National Minimum Wage

Lord Stoneham of Droxford Excerpts

Thursday 6th November 2014 Lords Chamber

[Lord Newby]

My Lords, as I said, a number of departments already pay the living wage. It is fair to say that there is a move across the rest of government in that direction, which is not yet complete. It is for individual departments to take those decisions. As far as care workers are concerned, HMRC, which is responsible for enforcing the minimum wage, has done a significant amount of work on this and is increasing its enforcement activities in the care sector and elsewhere. I take the point that the noble Baroness makes. In 2012-13, HMRC identified £3.9 million in arrears of wages for 26,000 workers who were not getting their full whack on the minimum wage.

[Lord Stoneham of Droxford (LD)]

My Lords, there is a sensitive relationship between raising the minimum wage and employment levels. Does my noble friend agree that it is only now, with rising employment and economic growth, that we can afford to give priority to raising the real level of the minimum wage, together with simplifying benefits and raising tax thresholds as a way of helping the low paid?

[Lord Newby]

My Lords, I completely agree with my noble friend; the increase in the tax threshold has made a major impact on living standards. That is why real household disposable income, which is the key figure looking at living standards, increased by some 2.2% in quarter 2 2014, and why the OBR forecast that earnings will rise faster than inflation from the second half of this year for every year to 2018.

Industrial Strategy: British Business Bank

Lord Stoneham of Droxford Excerpts

Tuesday 8th July 2014 Lords Chamber

[Lord Stoneham of Droxford (LD)]

My Lords, it is a pleasure to take part in the debate initiated by the noble Baroness, Lady Wheatcroft, and to have her tour d’horizon of the Government’s industrial strategy from her perspective of experience in the business world and business journalism.

As the noble Baroness said, there are very good and encouraging signs of recovery as the economy starts to rebalance and growth resumes. When Vince Cable first started to refer to the term “industrial strategy”, I must say that I had certain concerns about that terminology, because I always associated it with the Government’s failed ventures to intervene in industry in the 1970s. However, the work at BIS over the past four years matches the Treasury in providing the essential components of recovery and the hope for sustainable growth. The brand “industrial strategy” is clearly being restored and reinvigorated, and it looks like a winner. I want to explain to the noble Lord, Lord Haskel, that there are components of an industrial strategy here. They are very clear, have been set out very clearly by the Secretary of State for Business, and a lot of them build on the good foundations left by the previous Secretary of State for Business, the noble Lord, Lord Mandelson.

There are four key components of this strategy. The first is the partnership activity concentrated on the key strategic sectors. We have seen the recovery in the automobile sector: it is remarkable. We are now one of the leading producers of motor cars in Europe. Now we have to concentrate on making sure that the component supplies are provided in the UK and not simply imported. This weekend in Silverstone we saw the spotlight on the specialist engineering companies which are behind the development of Formula 1, and all the reforms that they have introduced, particularly on energy conservation. Many of these SMEs are based here in the UK.

Two weeks ago, I visited Airbus in Toulouse, another example of where partnership between Government and industry has been remarkably successful. In 1995, 20% of passenger aircraft were made in Europe by European manufacturers; the rest were made in America. Today, more than 50% of those planes are made in Europe, largely through Airbus and its suppliers, and we have 10,000 employees in Airbus and 100,000 working in the supply chain of this company. It is impossible to see how success would be possible in that sector without a partnership between the Government on research and development and a vision of what a European industrial strategy could achieve in this sector. Any idea that a partnership with the German and French aviation sectors could take place so successfully outside the EU is, in my view, ludicrous.

The second key component of the strategy is the promotion of key technologies, particularly based on the partnership with universities and the development of catapult centres. The role of universities has been recognised as essential to economic growth. They are building on the competitive advantages in research, which we must now exploit in a successful industrial strategy, whether it is in energy storage, robotics, regenerative medicine or the other sectors and technologies that they have identified as part of the strategy.

The third component—and where the coalition has had great success, although I will not go into the detail tonight—is addressing skill shortages and unemployment through the growth of the apprenticeship scheme and a refocus on the importance of technical education. The provision of skills in these technical areas is vital for our industrial strategy.

The fourth component of the strategy is to provide financial support, particularly for small and medium-sized enterprises. We know that SMEs are a major provider of jobs and have been over the past couple of years—remarkably so as we have recovered from recession. There is great potential now through more start-ups and more growth from these companies. It is remarkable that until 2012 this country was the only one of the G8 countries without a specialist institution seeking to intervene and provide finance and advice for SMEs. Germany has its KfW bank; the USA, despite moves in Congress, still has the Small Business Administration. These are bodies with vast resources and expertise which all help with financing and advice for small businesses. I hope that our British investment bank, once it is approved by the European Union’s competition authorities in the autumn, will be a further force for us in this competitive market.

We are grappling with market imperfections in respect of financing small businesses. At a time when bank choice is down to four, with many withdrawing from high-risk, high-cost, more risky finance for small businesses, we needed to do something to fill that gap. It is long overdue. It is a problem that has existed in this country since the 1930s and when markets do not work then the Government have to help make sure that they do. There has been a lack of provision for debt and equity financing for these companies and there has been demand weakness as well. There has been a lack of awareness of business potential and of the benefits of raising finance at cheaper rents. Without the funding, these companies will not fulfil their potential. The first step is to develop the local networks, through investment partners, to form a strategic plan, which we have now seen published by the business bank, and then to develop the key partnering to help private finance think longer term and take advantage of government backing to lever lower borrowing costs. We have seen substantial progress in the first year of the bank: £282 million lent to 30,000 businesses; and the formation of 80 financial partners, with the aim of increasing this investment to £10 billion by 2018.

For the country to make its mark and to gain competitive advantage we have to see some continuity in these policies over the next four to 10 years. It is important to recognise that we will not see the benefits of some of these policies until the next Government or the Government after next—these policies take time to emerge—but we have got to see ongoing work to simplify financing schemes and to finesse them in different markets. We have to develop the bank to match the best of our competitors in other countries, particularly in Germany.

There are two final elements to the industrial strategy. The Government are making moves to ensure that government procurement is aimed at helping small businesses, particularly with the success of the Olympics in 2012. In the regional economic partnerships we have the basis for encouraging growth in the regions, and I hope that these organisations will be used to help promote financial opportunity for small businesses.

Just as the Treasury’s determination and focus on the financial and economic policy of the country are showing signs of working, so the industrial strategy, led by BIS, is ensuring that the firm foundations for industrial recovery and export growth are built on a genuine partnership between the Government and key industrial sectors: knowledge, the strength of our universities; firm initiatives to improve skills; government procurement policies; and, at last, the establishment of a heavy-weight, specialist organisation, the British Business Bank, to assist and advise SMEs on financing, which is long overdue.

