Financial Services and Markets Bill

Lord Sikka Excerpts

Committee stage
Wednesday 1st February 2023 Grand Committee

[Lord Sikka (Lab)]

My Lords, I and the noble Baroness, Lady Bennett of Manor Castle, oppose the Question that Clause 24 stand part of the Bill.

As I read the Bill, I wondered why growth and competitiveness as a regulatory objective appear at all. A friend in the City reminded me that the Government have been unable to deliver any Brexit benefit and have to show that they are doing something; therefore this had to be tagged into the Bill—although I understand that this clause was written at the behest of TheCityUK and UK Finance, which wanted to sponsor it.

The secondary objectives of growth and competitiveness cannot be reconciled with the main role of ensuring financial stability and consumer protection. If there is growth because of financial stability and consumer confidence, that is fine, but to go out of your way and say that the regulators must somehow grow the finance industry and promote international competitiveness is something else. Unless the Minister points me to it, I could not find anything in the Bill which indicates exactly what kind of weight is to be attached to each of those four conflicting objectives.

How much growth are the Government trying to secure in the finance industry? Are there any limits, and what are the economic and social costs? What would be the opportunity cost of more graduates going into the finance industry and shunning other careers, whether in manufacturing, chemicals or any other industry? How will the regulators ensure that somehow the UK has a greater supply of graduates? How will they ensure that there is adequate infrastructure? I could not see that any of these issues were answered in the long and hefty impact assessment.

The promotion of competition is an existing aim of the financial regulators. Here we can see that the FCA has persuaded some challenger banks to enter the market, although it has been utterly unable to tame the major banks that dominate the market; they have not been broken up and have reduced people’s access to the market—for example, by closing bank branches. Is taming the banks and breaking them up a matter for the FCA or for the CMA? The regulatory architecture continues to become more and more complex. Each regulator already passes the buck to somebody else, saying, “It’s your job to secure competition”, and that is domestically. When we move on to the bigger picture, it becomes even more complicated.

The common understanding is that the notion of competition relates to the state of the market and access to it. That is very different from the notion of competitiveness, which as a discourse does not have any permanent meaning in any sense; its meaning is always constructed and needs to be given. Essentially, however, it relates to the industry as a whole. That is a task for the Government, not for the regulators at all.

International competitiveness, as many noble Lords have already said, is about the ability to attract business from other financial centres. In the words of the former Business Secretary, Vince Cable,

“chasing ‘competitiveness’ really means … a race to the bottom—watering down standards in the hope of attracting more dubious sources of money to an industry.”

That is quite an indictment of the government objectives by a former Minister. Similar principles—that is, the principle of competitiveness—and approaches were behind the 2007-08 crash that hammered the whole economy. We are yet to recover from that folly, but they are being brought back. The Governor of the Bank of England, Andrew Bailey, said that before the last crash the regulator

“was required to consider the UK’s competitiveness, and it didn’t end well, for anyone”,

yet we are embarked on exactly the same course again.

There was an unprecedented bailout of the finance industry. No other industry in British history has needed that kind of state support, and we continue to be plagued by all kinds of scandals, even in an environment where regulators are not pursuing international competitiveness. We have had nearly £1 trillion of quantitative easing to the finance industry. The result is that there is asset price inflation and real wages are still down, yet it is hard to see any reflection of that in the Government’s impact assessment.

Competitiveness, as we all know, was specifically removed from financial regulation in 2012, but it is being unceremoniously smuggled back in. The Government are clearly opting for a race to the bottom for a sector that has been a serial offender and has actually eroded growth. The finance industry has mis-sold numerous financial products over the years, including pensions, endowment mortgages, precipice bonds, split capital investment trusts, payment protection insurance, mini-bonds and much more. It has led the field in international tax abuse, money laundering and sanctions busting. Is that what the Government really want to grow? Is that what the regulators are supposed to be growing?

Rather than cleaning up the industry, this Bill should have been preceded by a public inquiry into the finance industry to see what exactly needs to be cleaned up, but that never happened. Rather than cleaning up the industry, the Government, the Bank of England and other regulators have actually colluded with the UK banks over the consequences of their own criminal conduct. I have given examples, and I will repeat one here. HSBC was fined $1.9 billion in the US for facilitating money laundering. It admitted in writing that it had been engaged in “criminal conduct”. The then Chancellor, George Osborne, in collusion with the Bank of England and the head of the FSA, secretly wrote to the US regulators to say that they should go easy as HSBC was too big to jail and too big to fail. The result is that HSBC continues to commit financial misdemeanours.

