Banking

Lord Sassoon Excerpts

Wednesday 9th February 2011 Lords Chamber

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

My Lords, with the leave of the House I will now repeat the Statement on banking delivered earlier in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:

“Mr Speaker, I would like to make a Statement. The near collapse of the British banking system more than two years ago still generates today deep feelings of anger and cries for retribution. I completely understand that, for the link between risk and reward that underpins our free market was completely broken. Bankers who had made the most catastrophic mistakes walked away with huge payouts and pensions. Those entrusted by us to regulate those bankers and to run our economy washed their hands. Meanwhile, the rest of the country is left paying every day for their failures. The Government have to pick up the pieces. Let me set out how we will do that.

First, we will make sure that we learn every lesson that needs to be learnt so that this never happens again. We are entirely replacing the tripartite system of regulation that was introduced in 1997 and completely failed. Next week, we will publish the detailed proposals to give the Bank of England responsibility for prudential regulation, and to create a new consumer protection and markets authority that will protect the interests of bank customers. We will then undertake pre-legislative scrutiny, as requested by this House, before introducing the Bill. I hope that it will command support from all sides.

Later this year, we will also receive the interim and final reports of the Independent Commission on Banking, which this Government established and which I asked Sir John Vickers to chair. Sir John and his fellow commissioners are asking the difficult questions that need to be asked about how we protect the British taxpayer from future bank failures so that never again is a bank too big to fail, and we look forward to receiving their recommendations.

I should make it very clear that nothing I will say today about the settlement we have reached with Britain’s banks, including references to a level playing field, in any way pre-judges the outcome of the commission. That includes both the commission’s recommendations and the Government’s response.

The second task facing this Government is to make sure that we get the maximum sustainable tax revenues from the financial sector. HM Revenue and Customs confirms that the one-off bank payroll tax introduced in the dying months of the previous Government raised £2.3 billion net but, as my predecessor as Chancellor has pointed out, it could not be repeated without massive tax avoidance. I agree with him and we will not repeat the bank payroll tax. Instead we have implemented a new and permanent bank levy, which is why yesterday I announced an increase in that levy so that it raises £2.5 billion this year. This will bring the total raised by the new bank levy to £10 billion over the Parliament, and it means that in each and every year of this Government we will raise more in bank taxes than the previous Government raised in any year.

We have also required all the major banks operating in the UK to comply in spirit and by the letter with the code of practice on taxation. This code was announced with a fanfare, but I discovered today that only two banks had signed up to it. Today all the major banks have signed.

The third task facing the new Government was to reach a new settlement with the banks so that they contribute to Britain’s economic recovery. Some prominent people in this House were predicting just 24 hours ago that my tax announcement meant that our discussions with the banks on lending were falling away. The House will be pleased to know that this prediction was wrong. This morning, the heads of the major British banks—Barclays, RBS, Lloyds and HSBC—reached a new settlement with the British Government. I want to thank John Varley, the former chief executive of Barclays, for the huge amount of time and personal commitment he has given to this project. The essentials of this new settlement are exactly as I set out last month, and I am today publishing an exchange of letters between John Varley and myself. The banks will: lend more money, especially to small business; pay more taxes; pay fewer bonuses; be more transparent about the bonuses they do pay; and make a greater contribution to our regional economy and society.

In return the Government commit to the success of a strong, resilient, stable and globally competitive financial services sector in which UK banks can compete with the best banks in the world on a level playing field and in which London is a world centre for finance. That is good for jobs and growth in our country.

I shall go through each part in detail, starting with pay and bonuses. Most of us of find the levels of pay in financial services to be completely out of kilter with what the rest of society would regard as fair or reasonable. We are determined to bring responsibility and constraint and to ensure that pay is properly taxed. Four years ago, at the height of the banking boom, the City paid £11.5 billion in banking bonuses, most of which was in cash, most of which could not be recovered when the banks collapsed, and too much of which went untaxed. The new remuneration code introduced last month and the tax avoidance measures we are taking will change that. Today I can tell the House that the four major British banks have also agreed that total bonuses for their UK-based staff will be lower than last year and lower than they would have been without today’s settlement. The independent, non-executive director who chairs each bank’s remuneration committee will have to confirm personally in writing to the FSA that their pay accord conforms with today’s commitments. For the first time, the banks have agreed to seek explicit approval from their board’s remuneration committee for the pay of the 10 highest paid employees in each of their main business units. This did not happen in banks such as RBS before the crisis, where the board was ignorant of what was going on.

We have also insisted that the banks be far more transparent about who and how they pay. From this year onwards, the four major banks have committed to disclosing the pay details not just of their executive board members, but also of the top five highest paid executives not on the board. This will mean that the salary details of at least seven executives at each bank will be published this year. That compares with five individuals in the US and Hong Kong, and only board executives in Germany and Japan. By disclosing individual pay levels, it goes further than the Walker disclosure recommendations, on which we are seeking international agreement. We will consult on whether to make it a mandatory requirement from 2012 on all large UK banks to publish the pay of both the board plus the eight highest paid senior executive officers. This would mean that Britain has the toughest and most transparent pay regime of any major financial centre in the world.

I shall also provide an update on the situation at RBS and Lloyds. In 2009, the last Government signed an agreement with RBS that explicitly said would,

“enable pay arrangements in line with the market”,

this year. Despite that constraint, which we have inherited, UKFI, the arms-length body that manages the Government’s stake in these two banks, has agreed the following: for all staff at RBS and Lloyds, the maximum up-front cash bonuses will be limited to a maximum of £2,000 this year. All executive directors, including the chief executives, have agreed to receive this year’s bonuses entirely in the form of shares. Directors will have to wait until 2013 to convert these shares into cash. As the Prime Minister made clear last month, the bonuses at RBS and Lloyds will in total be smaller than they were last year and so, crucially, will the compensation ratios. They will be backmarkers in the industry, instead of the frontrunners they once were.

Let me turn from pay to the additional support that British banks have committed to provide to the regional economy. At the end of last year, the industry pledged £1.5 billion to a new business growth fund that will invest in the kind of expanding small businesses that hold the key to Britain’s more balanced economic future. Today it commits to making an additional £1.2 billion contribution to society. The four major banks commit to an additional £1 billion for the fund and an additional £200 million to capitalise the big society bank. The business growth fund contribution will be front-loaded over the next couple of years so that more help can be given to businesses sooner. This money will be additional to the lending commitments and additional to any funding already allocated from dormant bank accounts.

Finally, at the heart of today’s settlement is a commitment from the four major banks, as well as Santander, to make much more money available for lending to small and medium-sized businesses. Last year, these banks lent £66 billion to such businesses; today, the banks commit to lend £76 billion this year—£10 billion more gross new lending to small and medium-sized businesses. This is a massive 15 per cent increase, materially higher than they had been planning to lend this year and materially higher than anyone who followed these discussions would have expected. It comes alongside a very welcome commitment from the banks to improve greatly their customer service to small businesses, with a free mentoring service, published lending principles, transparent appeals and improved access to trade finance. Overall gross new lending to all businesses, large and small, will increase from £179 billion to £190 billion. They make a commitment to lend even more if demand materialises. Absent this accord, the banks were actually expecting lending to fall this year.

In order to ensure that progress against these lending commitments can be monitored, the Bank of England has agreed to collect the relevant data and publish them on a quarterly basis. To help ensure that today’s agreement is honoured, for the first time the pay of the chief executives of each bank, as well as the relevant business area leaders, will be linked to performance against the SME lending targets. Of course, if, even then, the banks fail to live up to their promises, the Government reserve the right to return to the issue and take further measures. However, I sincerely hope that that is not necessary.

The anger at the terrible mistakes of the banking industry and the failure of those who regulated it will long remain, and rightly so. But let us, as a country, confront this hard truth: anger and retribution will not bring one percentage point of economic growth or create one single new job. The anger will remain, and we must never make the same mistakes again, but Britain needs to move from retribution to recovery. Today we get the banks to commit, with more for lending—£10 billion more for small businesses—more for our regional economies and society, £10 billion more in taxes, lower bonuses and the most transparent pay regime in the world. In return, let us build a banking industry that creates jobs for hundreds of thousands of our citizens and competes in the world. Above all, let us make sure that the economic catastrophe that befell this country can never be repeated. That is how this Government will clean up the mistakes of the past. I commend this Statement to the House”.

My Lords, that concludes the Statement.

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[Lord Sassoon]

My Lords, I am disappointed that the noble Lord, Lord Eatwell, recognises nothing in this Statement that moves things forward because, compared with what the previous Government did, my right honourable friend the Chancellor of the Exchequer has made enormous strides forward.

Where should I start? On the question of lending, it is precisely the gross lending target that matters. The net lending target which the previous Government imposed on a couple of banks let them off the hook. It is the significant total lending for 90 per cent of the SME market that is captured by the banks in the agreement that means we can confidently say that the banks are committed to lending 15 per cent more to the SME market this year than they did last year. Through the process of these talks, the banks have got themselves from a position of looking at flat or reducing lending this year to looking at a position of increased lending. I regret that the noble Lord, Lord Eatwell, seems to have confused gross and net lending. It is the gross figure for the whole market that matters. We have linked—in a way that the previous Government did not—the achievement of those lending targets with the pay of the key decision-makers in the banks. If they do not meet the targets, it will be reflected in their pay in a way that was never done before.

I turn to the business growth fund. Again, I regret that the noble Lord, Lord Eatwell, may be a little confused. He talked about loans from the fund, but it is an equity investment fund; it is absolutely additional funding to anything comparable that the banks have done before. As to the pace of build-up, the banks have today committed £1 billion in addition to the £1.5 billion that they had previously committed. They will front-load the commitment of that money, which will go with the pace of businesses that are growing and are in a position to receive the equity support. It is a significant fund.

The other thing that is different about the lending targets and the agreement of this Government compared with that of its predecessor is all the qualitative measures that the banks have come up with in their task force to stimulate demand and give the confidence that SME businesses need to approach the banks to ask for the money that is now clearly available. In every dimension—by moving from partial net targets to sensible gross targets that cover 90 per cent of the market; by the linkage to pay; by capturing that market; and by the qualitative measures that are in the task force—we have come up with completely different and better measures than did the previous Government.

Similarly, on the question of remuneration, the noble Lord, Lord Eatwell, talks selectively about the backward-looking and one-off disclosure requirements that were linked to the TARP. Under normal US banking requirements, no more than five executives are likely to be caught by the remuneration disclosures. What we have done—to which the noble Lord did not draw attention—is focus the disclosures on the people who are running the main lines of business. It is not a question simply of bandings, but of focusing the disclosure on the people who matter, because they are taking the key decisions.

