in the next few months—I expect them in the third quarter—for the tools and powers that it believes will be necessary and appropriate to enable it to carry out its function. For the avoidance of all doubt, I will confirm that the FPC will have no role in setting fiscal policy.

The noble Lord then raised the issue of macroprudential and microprudential risks. I thought that his analysis was interesting. Clearly there is a very difficult issue about where the micro and macro areas stop and start and how they relate to each other, which goes to the heart of the problem with the tripartite arrangement. The Bank of England was clearly responsible for analysis of the macro risks but was not given by the previous Government the tools to deal with the consequences of the problems that it found. On the other hand, the Financial Services Authority was responsible for the micro risks—and never the twain shall meet. I am surprised that the noble Lord does not give the Government credit for the fact that we have brought the macro and micro together under the umbrella of the Bank of England precisely to address the problem that he identifies.

The noble Lord mentioned toxic products. Some of these may have been related to macro factors, but one has only to look at the scandal of PPI—not to mention a string of other products wheeled out by the financial services sector over the past few years—to understand that toxic products are most often generated at firm level, and it is appropriate that the conduct authority should have powers to ban them.

The noble Lord went on to ask about the definition of the ring fence. The question of the ring fence should be left to the appropriate experts. The Independent Commission on Banking, chaired by Sir John Vickers, will in the second phase of its work focus on precisely how the ring fence will work; that is what it is doing at the moment. On the specific question of whether the ring fence will apply to EU-passported banks, the FSA’s and in future the PRA’s full rules will apply only to banks headquartered in the UK. EU bank branches that are passported into the UK have as their lead authority the EU home regulation, not the UK host regulation: therefore, any ICB proposals would be implemented consistent with EU law. That is one of the principles enshrined in my honourable friend's Statement.

The question of Northern Rock was raised. As I said, we want to see a competition and are required under state aid rules to have one that is fair and open to all parties. We would welcome mutuals participating in that bidding process. As to whether a mutual outcome would be a greater buttress of stability, that is open to question. Any bidder for Northern Rock or participant in our banking system needs to demonstrate a level of financial stability that meets the regulatory requirements. I think one should not draw a distinction between different categories of institution on that basis.

The last point raised by the noble Lord was about Basel III and the Government’s support for the higher capital requirements under it, I think pointing out that the capitalisation of the Irish banks exceeded the Basel III limits. That enables me to confirm that the Government’s position on this is that for too-big-to-fail banks a capital buffer above Basel III is appropriate to ensure their resilience.

[Baroness Kramer]

My Lords, I must congratulate the Government on their courage in recognising not just the need to reform regulation and the regulatory system, which certainly was not fit for purpose, but to go beyond that to recognise the need to restructure the banking industry in the teeth of a lot of opposition from the industry itself, although a stronger case certainly needs to be made fully to convince all of us that ring fencing is a better strategy than division of the banks.

I shall ask the Minister two questions arising out of today. He talked a moment ago about a new regulatory system bringing together micro and macro, which is what we all wish to see, but he will be aware of the remarks made today by the Governor of the Bank of England, which were quoted in the Daily Telegraph, about reducing the burden of routine collection and focusing on the major risks to the system. He will know that the system collapsed in large part because securitisation and derivatives were piled on top of mortgage loans that were faulty and very often fraudulent. It was the failure to see the link between the micro and the macrosystemic that led to the crisis that we saw. Will he make sure that we do not now have a swing back in the other direction in regulation to systemic ignoring the relevance of the micro?

On the return of banks to private ownership, which is something we all wish to see, will he give some assurances that serious consideration will be given to schemes such as that proposed by my colleague Stephen Williams, MP for Bristol West, which would involve a distribution of shares in part to the public in order that they may gain some of the upside? The Treasury would still receive its funding, but on a deferred basis. Would he agree that UK Financial Investments, being a very silo organisation, is not likely to appreciate the potential benefits of that much wider engagement with the public, sharing upside reward with people who have suffered from the crisis?