Budget Statement

Lord Stoneham of Droxford Excerpts

Thursday 27th March 2014 Lords Chamber

[Lord Stoneham of Droxford (LD)]

My Lords, this is an encouraging Budget. It is clear that the outlook for employment is improving, business investment is clearly moving forward, and business confidence has substantially improved. It is always the most vulnerable who benefit most from the extra job opportunities. However, exports remain a worry, and I hope that the Government will concentrate, among other things, on looking at more import substitution and home sourcing, particularly in sectors which we know will now grow, such as—I hope—housing. Housing is the great conundrum in our economy and still remains largely unresolved, with a huge shortage of supply and too much demand.

In the current circumstances, it is right that while combining a commitment to correct the financial deficit, the Government should now convert their austerity theme to one of sustainable growth. The best levers they can pull are to continue their emphasis on improving skills and on improving infrastructure helped by low-cost private sector funding, to focus on their industrial strategy to partner improvements in key sectors, and to encourage export growth and import substitution.

I am surprised that few Members of this House have concentrated on the main subject of the Budget: pension reforms. I have worked with Steve Webb since 2002 on determining Liberal Democrat policy on pensions, so I will concentrate on that. I am proud of what the Government have achieved in the pension field. We have built on the work of Adair Turner’s Pensions Commission and the early work done by the Labour Government. The triple lock on the state pension has protected the most vulnerable in the recession, and the basic state pension is now worth a higher share of the average wage than at any time in the past two decades. We are introducing a single-tier state pension to provide a simple, decent state pension, set above the basic means test, so that working people will know what they will get in retirement from the state and can therefore plan accordingly.

We are seeking to reverse the decades-long decline in private sector pensions provision. Barely one worker in three in the private sector paid into a pension at the time the Government came in, and urgent action was required. In 2012, we began the process of automatic enrolment, and 10 million people have already gone into workplace pensions. That has been a great success; more than 3 million workers have been automatically enrolled, and only one in 10 has exercised their right to opt out. A combination of employer contribution and tax relief from the Government makes an attractive proposition to people who were not otherwise making proper pension provision. That has given rise to the biggest rise in workplace pension coverage since figures began to be collected in 1997.

The Government still need to make sure that these pensions savings are invested in value-for-money schemes that will be well governed, and that individuals do not build up multiple-stranded pension pots but follow them when they change jobs so that a worthwhile sum can be built up. Having ensured that the vast majority of workers build up a worthwhile pension pot on top of a simplified state pension, the Budget has taken the opportunity to look at the choices people will face in retirement, reduce complexities for consumers in their financial planning for their retirement and generally encourage more long-term saving.

I was interested to see that Janan Ganesh, a Financial Times commentator, wrote this week:

“Historians of the coalition government will have to work out how Britain came to be governed so radically by such pragmatists”.

It is interesting that we in this Government have achieved the biggest fiscal contraction since the war; the public sector payroll expansion of 13 years of the Labour Government has been undone in one Parliament; we have had multiple public sector reforms in education, the health service and welfare; and now the Budget is throwing all the old pension orthodoxies on to the bonfire. My noble friend Lord Lawson—who, sadly, is not with us today—recently said on the radio that the coalition was now pointless. However, we have to ask, as the FT columnist said, whether the Government have been able to govern more radically than a single-party Tory or Labour Government could have done, particularly in the area of pensions.

The Budget proposals will end the closed market for annuities and open up choice. Potentially, savers can better control their financial planning for retirement, and that will encourage innovation among fund managers to come up with new products. The annuities market has been far too closed, uncompetitive and complacent, as the Financial Conduct Authority has recently shown in its report. The opportunities of this change are matched, however, by a number of dangers, and we must use the next year for proper consultation to get the right safeguards in place for these major changes.

There are a number of things that the Government have to concentrate on. Mis-selling will not go away. As the noble Lord, Lord Hollick, warned us—sadly, he is not in his place at the moment—the last revolution in personal pensions in the 1980s gave rise to the worst mis-selling opportunities of our generation. I well remember, as an employer at that time, resisting employees who were being persuaded by slick salesmen that they should give up their defined benefit pensions for their new personal pensions, which they were being offered by these salesmen.

We have to watch, because, when we make these radical changes, mis-selling will continue. The Government must be vigilant and people should not be allowed to fritter away their pension pots through bad selling. The Government have initially started to provide independent advice; it must be mandatory, and it has to be very well organised. The 400,000 people entering retirement each year need that independent advice. There is also a danger that, if the newly freed pension pots flood into markets such as buy-to-let property, the older generation will add to the burden on the young if prices are simply pushed up further and first-time buyers are more out of reach in the housing market.

We must also remember that tax relief on pensions savings has been justified largely as a reward for long-term saving. However, if it encourages short-term spending, it has to be questioned. There is huge inequality on tax relief on pensions savings. If you cap the lump sum free-of-tax payment, on which the cap has up to now been £312,000—that is the sum that people can take tax-free from their pensions if they have the maximum pension allowance—at average earnings of, say, £30,000, there is a saving to the Exchequer of £2 billion. So there is a huge subsidy there that is going to the better off in society. To contain pension tax relief to the standard rate of tax, which has long been a Liberal Democrat policy, would save the Exchequer £10 billion—so we have to justify that tax relief, and we have to ensure that in a time of austerity the principal beneficiaries of tax reductions are those on average or below average earnings. There will be public anger if it is not concentrated on those people.

Finally, we have to ensure that there are major reforms here. We need reform. It is positive that it is being done, but we have to ensure that we do not simply become an onshore tax haven for the better off because of these new schemes. The Government have initiated a pensions revolution, which we should welcome. The changes will have major long-term consequences. We must use the coming year to ensure that this revolution occurs fairly and efficiently and is not susceptible to any short-term electoral advantage ahead of the election, which could be deeply damaging to society and the long-term cohesion of this country and the economy.

EU: Fraud (EUC Report)

Lord Stoneham of Droxford Excerpts

Wednesday 11th December 2013 Grand Committee

Moved by

[Lord Stoneham of Droxford]

That the Grand Committee takes note of the Report of the European Union Committee on The Fight Against Fraud on the EU’s Finances (12th Report, Session 2012–13, HL Paper 158).

[Lord Stoneham of Droxford (LD)]

My Lords, this Motion was at one stage in the name of the noble Baroness, Lady Corston. As noble Lords may already know, the noble Baroness was unwell last week and is recuperating at home. Therefore, I am speaking on her behalf.