I am disappointed that the noble Lord, Lord Eatwell, appears to have spent too much time today listening to Channel 4 and reading the newspapers and not enough time concentrating on the agreement, which takes us to a completely different place from where the previous Government were. Perhaps it is regrettable that none of the noble Lords who were Ministers in the Treasury at different times under the previous Administration were here to put him right.

[Lord Higgins]

My Lords, the Minister repeated a very complicated and extensive Statement on what the Government propose to do. One thing is clear: they are right to get rid of the tripartite agreement that was so disastrous under the previous Government. It would seem that the Government are now adopting a very balanced view. They have a very difficult task in maximising revenue from the City while at the same time not driving people abroad who would otherwise contribute an enormous amount to the British economy.

When the previous Statement was made, I expressed concern that in the discussions that the Government were having, they confused the situation by appearing to say, “We will be soft on bonuses, provided you lend”. In the event, it is clear that the Government are being extremely tough on bonuses and have reached a separate agreement on increasing the amount of lending, which is so important.

The public anger on this matter is very much related to the expression “bonus”. In the public mind is the simple thought that any amount extra that is paid ought to reflect performance. However, what has been so clear in the banking sector is that bonuses continue to be paid on a huge scale while performance has been lamentable. Can my noble friend say to what extent the restrictions that are now being placed on bonuses will ensure that they reflect the performance of the various individuals and banks concerned? The idea of a pool of bonuses among the banks when their performance has been very poor is, I think, a serious problem. The bonuses for individuals seem to be related hardly at all to performance.

Finally, I welcome the fact that much tougher action has been taken with regard to the banks which have been rescued by the taxpayer and that the remuneration committees and, in particular, UK Financial Investments Ltd will make sure that in future these matters are looked at on a commercial basis while ensuring that bonuses are not excessive.

[Lord Sassoon]

I am grateful to my noble friend Lord Higgins for pointing out that at the heart of the failure of the system and the mess that this Government have had to pick up and sort out was the failure of the tripartite system of regulation, which of course we are sweeping away. Seeing the noble Lord, Lord McFall of Alcluith, opposite reminds me that he very perceptively characterised it as a Rolls-Royce system when it sat on the shelf but an old banger when it got on the ground. I wish that I had his turn of phrase, but the tripartite system was indeed at the heart of it.

As to bonuses and their linkage to performance, that is absolutely at the heart of what the Government have agreed with the banks today. I think that the critical new element is the linkage between the performance of the banks on meeting SME lending targets and the pay of the chief executive and the other senior executives who are directly responsible for that line of business. Therefore, it is a crucial point. It is well made by my noble friend and it is at the heart of this agreement.

[Lord McFall of Alcluith]

I refer the House to the Register of Lords’ Interests, as I have an interest in this area. Does the Minister not agree that there is still too much wriggle room on the issue of transparency for the banks and that one of the big issues in this crisis was the mispricing of risk? Therefore, the more people whose salaries are known—particularly, for example, traders, although I do not know whether that is taken into consideration here—the better in terms of aligning the risk. When we talk about bankers’ bonuses and anger, the Governor of the Bank of England had it right when he appeared before the Treasury Select Committee a few years ago and said that the incentive structure in banking was distorted. Do the Government not agree that we need to tackle that issue to ensure that we restore trust and confidence in the banking sector?

[Lord Sassoon]

Indeed, I completely agree with the noble Lord, Lord McFall. With regard to the Merlin agreement, the fact that the five highest-paid senior executive officers now come within the remuneration disclosure is very important. As the noble Lord will know, senior executive officers typically encompass not only those responsible for managing the key divisions but also people such as the chief financial officer and the chief risk officer, who are at the heart of controlling risk in the system. Therefore, I think that the noble Lord’s point is very well made and, as I said, the Government will consult on this issue in the forthcoming year.

[Lord Newby]

I think the Minister for repeating the Statement and I agree with him that the noble Lord, Lord Eatwell, should surely be directing his moral outrage at his colleagues—not least the noble Lord, Lord Myners. If it was so easy to make all the changes which he is castigating the Government for having failed to make, I wonder why none of those changes was implemented by his Government.

A number of measures in the Statement are welcome. I welcome the fact that cash bonuses for the part-nationalised banks are limited to such a small amount. The noble Lord, Lord Eatwell, may not think that £2,000 maximum cash bonus is a change, but if you ask bankers whether they think that it is a change, I suspect that they would have a different view. I also welcome the fact that the banks in their statement said that they aim to foster more demand in lending to SMEs. Given that the view of the SME community over the past two years has been that those banks have been thwarting demand and that one of the main problems has been the attitude at the top level of those banks on lending to SMEs, if senior management in those banks get their regional people to foster more demand for loans, there will be more loans. That is clearly what we want.

I want to make two points for now. First, there is a rather curious suggestion about consultation on disclosure of the highest paid earners. That is the proposition that the banks should publish the pay of the board plus eight of the highest paid senior executive officers. Eight seems to be a figure plucked out of the air. Surely it would be more sensible for the Government to consult more widely and, in particular, to consider whether disclosure should not apply to everyone in the banks who earns above a certain amount.

Secondly, as the noble Lord, Lord Eatwell, pointed out, the Banking Commission is the next part of the story in the operation and regulation of the banks. The Statement simply states that the Government are looking forward to receiving the recommendations of the Banking Commission. That is an extremely weak statement. It implies that the Government will receive them, say thank you very much and then leave them on the shelf. Can the Minister reassure me that the Government will be minded to accept proposals from the Banking Commission and will not simply regard this as an academic exercise?

[Lord Sassoon]

I am very grateful to my noble friend Lord Newby for expressing some of the sentiments that I wish I had expressed as succinctly as he did about the Opposition's abject failure to have gripped these issues earlier, and for pointing out what a dramatic difference a mere £2,000 in cash makes to a senior banker who, under previous arrangements, would have been expecting to receive many multiples of that.

We will consult on my noble friend's specific questions and have no presumption as to where the outcome of the consultation will be on the remuneration/disclosure issue. There is no particular magic about the number eight, but eight plus two executives on the board, which there might typically be, would total 10. That is about double the number disclosed in, say, the US or Hong Kong so we are already exceeding disclosure in the US and Hong Kong and going further to a position which might double the number of directors whose remuneration is detailed. That seems to be a good point to start a consultation, but it will be an open one.

As for the independent Banking Commission, I can absolutely confirm that the Government do not remotely regard this as an academic exercise. We appointed the commission early after we took office because we thought that it was so important to get to the bottom of the issues about the structure of the industry, “too big too fail”, and so on. When my right honourable friend says “Look forward”, he means in a positive sense look forward to what will be a serious and important piece of work.

[Lord Liddle]

My Lords, many commitments in Project Merlin—such as more lending to more businesses in the regions; the establishment of the equity fund promised in the Rowlands review, which was an initiative of the previous Government, as the Minister will remember; and, indeed, the support for the big society, if that comes off—if delivered on, and it is a big if, are welcome, and no one wants a vendetta against an important industry such as financial services. However, on the central question of remuneration, the Government have set themselves the important test that it should be fair and reasonable. On that basis, does the Minister agree that the Government’s proposals fail that test? Does he think that the £9 million bonus that Mr Bob Diamond will get from Barclays is fair and reasonable—yes or no? It seems to me that the Government have to be clear on these issues. That is particularly true for a Government where the Secretary of State for Communities and Local Government seems to think that the problem of local authority cuts can be solved by cutting chief executives’ pay. That is populist politics being played in the public sector, but will the Government play honest politics when dealing with bankers’ bonuses?

[Lord Sassoon]

My Lords, today is precisely about honest politics. In answer to the first part of the noble Lord’s assertions and questions, there may have been plenty of good ideas floating around—whether it was the Rowlands review, the tax code for banks, the big society bank; I could go on and on and on—but the previous Government were completely unable to deliver on any of them. My right honourable friend has today set out hard delivery on so many of these issues. As for the question of remuneration, I believe that the deal on remuneration that has been done today on behalf of the British taxpayer and the British people is a fair and reasonable one. I certainly do not know, and do not wish to know, the individual bonuses that hypothetically may go to people, and I do not intend now or in the future to comment on individual banker's bonuses. The critical thing is that we now have a fair and reasonable deal between the Government, as the representative of the taxpayers of this country, and the banks, and it is one that will be enforced.

[Lord Risby]

My Lords, would the Minister care to consider the impact of the failure of the tripartite regulatory system in the context of European regulatory arrangements and our credibility not only in the European context but in the domestic context as well? Does he think that after this disastrous failure of policy, a new regulatory framework is urgently needed to put stability back into the system?

[Lord Sassoon]

I completely agree with my noble friend Lord Risby that at the heart failure of the failure and the heart of what needs to be done is the need to get the British regulatory system back on to an even keel. That is why we came forward with ideas in opposition and consulted widely on them even then. We have also moved fast in government. Only last week the appointment of the prospective head of the new consumer body was announced. We will continue urgently to roll out our proposals on the new regulatory structure. I absolutely take my noble friend's point that in the context of the United Kingdom's standing internationally, the leadership that we have shown in getting a new structure in place has been very much understood and respected by our peer group in Europe and more widely.

[Baroness Kramer]

My Lords, does the Minister not agree that it is absolutely crucial that a significant portion of the new lending should go to small businesses in areas of deprivation and to areas that will suffer severely from job cuts in the public sector? As a consequence, what will he do to encourage the banks to take a more sophisticated view of credit analysis so that micro-companies and new companies, which are the best hope in those areas, have access to funding, rather than just well-established small entities?

[Lord Sassoon]

I am grateful to my noble friend for allowing me to emphasise that the banks have at the heart of their intention on all lending to make sure that there is absolutely universal coverage across the United Kingdom. On the question of how businesses are put in a position to come forward, one of the most important elements of the banking task force is its proposals for mentors for businesses. Whether that is mentoring businesses to put them in a better position to apply for and take up loans or having a much clearer system of principles around lending and appeals processes, there is certainly a package of measures which goes to the points my noble friend rightly makes.

[Lord Maples]

My Lords, may I suggest to my noble friend that the central issue here is the rate of growth of credit, which is at the bottom of all banking crises? It does not matter what system of regulation is in place if it does not bring the rate of growth of credit back in line with the rate of growth of the economy. There has been a considerably faster rate of growth in credit. If that continues, we are going to have another banking crisis, whatever the system of regulation may be. Perhaps I may ask a specific question. One of the reasons the banks have made so much money over the past couple of years is that the Bank of England has been lending them money—money that it does not have, incidentally—at an interest rate of around 0.5 per cent. The banks have been able to lend that money on at 4, 5 and 6 per cent and thus have made a huge amount of money, out of which they are paying bonuses, presumably on the basis that it has been their clever management that has made all this money. Has my noble friend pointed out to them the value of this subsidy, and has he indeed calculated the value of this subsidy towards banks’ profits? We needed to help them rebuild their balance sheets, but that was why they were being lent money cheaply by the Bank of England. They are booking that as profits, attributing it to their own clever management, and paying themselves bonuses out of it.