[Lord Sassoon]

I am grateful to my noble friend Lady Kramer for her general support for what we are doing and her recognition of how far the Government have already gone in pushing forward with the structural and regulatory reforms. On the micro/macro link, I refer noble Lords to the full, and very interesting, remarks by the Governor last night at the Mansion House because he talked with great coherence and good sense about what the failure of the previous regulatory regime was, which was to collect a huge amount of detailed data that it was unable to analyse to draw out the conclusions.

However, in the new world, experienced bank supervisors are needed who are able to analyse and draw out the picture, which was never difficult—whether it was on securitisation or on a lot of other matters or funding models—before the crisis. There should be meaningful discussions with the banks in terms of the individual banks that they supervise about what this translates to in terms of the exposure of the individual bank’s business model. If my noble friend were to read the Governor’s full remarks, she would see that the Bank is absolutely where she would like it to be on its thinking on this. I got no sense of swing-back in it.

On ownership of the banks, we are well aware of the proposals that have come in, including that from Stephen Williams on mass retail participation. We and UKFI are actively considering mass retail participation as we think ahead to returning the banks into the private sector, which of course is not the same thing. A subset of it would be distributing the banks’ shares for free or on some other basis, which raises value-for-money considerations and quite a lot of technical market considerations. But I can reassure my noble friend that all these proposals will be given due consideration.

[Baroness Turner of Camden]

My Lords, I have here a letter from Unite, the union representing the workforce at Northern Rock. As can well be imagined, the workforce is extremely concerned about its future. It points out that at its height Northern Rock had 6,500 employees. It also ran the Northern Rock Foundation with £200 million of investment in the area. Those in the workforce are concerned not only about their own jobs but about the general impact on the situation in the north-east, where there is a very high level of unemployment and where people have great difficulty in getting alternative work. In any situation in regard to restructurings and so on, it should be a major concern for the Government to ensure that whatever decisions are taken do not worsen the unemployment situation in the area. Everything possible should be done to ensure that employment is kept at a reasonable level. As regards Northern Rock, that does not seem to be the situation.

I am very glad that my noble friend on the Front Bench raised mutualisation because it seemed to me that that is a way in which it might be possible to maintain a much higher level of employment in the area. It is very important to bear in mind concern not just about the financial stability, important though that is, but about what happens to employment in the area and the general standing in the area of not only the financial situation but the economic situation generally.

[Lord Sassoon]

I am grateful to the noble Baroness, Lady Turner of Camden, because these considerations will be ones which prospective bidders for Northern Rock will be asked to address in their bids. Of course, the Government are very mindful of the situation in the north-east and its dependence on the public sector in particular. I am sorry that my noble friend Lord Bates is not here today because I am always refreshed by his reminder to the House that a lot of vibrant new business is being generated in the north-east. But I very much recognise, as do the Government, the problems, and the bidders will be asked to make a lot of these things clear when they come forward with proposals.

[Lord Higgins]

My Lords, I welcome overall this Statement and the speech last night made by the Chancellor on related matters. In many ways, the Chancellor’s speech spelt out what he intended rather more clearly than was done in the Statement today. However, I am very glad that he is sticking to his plan A for the economy, which was so clearly endorsed by the IMF recently. In response to the question of whether it was time to adjust macroeconomic policies, it gave the clearest possible answer—no.

As to regulation, it must be right that the Chancellor is scrapping the tripartite agreement, which had such disastrous consequences. The position was not quite clear from my noble friend’s reading of the earlier Statement. My understanding is that what is being proposed is what the IMF calls a triple peak arrangement; that is, a new prudential regulator, a new financial conduct authority and a new macroprudential authority. Am I right in thinking that there are three bodies rather than two?