The European Union Committee’s Sub-Committee E on Justice, Institutions and Consumer Protection, of which I am a member, prepared the report which is now before the Grand Committee. The Motion invites the Grand Committee to take note of the report The Fight Against Fraud on the EU’s Finances. I welcome the involvement in this debate of my noble friend Lord Newby. Given his experience in Customs and Excise, I cannot think of a Minister more qualified to reply to a debate on fraud.

In July last year, under the considered and diligent stewardship of the predecessor of the noble Baroness, Lady Corston—the noble Lord, Lord Bowness—the sub-committee of which I am a member decided to launch an inquiry into fraud on the European Union’s finances. The committee sought to gauge the vulnerability of European Union funds to fraud and assess the effectiveness of the European Union’s anti-fraud system and the effectiveness of the member states in pursuing any crimes perpetrated against the European Union’s budget.

In addition, the inquiry was timed to coincide with the publication of a directive aimed at protecting the European Union’s financial interests through the criminal law. We saw more than 30 individual witnesses and some members of the committee, including myself, travelled to Brussels, where we saw all the relevant EU agencies and bodies tasked with dealing with fraud, plus a number of MEPs. We are very grateful to all those who submitted evidence to our inquiry.

Since 2011, the Commission has produced a number of legislative proposals designed to improve the protection of the EU’s financial interests which are highlighted in the report. In addition, since the report’s publication in April this year, the Commission has also brought forward a regulation reforming Eurojust—the European Union’s criminal justice agency—and the controversial proposal introducing the concept of the European Public Prosecutor’s Office, which is designed to prosecute crimes affecting the Union’s financial interests. The Government have decided not to opt in to the Eurojust proposal, against the express view of this sub-committee, and the coalition agreement has ruled out the UK’s participation in the European Public Prosecutor’s Office.

European law makes combating fraud on the EU’s finances the responsibility of both the European Commission and the individual member states, but the member states’ authorities remain responsible for administering 80% of the money. Given this fact, the overwhelming weight of responsibility for the protection of the EU’s financial interests falls on the individual member states and, in the context of criminal frauds, their crime-fighting bodies.

The report recognises the hidden nature of criminal fraud. We understand that estimating the levels of fraud perpetrated in the individual member states with any degree of accuracy is very difficult. These problems are magnified once you introduce the additional complexity of the European Union’s 28 member state structure, but these difficulties should not allow the member states to ignore their responsibilities.

I plan to concentrate on four key aspects of our report: first, the vulnerability of EU funds to fraud and their potential scope for fraud; secondly, fraud specifically in the UK related to EU funds; thirdly, the European fraud concerning VAT; and, fourthly, the European Union’s anti-fraud structure. I turn first to one of the main conclusions of our report; namely, the vulnerability of EU funds to fraud. In 2011—the year that forms the main focus of the committee’s inquiry—the EU’s budget was €141.9 billion. In 2011, the total government revenue in the UK for the same year was £589 billion. The UK’s budget is three and half times the EU budget.

Under its obligation to report annually on its anti-fraud work, the Commission produces a figure for fraud in the European Union based on the frauds reported to it by the relevant member state authorities. The figure for 2011 was €404 million, or 0.28% of the EU’s 2011 budget. Many of our witnesses told us that this was an underestimate of the problem, and Rosalind Wright QC, former director of the Serious Fraud Office in the UK, said this figure represented the tip of the iceberg. The Commission rejected the iceberg analogy and suggested that EU funds were no more prone to fraud than national budgets, while the UK Government argued that EU funds,

“will always be vulnerable to fraud”.

The UK’s National Fraud Authority which, until its recently announced abolition by the Home Secretary, was tasked with co-ordinating anti-fraud action in the UK, told us that the current level of fraud suffered by the UK public purse amounts to about £20.3 billion per annum, which suggests that for 2011 in the UK, 3.4% of the public purse was lost to fraud. So, in line with the Commission’s evidence that the EU’s budget is no more prone to fraud than national budgets, the committee took the estimate for fraud in the UK and applied it to the EU’s annual budget for 2011 and arrived at a figure for fraud on the EU’s budget for 2011 of €4.82 billion, a figure more than 10 times more than the Commission’s official figure.

The committee’s report recognised the various caveats and warnings that have been applied to the process of deriving these figures for fraud on the EU’s budget from national figures. Nevertheless, it is clear to the committee that the Commission’s official figure for 2011 of €404 million offers only a glimpse of the levels of fraud perpetuated against the EU’s finances. If the Government are right that EU programmes will always be vulnerable to fraud, and in some member states increasingly so, the final figure will be even greater. I note that in its recent impact assessment in support of the proposed European Public Prosecutor’s Office, the Commission suggested that the actual level of fraud on the EU’s budget was in the region of €3 billion, so it is moving towards the committee’s figure.

In their formal response to this report, the Government expressed concern about our estimate of the level of EU fraud, adding that they did not recognise the committee’s figure. We were disappointed with the Government’s lack of engagement with this key conclusion of our report, so I offer the Minister an opportunity during this debate to engage with this aspect of our conclusions. Given this disappointing context, we were unable to see how the member states’ and Commission’s claims to protect the EU’s financial interests could be justified. We hope that the introduction of the directive on protecting the EU’s financial interests via the criminal law, which introduces an EU-wide definition of fraud on the EU’s finances, will help to alleviate this problem.

We also looked specifically at the extent to which fraud against the EU’s budget was committed from within the UK and assessed the rigour of the Government’s duty to report evidence of fraud to the Commission. I regret that the picture that emerged was not good. The committee recognised that the same difficulties that apply to estimating fraud on the EU’s budget also apply to assessing the levels of EU fraud committed from within our shores. None of our witnesses was willing to place a precise figure on the problem, but the National Fraud Authority suggested a figure of £41 million, about 1% of the total EU-funded expenditure in the UK. However, it warned us to treat this estimate with a “high degree of scepticism”.

What emerged is that no single government department or body appeared to co-ordinate or take ownership of the UK’s fight against EU fraud. The Government told us that they take all these matters seriously and EU fraud “extremely seriously”, but the responsibility to deal with fraud and to report it to the Commission falls on the individual department dealing with the relevant funds. When asked, the Minister was not “sure” whether the Government collated all the different departmental figures into one place. This lack of co-ordination concerned us and confirmed our view that individual member states, including the UK, do not devote significant resources to pursuing EU fraud and, as is their responsibility under EU law, to reporting it to the Commission.

We therefore recommended in the report that the Government nominate a single department or agency to co-ordinate the fight against EU fraud in the UK and to take responsibility for attempting to quantify the problem. In their response to us, the Government agreed that this information should be shared between government departments and that, while there is room for improvement, such sharing already takes place. We welcome this, although we have wondered why it has been so difficult for the committee to get a clearer estimate of the level of the problem in the UK, even allowing for the nature of fraud, from those witnesses we saw from the relevant national bodies.