Is that an example of the regulators somehow managing to balance growth and competitiveness? There is certainly growth in dirty money; that has continued. As for competitiveness, all the banks are still charging us roughly the same fees for overdrafts, and they are engaged in other nefarious practices as well. I provided that example regarding HSBC in the previous debates on the Bill.

Scholarly research carried out at the University of Sheffield, where I am emeritus professor, shows that between 1995 and 2015 the finance industry made a negative contribution of £4,500 billion pounds to the UK economy, yet the Government are weakening what modest regulation there is under the guise of the pursuit of growth and competitiveness. Just how bloated does the finance industry have to be before anyone recognises the danger signs flashing all over it? What evidence is there to show that the financialisation of everything is a positive development?

At the next crash, which will come if these objectives are implemented, not just banks but the whole high street will be in trouble, because organisations such as Morrisons, Asda and many others are under the control of private equity, which is utterly unregulated but meshes into the sector that we are trying to regulate. I hope the Minister provides us with some evidence to show that the financialisation of everything, which is inevitable if we grow this sector, will somehow be positive. I look forward to that reply.

The Government have provided no evidence to show that the finance industry has turned a new leaf. Since the 2007-08 crash, there have been scandals galore, whether London Capital & Finance, Blackmore Bond, the Woodford fund, banks forging customers’ signatures or numerous others. What are regulators going to do when faced with multiple objectives?

Do the Government and the regulators even know what the finance industry does? Mini-bonds came as a shock to the FCA; when people told it about them, it did not pay much attention. After the Kwarteng Budget, the gilt market declined because neither the Government nor the regulators knew anything about the impact of market yields on liability-driven investments and pension funds. Just yesterday, the Work and Pensions Committee was told that that Budget resulted in a £4 billion loss to pension funds. The Bank of England earmarked £65 billion of expenditure to bail out that market. As a result, some people made fortunes, but many innocent people made huge losses. There were huge wealth transfers from City speculators to pension funds.

How is the regulator going to adjudicate which kind of wealth transfer is good and which is bad? Regulators have no mandate to do that; only Parliament has that mandate and only the Government can act on behalf of Parliament to do that. Financial stability, growth and competitiveness cannot be reconciled, because there are too many contradictions and the Government are not willing to deal with them.

These kinds of losses are part of the reason why our economy is in the doldrums. The IMF is telling us that we are a basket case in terms of economic growth, yet we are piling on more and more of exactly the same. Ministers have not explained what the competitiveness and growth objective will do to regulators’ duties. We have about 41 regulators in the finance industry; will they all be required to promote competitiveness? How will their efforts be measured? There are 25 anti-money laundering regulators; how will they promote growth? Will they encourage more money laundering and bring in more hot money? Will they object? What will they actually be doing? Perhaps the Minister can spell that out.

We have a real patchwork of enforcement. We have the FCA, the Serious Fraud Office, the Crown Prosecution Service, HMRC, the Bank of England and others. How will they be promoting competitiveness and growth? Will they be lax? Will they copy Chancellor George Osborne, secretly intervene and say to somebody, “Please do not prosecute HSBC, even though it has been caught laundering money and admitted to it”? The Government have provided no answers to these questions and there is nothing about in in the Explanatory Notes. The Government are, in effect, laying the foundations of the next crash, just as the Conservative Government’s light-touch regulation laid the foundations of the 2007-08 crash.

Experienced voices are telling us to change course and not to go down the line that the Government are pushing. For example, Howard Davies, who served as chair of the Financial Services Authority between 1997 and 2003, said that

“he was ‘not keen on’ the competition clause, which went further than the guidance laid out prior to the financial crisis. At that time, he said the FSA only had to prove that issues such as competitiveness were ‘taken into account’ and were not something ‘you were trying to achieve directly’.”

So that is a warning. He added:

“In my view, to give the regulator the objective of promoting competitiveness, could be the thin end of a rather peculiar wedge. I mean, why would … the regulators not come in and tell us to cut our cost-income ratio? That would improve our competitiveness. And if they had a competitiveness objective, it seems that would give them an ‘in’ to the way we run our business, which I think would be a bit tricky, really, and that is one reason why the regulators aren’t really keen on it either.”