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[Lord Sassoon]

My Lords, because of the failure of the regulatory system and because of the huge over-leveraging in the economy, it was absolutely necessary for the previous Government to take drastic measures to get the banking system back on to an even keel, and of course that did mean that a number of measures were taken by the Bank of England to pump in liquidity under special schemes which always were time-limited and will have to be repaid. That was a necessary part of the rescue of the system. As I say, those measures are time-limited. It is precisely a combination of those measures and making sure that the banks, with the capital and liquidity available to them, now focus on advancing the resources they have to the small and medium-sized enterprises of this country that is at the heart of the agreement today.

Equality

Lord Sassoon Excerpts

Tuesday 8th February 2011 Lords Chamber

[Lord Smith of Clifton]

To ask Her Majesty’s Government what is their policy regarding the growing gap between the rich and the poor in the United Kingdom.

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

My Lords, action taken in the June Budget and spending review has demonstrated the Government’s commitment to fairness. We set out in the spending review our best estimate of the overall distributional impact of the fiscal consolidation. This shows that the top 20 per cent contribute most to the fiscal consolidation as a percentage of net income and benefits in kind.

[Lord Smith of Clifton]

I thank the Minister for that Answer in so far as it goes. This gap has been growing for three decades. When does the Minister think that the gap will be so great that it constitutes a threat to the social fabric? Will he also give us a progress report on the pay crackdown on bankers promised by the Chancellor of the Exchequer?

[Lord Sassoon]

My Lords, the Government take extremely seriously the question of fairness, which is why we introduced for the first time a distributional analysis to show the effects of not only our Budget but also our spending review decisions. In the measures that we have announced so far, in what is a very difficult fiscal situation, there is a fairness premium of £7.2 billion. The Government are putting these issues centre stage. In relation to bankers’ pay, my right honourable friend the Chancellor of the Exchequer has announced today that the levy on banks will be brought forward, so that the banks will be taxed at a higher level than under the previous Government’s one-off spending plans. We will await further developments in relation to discussions ongoing with the banks.

[Lord Eatwell]

My Lords, in the noble Lord’s reference to his Government’s policy on this matter and to the Budget, was he not being a little misleading, as the equality analysis in the Budget included the measures introduced by Mr Darling in March? When the measures introduced by the coalition are taken alone, they do not contribute to greater equality.

[Lord Sassoon]

My Lords, we took some very difficult decisions about which of the previous Government’s measures we would continue with and which we would not. The principal measure of the previous Government that we did not continue with was the full national insurance tax—the jobs tax—which would have been a significant drag on the growth prospects of this economy. Of course it was right that we should take into account the distributional effect of the total package of measures that we put through as a Government this year in the Budget and in the spending review. That is just what we have done.

[Lord McFall of Alcluith]

Is it the Government’s intention to adhere to the last Government’s ambition to eliminate child poverty completely by 2020?

[Lord Sassoon]

My Lords, this Government are committed to the Child Poverty Act 2010. I note that the previous Government struggled somewhat with their previous child poverty target; the target to halve child poverty by 2010 was widely acknowledged to have been missed. This Government are committed to the targets in the Child Poverty Act and will bring forward a strategy by the end of March 2011.

[The Earl of Listowel]

My Lords, the Minister will recall that the right honourable David Cameron, the Prime Minister, appointed Frank Field MP to produce a report on child poverty, which he duly did and recommended early intervention. Is he aware of the report in yesterday’s Times in which Frank Field said that he is very concerned at the threatened closure of many Sure Start children’s centres? Will the noble Lord consider with his colleagues what might be done to prevent this? Frank Field suggests that local authorities should be made aware that shortly there will be new child poverty indices and that local authorities will fall down if they do not meet them and if they close these centres.

[Lord Sassoon]

My Lords, Frank Field’s work will indeed inform the child poverty strategy, which, as I said, will be coming forward by the end of March this year. In relation to his reported comments in the newspapers, the Government have introduced an early intervention grant amounting to £2.2 billion, rising to almost £2.3 billion in 2012-13. It is up to local authorities how they spend that and their other resources. We have taken away significant numbers of the ring-fenced targets that they had to meet. They have money with which to keep the existing network of children’s centres open and they have obligations under the Childcare Act 2006, but it is a decision for the local authorities.

[Lord Boswell of Aynho]

My Lords, while I in no sense wish to minimise the realities of poverty, is it not time that we started to move at least some of the terms of this debate away from a static analysis about whether one measure is or is not helpful, or whether there is enough incentive at one point in time, towards a much more dynamic approach in which we emphasise the importance of personal development, education, training and personal responsibility so that, as people move into employment, which is the best solution for poverty, they may better themselves financially and lead a more fulfilling and satisfactory life?

[Lord Sassoon]

I am grateful to my noble friend and I agree completely with his analysis. That is why we have introduced the £2.5 billion pupil premium to increase the emphasis on the educational development of children from the most disadvantaged backgrounds; that is why we are introducing the £150 million per annum national scholarship fund; and that is why my right honourable friend the Secretary of State for Work and Pensions is working on the most complex and important reassessment of welfare and benefits that has been attempted for two generations in order to get away from the overcomplex system of means-tested cash benefits and the dependency of far too many families who are trapped in welfare.

[Baroness Farrington of Ribbleton]

My Lords, would the Minister care to answer the question put by the noble Lord, Lord Smith of Clifton, who asked not about the taxation of banks but about bankers? Does he agree with me that if I received a bonus of £100 million and were to lose even half of it, that would not be the same as being in poverty and losing £10 a week?

[Lord Sassoon]

My Lords, the subject of the Question this afternoon is what the Government are doing about the gap between the rich and the poor, which is something that we take extremely seriously. The best thing that we can do is to set the stable conditions for sustained growth in the economy, because that is what will improve the lot of the poorest in our society.

Budget Responsibility and National Audit Bill [HL]

Lord Sassoon Excerpts

Monday 7th February 2011 Lords Chamber

Moved by

[Lord Sassoon]

That the Bill do now pass.

[Lord Eatwell]

My Lords, the passage of the Bill through your Lordships’ House has been an excellent example of the importance of this House as a scrutinising and revising House. On behalf of these Benches, I thank the Treasury Bill team; Miss Jessica Levy from my office, who managed most of the relationship with the Bill team; and the Ministers, notably the noble Lord, Lord Sassoon, for the way in which they have approached the discussions and constructive negotiations on the content of the Bill.

The Office for Budget Responsibility established by the Bill is a peculiar institution. It is both outside government and of government. We need to ensure that legislation provides a framework for its independent operation as far as possible. That is what, working together, we have managed to do. We have clarified the role of non-executives, we have removed the statements in the Bill that seemed to qualify independence, we have enabled the OBR to consider issues of national risk, and we have enabled a process of external review of operations.

A number of factors remain. We on this side of the House are not entirely content with the budgetary provision for the OBR, or with the role of the charter as a qualifying agent that qualifies the OBR’S independence and instructs it.

--- Later in debate ---

[Lord Myners]

My Lords, my words are very much in the same direction as my noble friend’s. This has been a superb example of the House working well. We had long and detailed discussions in Committee. The Minister listened attentively and reserved his position, but came back with constructive amendments, and at all stages he kept fully informed everyone who is interested in the Bill by writing to us and keeping us up to date. It is a better Bill as a consequence of the House working effectively in the way that it did.

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

My Lords, I thank the noble Lords, Lord Eatwell and Lord Myners, for those remarks. I add my thanks to the Bill team, who did a cracking job, and to the Opposition for the constructive spirit in which we saw the Bill through.

Bill passed and sent to the Commons.

Civil Procedure (Amendment No. 4) Rules 2010

Lord Sassoon Excerpts

Monday 7th February 2011 Grand Committee

Moved By

[Lord Sassoon]

That the Grand Committee do report to the House that it has considered the Civil Procedure (Amendment No. 4) Rules 2010.

Relevant documents: 14th Report from the Joint Committee on Statutory Instruments.

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

I beg to move that the Grand Committee do now consider the Civil Procedure (Amendment No.4) Rules 2010, but I will also speak to the Rules of the Court of Judicature (Northern Ireland) (Amendment No.3) 2010.

Noble Lords may find it helpful if I start by briefly explaining the wider legislative context of the rules that we are debating today. The ruling of the Supreme Court in the case of Ahmed and others v HM Treasury in January 2010 placed the legality of the Terrorism (United Nations Measures) Order 2009 in doubt. Consequently, the Terrorist Asset-Freezing (Temporary Provisions) Act was passed in February 2010 to protect the 2009 order from being quashed on vires grounds. Subsequently, the Terrorist Asset-Freezing etc. Act 2010 received Royal Assent in December and put terrorist asset-freezing designation powers in primary legislation. I think that all parties recognise that the 2010 Act was absolutely necessary to the United Kingdom’s continued national security and to fulfil our international obligations under United Nations Security Council Resolution 1373.

Both Houses of Parliament gave the Act careful scrutiny during its passage, in particular looking closely at the civil liberties issues raised and how best to address them without compromising national security. The Government made a number of amendments to the asset-freezing regime provided by the 2009 order, including the introduction of a higher threshold for designations lasting longer than 30 days—reasonable belief rather than reasonable suspicion—and a merits-based right of appeal against designation decisions rather than judicial review. I am confident that we struck the right balance in the 2010 Act between protecting national security and protecting civil liberties.

As part of the government amendments which introduced a merits-based right of appeal to asset-freezing designation decisions, a provision was included to allow the Lord Chancellor to make rules of court for such appeals. That was necessary to allow rules to be made quickly after the Bill received Royal Assent. Rules were needed quickly because transitional provisions in the Act deem designations in force under the 2009 order to have been made under the 2010 Act for a short time to ensure continuity of asset-freezes. Rules needed to be made to ensure that there was a framework in place if designated persons wanted to challenge their freezes under the Act.

The Lords Chief Justice of England and Wales and of Northern Ireland were consulted on the draft rules. The Civil Procedure Rule Committee was informed that the Lord Chancellor would be making rules to provide for asset-freezing appeals and was shown an early draft. The Civil Procedure (Amendment No.4) Rules 2010 and the Rules of the Court of Judicature (Northern Ireland) (Amendment No.3) 2010 were laid before Parliament on 23 December 2010 and came into force the next day.

The rules of court made by the Lord Chancellor for designation appeals amend Part 79 of the Civil Procedure Rules and Order 116B of the Rules of the Court of Judicature (Northern Ireland) 1980 respectively. Part 79 was created following the passage of the Counter-Terrorism Act 2008 to provide rules of court for financial restriction proceedings, including asset-freezing proceedings.