Furthermore, on 2 December the Home Secretary by way of a Written Statement announced the abolition in March 2014 of the National Fraud Authority. I note that her Statement makes no mention of EU fraud, nor does it assign responsibility for dealing with the problem to any specific UK body. I therefore have to ask the Minister: who will be responsible for leading the fight against EU fraud in the UK after 31 March 2014?

I turn now, briefly, to VAT fraud or carousel fraud, as it is often known. This is a highly technical fraud perpetrated against the VAT system involving a series of often non-existent transactions involving the purported movement of goods and services within the EU’s single market. At the outset of our inquiry, the Government were of the view that VAT fraud was outside the scope of our investigations, but it was clear from the evidence received that this remains a very significant problem throughout the EU. The report is clear that the committee understands the Government’s opposition to any EU measure or action which would extend the EU’s competence into tax enforcement in the UK, but we argue that this legitimate concern should not allow fraud which diminishes the amount due to the EU to be ignored or not pursued with vigour. We have our doubts that existing EU measures are tackling this problem and, therefore, the report called on the Government to suggest alternative robust measures to combat VAT fraud. In their response the Government reassured us that they are fully committed to fighting VAT fraud and that it is “pursued with vigour” by HMRC. Perhaps the Minister will confirm what that figure will be. We do not doubt their determination, but are the Government sure that the other member states’ authorities pursue this problem with similar enthusiasm and vigour?

The committee considered the quality of the EU’s current institutional framework for dealing with fraud. We found that OLAF—the EU’s anti-fraud body— remains an agency of limited powers. Budgetary restrictions force it to be selective about the cases it pursues. We are concerned that if OLAF were to be seen as a body whose recommendations are never followed up by the individual member states which lack enthusiasm in dealing with EU fraud, its effectiveness will be questionable. We also fear that the relationship between the EU’s crime-fighting agencies—Europol, Eurojust and OLAF—as currently constituted represents a tangled web which undermines any co-ordinated response to fraud on the EU’s finances.

Finally, given that it was repeatedly proposed as a solution to the problems inherent in the EU’s anti-fraud system, the report briefly addressed the then unpublished proposal for a European Public Prosecutor’s Office. This was brought forward by the Commission in July, and we issued a reasoned opinion challenging the proposal on subsidiarity grounds. We concluded the report by asking the Government how they would propose tackling the flaws identified in our report without participating in the European Public Prosecutor’s Office proposal. We have as yet not received a satisfactory reply to that question and would be grateful if the Minister could address the issue in his reply.

While combating fraud in the EU’s finances may pose unique challenges for both the EU’s institutions and individual member states, protecting the public purse in these difficult economic times remains the responsibility of us all, as we say in the opening chapter of the report. Those of us committed to countering negative public scepticism about EU institutions also have every interest in a more vigorous approach to eradicating the perception and reality of fraud. I beg to move.

--- Later in debate ---

[Lord Stoneham of Droxford]

I thank my noble friend for his response and everybody who has spoken in this debate. I have already thanked, but would like to do so again, the noble Lord, Lord Bowness, for his leadership of this group. I would also like to mention Tim Mitchell, as well as Mike Thomas, and thank them for their support during this investigation.

We had a number of speeches from members of the committee, and I appreciate their support and also that of the noble Lord, Lord Davies. It was good to hear a pro-European being so pointed in his comments, both on our report and on the Government’s approach.

On the Government’s response, I understand that my noble friend was in great difficulty in going further than the response that we have already had, but those of us who were listening carefully appreciated a number of his comments. He said that more work needs to be done on estimating the level of fraud, and the committee will certainly welcome that. He talked about the new approach with the National Crime Agency; that is something that we will want to look at, particularly with its additional emphasis in setting up a special group on economic crime. I am not sure that we got quite the single-source co-ordination that we were looking for, but we appreciate the efforts that the Government and Treasury are making on tax fraud in general and his reassurances on the work being done on VAT.

I accept that it is very difficult to give a perspective on OLAF, but my noble friend said that the National Crime Agency would strengthen relationships with OLAF and Eurojust, which we welcome.

I am sure that we wish to emphasise and support the strength of feeling that my noble friend will communicate to the Home Office, via the strong arm—we hope—of the Treasury, in relation to what needs to be done regarding the single point of contact. We look forward to the Government developing their alternative to the European Public Prosecutor’s Office proposal. I thank all Members of the Committee for their support in what has been a very interesting debate.

Motion agreed.

Care Sector: Minimum Wage

Lord Stoneham of Droxford Excerpts

Wednesday 27th November 2013 Lords Chamber

[Lord Newby]

My Lords, I certainly pay tribute to the work done by care workers. Obviously, local budgets are constrained. However, to the extent that local authorities are commissioning care, they have an obligation to ensure that their commissioning is done in such a way that the people providing it are not in breach of the conditions on low pay. One of the key points in this area is the provision by HMRC of a free pay and work rights helpline for people who feel that they may be suffering because they are not getting the minimum wage as a result of things such as the travelling time problem that we discussed earlier. The helpline is heavily used, but everybody who rings it will have their case looked into.

[Lord Stoneham of Droxford (LD)]

Does not this report indicate the determination of the Government to insist on compliance with the minimum wage legislation? Within what timetable does the Secretary of State for Business expect his investigation on linking minimum wages to the living wage to come to fruition?

[Lord Newby]

My Lords, the Secretary of State at BIS—Vince Cable—very recently asked the Low Pay Unit to look into this matter with considerable urgency, although I do not think that he has put an absolute date on it. However, the Government take this issue extremely seriously. We hope very much that we can make quicker progress than we have in the past in raising the level of the minimum wage.

Financial Services Bill

Lord Stoneham of Droxford Excerpts

Monday 12th November 2012 Lords Chamber

[Baroness Hayter of Kentish Town]

My Lords, financial services is perhaps less problematic than broadcasting at the moment. Amendment 25D stands in my name and that of my noble friend Lord Eatwell. This is perhaps the key amendment in all the ones that we will discuss today. We will simply not get this industry back on track and working in the interests of its savers and borrowers until firms put clients’ interests above their own bonus levels, remuneration or promotion prospects. Rather as doctors take care—above all else—of their patients, so must the banks, the insurance companies, those who lend us money and those who care for our savings put our interests centre stage.

These amendments seek to ensure that where consumers put trust in a firm’s discretion, and are vulnerable to the exercise of that discretion, the firm must act in their best interests. Trust is key to this industry. As John Kay wrote in his July review for the Government:

“Financial intermediation depends on trust and confidence: the trust and confidence that savers who invest funds have in those they choose to manage these funds”.