Financial Services and Markets Bill

Lord Sikka Excerpts

Committee stage
Wednesday 25th January 2023 Grand Committee

[Baroness Penn (Con)]

My Lords, I will begin by speaking to government Amendments 26 and 191 to 195 in my name, and Amendment 27, tabled by the noble Baroness, Lady Kramer. As she described very well in her contribution, CCPs are a type of market infrastructure and play a vital role in promoting financial stability in markets.

Government Amendment 26 will allow the Bank of England to extend a firm’s run-off period to the temporary recognition regime from a maximum period of one year to a maximum period of three years and six months. This will ensure that overseas central counterparties, or CCPs, within that run-off can continue to offer services to UK firms during that period.

While the UK was an EU member, access to overseas CCPs for UK firms was determined centrally by the EU. Following the UK’s exit, the Government put in place a new process to tailor access to the UK market, together with a temporary recognition regime, or TRR. The TRR allows UK firms to continue to use overseas CCPs while the Treasury and the Bank of England make equivalence and recognition decisions in respect of those CCPs. Once made, these equivalence and recognition decisions will provide the basis for long-term UK market access for overseas CCPs.

The TRR was accompanied by a year-long run-off regime, intended to ensure that CCPs that leave the TRR before it expires, without gaining recognition, can slowly and safely unwind transactions with UK members before exiting the UK market. Remaining within the TRR requires CCPs to take a number of steps, including submitting an application for recognition to the Bank of England by 30 June 2022. While the majority of CCPs in the TRR did this, a small number did not apply for recognition by that deadline and have consequently entered the run-off regime. UK firms therefore stand to lose access to these CCPs at the end of June 2023 under the current arrangements.

Amendment 26 will allow the Bank of England to extend a firm’s run-off period to the temporary recognition regime from a maximum period of one year to a maximum period of three years and six months. This extension is appropriate as the Government understand that some of the CCPs in the run-off may wish to apply for recognition in future. A temporary loss of access for UK firms to these CCPs would be highly disruptive. The extension therefore provides time for CCPs in the run-off regime who wish to apply for recognition to do so and ensures that the relevant CCPs can continue to offer services to firms during that period. It also ensures that, where necessary, UK firms can wind down their exposure to CCPs, leaving the run-off state in a safe and controlled manner.

Amendment 27 from the noble Baroness, Lady Kramer, seeks to remove proposed new sub-paragraph (3), which makes it clear that the Bank of England can vary any decisions it has already made on the length of the run-off period for a particular firm. I understand that this is a probing amendment to understand how that works. However, the Bank already provides dates by which these firms must exit the run-off, in line with the existing one-year limit set in legislation. This amendment extends the limit set in legislation and then gives the Bank the power to vary those dates under it. It is important for the Bank to set the exact date on which a particular CCP will exit the run-off in order to carefully manage the process for the reasons the noble Baroness points out. The run-off period for a firm cannot be more than the three years and six months specified in this legislation.

The Bank can specify a period shorter than this for a particular CCP. This does not affect the equivalence process as described by the noble Baroness. Equivalence is a separate process managed by the Treasury where the Treasury determines that an overseas jurisdiction is equivalent to the UK’s regime based on an assessment of the jurisdiction and its regulatory regime. Amendment 26 therefore allows the Bank to set specific dates for when CCPs will exit the run-off, with a maximum period set in legislation, which the Bank is currently responsible.

Briefly, Amendments 191 to 195 to Schedule 11, which introduces a special resolution regime for CCPs, are technical amendments which will ensure that Schedule 11 functions as intended and reflects the original policy intent, by correcting drafting and clarifying the scope of certain provisions.

On Amendments 21 to 25 and 41, tabled by the noble Baroness, Lady Worthington, the Government believe that effective commodities markets regulation is key to ensure that market speculation does not lead to economic harm. This is a lesson we all learned from the food crisis in the 2000s, and the Government remain committed to the G20 agreement that sought to address that.

However, the current regime, which we have inherited from the EU, is overly complicated and poorly designed. The application of limits to close to a thousand different types of commodity derivative contracts is far too broad. It captures many instruments that are not subject to high levels of volatility or speculation, and therefore unnecessarily undermines trading and liquidity in some contracts. Since the UK left the EU, the EU has significantly reduced the scope of its regime to only a handful of contracts—just 18—and no other major jurisdiction applies position limits as widely as the current UK regime.