Rules in Part 79 cover the use of closed information and special advocates and are intended to ensure that information is not disclosed contrary to the public interest while ensuring that proceedings are properly determined. The existing provisions of Part 79 apply judicial review principles to such challenges. These remain in force for decisions—such as challenges in relation to asset-freezing licensing decisions—that remain subject to judicial review principles.

There are three strands of amendments to the Part 79 rules to allow for appeals. First, Rule 79.1 is amended so that the general provisions concerning the appointment of special advocates, the requirements for disclosure and procedures for determination of proceedings apply also to designation appeals. Secondly, a new Section 3 is inserted. This deals with the mechanics of starting an appeal by setting out the details to be included in the notice filed to start an appeal and the material to be filed with that. It also applies existing rules to any application to the Court of Appeal following a High Court determination. Thirdly, there is one substantive amendment made to the general provisions in Section 4 of Part 79 as they apply to appeals. This concerns disclosure, which in itself is a complicated matter and requires a little explanation.

Rule 79.23 requires the “disclosing party” to search for material that is relevant and, under Rule 79.23(1)(b), to file and serve material: on which the disclosing party relies; which adversely affects the disclosing party; which adversely affects the other party; or which supports the other party.

There is an exception for the disclosure of “closed material” which is dealt with separately. A difficulty arises because the definition of closed material in Part 79 does not cover material which a party holds and which adversely affects not him but the other party, but which he does not wish to use. Therefore, if the Treasury holds sensitive material which supports the case for designation but which, for reasons of national security, it does not want to rely on in an appeal, it could be argued that it should be disclosed under the current wording of Rule 79.23. We think that this interpretation is wrong, given the obligations in the rules to ensure that disclosures of information are not made where they would be contrary to the public interest.

We are therefore using this amendment to make clear the parties’ disclosure requirements so far as the rules apply to appeals. We will ask the Civil Procedure Rule Committee to exercise its power to remove this provision from Part 79 as it applies to other financial restriction proceedings. Let me stress that this change in no way adversely affects the appellant or the proper determination of the appeal. Nor will it affect the Treasury’s obligation to disclose all information which adversely affects the Treasury’s case or supports the other party’s case.

On 4 February, the Joint Committee on Statutory Instruments published its 14th report, in which it drew two issues to the special attention of both Houses. We are grateful to the committee for publishing the report on Friday, rather than tomorrow as would have been its usual practice. Early publication has enabled this debate to go ahead when otherwise it would inevitably have had to be postponed.

The first point to which the JCSI draws special attention is a failure to set out the fact that Section 28(4) of the Terrorist Asset-Freezing etc. Act 2010—one of the instrument’s enabling powers—incorporates by reference Sections 66 to 68 of the Counter-Terrorism Act 2008. Sections 66 to 68 authorise provisions in the court rules which apply to designation appeals. The JCSI concludes, and the Ministry of Justice accepts, that the instrument does not in this respect comply with proper drafting practice. However, there is no effect on the validity of the instruments.

The JCSI has also drawn attention to a reference in each set of rules to “the application” rather than “the appeal”. The Ministry of Justice has made it clear in correspondence with the JCSI that although the meaning should be clear from the context, use of “the appeal” would have been preferable. The Ministry of Justice will draw that to the attention of the Civil Procedure Rule Committee, which can, if it considers it appropriate, make that change next time the Civil Procedure Rules are amended.

I turn now briefly to the Rules of the Court of Judicature (Northern Ireland) (Amendment No.3) 2010. Order 116B was, like Part 79, created following the passage of the Counter-Terrorism Act 2008 and creates rules of court for the determination of challenges to financial restriction decisions. Order 116B has a similar scope and content to Part 79 in that it provides for the use of closed material and the appointment of special advocates. Order 116B is similarly amended by the Amendment No.3 instrument to apply it to designation appeals under the 2010 Act, and is amended in the three ways outlined above for Part 79. If the amendments to Part 79 and Order 116B are approved, any future amendments to Part 79 will be made by the Civil Procedure Rule Committee and any future amendments to Order 116B will be made by the Northern Ireland Court of Judicature Rules Committee.

The court rules we are debating set out the process we expect the court to follow when considering merits-based challenges to designation decisions. They implement one of the key new safeguards agreed for the UK’s terrorist asset-freezing regime. They are necessary to ensure that a proper framework is in place for challenges to asset-freezing designations, and will ensure that appropriately in-depth scrutiny is given to the relevant decision while protecting sensitive material from damaging public disclosure.

[Lord Davidson of Glen Clova]

My Lords, I am grateful to the Minister for introducing these rules. The previous Government promoted terrorist asset-freezing orders, for very good reasons, to increase the protection of the UK and of its citizens. I am pleased to see that the approach has been continued by this Government. I particularly welcome the refinement in relation to disclosure, which I agree will remove the potential for difficulty.

One appreciates that, prior to the election, many members of the then Opposition made criticisms about anti-terrorist legislation and that this Government contains a number of those who made those arguments—although not, of course, the Minister. Yet those others are, perhaps, now coming to an understanding that the tension between civil liberties and the protection of the UK is rather more complicated and less clear-cut than they first argued. One notes that they are also discovering this in relation to control orders, another area which was of great controversy.

These instruments seek to implement the innovations that the Government thought proper to bring to terrorist asset-freezing orders. The use of judicial review with the addition of a separate merits-based appeals structure adds another level of potential court intervention. Another innovation is the introduction of the distinction between “reasonable suspicion” and “reasonable belief”, which is not pellucid. It now means that where the individual is reasonably suspected of being involved in terrorism, he will not be under a terrorist asset-freezing order after 30 days, unless that reasonable suspicion is shown to move towards reasonable belief standards. I am not sure whether that is particularly reassuring to UK citizens.

There are views that reasonable belief and reasonable suspicion are, if at all different, extremely close in meaning given the application of the objective standard imposed by the use of “reasonable”. This will no doubt be an area for complex argument before the courts, but it is perhaps not easy to see how much of a gain for the civil liberties argument this represents, if the difference is negligible. If, on the other hand, there is a palpable and real difference between the two standards—one notes that the noble and learned Lord, Lord Brown of Eaton-under-Heywood, has identified such an interest in the case of Saik—then the notion that those reasonably suspected of being involved in terrorist activity will be at liberty, after 30 days, to use their assets as they choose becomes a real concern.

It would hardly be satisfactory, where an interim order is made expressly because the individual is reasonably suspected of being involved in terrorist activity and to protect members of the public, that if one falls short of reasonable belief that individual is at liberty to do with his assets as he will. Is the Minister in a position to offer guidance on an interpretation of the difference between reasonable suspicion and reasonable belief? I ask him that because doubtless it will become an issue in the courts. It is doubtless that the provisions in respect of judicial review and appeal will be deployed on these types of arguments as well as on other issues. The expansion of the courts’ role with the addition of a separate merits-based appeals structure regarding terrorist asset-freezing orders against individuals suspected or believed to be involved in terrorist activity will presumably be welcomed by those individuals, at least. In this context, it would be interesting to hear whether the Government consider that the courts’ increased role pursuant to these instruments provides an increase or a reduction in the level of protection to the population at large—for of course it is they who will be among the victims in the event of any future terrorist attacks.

Will the Minister explain whether this expansion of the court’s role creates a tougher or more relaxed environment for potentially highly dangerous terrorists? I ask that question in the light of the expression made by the noble Lord, Lord Carlile of Berriew, in his recent report on the Prevention of Terrorism Act 2005. There is a concern that European Court of Human Rights’ decisions are making the UK,

“a safe haven for some individuals whose determination is to damage the UK and its citizens”.

The question should be asked whether the Government consider the expansion of the court’s role by these orders discourages or encourages those individuals identified by the noble Lord, Lord Carlile.

The Minister has made reference to the report of the Joint Committee on Statutory Instruments regarding the failure to comply with proper drafting practice and defective drafting. I note his explanation and proposed action in relation to these observations and I shall say nothing further on the point. However, we welcome the general continuation of the previous Government’s approach to disrupting potential terrorist activity.

[Lord Sassoon]

My Lords, I am scripted to say that this has been an interesting debate, but it has been a short, focused and to-the-point exchange. I am grateful to the noble and learned Lord, Lord Davidson of Glen Clova, for being short, sharp and to the point in asking me some key questions about these new court rules.

The noble and learned Lord asked about the distinction between suspicion and belief, and what, if anything, that says about our underlying concern for national security as balanced with proper safeguards on grounds of civil liberties. As the noble and learned Lord will know, various court judgments define the difference between reasonable suspicion and belief. In summary, for suspicion, one believes that something may be so and, for belief, one believes that it is so. I am certainly not in a position to second-guess the courts, which have judged that there are significant differences. The Government certainly believe that national security requirements can be met by this combination of interim freezes for up to 30 days on the basis of reasonable suspicion, during which time further investigations can be made to determine whether the belief can be met. We believe that this balance between the national security and the civil liberties imperatives, which was extensively debated in your Lordships’ House, achieves what is intended. The court rules merely flow from that. I certainly do not think that the court rules in any way cut across or work against that construct.

On the role of the courts and judicial review versus appeal, the question was asked whether these instruments will result in a strengthening or a lessening of the protection of the public or, indeed, of the appellant. As a non-lawyer, I understand that what has been striking in the way that the courts have interpreted judicial review recently is that—in a national security context and, specifically, in relation to control orders—courts have increasingly approached judicial review in a way that is substantively similar to that of an appeal process. When considering the control order in the MB case, the Court of Appeal made it clear that it could substitute its own view for that of the Minister when deciding whether reasonable suspicion existed. We had expected the court to take a similar approach in relation to asset freezes, which would bring judicial review and appeal, in substance, close together in this area. In part, the approach we took in the 2010 Act was to formalise, in effect, what the courts were moving towards. It is better if, in reality, the substance of what the courts were moving towards was an appeal, but we actually put in the legislation, as Parliament has seen fit to do, a full appeals process and then the court rules follow from that. The noble and learned Lord’s question, in a sense, falls away because the courts have been bringing the two processes increasingly closer together.

On the role of the European Court of Human Rights, we do not think that the rules we are looking at here and the thresholds for suspicion and belief will mean any material change as to whether, why and how the ECHR can intervene in any particular case. Without commenting on the discussion on these issues over the weekend, I do not think that anything we are doing in the Act or the rules which we are considering today touches materially on those concerns.

I hope I addressed the less than perfect drafting in my opening remarks. The first of the two issues is a stylistic point that is an omission, but it does not have substantive effect. In the second case, it is clear from the context that the words, “the application” refer to the application to the Court of Appeal and so I think there is no question of possible misinterpretation of the statutory instruments and no substantive risk of being challenged in court. In any event, it will be up to the Civil Procedure Rule Committee to be able to amend the rules should that committee deem it necessary.