I turn to the other question in relation to regulation and to the question of ring-fencing. Personally, I would have preferred the more radical solution of complete separation. I realise the arguments about cost of capital, competition and so on but, after all, American banks did survive quite successfully for a long time under the Glass-Steagall arrangements. But when we come to the question of ring-fencing between the investment part of a bank and its retail part, I am not clear whether it is intended that the ring fence should have holes in it or whether there is to be a complete ban on capital flowing from one side of the ring fence to the other. There seems to be some discussion at the moment which suggests that the ring fence would not be as solid as perhaps some of us would wish it to be.

The other thing that is not clear about whether something is too big to fail is whether, following the establishment of the ring fence, the part of the bank concerned with investment banking, no matter how large, would be allowed to fail but the retail side would not. In other words, there would be an absolute guarantee that the retail part of a bank would be protected by the Government. If that is so, it raises very serious questions of moral hazard. The extent to which the retail banking section has not been devoid of the recent problems arising from risk-taking creates a real problem. Obviously, we will be much clearer about this when we see the White Paper and the pre-legislative scrutiny which takes place. But perhaps my noble friend would clarify precisely what is meant by ring-fencing in this context.

[Lord Sassoon]

My noble friend’s first question was about whether this is twin peaks, triple peaks or whatever. I have always found that a somewhat stale way to analyse the issue because over the past decade constant comparisons were being made between single peaks, twin peaks and so on, so I am reluctant to be drawn into characterising what we are now proposing as any number of peaks. All I can say is that it is emphatically not a triple-peak solution in that the macroprudential and the micro in the PRA are going to be in one body in the Bank of England. So although characterising it as twin peaks is closer to the models that have been analysed by academics and others over the last few years, it gets us back to language that I am not sure is entirely helpful. However, it is certainly not a triple-peak solution.

On the questions around separation and permeability of the ring-fence, the Government will be guided by the independent commission’s final report. But it is also important to recognise what the ICB’s interim report did and did not say. To put it simply, it certainly was not a division between retail and investment banking. The commission acknowledged that a balance has to be struck between imposing very high costs on an important sector and the degree of safety. The point of firewalling is not to eliminate all risk, but to minimise the risk and cost to the taxpayer should a bank fail. The ICB is now focused on these issues between now and September. The principal issues to be looked at by the Government and the Bank of England will be the powers to manage the collapse of any investment bank, were that to happen in the future. As I hope was clear from my honourable friend’s Statement, one of the principles in establishing the ring-fence is to make sure that the taxpayer is not exposed on either side of it. Therefore, getting rid of the risk of moral hazard is at the centre of the construct that we are looking to put in place.

[Lord Hollick]

My Lords, I, too, welcome the Government’s endorsement of the requirement for high-street banks to be better capitalised. However, I share the concerns of the noble Lord, Lord Higgins, about the efficacy and efficiency of ring-fencing, as opposed to total separation. As the Minister will know from his time in the City, banking groups are funded and the Treasury is run on a group basis. To separate the groups and deal with permeability will be extremely difficult. A legal separation would reduce, if not eliminate, the risk of inter-group contagion. It would also allow the risks of the high-street bank and the investment bank—or whatever the Minister chooses to call it—to be properly priced. This would benefit the ordinary consumer. The lower cost of borrowing that a better capitalised high-street bank paid could then be passed on to the borrower.

The second issue that arises on this is, again, a welcome commitment to apply this right across the banking industry. However, many of our banks are headquartered in other countries. Have the Government had any discussions with the Governments of, for instance, the United States and Spain? Do they share the Government’s enthusiasm for this approach? Will the Government also ensure that the lead regulator—whether in the United States or in Spain—will follow the same path?