To ensure that the regime is calibrated correctly, the Bill makes trading venues responsible for setting position limits. As some in the Committee have noted, they are well placed to ensure limits apply only to contracts that are subject to high volatility. However, the Bill empowers the FCA to put in place a framework for how trading venues should apply position limits and position management controls. As part of this, the FCA will continue to require trading venues to set position limits on contracts which pose a clear threat to market integrity. The FCA has confirmed that agricultural and physically settled contracts, among other highly traded contracts, will continue to be subject to position limits, in line with the UK’s G20 commitments, and therefore consistent with international standards.

The FCA will also retain its ability to intervene directly to set position limits if it believes it is necessary. However, Amendments 21 to 25 would require the FCA to instead continue setting position limits on all commodities that are traded on a venue or economically equivalent over-the-counter traded derivatives. This would place unnecessary restrictions on investors, to the detriment of all market participants, and would place the UK at a disadvantage compared to other international financial centres, such as the EU and the US, which apply restrictions to contracts that genuinely pose a risk of volatility. It would change existing market practice that has been shown to work effectively.

I will address more directly a number of the points that the noble Baroness, Lady Worthington, raised. On how to manage the “conflict of interest”, as she put it, for trading venues, as I said, under the measure in the Bill the FCA will establish a framework that will govern the way venues set and apply limits. The FCA will also have powers to intervene and require venues to set limits on specific contracts that pose a risk to market integrity.

On the FCA’s information-gathering powers, in particular in relation to over-the-counter trading, the FCA will have more powers to request information from any participants about contracts it is considering applying limits to. This includes, but is not limited to, over-the-counter contracts. I assure the noble Baroness that over-the-counter contracts will remain in scope as the FCA will have the ability to set limits. This means that over-the-counter traded agricultural products will remain in scope.

The noble Baroness also asked how, given that the FCA often participates in international fora, exchanges will be plugged into them. Market participants, including exchanges, are often invited to participate in round tables organised by international bodies, such as IOSCO, to discuss specific regulatory issues. They can also respond directly to consultations.

I hope that provides some reassurance to the noble Baroness on some of the specific questions that she raised.

[Lord Sikka (Lab)]

I thank the Minister. Unless she is going to in a moment, she did not specifically refer to Amendment 41. What it proposes is very reasonable, for two reasons. First, the information that the noble Baroness, Lady Worthington, requests is costless. It is readily available within the organisations. Secondly, if we go back to the last crash, one of the complaints about Bear Stearns was that it made almost 100% of its income from risky speculation, but the breakdown of that income was not available. Therefore, the creditors and other stakeholders were unable to make an assessment of the likely continuation of that income or the risks attached. This kind of disclosure gives us insights into the risks and enables market punters to make their own predictions about future cash flows and riskiness, and it is all costless. Therefore, it is hard to see what objections there can be to this disclosure.

Financial Services

Lord Sikka Excerpts

Wednesday 11th January 2023 Lords Chamber

[Baroness Penn (Con)]

We absolutely recognise the importance of cash to the people the noble Baroness mentions. As she says, it is for shops and other service providers to determine how they accept payments, but we are legislating to protect access to cash through the Financial Services and Markets Bill. That should help those shops and service providers which wish to continue to accept cash to do so, because we are focusing on this from both a consumer and a wholesale perspective.

[Lord Sikka (Lab)]

My Lords, if I understood the Minister correctly, she said that the consultation, or the rules, on bank branch closures are being strengthened. May I ask her to consider three facts? First, there is absolutely no consultation between banks and customers before a branch is closed. Secondly, banks do not publish details of their financial calculations to show whether a branch should be closed or not. Thirdly, people do not have the opportunity to object and vote against a bank’s decision. In light of that, what is any guidance worth?

[Baroness Penn (Con)]

My Lords, what I actually said is that the FCA guidance on bank branch closures has recently been strengthened. I do not recognise the picture the noble Lord paints. Firms are expected carefully to consider the impact of planned closure on their customers’ everyday banking and cash access needs and to consider alternative arrangements. The strengthened FCA guidance has specifically looked at enhancing protections for consumers who rely on those branch services. For instance, there are examples of banks placing people in those branches to ensure that they can help their customers to access banking through digital means such as mobile or online banking. There is also the rollout of Post Office banking hubs to provide more in-person services to customers.