I hope I have been able to deal adequately with the noble and learned Lord’s points as I believe it is important that these rules are approved today. They provide the framework for those designated under the Terrorist Asset-Freezing etc. Act 2010 to challenge their asset freeze designation under the new appeals procedure. The court rules will ensure that rigorous scrutiny is given to the relevant decision, while at the same time protecting sensitive material from damaging public disclosure. Therefore, I commend these rules to the Committee.

Motion agreed.

Rules of the Court of Judicature (Northern Ireland) (Amendment No. 3) 2010

Lord Sassoon Excerpts

Monday 7th February 2011 Grand Committee

Moved By

[Lord Sassoon]

That the Grand Committee do report to the House that it has considered the Rules of the Court of Judicature (Northern Ireland) (Amendment No. 3) 2010.

Relevant documents: 14th Report from the Joint Committee on Statutory Instruments.

Motion agreed.

Investment Bank Special Administration Regulations 2011

Lord Sassoon Excerpts

Thursday 3rd February 2011 Lords Chamber

Moved By

[Lord Sassoon]

That the draft Regulations laid before the House on 10 January be approved.

Relevant Documents: 12th Report from the Joint Committee on Statutory Instruments.

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

My Lords, I beg to move that the draft regulations and the draft order laid before the House be approved. The global financial crisis and ensuing economic woes have shown us all the huge costs of inappropriate regulation, excessive risk-taking and overconfidence in the banking system. This was no more apparent than with the collapse of Lehman Brothers in 2008, where widespread panic gripped the financial markets and where clients in the United Kingdom were unsure as to whether they would ever recover the billions of pounds-worth of assets and money that they had invested. In fact, that is still being resolved.

We simply cannot afford a repeat of what flowed from the Lehman collapse. It is now our responsibility to develop an insolvency regime robust enough to handle the failure of investment banks. This is essential if we are to maintain the UK’s position as the world’s leading centre for financial services. However, let us be clear: while the regime being debated today is a step towards addressing this issue, the new regime by itself is not enough. That is why the Government are undertaking comprehensive reforms on both the domestic and international stage.

At home, we are overhauling the failed tripartite structure of financial regulation and strengthening our resolution frameworks. We have also set up the Independent Commission on Banking to advise on how to mitigate systemic risk in our financial system. We are looking forward to receiving the commission’s recommendations in September. Internationally, the Government are working closely with the Financial Stability Board and the European Commission to develop a globally consistent approach to resolving systemic firms. This will help to create a level playing field, which is important to ensuring that UK competitiveness does not suffer.

Let me now turn to the focus of this afternoon’s debate, which is the special administration regime. The current insolvency arrangements under the Insolvency Act 1986, although perfectly suitable for winding up most firms, do not take into account the complexities and conflicts that an administrator faces when winding up an investment bank. The administrator does not have an explicit objective to return client assets or to co-operate with market infrastructure bodies. Instead, the administrator must act solely under its objective to either rescue the company or maximise returns to creditors before winding it up. This potentially places the administrator in a difficult position if additional focus is required to return client assets or to resolve counter-party positions. The administrator is likely to require frequent directions from the court before taking the necessary actions, and this is extremely costly. The existing regime also creates uncertainty for investors as it is not clear that the administrator has a duty to work to return their assets and money. This is harmful to the UK’s reputation as a safe place for investors to entrust their assets.

The special administration regime we are debating today addresses this uncertainty by giving the administrator a specific objective to ensure the return of client assets. It will also reduce the length of a potential administration and minimise the costs for creditors and for the wider economy, and it has undergone extensive public scrutiny to ensure that this will be the case. The proposed regime has benefited from the input of an advisory panel of over 30 industry practitioners. We have also consulted on the regulations themselves, and the introduction of the regime has the full support of many in the financial sector. This is because no one wants to see another failure like Lehman Brothers, where the administration is entering its third year with substantial sums of client assets still to be returned.

I shall now provide a brief summary of the two statutory instruments we are considering today, starting first with the Investment Bank Special Administration Regulations 2011. These regulations provide administrators with three statutory objectives. The first objective will give the administrator a duty to return client assets because it is essential that client assets are returned as quickly as possible to prevent any undue suffering and financial hardship. Having this first objective will allow the Financial Services Authority, if necessary, to instruct an administrator to prioritise the return of client assets above the other aims, a power I will return to later. Under these regulations, in order to achieve objective 1, the administrator will also be able to set a bar date for claims to client assets. This will significantly improve the speed at which client assets can be returned. The bar date will include safeguards to reduce the possibility of a client losing out from its implementation—for example, by failing to submit a claim. These safeguards will be set out in the insolvency rules which will be laid separately before Parliament shortly after these regulations come into force.

The second objective ensures that an administrator shares information with market infrastructure bodies. It is essential that when an institution becomes insolvent, the administrator works with the relevant clearing houses and exchanges, and with the authorities, to resolve all failed trades and all open positions. Without this co-operation, market confidence and the stability of our financial markets would be seriously undermined. It is also important that the administrator works with the FSA to facilitate any actions the authorities might need to take as a result of an investment bank becoming insolvent.

Moving on to the third special administration objective, this follows the example set out under the Insolvency Act 1986 to ensure that, in the event of an investment bank special administration, the administrator will continue to work in the best interests of all creditors in either rescuing the investment bank, if that is at all possible, or in winding it up. Having this objective means that the administrator is unlikely to be successfully challenged for working in the best interests of the creditors in winding up the firm. Under the new regime, the Financial Services Authority will have the power to direct the administrator to prioritise one or more of the special administration objectives over the others, although I should stress that the regulations make it clear that this power can only be used if it is in the interests of financial market stability.

Another important part of this regime is that if the administrator continues to meet payments, suppliers of key services to that investment bank will not be allowed to terminate their services. The proposal is relevant to all suppliers of equipment used by the investment bank in connection with the trading of securities or derivatives; suppliers of financial data and infrastructure permitting electronic communications services; suppliers of secure data networks provided by an accredited network supplier; and suppliers of data processing capabilities.

On the second statutory instrument, the Investment Bank (Amendment of Definition) Order, the Banking Act currently stipulates that only firms holding client assets are within the scope of the special administration regime. This order widens the scope of the special administration regime to ensure that firms holding client moneys are also included. This is because the Government and their investment banking advisory panel agree that it does not make sense to have two different insolvency regimes—one for firms holding client assets and one for firms holding client money. It is right that the new regime should apply in both instances as it is suitably flexible to do so. Separate insolvency regimes for firms holding client money versus those holding client assets would serve only to complicate further what is already a complicated process.

The Government have, however, excluded from the scope of the special administration regime institutions that hold client assets only for the purpose of carrying out an insurance mediation activity. We have done this for the simple reason that the special administration regime is not designed for these types of business activity. Firms conducting these activities will enter the same insolvency proceedings as before.

This legislation will help preserve the UK’s reputation as a leading destination for investment banking. It is a clear demonstration that we have learned from past mistakes, that we are serious about financial reform and that we will do everything in our power to ensure that financial stability is placed at the heart of our regulatory agenda. The legislation is good for the industry and good for the customer.

--- Later in debate ---

The legislation suggests that at this stage the Government appear to have learnt very little over the past three years. All that they are doing is putting in place the power to wind up investment banks without at the same time making the regulatory changes that would reduce the probability of failure and provide for orderly wind-up. We do not just need a mechanism; we need a process that ensures that the mechanism works speedily and fairly. I suggest to the Minister that these regulations, welcome though they are, are such a partial dimension of the total picture that the House will need reassurance on these wider matters.

[Lord Sassoon]

My Lords, this has been an interesting debate, perhaps a little more interesting because of one or two of the little side conversations that got going, and certainly more interesting than the perhaps slightly dry but very important regulations had led me to expect. I am grateful not only for all the contributions made but for the general support for the proposed regulations. The past few years have shown that investment banks can fail and can cause huge disruption, not just to investors but to the wider economy. That is why the Government are putting in place this new regime.

I said at the beginning that the regime is being developed with the input of industry experts. I should like to echo the thanks of the noble Lord, Lord Myners, for the input and help that we have had. These have been complex instruments to develop. I am also happy to acknowledge the process that has resulted in these regulations today was one that the noble Lord himself kicked off when he was in the Government. It has taken a couple of years to get the regulations right and to achieve a regime that I believe is fit for purpose.

In addition, in accordance with Section 236 of the Banking Act, the regime will be reviewed within two years of the regulations coming into force. That review will consider how far the regulations are achieving the objectives set out in Section 233 of the Banking Act and whether the regulations should continue to have effect. A copy of that report will be laid before Parliament. That goes some way to answering the questions of the noble Lord, Lord Davies of Oldham, about future-proofing, continuity and the connection to the wider regime. These are important questions, but they have been taken account of within the regime that the Banking Act sets up.

On the specific question on the future of the Financial Services Authority, I would not presume, until your Lordships’ House had passed the necessary legislation that will come forward, to talk too much about what happens after the Financial Services Authority comes to the end of its life. However, in that legislation, we will take full account of all the functions, including those under these instruments, which the FSA currently covers.

The noble Lord, Lord Myners, asked about the situation with Germany. In particular, in response to that situation, the FSA has consulted on introducing a 20 per cent cap on intra-group deposits of client money so that the scope for exposure to overseas regimes that may have some bar on the return of money is significantly reduced. Of course, as I have already indicated, we work as a Government to ensure that resolution regimes, in so far as is possible, can be made consistent on both a European and global basis.

[Lord Myners]

The capping of exposures may be a good thing in itself, but what happened here was that, after the collapse of Lehman brothers, the Germans effectively said, “These are no longer client assets. They will be deemed to be the assets of Lehman Brothers International”. That is the core of the matter. It strikes me as quite extraordinary that a fellow European nation should have done this. To date, we have not been successful in unwinding what could only be regarded as a hostile action to the concept of client money. I welcome what has already been done, but I urge the Minister to take an interest in this and to see whether, perhaps with the FSA, we could give one more push on this subject.

[Lord Sassoon]

My Lords, the noble Lord, Lord Myners, knows very well the difficult background to this, as well as the fact that the German situation is, in the first instance, a matter for the courts. It is therefore difficult to go into it in much detail. That is where it principally lies, rather than being a government to government matter. As I have explained, the sensible response to cover the generality of these situations is to ensure that investment banks do not in future overexpose the intra-group excessively. That is why they have introduced the 20 per cent restriction. We will wait to see how this matter is resolved in the courts and what further lessons, if any, that leads to.

The noble Lord then asked a second question about sources of moral hazard in omnibus accounts. Again, the Financial Services Authority has certainly focused attention on this area. It has committed to enhancing the client assets source book, where regulatory failures in the general area of protection of clients’ assets were very much exposed by the Lehman Brothers case. It is not the case that omnibus accounts are, in themselves, a source of hazard, as long as there is proper segregation of clients’ money, which is the critical issue here.