[Lord Sassoon]

My Lords, there are many questions wrapped up in all that. I am conscious that we have four minutes to go. I repeat myself, but we have set up the independent commission with a suitable group of experts and resourced with a secretariat that is now grappling with precisely these questions. Legal separation has, in the history of the US and Glass-Steagall, proved itself to be an incomplete answer to this. We have to find the best answer. We have set out the Government’s perspective, which is to endorse the principle, and set down the standards by which we shall judge the solution that the commission comes up with. I am sure it will listen to the ideas that are put forward here this afternoon, as well as to all the other submissions that it receives. It is not an easy challenge for the commission, but it is made up of the best people to carry it out.

On the international side, one of the standards by which the Government will judge the solution and decide whether to endorse it is compatibility with the international rules. That is the minimum. That is not what the noble Lord went on to say. As to whether other people will come with us, all I can say is that there has been a high degree of interest in what the commission has come up with in its interim report. People around the world are studying it. We shall see in time whether they will follow it. All I know is that the eyes of the world are very much on the continuing work of the commission.

[Lord Stewartby]

My Lords, I draw attention to a confusing passage in the Statement, which makes the text about micro and macro more difficult to understand. It says:

“The Prudential Regulatory Authority will focus on microprudential regulation. It will bring judgment to the vital task of regulating the soundness of individual firms”.

However, that is not a task for regulation; it is a task for supervision, which is not mentioned in the Statement and caused some confusion in earlier business on these matters. I shall not say this at any length but supervision is a separate process, which got slightly lost under the old system. We need to be careful that these are two separate things, which are complementary and sometimes overlap, but nevertheless are not the same. The text on that needs another look.

[Lord Sassoon]

I am grateful to my noble friend because this is a technical but very important area. He is completely right that there is a fundamental distinction between supervision and regulation and often texts can be loose on this. I hope that when he has a chance to read the White Paper he will see that there is extensive discussion of these areas. I refer him to the interesting remarks of the governor last night about the approach to supervision which he intends the Bank and the PRA under it to adopt in the new world, and that that should be a very different approach to supervision from what we have seen recently with the FSA. I take my noble friend’s points to heart, but the short text of the announcement does not give the full flavour that lies behind it.

[Lord Maples]

I have a couple of quick points on the ring-fencing proposal. Does what the Chancellor said last night mean that we have finally ruled out the idea of a complete split between investment banking and commercial banking? Secondly, does the Minister agree that for ring-fencing to work, the ring-fenced commercial or high-street bank will need a strong degree of independence on its board of directors to enable it to stand up to the banking group of which it is a part?

Thirdly, the Minister’s point about how many holes there are or how permeable the ring-fence is is important because presumably the purpose of the ring-fencing is to stop the investment banks’ liabilities appearing on the commercial banks’ balance sheets as assets, or for that matter the liability of any other investment bank. If that permeability is there at all, investment bankers will find some way of using the commercial banks’ balance sheets to their advantage.

[Lord Sassoon]

My noble friend makes some important points, which the independent commission has in the forefront of its thinking to resolve over the next few months. It is not that we have ruled out everything but that we have set up an independent commission. It came up with the ring-fencing proposal in its interim report and that is what my right honourable friend the Chancellor has endorsed, subject to the caveats included in the Statement. My noble friend’s points about how this is worked out in detail are some of the absolute correct ones.

Consumer Insurance (Disclosure and Representations) Bill [HL]

Lord Sassoon Excerpts

Wednesday 15th June 2011 Lords Chamber

Moved by

[Lord Sassoon]

That the Bill be now read a second time.

[Lord Sassoon]

My Lords, a Second Reading Committee considered the Bill in the Moses Room on Monday 13 June, and I therefore beg to move this Motion formally.

[Lord Lloyd of Berwick]

My Lords, I regret very much having missed the Second Reading debate on Monday—somehow it escaped my notice. It was a most interesting debate and I should like to have taken part. All I will say now is that this Bill was very well chosen for the new Law Commission Bill procedure and I hope that there are others like it in the pipeline. I support the Motion.

--- Later in debate ---

Moved by

[Lord Sassoon]

That the Bill be committed to a Special Public Bill Committee.

Motion agreed.