Financial Services and Markets Bill

Lord Sikka Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[Lord Sikka (Lab)]

My Lords, I too welcome the noble Lord, Lord Remnant, to the House and thank him for his excellent maiden speech.

This is not a Bill that will clean up the City, enhance its accountability or streamline the regulatory architecture. There are at least 41 overlapping and buck-passing regulators. These include the Bank of England, the FCA, the PRA, 25 anti-money laundering regulators, OPBAS, the Pensions Regulator, the Pension Protection Fund and sundry others, all poorly co-ordinated. The enforcement architecture is also fragmented. It involves the SFO, the Crown Prosecution Service, the FCA, the National Crime Agency, the Bank of England, the Treasury, the Home Office and God knows who else. Can the Minister explain why this potholed regulatory architecture will not hinder the Bill’s objectives?

The FCA has been severely criticised for its failures in episodes such as Connaught, London Capital & Finance, Blackmore Bond, the Woodford fund and Link Fund Solutions. The Work and Pensions Committee’s July 2021 report relating to protecting pension savers said that the FCA’s evidence lacked integrity. John Swift KC’s December 2021 review into the supervisory intervention on interest rate hedging products criticised the FCA. The National Audit Office investigation into the British Steel Pension Scheme was also critical of the FCA. Can the Minister tell us why the Bill has not been preceded by an inquiry into the operational efficiency of the FCA?

The regulatory apparatus in this country is adept at sweeping things under its dust-laden carpets. Indeed, the Government themselves have done that. They have a history of shielding banks engaged in “criminal conduct”. A good example is that of HSBC, which the Bank of England, the Treasury and the then banking regulator colluded to cover up. This week the Times reported that Barclays, HSBC, NatWest, Standard Chartered and Lloyds are facing nearly 100 lawsuits, mostly in the US, for violating competition law, fixing prices, interest and exchange rate violations, sanction busting and terrorist financing, yet we have not heard a peep about it from anybody in the UK. As usual, they think things will go away. The Bill dilutes the current regulatory system and even eliminates the modicum of independence enjoyed by regulators by empowering Ministers to direct the FCA. Ministers’ objectives are entirely different from the regulators’.

Since 2015, 4,685 bank branches—almost half—have closed. Many districts and villages do not have a physical bank branch and millions cannot access online banking, so it is hard to see how the FCA is promoting effective competition when people just cannot access banking services. Can the Minister explain how the Government are dealing with disappearing bank branches?

The Bill adds an international competitiveness element to the FCA’s remit—something that was removed after the last crash, as others have said. This really opens the floodgates to reckless practices. The regulator would need to look at what Cayman, Bermuda, Belize and other jurisdictions are doing and use those as a benchmark to recalibrate UK regulation. This is ultimately a race to the bottom and will surely undermine the prime objective of securing financial stability.

The collapse of FTX and other companies has led to losses of nearly $1 trillion, which shows that crypto assets and currencies are highly dangerous. Yet instead of banning these dreamt-up currencies, the Bill legitimises the trade. That will send a message to ordinary people that it is perfectly safe to hold and trade in those assets. After all, it is regulated. The ultimate result will be that, before long, the regulators will be paying millions of pounds in compensation. I urge the Minister to reconsider this part of the Bill, because it could well be the beginning of the next crash. In due course, I will table a number of amendments.

Financial Inclusion in England

Lord Sikka Excerpts

Wednesday 30th November 2022 Lords Chamber

[Baroness Penn (Con)]

I am afraid to say to my noble friend that I do not recall the farthing myself. The Government had a consultation on cash and digital payments in 2018 and the responses strongly supported not changing the denominational mix of coinage at that time. However, as with all areas of policy, we keep this under review.

[Lord Sikka (Lab)]

My Lords, I have met many people who are visiting pawnbrokers, putting down their everyday things just to get a few pounds to enable them to survive. They are paying interest rates of 160% upwards. Does the Minister consider that to be affordable? If not, what is she proposing in order to help these people?

[Baroness Penn (Con)]

I do not consider that to be affordable at all. We are taking a number of actions in this area. We work closely with Fair4All Finance, the organisation set up to distribute funding from dormant assets. One of its projects is working on the no-interest loans pilot scheme to try to provide a different route and access to credit for those who need it. At the Autumn Statement, we heard from my right honourable friend the Chancellor the action we are taking to direct our support this winter and next year to the most vulnerable households.