This goes to the heart of the behaviours, ethics and very thought patterns of this vital industry. Surely, as we have heard already today, we have enough evidence from LIBOR, precipice bonds, mortgage mis-selling and interest rate swaps that cultural change is needed in this industry. The costs of the PPI scandal, which has already been referred to, are now being picked up by those very offending banks. I believe that this amendment is in their interests. If they were stopped from doing these things beforehand, they would not then have to put things right afterwards.

The PPI scandal has sometimes been blamed on the lack of early intervention by the FSA, on the insufficiently rapid transmission of intelligence from the Financial Ombudsman, or on absolutely anything or anyone other than the mis-selling banks themselves. Had those banks had a duty of care towards clients, or been required to consider their best interests, there is no way that they could have continued to sell those products once they realised how few of their purchases would actually be covered by them.

Surely it is strange that where a saver puts their money into a trust-based pension scheme it is governed by trustees who have fiduciary duties to act in the best interests of beneficiaries, but that if that same saver puts their money in a contract-based pension scheme or similar scheme run by commercial providers, the FSA’s rules governing such contracts impose no duty on providers to put beneficiaries’ interests first. That cannot be right. It is not what savers expect of their provider.

The amendments would ensure, in an enforceable way, that authorised persons act in the best interests of their clients. As I argued in Committee, the Bill expects consumers to,

“take responsibility for their decisions”—[Official Report, 11/6/12; col. 1255]—

but without placing a corresponding requirement on firms to act in the best interests of their clients. This lacks balance. As the Kay review says:

“Stewardship is incompatible with conflict of interest”.

Kay calls for all those involved in the equity investment chain to observe fiduciary standards in their relationships with clients. Thus financial services should owe their customers the same duty of care as a lawyer or other professional by acting honestly, fairly and professionally in the best interests of their customers and in managing conflicts of interest. It is no good relying on rules to ensure this. Such requirements on firms have been in the FSA’s principles for business, yet consumers have still been shabbily treated.

We want there to be a duty of care in the Bill to ensure proper oversight and to emphasise its importance both to the regulators and the regulated. Such a duty of care will ensure that financial services can no longer profit unfairly at the expense of their customers. It is not enough—in case the Minister is going to say it—to leave this simply to the banking commission. It should be central to the Bill.

The Kay review calls for the application of fiduciary standards of care by all those who manage or advise on the investments of others. That is what we seek in these amendments and what I hope this House will now support. I beg to move.

[Lord Stoneham of Droxford]

My Lords, I support the amendment. The issue behind the amendments in this group is that the investment industry’s duties to savers appear to be poorly understood and observed. As the Law Commission has confirmed, where firms are managing other people’s money or giving them financial advice, they have strict fiduciary duties to act in those people’s interests. This includes both individual clients and institutions such as pension funds which represent large numbers of underlying savers.

Fiduciary duties are stricter than FSA rules, yet they are not universally accepted within the industry. There is anecdotal evidence that firms often seek to exclude or restrict their liability for breach of fiduciary duties through contractual terms which may not be read or understood by the lay trustees of pension funds. Even where they are accepted, it is very clear that they are not being applied. In the past week, the FSA has published a “Dear CEO” letter on conflicts of interests among asset managers which found that,

“many firms had failed to establish an adequate framework for identifying and managing conflicts of interests”,

and that,

“in most cases senior management failed to show us they understood and communicated this sense of duty to customers”.

In other words, firms are often not meeting even the FSA’s standards regarding conflicts of interest, which are lower than fiduciary standards.

As these are common law duties, they do not form part of the FSA’s regulatory approach. Indeed, there is confusion over whether it is appropriate for the FSA to enforce them, with some arguing that it is for beneficiaries to pursue court actions if duties are breached.

Where pension savings are concerned, this is unrealistic and unsatisfactory as a means of achieving high standards of care across the market. An explicit, best-interests principle in a Financial Services Bill would give the FCA a powerful tool to ensure that consumers’ interests were protected.

The concern is that the Bill’s new wording is significantly weaker than that proposed by the Joint Committee and may not provide a high enough level of protection for consumers. It lacks clarity in what might constitute an appropriate level of care, thereby leaving open the very question it was intended to resolve. Where those managing people’s long-term savings are concerned, the problem is precisely that there is confusion and misinformation about what is the appropriate level of care. Explicit confirmation that those managing other people’s money must act in their best interests would be a clear and effective way to help achieve the Joint Committee’s intention. Amendment 25D would provide that confirmation, since anyone managing somebody else’s money would meet the criteria of discretion and consumer vulnerability.

The noble Baroness, Lady Hayter, drew attention to the fact that this issue has the potential to seriously undermine the aims of auto-enrolment. In trust-based pension schemes, it is clear that the trustees are there to act in beneficiaries’ best interests. Indeed, as the ABI pointed out in oral evidence to the Joint Committee, one positive feature of the National Employment Savings Trust—NEST—is that it has a trustee structure that looks to protect its members. However, many savers are likely to be auto-enrolled into contract-based pension products where, as things currently stand, no such protection exists. Since the House of Lords considered the Bill in Committee, we have had the Kay review of UK equity markets. It recommended that:

“Regulatory authorities … should apply fiduciary standards to all relationships in the investment chain which involve discretion over the investments of others, or advice on investment decisions. These obligations should be independent of the classification of the client, and should not be capable of being contractually overridden”.

This amendment seeks to address a number of objections to similar amendments raised in the Commons and in the Lords in Committee. First, it does not rely on the term “fiduciary duty” but rather seeks to enshrine the common sense principle that underpins these duties—that where consumers rely on a firm’s discretion, that discretion must be exercised in the consumers’ best interests. Secondly, it would not supersede or restrict the specific standards to be laid down in FCA rules but rather would provide an overarching principle that the FCA should bear in mind when setting those rules. Thirdly, it would not apply across the board but only where appropriate—that is, where consumers have a particular relationship with providers that justifies a best-interest standard.

When we looked at a similar amendment to Amendment 25D in Committee, my noble friend Lord Sassoon expressed sympathy with the intent but argued that it was a matter for the FCA to make detailed rules on, rather than to be included in the Bill. However, as I have already said, part of the problem is that the common law status of fiduciary duties makes it unclear whether it falls within the FCA’s remit to uphold them, hence the need for an explicit reference in the Bill. It has also been suggested that refusal to amend the Bill in this way indicates a lack of political support for robust action to challenge the interests of financial intermediaries. Indeed, this could make the FCA feel that it has limited room for manoeuvre. Therefore, I hope that my noble friend will be more prepared to consider accepting the amendment and, at the very least, that he will give some indication of the support that the Government will give to the full implementation of the Kay recommendations.

