Financial Services Bill

Lord Sikka Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Thursday 28th January 2021 Lords Chamber

[Lord Sikka (Lab) [V]]

My Lords, I congratulate the noble Lord, Lord Hammond, on his excellent speech. I welcome him to the House and look forward to his wise words on many issues.

The Bill has many deficiencies. I have sufficient time to speak on only two matters. In the post-Brexit world, the UK needs to compete to attract business. A key requirement is to ensure that the UK is a clean place with robust regulators. However, the Bill does not do that. It should have been preceded by an independent public inquiry into the finance industry and its regulation.

Regulatory failures continue to make headlines. For example, Dame Elizabeth Gloster’s report on the collapse of London Capital and Finance found that the FCA’s supervision was “wholly deficient” and that its staff

“had not been trained sufficiently to analyse a firm’s financial information to detect indicators of fraud or other serious irregularity.”

The report concluded that the FCA failed to fulfil its statutory objectives. The FCA has also been criticised in a report on the collapse of the Connaught Income Fund, and the long-running saga of frauds at the Royal Bank of Scotland and HBOS are further evidence of the FCA’s failures.

Anyone tackling corrupt practices in the finance industry faces obstacles. In February 2017, the Thames Valley police and crime commissioner, Anthony Stansfeld, prosecuted six financiers, including a senior ex-HBOS banker. They were jailed for a total of 47 and a half years. After being shamed, the FCA in June 2019 fined Lloyds Bank £45.5 million. Thames Valley Police force spent £7 million on the prosecutions, but it has not really been compensated by the Government and thus the force has been disabled from mounting any further investigations.

The Conservative police and crime commissioner for Thames Valley has also sought to tackle other cases of financial frauds but has met political and regulatory opposition. On 8 February 2019, he told the London Evening Standard:

“I am convinced the cover-up goes right up to Cabinet level. And to the top of the City.”


That is a strong condemnation of the current regulatory arrangements. The recurring problem is that the regulators are too close to the industry and like to bat for the industry rather than protect people from malpractices. The Bill does not cleanse the finance industry or enhance protections for the people.

My second point relates to the Basel III framework which is implemented by the Bill and affects the calculation of minimum capital requirements and leverage ratios for banks. However, many of the problems highlighted by the 2007-08 crash remain unaddressed. The Government want banks to have more equity, but they have incentivised debt and high leverage, as the interest payments attract tax relief and enable banks to report higher returns to shareholders. Why have the Government not addressed this contradiction at the heart of the calculations of capital for banks?

Financial statements of regulated financial enterprises are based on international financial reporting standards—IFRSs, as they are commonly known. Their use was heavily criticised in the 2013 report by the Parliamentary Commission on Banking Standards. The IFRSs give management too much discretion and management has used that to massage financial statements, as was shown by Carillion, for example. The IFRSs have no clear concept of capital maintenance and therefore calculations of capital based upon accounting numbers are fundamentally flawed. On bank balance sheets, various transactions in historical costs, amortised costs, net realisable values, present values, fair values, market values and even internally generated numbers are all added up. The calculation does not yield any meaningful number for capital maintenance. Banks are currently neither maintaining money, nor real or physical capital, so why do the Government consider them to be a useful guide for regulators?

Neither the FCA nor the Prudential Regulation Authority sets accounting rules for financial enterprises, but they rely on whatever the Financial Reporting Council comes up with. They are storing trouble for the future. The bank financial statements are targeted at short-term shareholders, essentially speculators and capital markets. They do not tell the regulators anything about market interdependencies or systemic risks, all of which were the causes of the 2007-08 crash.

The UK regulators rely on external auditors, even though big accounting firms are unable to deliver honest and robust audits. All banks which crashed in the 2007-08 crash received unqualified audit reports. The Financial Reporting Council routinely laments that 25% to 50% of the audits conducted by the big four accounting firms are deficient. Yet, bizarrely, regulators rely upon auditors. Auditors owe a duty of care to the company but not to any regulator. Regulators do not have a statutory right of access to the auditors’ files or staff. That was one of the reasons why the Bank of England was unable to fully investigate audit failures at Barings, delivered by Deloitte and Coopers & Lybrand, a firm which is now part of PricewaterhouseCoopers. Yet no lessons have been learned. One must also ask whether the reliance on ex-post audits is wise in a world of instantaneous movement of money. Is it not time that the regulators took direct responsibility for auditing the financial statements of banks?

[Baroness Penn (Con)]

My Lords, perhaps this is an opportune moment to remind Back-Benchers of the advisory time limit of six minutes for speeches.

Economic Update

Lord Sikka Excerpts

Tuesday 12th January 2021 Lords Chamber

[Lord Agnew of Oulton (Con) [V]]

I am not entirely sure what the noble Lord is referring to—perhaps to supply chain issues in the first few days of Brexit. If that is his question, I can assure him that all is being done to iron out these initial problems. Overall, the system has worked remarkably well when one considers the enormous change in operating procedures that businesses have had to bring about on an essentially cliff-edge basis.