Autumn Statement 2022

Lord Sikka Excerpts

Tuesday 29th November 2022 Lords Chamber

[Lord Sikka (Lab)]

My Lords, it is a pleasure to follow the noble Baroness, Lady Jones of Moulsecoomb.

This Budget offers nothing to women. Over half the workforce in the public sector is female and all the Government are offering them is cuts in real wages, condemning millions of teachers, nurses and others to rely on charity.

Depressions are avoided by improving people’s purchasing power but this Government are bent on depleting it; for example, by freezing personal allowances and income tax thresholds. Some 3.2 million additional people will now become liable to pay income tax, and another 2.6 million will pay tax at the higher rates. Even before the pandemic, the poorest 10% of households paid 47.6% of their income in direct and indirect taxes, compared with 33.5% by the richest 10%. Can the Minister explain why the poorest continue to pay the highest proportion of their income in taxes?

After the September Budget, the Government found £19.2 billion to bail out pension funds. They have for years funnelled billions in quantitative easing to City speculators. In the most recent Budget, the Chancellor handed £18 billion of tax cuts to banks but could not hear the cry of 800,000 hungry children. Ministers have taken to the airwaves to claim that they are actually inconveniencing their rich friends, even though the Chancellor failed to introduce a wealth tax or financial transactions tax, end the non-dom tax dodges, or reform trusts to prevent the rich from avoiding inheritance tax.

However, the Government have lowered the 45% income tax band threshold from £150,000 to £125,140. The result is that, from April, a FTSE 100 chief executive earning a £4 million annual salary will pay £1,243 a year extra in income tax. That is equivalent to £24 a week, which is less than they pay for a glass of wine when they go out on a Saturday night. The Government call this progressive taxation. By taxing capital gains at the same rate as earned income and charging national insurance on the same basis, the Government could have raised £25 billion to redistribute, alleviate poverty and invest in the economy. Instead, they have tinkered with the tax-free allowances for capital gains tax and will now raise only around £1.6 billion over five years.

The Government continue to penalise workers by taxing earned income at rates between 20% and 45%, but capital gains are taxed at rates between 10% and 28%. Recipients of capital gains use the National Health Service and social care but pay nothing in national insurance. That is wrong. There is similar tinkering with domestic dividends, which will raise £940 million by 2027-28. The Government could have raised around £8 billion a year by aligning the tax rate on dividends with earned income. And the Government have done absolutely nothing to check tax avoidance on dividends paid to foreign investors; they continue to be paid tax- free. No other Government do that.

Conservative Chancellors make ritualistic references to tax avoidance, and this Budget is no exception—although the Chancellor failed to mention that, since 2010, HMRC has failed to collect over £400 billion in taxes. Alternative models of the tax gap put that amount at around £1,500 billion.

Additional investment in HMRC is most welcome. Every £1 spent on investigations into the tax affairs of large businesses yields an extra £56 in tax to HMRC, while investigations into wealthy individuals yield £28 for every £1 spent. But what budget have the Government actually allocated to HMRC? Let us look at the small print in the Treasury papers. For 2022-23 the budget for HMRC is £5.9 billion, for 2023-24 it goes down to £5.6 billion and for 2024-25 it is down to £4.6 billion. That does not suggest that the Government are serious about tackling our tax-avoiding friends—and double-digit inflation means that HMRC’s budget is in fact totally depleted.

On 13 July, during the passage of the Energy (Oil and Gas) Profits Levy Bill, I drew attention to several fatal flaws in the design of the levy, otherwise known as the windfall tax. It applied only to profits from the North Sea and excluded profits generated through refining, trading and forecourts. It did not apply to untaxed global profits of companies resident in the UK. Several Ministers continued to claim that we cannot tax the global profits of companies, so I shall remind the Minister what the law is: companies resident in the UK are liable to pay UK corporation tax on their global profits. Of course, they get credit for taxes paid in other countries that are subject to double-tax treaties and agreements. That means that if a company has funnelled profits from the UK to a tax haven with zero corporation tax or at least a lower rate, those profits can be taxed here—but the Government choose not to do so.

The result of the failed windfall tax levy is that Shell has not paid any windfall tax while BP might, and neither company has paid any UK corporation tax for the last three years. So my question to the Minister is: how do the Government hope to collect more without redesigning the windfall tax scheme? It needs a complete redesign. I hope the Minister will be able to answer that.