[Lord Peston]

My Lords, in supporting my noble friend’s amendment I reread this section of the Bill, and I realised that I did not understand it at all. On the face of it, we are discussing here the consumer protection objective—that is, a series of statements most of which could be read as totally vacuous. In fact, as I read them again, I immediately thought, “What does it leave the FCA to do, rather than simply tell them?”. There are remarks like:

“the general principle that consumers should take responsibility for their decisions”.

If that is a general principle, why do any of the other principles hold?

There is,

“the needs that consumers may have for the timely provision of information and advice that is accurate”,

and so on. Anyone who knows anything about systemic risk knows that the relevant amount of information is massive and that few people on this planet would be capable of processing it in order to come to a view.

My noble friend’s amendment at least seems to have some impact on the FCA possibly doing something. Reading the Bill, I have great difficulty seeing what the FCA then does. Perhaps the Minister can tell us.

Financial Services Bill

Lord Stoneham of Droxford Excerpts

Wednesday 18th July 2012 Lords Chamber

[Baroness Drake]

My Lords, Amendment 107 is in my name. Bob Diamond said in November 2011 at the “Today” programme lecture:

“Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity.”

This amendment puts that principle in the Bill, by adding to the FCA’s consumer objective that it must have regard to the general principle that,

“where consumers properly repose trust in a firm’s discretion and are vulnerable to the exercise of that discretion, the firm has a duty to act in the consumer’s best interests”.

That is simply what millions of people want, and they will not understand if it is denied to them. The basic principle is simple: if you have discretion when looking after someone else’s money, the starting point should be that you act in that person’s or that client’s best interests.

I anticipate that the Minister will argue against the amendment, citing the fact that current FSA rules already say that firms must,

“pay due regard to the interests of its customers and treat them fairly”,

but paying due regard is not enough to rebuild trust in the industry, and experience shows us that it falls short of any kind of duty of care. Firms may not get every decision right on every occasion and risk will not go away, certainly in investments, but firms should at least be able to demonstrate that when they exercised their discretion and took a decision, they believed that they were acting in the client’s best interests. The Government have expressed a preference for the FSA rules to lay out a specific, clear, focused and transparent set of duties on firms, but rules are geared to achieving compliance rather than changing behaviours. There must be a guiding principle to inform the content of those rules—the duty to act in the consumer’s best interests. People in positions of trust in financial companies have to change their behaviour. We simply cannot carry on the way we are.

The FSA is attributed with the comment in FTfm on Monday 16 July that,

“fiduciary duties are more of an aspect of common law rather than something established by its rules and regulations”.

That basically amounts to the FSA confirming that under the existing proposals it does not see it as part of its remit to uphold the standard of protection that the amendment proposes. Hence, that is a very compelling argument precisely for this amendment. Others will argue that the amendment imposes a new obligation on firms and that it is not a reasonable standard to ask of a commercial entity. I am not sure that it imposes a new obligation but it certainly makes it explicit. In oral evidence to the Joint Committee Martin Wheatley, CEO-designate of the FCA, said that,

“firms … have responsibilities in terms of appropriateness, in terms of their conduct and in many cases they also have a fiduciary responsibility to clients”.

The wording of the amendment reflects legal principles in that the Law Commission’s summary of the characteristics of a fiduciary relationship are discretion, power to act and vulnerability.

The principle in this amendment is not inconsistent with a commercial entity’s desire to make a profit: what it prevents is unauthorised profit or profiteering at the expense of clients. Firms can continue to have and pursue their own interests, just not at the consumer’s expense. Conflicts of interest need to be properly managed. Again, some may argue that a duty to act in the consumer’s best interest is not the right standard to impose across the board between providers and consumers, but the amendment would not apply across the board. It would apply where consumers have a particular relationship with providers that relies on a firm’s exercise of discretion and they are vulnerable to it.

In their response to the Joint Committee report, the Government inserted the new principle in the Bill, to which the FCA must have regard, that,

“those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate”.

The amendment gives clarity to what is an appropriate level of care where trust and discretion are involved to set a higher standard of protection. A duty to act in the consumer's best interest is clearer in its requirements to avoid and manage conflicts of interest. Where a client reposes trust in the firm's discretion and is vulnerable to the exercise of that discretion it is not enough to balance competing interests. Rather, the firm must ensure that conflicts cannot damage clients.

Separating retail and wholesale banking is part of the solution to addressing financial stability and integrity, but it is not the whole answer. Millions of ordinary people are saving, directly or indirectly, through the capital markets and are vulnerable to the exercise of discretion by a long chain of intermediaries. Legislation must protect not only the integrity of retail banking but the interests of the savers in so-called casino banking. “Casino” may be appropriate for the behaviour of some intermediaries—the fund managers, traders and others—but it is not the underlying purpose of the investment market. As auto-enrolment into workplace pensions gets under way in October, millions more people will be added to those saving through these markets, many of them low and modestly paid workers. Even before auto-enrolment, which will bring billions more into these markets, £380 billion is invested in DC pension schemes in the UK. That excludes the billions in DB schemes, investment ISAs and other products and with-profits investments.

The Centre for Policy Studies has just published Michael Johnson's report Put the Saver First, which I have just read. Although I may not agree with all of his recommendations, it makes an excellent contribution to the debate as to why the financial services industry is mistrusted. It states that the financial services,

“industry would appear to have forgotten that customers are providing the scarce resource upon which the whole of the … industry relies: their savings capital … Essentially, the industry should put the customer at the centre of everything it does … It is clear that many people are investing in products they do not fully understand, which are governed by a jungle of complex rules and tax regimes that, collectively, almost nobody understands. Savers are therefore putting their trust in the industry, and they need to be protected in situations in which the industry has a knowledge advantage. For almost all investors, this excludes very little. A less subtle description is that regulation should protect investors from the industry’s self-interest, its inefficiencies and, in some cases, its predatory instincts”.

In an investment industry with a long chain of intermediaries, the saver exercises virtually no influence over many key decisions. Indeed, at the behest of the Government, Professor John Kay is examining the lengthy investment chain and the implications for efficient capital markets. There is no shortage of evidence of misalignment and conflicts of interest between the consumer and the providers. The interests of the end users of capital markets—the savers and investors and those seeking capital—need to be reasserted. That in turn will support UK economic interests.