As has been said, today is not the time to get into the questions that came up at the end of the speech of the noble Lord, Lord Myners, about bonuses, the importance of the City and so on. We will definitely come back to these things. I am grateful for the noble Lord’s confirmation that he supports the Independent Commission on Banking. I very much hope that it will shed light—as Sir John Vickers’s recent speech indicates it will—on all these issues. The noble Lord also referred to Project Merlin, which we are working on very hard to ensure that banks pay out bonuses that are less than they otherwise would have been and lend more than they otherwise would have done.

[Lord Myners]

I make one last intervention on this. Can the Minister tell us simply how the Government will find out what bonuses otherwise would have been and how much money would have been lent in the absence of Merlin? It seems that the Minister yesterday, in using the terms “demonstrable” and “verifiable”, overreached himself in suggesting that there was a way in which the outcome of Merlin could be proved. Can the Minister, in very simple, straightforward terms, explain how he will prove these issues on bonuses and credit extension?

[Lord Sassoon]

My Lords, when we have a Project Merlin outcome to announce, the noble Lord will no doubt have every opportunity to cross-question me on these matters. I also note, just in case noble Lords missed it, that the noble Lord committed himself to that being his final intervention. He is certainly well below his batting average for interventions in my closing remarks but we will see whether he holds to it. I shall try not to provoke him. The only further thing that I wanted to say in response to the noble Lord was that, despite what I just said about banking and unfinished business on bonuses, I very much echo what he said about the importance of the City. Extraordinarily skilled work is done by many experts across the financial and business services in the City, and the City adds great value to the UK economy; we should not forget that.

I will respond to a couple of the points raised by my noble friend Lady Maddock. The supplier proposal adapts existing provisions in insolvency law, specifically within the Insolvency Act 1986. We are trying to ensure that, in the case of investment banks, those critical suppliers without whom the resolution of the investment bank cannot take place—the positions cannot be closed out—continue to supply. When we talk about 28 days, it is important that the supply is paid for but it is a question of whether it is paid for within the 28 days. The supplier can stop supplying if any charges in respect of the supply remain unpaid for more than 28 days, if the administrator consents to the termination, or if the supplier has the permission of the court. In that context, the definition of hardship will be left to the judgment of the court.

As regards the bar date, the critical protection is that sufficient time has to be allowed for publicity to be given to the fact that the investment bank has gone into special administration. There has to be sufficient time for affected clients to calculate and submit their claims and for practical difficulties in establishing claims to be sorted out. Therefore, I believe that there are sufficient protections in the regime.

The noble Lord, Lord Davies of Oldham, asked me a number of questions. I hope that I have dealt with the future-proofing and questions around the Financial Services Authority. Consumer protection will be fully taken into account in the architecture that we will propose to replace the Financial Services Authority. Central counterparties and the regulation of over-the-counter derivatives is an area which falls within the general heading that I addressed: namely, that we must work to achieve international and global solutions. I see some nodding and shaking of the head from the Benches opposite. That indicates that these things are not easy. We need to have a regime in place that is safe and appropriate for the markets in the UK, but equally we need to ensure that we have something consistent within the EU and the G20 framework as mechanisms which could provide safe solutions that might work against free investment flows. We have to ensure that this is not one of those issues where protectionism comes to the fore under the cloak of providing safe solutions. I absolutely take the point that the settlement of transactions is ongoing business in which the Government take an active part.

As regards how living wills fit with this new regime, recovery and resolution plans are again a core part of both our and the G20 authorities’ response to the “too big to fail” problem and will be required of all systemically important financial institutions. That is the critical definition in that context. It is not a question of an arbitrary definition that splits investment banks from other banks in the way that the noble Lord suggested might be the case.

On the protection of client assets, it is worth remembering that the FSA has set up a new client asset unit, which is a centre of excellence and expertise within the FSA, in further recognition of the important issues raised by the lessons learnt from Lehman. That further stresses the fact that although these instruments being put in place today are critical, they are in many respects only a part of a wider construct.

The first point that the noble Lord raised, but the last one which I should address, concerns the definition of fairness. The relevant provision is based on existing provisions in the Insolvency Act 1986 and the Financial Services and Markets Act 2000. “Fair” is the modern term for the previously used “just and equitable”. While I do not profess to be an expert on these matters, I am assured that the term “fair”—its use is based on a lot of case law defining “just and equitable”—is well defined under court rulings and will be well understood by those administering the special administration regime.

That has been a long response to a short but important debate.

[The Archbishop of York]

I did not clearly hear the noble Lord’s answer to the question of the noble Baroness, Lady Maddock, about the bar. Who will determine what sufficient time is? How would I know that as a client? Who will determine that it is sufficient?

[Lord Sassoon]

I thank the most reverend Primate for pressing me on that. The critical thing, as I said before, is not that some arbitrary time is laid down, because that will relate to the complexity of the individual administration case. The objective has to be for the administrator to fulfil his objectives. The principal objective that we are looking for is the return of the money as quickly as possible. That will be the objective that the administrator will be looking to fulfil, subject to these safeguards that I have tried to explain to make sure that absolutely everything is being done so that those with money at risk are informed and have time to calculate their claims. A date cannot be fixed in a way that applies to all circumstances, because, if so, there would be a backstop date that might disadvantage people in a simple administration.

Motion agreed.

Investment Bank (Amendment of Definition) Order 2011

Lord Sassoon Excerpts

Thursday 3rd February 2011 Lords Chamber

Moved By

[Lord Sassoon]

That the draft Order laid before the House on 10 January be approved.

Relevant Documents: 12th Report from the Joint Committee on Statutory Instruments.

Motion agreed.

Currency Markets

Lord Sassoon Excerpts

Wednesday 2nd February 2011 Lords Chamber

[Lord Dykes]

To ask Her Majesty’s Government when they will next hold talks with eurozone representatives to discuss the present state of currency markets.

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

My Lords, Ministers regularly meet their opposite numbers from other member states to discuss pertinent economic and financial issues, including currency issues, at ECOFIN. The next council meeting is currently scheduled for 15 February.

[Lord Dykes]

I thank the Minister for that Answer and for the fact that, on at least four or five recent occasions, HMG have said with great emphasis that the United Kingdom benefits directly from a strong, stable and secure eurozone. Does he feel that if the City, which is probably the largest euro-trading market in the world now, is undermined by greedy gamblers still spreading false stories about the strength of the euro, that would be a tragedy for the City of London?

--- Later in debate ---

[Lord Sassoon]

My Lords, we want to see a transparent, deep and liquid market in the euro, other currencies, commodities and all forms of securities. As my noble friend suggests, it is right that London has taken the lead not only in global currency trading but in so many other markets. This Government intend to ensure that that continues to be the case.

[Lord Barnett]

Could the Minister confirm the recent figures issued by the highly respected Bank for International Settlements that the sovereign debt owed to British banks by Ireland, Greece and Portugal is something like $233 billion and would be $370 billion if Spain was included? In those circumstances, would it not be sensible to involve ourselves in discussions on a serious eurozone scheme that would help to avoid any serious problems?

[Lord Sassoon]

My Lords, the European stability mechanism is the permanent mechanism that will replace the temporary arrangements and there is a commitment among European leaders to complete the design by March 2011. Even though we are not in the eurozone and will not be a member of the new stability mechanism, we have been invited to participate in the design. My right honourable friend the Chancellor confirmed to President Juncker, I think on 7 December, that the UK would take up that invitation to participate in the design.

[Lord Trimble]

My Lords, will Her Majesty’s Government be prepared after 25 February to support the Irish efforts to renegotiate the interest rates on the finance made available to Ireland, as that would be preferable to a default, which would almost certainly be the alternative to such a renegotiation?

[Lord Sassoon]

My Lords, I think that we had better see how this plays out. It is encouraging that the European financial stability fund was able to make a successful bond issue at the end of last month. There was something like €45 billion of demand, which, in the technical phrase of the markets, was considered a blow-out—a hugely successful deal. That brings into question whether the terms can in any way be softened, but we had better wait to see how this evolves.

[Lord Eatwell]

My Lords, the noble Lord has said on numerous occasions to the House and again today that the stability of the eurozone is in Britain’s best interests. He has also told us today that Britain will participate in the design of the new stability mechanism. Will he tell us whether Britain will participate fully in the operation of the new stability mechanism, once designed, or will we continue to hover irrelevantly on the sidelines when Britain’s interests are at stake?

[Lord Sassoon]

My Lords, I have been completely clear, as has my right honourable friend the Chancellor of the Exchequer on numerous occasions, that while we wish to see a stable eurozone, which is indeed in Britain’s best interests, we will not be a part of the new permanent European stability mechanism, which is a matter for the eurozone countries. However, that does not mean that we are not rightly concerned, as I have just explained, to make sure that the stability mechanism is established in an appropriate way. Just as we played a constructive role in relation to Ireland, we will continue to play a constructive role in relation to all these matters as we go forward.

[Lord Newby]

My Lords, following on from the previous question, will the Minister confirm that the Government will press the ECB to issue more euro-denominated bonds? That is a cheap and efficient way of generating funds which can be taken up by Ireland, Greece and the other eurozone member states that are now in financial difficulties.

[Lord Sassoon]

My Lords, I am grateful to my noble friend for again underlining some of the successes in recent financing in the eurozone, which is an encouraging sign. I would not go so far as presuming to give the ECB further advice, but certainly recent market operations have been encouraging.

[Lord Stoddart of Swindon]

Does the noble Lord agree that the fact that we are not in the euro has meant that our currency has been able to take the strain and that exports have increased? This country is likely to survive much better out of the euro currency, especially in regard to interest rates, which have been kept particularly low, to the benefit of industry and house buyers.

[Lord Sassoon]

I am grateful to the noble Lord and I thoroughly endorse his sentiments. This country has benefited greatly in recent years through the crisis by not being in the euro and by being able to develop our own policy responses. This coalition Government have no plans to enter the euro and are not making any preparations to do so at any future date.

[Lord Pearson of Rannoch]

Will the noble Lord go further and agree that, if the euro had never been invented, the currency markets and the world economy would not be in the trouble that they are?

[Lord Sassoon]

No, I would not want to go that far.

[Lord Liddle]

My Lords, does the Minister have a comment on reports in today’s Financial Times that the French and the Germans are negotiating for the eurozone a competitiveness pact, which would have considerable implications for the single market? What steps will the Government take to ensure that Britain is fully involved in these discussions and that this will not be another case where we will be hovering on the sidelines?

[Lord Sassoon]

My Lords, I cannot comment on any specific proposals that might come forward from France and Germany, but the Government are right at the forefront of discussions to extend the single market to make sure that competitiveness issues internally and externally for the EU competing globally are kept firmly at the forefront of the European agenda.