Finally, empirical evidence shows that austerity kills. Some 335,000 people died between 2012 and 2019 from government-imposed austerity. Could the Minister tell us how many more will die from the cuts included in this Budget?

Financial Markets: Stability

Lord Sikka Excerpts

Thursday 3rd November 2022 Lords Chamber

[Lord Sikka (Lab)]

My Lords, I thank the noble Lord, Lord Sharkey, for facilitating this very timely debate. I want to talk about the elephant in the room, which is the finance industry and how it has destabilised the whole society. We have about 41 regulators for the finance industry, but they have very little idea of what the finance industry actually does. Indeed, it came as a shock to them after the banking crash that they were using derivatives to such a large extent. After the fiasco of the mini-Budget, some £1.3 trillion has been wiped off the UK bond market, and that includes £882 billion from gilts and the index-linked gilts market. The Pensions Regulator tells us now that some 7,500 pension schemes may well be technically insolvent. Did the Bank of England, the Treasury, the regulators or the FCA know how the pension funds are funded? We frequently get impact assessments accompanying financial Bills, but none of them looks at the destabilising effects of what the Government actually do. I hope we will get something different.

Financial markets are inherently unstable and, in the absence of effective regulation, continue to destabilise society. Short-termism is prevalent, compounded by fraud and anti-social practices, which are rife in the City of London. Numerous financial products have been mis-sold for more than half a century. Has any big company ever been liquidated as a result? No. Governments bail out the industry—that means there is no threat of bankruptcy at all for the key players and they then have a public licence to continue to misbehave. Financial sanctions are puny and they continue to engage in tax avoidance, rigging interest rates and exchange rates, forging customers’ signatures, money laundering and anything else we can think of.

The finance industry is the only industry that has the capacity to decimate economies. Research by my colleagues at the University of Sheffield has shown that between 1995 and 2015, the bloated, scandal-ridden finance industry made a negative contribution to UK GDP of £4,500 billion, yet the Government do not take that on board in anything they do in relation to this industry. There is no public inquiry of any kind as to how the industry operates. Can the Minister tell us when we will get a public inquiry into this scandal-ridden industry?

Effective regulation is the key. That was recognised after the 1929 Wall Street crash, when the US created the Securities Exchange Act. Of course, it has not fully succeeded. The UK has a rather laissez-faire approach. Until the mid-1970s banking crash, there was no regulator for the banking industry at all. The Banking Act 1987 handed the keys to the Bank of England and it failed miserably, as was shown by the frauds at BCCI and Barings and the collapse of Johnson Matthey. Then we had, through the revolving doors, the Financial Services Authority, after which the 2007-08 crash showed that the chaps regulating the chaps does not work at all; it has never worked. Then we brought in the FCA and the PRA and the scandals have not gone away, whether it is London Capital & Finance, Blackmore Bond, Woodford Equity or any other. The HBOS and RBS frauds are still unresolved. My colleagues have sent regulatory bodies 10,000 pages of evidence to show that banks are forging customers’ signatures to repossess their homes and businesses, yet we have seen no action of any kind.

The shadow banking industry is not regulated at all, yet it is bigger than the regulated banking industry. That is another elephant in the room and we saw part of the effects of that through its effects on pension schemes. Can the Minister tell us why the shadow banking industry is not regulated on the same terms as the banking industry?

I shall wind up by reminding noble Lords that we need effective independent regulation in which the stakeholders, not the City elites, are in control of what happens in our society. Until that happens, there is little prospect of stability in the finance industry and that will affect the rest of the economy, because everything is now financialised. Indeed, private equity owns supermarkets: if they collapse, supermarkets will collapse too.

--- Later in debate ---

[Baroness Penn (Con)]

I do not believe that that characterisation is right. Ensuring that we have a strong financial services sector also benefits many other parts of our economy in terms of access to capital, and many other things. It does not need to be at the expense of the rest of our economy. It strengthens the rest of our economy.

[Lord Sikka (Lab)]

The Minister referred to £100 billion of tax from the finance industry. That is misleading, because it includes things such as the VAT collected by the finance industry, which is borne by customers; PAYE, which is borne by employees; and national insurance, part of which is also borne by employees. Surely that £100 billion number needs to be corrected.

[Baroness Penn (Con)]

No, it is correct. The noble Lord seems to know how it is composed, so we are transparent in how that number is reached. I would like to make a little progress.