The Bill should address the cultural issues by reasserting the appropriate nature of the relationship between provider and consumer, where the latter is vulnerable to the exercise of discretion by the former and where financial services have too often been seen as controlling the real economy rather than supporting it. The LIBOR and EURIBOR rate-fixing scandal made many organisations furious because it subverted the integrity of a pricing mechanism at the heart of the capital markets. Promoting consumer engagement and empowerment is of course welcome, but it cannot be a substitute for greater clarity about the roles and responsibilities of each player in the investment chain.

[Lord Stoneham of Droxford]

My Lords, I am pleased to speak in support of Amendment 107, which was spoken to so well by the noble Baroness, Lady Drake, and I also have sympathy with the other amendments in this group tabled by my noble friend Lord Sharkey.

My personal interest in the success of the coming revolution in pension policy through auto-enrolment makes me especially keen to support this group of amendments. We have to rebuild trust in the financial services sector, where culture is currently suspect, to encourage greater pension savings. An explicit “consumer’s best interest” principle in the Bill would be a powerful tool for the FCA to ensure consumer interests are protected. Fiduciary duty requires those entrusted with other people’s money to put those customers first and provide appropriate stewardship, not to exploit their position to make an unfair profit or to get involved in undue risk where it is inappropriate. If duties were properly observed and enforced, it would provide a sea change in the prevailing culture of the financial services industry and lead to a much better outcome for consumers.

The problem is to get the balance right between consumers and firms. Concern was expressed in pre-legislative scrutiny that the draft Bill was unbalanced, enshrining the principle that consumers are responsible for their decisions but not placing an equivalent responsibility on firms. The new principle, inserted by the Government, to which the FCA must have regard, is that,

“those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the … risk involved”,

and the consumers’ capabilities.

The question is whether we are prepared to leave this so vague and open to interpretation that it would provide very weak guidance. With respect, it leaves open the question that it was intended to resolve. For those managing long-term savings, the problem is precisely that there is confusion and misinformation about the appropriate level of care. Explicit confirmation that those managing other people’s money must act in their best interests would be a clear and effective way to get the balance right in the equivalent responsibility for consumers and firms.

When the Bill was considered in the other place, the Minister argued on this clause, as amendments were submitted for an explicit reference to fiduciary duty in the Bill, that:

“Customers should not have to dust down the old statute books and dig out their dictionaries … to identify what standards they can expect from providers”.

He said that it was better for the FCA to set out clear and specific standards via its rules. He also said that he was not convinced that fiduciary duty,

“is the right standard to impose across the board between providers and consumers”.—[Official Report, Commons, 1/3/12; cols. 271-72.]

Our Amendment 107 tries to address these objections. First, it does not rely on the term, “fiduciary duty”; it simply enshrines the common-sense principle that underpins these duties. Where consumers rely on a firm’s discretion, that discretion must be exercised in those consumers’ best interests. Secondly, it would not supersede or restrict the specific standards to be laid down in FCA rules, but rather provide an overreaching principle that the FCA should bear in mind when setting those rules. Thirdly, it would not apply across the board but only where appropriate, particularly where consumers have a relationship with providers that justifies a best-interests standard. I hope that the Minister will closely consider this matter and strengthen Clause 5 by accepting these amendments.

[Baroness Hayter of Kentish Town]

My Lords, this is perhaps the most important debate today—perhaps the most important of the whole clause—because these amendments are about requiring savings to be managed in the interest of savers, not financial intermediaries. As we have already heard, the Joint Committee recommended that the Bill,

“place a clear responsibility on firms to act honestly, fairly and professionally in the best interests of their customers”.

That should not be too much to ask. As my noble friend Lady Drake said, the Law Commission confirmed that where firms are managing other people’s money, or giving financial advice, they have fiduciary duties to act in those people’s interests, both individuals and institutions such as pensions that represent, after all, large numbers of individual savers. That fact is, sadly, not generally reflected within the industry. Because these are common-law duties, as we have heard, they do not form part of the FSA’s regulatory approach, hence they need to be repeated in the Bill, partly to comfort consumers that the Bill does not trump these common-law protections, partly to give the FSA a powerful tool to ensure that consumers’ interests are protected and partly to ensure that this duty of care is absolutely entwined in the industry’s DNA, where it has, until now, been lacking.

Budget: Cost of Changes

Lord Stoneham of Droxford Excerpts

Tuesday 12th June 2012 Lords Chamber

[Lord Stoneham of Droxford]

Does my noble friend agree that there is a source of revenue for the Government in that they can both protect and even extend the winter fuel allowance for the most vulnerable in society by asking higher rate taxpayers to pay tax on what they receive?

[Lord Sassoon]

My Lords, what this Government have done as far as the wealthiest are concerned is to raise five times as much tax from them as the Labour Party would have done under its plans, so that the top 1% of the population of earners pay 27.7% of tax. We are very concerned to make sure that tax falls where it should: on the broadest shoulders.

Impact of Government Policies on Family Budgets

Lord Stoneham of Droxford Excerpts

Thursday 27th October 2011 Lords Chamber

[Lord Stoneham of Droxford]

My Lords, this debate is being held at a time of worrying outlook for the economy. No family or household who saw the figures last week of a 5.2 per cent increase in inflation and a comparable increase in salaries of 1.8 per cent needs telling that grappling with high energy and food prices is very tough indeed. There is huge concern about job security, declining real incomes and frail confidence both in business and in households.

When I joined the House of Lords I thought that it had a reputation for being best at strategic policy debates. Although I would like to thank the noble Lord, Lord Knight, for initiating this debate, I regard it as more of a tactical debate with strong political undertones if not overtones. I have always admired his political skills, not least in retaining Dorset South in 2005. As somebody who was helping to organise the Liberal Democrats’ election campaign that year, and also as a man from Portsmouth, I admired the way in which he arranged for the Sea Cadets to give the Prime Minister a welcome on the first day of that election campaign in Weymouth. It was one of the high spots of the campaign, which certainly did not get better in my view. It showed real political skill.

I would, however, like to correct the noble Lord. He kept referring to the Tory Government: this is a coalition Government. There are good reasons why this is a coalition Government. The Government are trying to grapple with decisions. If there had been a Labour Government, they would have had to grapple with the same problems.

All recessions are painful but I have worked through five of them and this one is undoubtedly the worst. This one is particularly bad because there has been a decline in gross domestic product, and that is bound to cause a fall in living standards. All recessions, sadly, weed out marginal companies and businesses, and that creates unemployment. Sadly, resources at a time of recession are always at their weakest to protect the vulnerable, and that is one of the difficulties that we face now. The aim of the Government is obviously to ensure that the broadest backs share the greatest burdens in this situation as we work to restore the economy, the destruction of which, I must point out again, started under a Labour Government.

At this difficult time, I recall JK Galbraith's warning to President Kennedy. He said:

“Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable”.