[Baroness Williams of Crosby]

Have the United Kingdom Government had any discussions with the German Government about coming into the European bond market, which, as my noble friend will know well, would have a very favourable effect on yields?

[Lord Sassoon]

I shall not comment on individual discussions about market matters, but I again note some of the positive developments in Europe collectively as well as the auctions since the beginning of the year by Portugal, Spain and Greece. However, we must recognise that the currency situation remains very fragile.

[Lord Grocott]

As the Minister is clearly pleased that Britain is not a member of the euro, would he like to remind the House which Government made that decision and would he like to join me in congratulating them on making the right decision?

[Lord Sassoon]

I am indeed content that we are not in the euro.

National Insurance Contributions Bill

Lord Sassoon Excerpts

Wednesday 2nd February 2011 Lords Chamber

Moved By

[Lord Sassoon]

That the Bill be read a second time.

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

My Lords, I am pleased to open this debate on the Bill before us today, which has two purposes.

The first part of the Bill introduces a 1 per cent increase in the class 1 employee and employer rates, and the class 4 self-employed rates of national insurance contributions from April of this year. As some Members of the House will no doubt remember, this was announced by the previous Government in their 2009 Pre-Budget Report. If the increases were to be introduced as the previous Government had intended, they would have led to an increase in the cost of labour. I reassure the House that this Government intend to reverse the impact of the previous Government’s tax on jobs by increasing the employer national insurance threshold, the primary threshold for employees and the income tax personal allowance.

At the Emergency Budget in June 2010, my right honourable friend the Chancellor confirmed that the personal allowance would be increased by £1,000 from next April and that the employer national insurance contributions threshold would rise by £21 a week over indexation. At the same time, my right honourable friend confirmed that it is our intention to raise the employee national insurance contributions threshold by £24 a week above indexation and to raise national insurance contribution rates by 1 per cent.

The first part of the Bill before the House sets out how the increase in rates of 1 per cent will apply. First, it increases the employer rate from 12.8 per cent to 13.8 per cent. This 1 per cent increase will also apply to class 1A and 1B contributions that are paid by employers on benefits in kind and pay-as-you-earn settlement agreements. Secondly, it will increase the employee main rate from 11 per cent to 12 per cent. The same 1 per cent rise will also apply to class 4 contributions paid by the self-employed, which will rise from 8 per cent to 9 per cent. Thirdly, the additional rates of employee class 1 and self-employed class 4, payable on earnings or profits above the upper earnings limit and the upper profits limit, will rise from 1 per cent to 2 per cent.

Compared with the plans that this Government inherited, over £3 billion a year is being returned to employers once our changes are fully implemented. Indeed, our actions will mean that some 880,000 low earners in the UK will be taken out of income tax altogether; that around 950,000 low earners will no longer pay national insurance contributions, while their benefit rights will be protected; that employees earning under £35,000 a year will pay less income tax and national insurance; and, that employers will pay less national insurance on all workers earning less than £20,000 a year.

The second part of the Bill encourages employment and enterprise in areas of the United Kingdom that are most reliant on public sector employment. Our aim is to help these regions move to a more sustainable economic model—one based on private sector growth, enterprise and investment. That is why we are introducing a holiday from employer national insurance contributions, with the aim of providing support for qualifying new businesses in targeted areas of the United Kingdom. This action will reduce the costs of taking on new staff and provide support in the vital early stages of business development. In order to ensure affordability, the holiday will be limited to the first 10 employees taken on in the first year of business. For each of these workers, the holiday will last for 12 months, unless the closing date for the scheme, 5 September 2013, is reached before the 12 months have elapsed. The maximum amount that an employer can profit from any single employee will be limited to £5,000. At the time of last year’s Budget, it was estimated that start-up companies would save around £940 million worth of national insurance over the next three years. This is money that they can use to hire additional staff, expand their businesses or invest in our nation’s economic recovery.

This is both an important and a necessary Bill. It will go some way towards enabling the reduction of the taxation of labour in targeted areas, to help support employment and secure the recovery. In short, the Bill is good for growth and good for jobs. I beg to move.

--- Later in debate ---

[Lord Sassoon]

My Lords, this has been an interesting and high-quality debate, as is usual for this House, even if it has gone off into general economic issues on a number of occasions. Nevertheless, I am grateful to all noble Lords who have contributed.

Perhaps I may first address one or two of the questions and concerns that have been raised in connection with the national insurance contribution rate rises. I shall to try to restrain myself and not be drawn into some of the broader economic debate. My noble friend Lord Newby neatly knocked some of those concerns on the head, and your Lordships do not need another long lecture from me to explain just why the deficit reduction is necessary and what the greater construct is.

The noble Lords, Lord McKenzie of Luton and Lord Myners, referred to VAT in different ways. The critical point here is that consumption taxes are generally regarded by economists as being the least damaging to growth. If we had raised in other ways the £13 billion that it was regrettably necessary to raise out of the increase in VAT—for example, through larger increases in national insurance contributions—it would have been significantly more damaging to growth and jobs.

The noble Lord, Lord McKenzie of Luton, asked about the £1.4 billion effect on employers. This is a complicated matter, because there is a net overall benefit of £3 billion accruing from the total package, but it is the case that the way in which we have ameliorated the previous Government’s plans means that some of the benefit is switched from national insurance contributions to income tax. So, yes, there will be a net rise in national insurance contribution payments, compensated by a larger fall in income tax payments. While one can dice and slice this any number of ways, the critical point is that, in total, employers will be £3 billion better off next year, and that figure will rise in future years.

The noble Lord, Lord McKenzie of Luton, asked about the relationship of thresholds going forward. We have no plans to break the alignment of income tax higher rate threshold and the upper earnings and profits limits. Beyond this, we will review options for simplification in the light of any advice we get on priorities which are identified by the Office of Tax Simplification as and when it looks at this area.

The last main point on Part 1 of the Bill related to the important question of the funding of the National Health Service. This was also referred to by the noble Lord, Lord Davies of Oldham. I hope it is completely clear to noble Lords that nothing in the Bill affects in any way the commitment to increase NHS spending in real terms in each year of this Parliament. We can afford to do this without additional funding from national insurance contributions. I hope that gives reassurance and answers some of the specific questions raised by noble Lords on Part 1 of the Bill.

There were a number of detailed questions on Part 2 of the Bill. The first general group of questions related broadly to the scope of the holiday, both geographically and in relation to charities in particular. On the question of charities, which was referred to by the noble Lord, Lord Myners, and the most reverend Primate, it is not the case that charities are excluded from the scheme, but they must qualify in a number of respects. First, a new charity must be located in one of the relevant regions and it has to carry on a trade. In those circumstances, the holiday will apply subject to the charity meeting the other qualifying conditions.

It would be wrong to say that all charities are excluded, but I accept that non-trading charities are. If they had been included, it would have complicated the scheme and created complexity around administration, eligibility, anti-avoidance rules and so on. Any benefit ensuing is likely to be limited as we estimate that relatively few non-trading charities employing staff are likely to be set up over the holiday period.

The consistent theme is that the scheme is targeted at new businesses creating employment. If a new charity carries on a business, it will qualify.

[Lord Barnett]

My Lords, the noble Lord gave a definition of “trade” as “trading”. However, Clause 5(6)(a) refers to,

“a trade, profession or vocation”.

Is that not somewhat different?

[Lord Sassoon]

My Lords, I think it is a wider definition, so if a charity in those areas was carrying on activities that went beyond trading, my understanding is that the charity would qualify. The noble Lord, Lord Barnett, makes a point that perhaps the latitude for charities is wider than I am painting it. However, the critical point here—perhaps I am using “trading” too loosely—is that we are talking about creating new employment. If a new charity is carrying on a business that creates employment, it will qualify.

[Lord Myners]

The Minister said that the Government estimate very few non-trading charities will be established during the holiday period. Can the Minister let us know how many charities the Government expect to be established during this period? They have clearly done the work; otherwise, he would not have given the answer that he did.

--- Later in debate ---

[Lord Sassoon]

My Lords, I will look to see how many non-trading charities have been created in past periods. However, the noble Lord is long on these questions about what might have been the case had we done the estimate on another basis. I will come on to the critical questions of what estimates have been produced in a minute, if he will permit me. I know he likes to come in on my responses to debates with more and more questions, and I shall try to answer some of the ones he asked me earlier.

The noble Lord, Lord Myners, and other noble Lords asked questions about the geographic extent of the holiday—of course we are delighted that Cornwall is included. However, London and other areas have been excluded. My noble friend Lord Newby admirably answered the question asked by the noble Lord, Lord Davies of Oldham, about London, so I would just refer him to what he already heard the noble Lord, Lord Newby, say.

The critical thing is that we are targeting the scheme, as a temporary measure, on providing assistance to those areas that are most reliant on public sector employment as we transition to a more sustainable model of economic growth. I appreciate that if we had a much more complex scheme, which we think would be disproportionate, we could pick out smaller areas. However, given the proportionality of the scheme and its administration, cost and complexity, the targeting we have done achieves the scheme’s main objectives and consciously excludes those areas that are not so dependent on public sector employment. It amuses me somewhat to note that in plenty of other contexts the Government are criticised for not targeting areas sufficiently and here we are targeting them on those areas where the transition is going to be most difficult.

The cost of extending the holiday to other regions, on the same basis that we have estimated the other costings, would be: £250 million for Greater London, £250 million for the south-east and £160 million for the east of England. These are not inconsiderable sums.

[The Archbishop of York]

Will the Minister assure us that he has done some research that tells him that Tower Hamlets and Hackney—boroughs that I knew when I was Bishop of Stepney—are not solely dependent on public services? Why are they not included?

[Lord Sassoon]

As I have tried to explain, the issue here is that we have to take broad areas of the country to make this workable. Otherwise, the scheme would be effectively unmanageable in the way that we want it. Some remarks have already been made about the cost of administering the scheme, and while of course there are boroughs in London that are very significantly deprived—and the noble Lord, Lord Myners, has raised questions about other parts of the country—we have had to work the design of the scheme around regional units. Therefore, as I have tried to explain and as my noble friend Lord Newby eloquently explained, the relatively benign employment conditions in London mean that we have had to take regions including London as a whole.

On the estimates of cost, I can reassure the noble Lord, Lord Myners. I do not talk about the Office for Budget Responsibility as an auditing body, although he might like me to do so. That is not what it does. The OBR has independently reviewed all the key figures and looked at the £940 million, the 800,000 employees and the 400,000 employers. I assure the noble Lord that, whatever term he likes to use, the OBR has put that through its machine—

[Lord Myners]

I have to intervene at this point. As the Minister knows full well, it was the Chancellor of the Exchequer who used the term auditing to describe the work of the OBR in connection with public expenditure.