[Lord Sikka (Lab) [V]]

My Lords, the Government have imposed pay freezes on public sector workers, and many others have received little or no financial support and are struggling to survive. However, they face the full and escalating costs of gas, electricity, water, broadband and even the funerals of their loved ones. What consideration have the Government given to freezing prices of these services to enable hard-pressed families to make ends meet?

[Lord Agnew of Oulton (Con) [V]]

I am not aware of a huge jump in inflation, as suggested by the noble Lord. Indeed, inflation remains extremely low. The pay freeze in the public sector was carefully targeted to ensure that those on the lowest earnings still received some protection.

EU-UK Trade and Cooperation Agreement

Lord Sikka Excerpts

Friday 8th January 2021 Lords Chamber

[Lord Sikka (Lab) [V]]

My Lords, despite commitments to fair competition and level playing fields, the TCA says little about tax policies. We had no debate and no ministerial clarification on the matter. The issues are likely to be problematic, especially as the UK is well on the way to becoming a tax haven for big corporations and the rich. Here, taxes have been shifted from capital to workers and consumers, unearned income is taxed at a lower rate than earned income, non-dom millionaires enjoy special privileges, and many companies pay little or no corporation tax. Despite numerous court cases, no big accounting firm has been investigated, fined or prosecuted for peddling unlawful tax avoidance schemes.

Outside the EU, the impulse of the Government is to turn the UK and its Crown dependencies into harmful tax havens. Inevitably, this will invite disputes about what fair competition, level playing fields and state aid mean. Last Sunday, the Prime Minister told the BBC’s “The Andrew Marr Show”, “You can use tax systems and subsidies to drive investment.” In this race to the bottom, the Prime Minister made no mention of the social costs. There is a failure to understand that businesses thrive on good social infrastructure, and this requires transparent and responsible tax policies. Will the Minister provide assurances that the Government will not turn the UK into a shabby tax haven for the rich and for footloose capital?

G7 Summit

Lord Sikka Excerpts

Thursday 26th November 2020 Lords Chamber

[Lord True (Con)]

My Lords, I share the noble Lord’s tribute to my good friend and noble friend Lady Sugg. The Government are committed to supporting international development and helping the world’s poorest people, as we have shown already in 2020, hosting the world’s biggest ever summit to raise funding for vaccinations in the poorest countries, and we continue to commit to supporting developing nations against the coronavirus problems.

[Lord Sikka (Lab) [V]]

My Lords, I draw attention to the Register of Members’ Interests, which states that I am an unpaid adviser to Tax Justice Network. We all know now that tax revenues are vital for economic recovery. A report by Tax Justice Network has estimated that, globally, more than $427 billion is lost each year due to corporate tax abuses and private tax evasion. The UK’s Crown dependencies and overseas territories are responsible for more than one-third of global tax losses. Will the Government ensure that curbing tax abuse is on the G7 agenda?

[Lord True (Con)]

My Lords, of course I note the points made by the noble Lord. The Prime Minister will give further details on the agenda for the G7 shortly.

Future of Financial Services

Lord Sikka Excerpts

Wednesday 11th November 2020 Lords Chamber

[Lord Agnew of Oulton (Con)]

I thank the noble Baroness for her question. In relation to the equivalence announcement, we are taking on board 17 equivalence rules. In the interests of brevity, I shall not go through all of them, but I shall ask that they are entered into Hansard. The point the noble Baroness makes about the early or perfunctory removal of equivalence is something we have taken on board. Indeed, other countries have expressed this as one of the EU’s problems, and it will be our intention to have a more transparent process that gives those countries the ability to respond to issues and have a more iterative dialogue.

In relation to the noble Baroness’s points on pension fund assets allocation, I touched on this yesterday in the Statement in relation to local government pension funds, and it is certainly a priority for us to try and steer some of these assets, on a low-risk basis, into infrastructure development.

[Lord Sikka (Lab) [V]]

My Lords, the finance industry has been engaged in bribery, corruption, money laundering, tax avoidance and mis-selling of numerous products. The victims of RBS and HBOS frauds are still awaiting compensation. In July this year, the Intelligence and Security Committee said some aspects of the finance industry were also a threat to national security. I ask the Minister and urge the Government to appoint an independent inquiry into the finance industry, as that would be a good way of promoting public confidence in the industry.

[Lord Agnew of Oulton (Con)]

I do not accept the noble Lord’s harsh criticisms of the sector. As in any sector, one gets miscreants, but is important to remind the noble Lord that this industry employs over 1 million people in this country and contributes £130 billion to our national economy and some £75 billion in tax receipts.