[Lord Sassoon]

My Lords, we are talking about the estimates here of the effect of the national insurance holiday. They have been put through the OBR’s estimable machinery in the normal way that the OBR does. As to the basis for the figure of 800,000 jobs, the detail of how that estimate was made and the data sources used were set out in the policy costings document published alongside the June Budget. I believe that the basis on which it was done was entirely transparent.

There was also a question whether the £940 million might be an overestimate of the benefit. It is a number that represents money that these new employers would otherwise have paid, so it genuinely reduces their labour costs and benefits them by that amount.

Lastly, I address the question about monitoring the holiday. My noble friend Lord Newby and the noble Lord, Lord McKenzie, asked about this, and the noble Lord, Lord Myners, may have touched on it. There will be monitoring and updates will be published after the end of the tax year on the operation of the scheme, including information at regional level. The Government envisage that the report will cover, from a regional and national perspective, the number of businesses applying and applications rejected, as well as the number of employees for whom a benefit is received and the amount claimed. This report will require information supplied by employers following the end of the tax year, and the first report will be published when the necessary information has been received, processed and checked to ensure that there is appropriate quality assurance. The Government aim to have these collated data and provisional findings published as soon as they become available, so it will be a comprehensive report on how the scheme is going.

[Lord Davies of Oldham]

Of course, the House will be reassured by the points that the Minister has just made, but does he have any comment to make on the question asked about the up-to-date position? The scheme has been running for a while now and there must, therefore, be some analysis of progress.

[Lord Sassoon]

My Lords, I really think that it is too early yet to have reliable data of the sort that I have indicated, which will come in at the end of the year, to make any judgments about the success of the scheme. As I have explained, we will publish comprehensive regional and national data on the scheme. It would cause there to be a disproportionate burden on the employers and the scheme if we asked them to report with greater frequency. The Government will study the data when they come in to make sure that we understand fully the impact of the scheme.

[Lord Myners]

Surely, the Minister will have data because applications have to be made and therefore will already have been made for an eight-month period. The Minister should be able to give us those data. I hope that, in writing to us after Second Reading, he will provide Members who have spoken in this debate with that information.

[Lord Sassoon]

My Lords, the scheme can be sensibly judged only when we get the full package of data on a national and regional basis that is broken down by the number of employees in the way that I have described. That will be published very transparently when there is a first basis of data on which to judge properly the impact of the scheme.

I want to address one last, important point from the noble Lord, Lord Martin of Springburn, about apprenticeships. Those have not been addressed otherwise in this debate but are of course relevant to the broader approach of the Government. His point is slightly detached from the main purpose of the Bill, but it gives me an opportunity to remind noble Lords that, in 2011-12, the Government will be providing £799 million for apprenticeships for 16 to 19 year-olds, which is an increase from the £780 million in 2010-11, and will fund 230,000 apprenticeship places for that age group. I trust that the noble Lord will recognise that this Government absolutely take on board the importance of apprenticeships. I could give the data if he wants, but I will not prolong the discussion now about the considerable amount of money that is also going into adult apprenticeships.

[Lord Martin of Springburn]

I welcome any help and initiative that is given to employing apprentices. On the remark about adult apprenticeships, it should not be forgotten that those who may have missed an opportunity when they left school should have an opportunity, as adults, to take up apprenticeships.

[Lord Sassoon]

Indeed, I think that in 2011-12 the sum for adult apprenticeships will be over £600 million. That accounts for something of the order of 430,000 apprenticeships, so the point is well made.

I am conscious of the time. I hope that I have been able to reassure noble Lords on the majority of the questions that they have raised on both parts of the Bill. I am grateful to the noble Lords, Lord McKenzie of Luton and Lord Davies of Oldham, for making it completely clear that the Opposition do not oppose this Bill. I am also grateful for having had the opportunity to explain the Government’s position on the issues in the Bill. The Bill enables the reduction of taxation on labour nationally, with extra support in targeted areas, and I ask the House to give the Bill a Second Reading.

[Lord Myners]

There was one final point which I raised about anti-avoidance in the larger corporate sector, through mechanisms such as paying bonuses by gold bullion and by other non-distributable or non-marketable instruments. Does the Minister endorse my view that such strategies are morally unacceptable? Will the Government use all efforts to ensure that such avoidance by large financial institutions receives as much attention as is apparently being focused here on avoidance by small employers in the regions?

--- Later in debate ---

[Lord Sassoon]

I was trying to keep my responses within the time limit and to matters relevant to this Bill but, if the noble Lord provokes me, I certainly did not receive any gold bars or anything like that from my employer. I shared that employer with the noble Baroness, Lady Vadera. Perhaps the noble Lord would also like to check with her to make sure that she did not receive any gold bars. Of course, the Government are very concerned to make sure that all taxpayers pay what is due. In respect of the banks—I did not want to be provoked into this—the previous Government greatly trumpeted a code of tax practice to get the banks to subscribe to it. They did not manage to get the banks signed up; we now have them signed up. If the noble Lord asks about it, we are very much on the case.

I ask the House to give the Bill a Second Reading.

Bill read a second time and committed to a Grand Committee.

Banking: Royal Bank of Scotland

Lord Sassoon Excerpts

Tuesday 1st February 2011 Lords Chamber

[Lord Hoyle]

To ask Her Majesty’s Government whether they have any plans to limit bonuses to be paid to senior Royal Bank of Scotland staff.

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

My Lords, UK Financial Investments manages the Government’s shareholding in the Royal Bank of Scotland on an arm’s-length and commercial basis. The Government are clear that remuneration policies at banks need to reward long-term sustainable performance, not incentivise short-term excessive risk taking. We have made it clear to RBS that it should have a smaller bonus pool than last year.

[Lord Hoyle]

I thank the Minister for that reply. Is there not something lacking when we cannot take firmer or more positive action in a bank in which we have 83 per cent of the shareholding? Does it not give the green light to the banks to carry on in the same way, while innocent people are losing their jobs because of the folly of the bankers, who are seen to be very close friends of this Government? The Government have talked tough and acted weak. Is there not a smell of hypocrisy about?

[Lord Sassoon]

I am grateful to the noble Lord, because it enables me to point out that we are hamstrung in dealing with the bonus situation at RBS. The previous Government signed an agreement with RBS that did not cover the payment of bonuses this year, which means that our hands are tied. I wish they were not. It was the wholly inadequate agreement that the previous Government signed that leaves us where we are.

Lord Forsyth of Drumlean: My Lords, will my noble friend confirm that 50 per cent tax will be paid on every pound that is paid in bonuses; and that 12 per cent national insurance will be paid by the employer, plus 2 per cent by the employee? Therefore, 63 per cent of the bonuses—I think that is the right number—will come back to the Exchequer at a time when it needs revenue. If the money is not paid in bonuses, presumably it can be offset against losses and the Exchequer will receive nothing.

[Lord Sassoon]

My Lords, indeed those numbers for the marginal rates of tax are correct. And that is not the only tax we extract from the banks—far from it. This Government have put in place a bank levy which will, when it comes into full force, raise an additional £2.5 billion out of the banking sector; a larger amount of money than was taken from the banks in the previous Government’s bonus tax.

[Lord Oakeshott of Seagrove Bay]

My Lords, can I encourage the Minister to use the full resources of the Treasury to try to find a way of untying his hands? I cannot believe that there is not a way around this. Is the Minister aware that Sir Philip Hampton, the chairman of RBS, a year ago told us that over 100 Royal Bank of Scotland bankers collected £1 million? What does the Minister expect the figure to be this year? Is he aware that I and the overwhelming majority of taxpayers, who are having to pay £828,000 of every £1 million paid out to RBS bankers, believe that we are entitled to see the names on the cheques?

[Lord Sassoon]

My Lords, the Royal Bank of Scotland is due to announce its results on 24 February. It normally makes its remuneration disclosures on or around that date, so we will have to wait. I have no knowledge of the number of bankers who might or might not be getting particular levels of bonus. Our relationship with the Royal Bank of Scotland is managed on a commercial, arm’s-length basis through UK Financial Investments.

[Lord Eatwell]

My Lords, as has been well-publicised, the Treasury and the Chancellor of the Exchequer have been entering into negotiations with the banks on bonuses and other activities. Will the noble Lord give me a categorical assurance that the results of those negotiations will in no way prejudge, constrain or compromise the findings of the committee into banking structures headed by Sir John Vickers?

[Lord Sassoon]

My Lords, with regards to the proposed possible settlement with the banks in Project Merlin, discussions are ongoing with the intention of seeing that the banks pay smaller bonuses than they would otherwise; that they are more transparent about their pay; that they make a greater contribution to local communities and the regional economies; that they treat customers fairly; and that they lend, materially and verifiably, more than they were planning to the businesses of Britain—especially small and medium-sized enterprise—so that they can grow and create this year. If we do not get such a settlement, my right honourable friend the Chancellor has made it clear that nothing is off the table. As to the Independent Commission on Banking, it is an independent banking commission and it will do its own thing as it sees fit.

[Lord Christopher]

Will the Minister clarify one of his answers in relation to the amount that will come to the Treasury this year? Will he please explain how—and when—those bonuses that are paid in shares and in a new vehicle entitled “cocos” are taxed?

[Lord Sassoon]

My Lords, the tax rules around deferred compensation are complex and depend on the sort of instrument being paid. Some tax on certain instruments is levied up front and some is levied later, so it depends very much on the circumstances of the individual instrument and the taxpayer. But, of course, some tax might indeed be levied later on.

[Lord Foulkes of Cumnock]

My Lords, will the Minister confirm that some of these millionaire and billionaire bankers, and indeed other millionaires and billionaires, use tax havens to salt away their money so that they do not actually have to pay tax to the United Kingdom Treasury? What are the Government doing to clamp down on these tax havens?

[Lord Sassoon]

My Lords, we are doing a lot more than the previous Government ever did. We have set aside an additional £900 million of expenditure for HMRC over the next spending round—the noble Lord may shake his head but that is a fact—and that will result in millions-worth of additional revenue each year being collected compared with what the previous Government did.

[Lord Brooke of Alverthorpe]

The Minister has described the nature of the relationship between the Government and the Royal Bank of Scotland. Is he content with the composition of remuneration committees attached to public limited companies? Given the widening gap between the better paid and the lower paid, is there not a case for a change in the diversity of the people who sit on remuneration committees? Are the Government prepared to explore this and perhaps look at whether we could see more representative groups on remuneration committees, particularly with those in the lower socioeconomic groups being represented?

[Lord Sassoon]

My Lords, the Financial Reporting Council continues actively to consider a range of ideas for improving corporate governance, and of course in recent months there has been the UK Stewardship Code and a revision of the UK Corporate Governance Code. I think that the Financial Reporting Council listens to all good ideas for improving corporate governance and is actively on the case.