Sharing pain in these circumstances is not easy, but the broad parameters of what the Government are doing are right. There will be no restoration in confidence, job security and growth unless there is confidence in the fiscal debt recovery plan both nationally and globally. Wherever possible we have to direct help to the most vulnerable. I particularly welcome the Government’s initiative, made despite all the pressures, in raising tax thresholds. At a time of severe economic pressures we have also given the triple guarantee for state pensioners, building on the pension credit scheme of the previous Government, which should protect those who are most vulnerable to inflation and least able to protect themselves. The brave universal credit reform will seek to reduce poverty, simplify a very complex system and improve work incentives.

The problem now is that many of the principal factors impacting on household budgets are externally driven. The exchange rate devaluation was 25 per cent in the last two years of the Labour Government. It has helped growth but—as Harold Wilson rudely discovered in 1967—the pound in your pocket is bound to be affected by higher prices.

The noble Lord, Lord Knight, mentioned fuel. Prices are obviously affected by the weak pound and the rise in wholesale energy prices. We would normally expect energy prices to fall in a recession. Most forecasters have been surprised that they have not fallen and there may be hope now that we may see some fallback in wholesale prices. But energy prices are now acting as a squeeze on real disposable income and deflating the economy. That is not a new problem. In a recent independent review of fuel poverty, Professor Hills has shown that the growth in households in fuel poverty grew from 2 million to 5.5 million between 2004 and 2009. This is a problem of rising wholesale energy prices and poor quality housing stock which is not sufficiently insulated to reduce the demand for energy, and therefore to help offset the price increases.

Although fuel costs and the weakened exchange rate are two key components of the extra costs on household budgets, we must accept that VAT has imposed a significant one-off increase in prices this year. I accept that the consequences of this tax and how regressive it is are disputed, depending on whether you assess it on income or household expenditure. However, the arguments are more complex when choosing between a cut in public spending or an increase in VAT. The critical question is where £13 billion in revenues would otherwise come from. Let us also not forget that no other authority than Alistair Darling was going down this track in 2009. I do not think that there is any guarantee that reducing VAT necessarily increases consumer spending; spending declined by 3 per cent in 2009 when the last Government tried it.

Let us also not forget—the noble Lord, Lord Knight, did not mention it—the benefits of low mortgage-interest rates. As the noble Lord, Lord Sassoon, reminded us in Questions today, a 1 per cent rise in UK interest rates today would add £10 billion to family mortgage bills alone. Actually, in the last year, the average fixed mortgage rate has fallen by almost 1 per cent. At least in this recession, unlike in 1989, we have not had negative equity in serious terms, with people forced to sell their homes because of high interest payments.

The Governor of the Bank of England has warned us that we are about to face the longest decline in real disposable incomes for some time. So what needs to be done to protect households? I believe that the Government must keep to their strategy that the broadest backs should suffer the greatest burden and that the most vulnerable should be protected. It is more than a symbolic gesture that we are maintaining high-pay restraint and the top rate of tax and that we have increased the CGT rate to 28 per cent.

Though all those aspects have to maintained, we must also maintain the Government’s ongoing commitment to raising tax thresholds as we can afford it. We must also maintain the commitment to the triple guarantee for pensions in April 2012. With quantitative easing, we must also recognise that this will create problems for those depending on interest from their savings, and indeed those approaching retirement and taking up occupational pensions. We must not forget that the consequences of low interest rates mean that people living on their savings and on occupational pension schemes are under severe pressure at this time.

In the energy sector, I hope that we will look at recognising what Professor Hills has said this week—that fuel poverty is very much linked to the issue of quality of housing as well as pricing, and that we need more schemes for better insulation, pioneered and financed by energy providers. Indeed, we need a whole series of partnerships. If the Government cannot provide the money then the partnerships will have to come through activity in the housing sector, with housing associations and the private sector, to develop funds for more social housing. It will have to come from energy companies, through some of the work of the regulator, to help those on low incomes and to encourage schemes for energy insulation, all of which are employment-generating activities. The banks need to be seen as sources of credit for small businesses. We need to work on that.

Always remember that once confidence has been shaken it takes a long time to rebuild it. The best protection for vulnerable groups is a growing economy, low inflation, and more choice of jobs. That requires a renewed partnership between industry and Government, to use the resources for business investment which they have but, for the time, are cautious in using.

Economy: Growth

Lord Stoneham of Droxford Excerpts

Thursday 31st March 2011 Lords Chamber

[Lord Stoneham of Droxford]

My Lords, I congratulate the noble Lord, Lord Hollick, on initiating this debate, and the maiden speakers on their first speeches in the House. It is a gamble to deal with the structural deficit in one Parliament, and to do it primarily by public spending reductions. However, the strategy has already had one major success in reassuring the bond markets so that the UK can borrow more cheaply than countries with lower deficits. Tight fiscal policy, combined with easy monetary policy and a competitive exchange rate, provides the best choice for avoiding a sovereign debt crisis while ensuring acceptable increases in growth.

The problem is that the alternative is a bigger gamble still. It was right in 2008 to allow a rise in public borrowing to restore growth and avoid a calamitous rise in unemployment, but the second highest deficit in the OECD must now be corrected. No one yet knows how public spending cuts will affect them, and this is creating uncertainty in the economy. That is one of the principal reasons to get on with consolidating the public finances rather than dragging out the process over two Parliaments. People will always assume the worst until it is done. For some it will be painful, but for many it will not be as bad as they anticipated. Consumer spending will be weak in the coming year, but all attempts to promote growth on mounting consumer debt will end in tears. It is business investment and exports that must provide the impetus.

There are encouraging signs. The economy is already two-paced. Despite the understandable gloom in areas where public spending is strong, manufacturing and exports have prospects and growth that they have not experienced in a decade. We want to get other businesses out of the mentality of cost cutting to maintain profit margins and to now start planning for growth.

The actions of the banks are one of the keys to future growth. I think that we all have doubts about whether they will respond when the country needs them, but if we are to get the uplift in business investment that we need, they must lend more to business and particularly to SMEs, because they are their only source of capital and finance. The Government's dominant shareholdings in the banking sector must be used to set targets for the lending that the country can reasonably expect from the banks. The lack of borrowing capacity in the green bank was a principal disappointment in the Budget, as the noble Lord, Lord Skidelsky, highlighted.

The other key requirement is to achieve stability in the outlook for interest rates. Any move upwards must be avoided now, but at some later stage it will be better to have the certainty of a modest, gradual and inevitable move upwards, rather than to have consumers and businesses fearing the worst. The economy always takes longer to respond and policy-makers hope. It takes time to change direction. However, we must be patient and hold our course. As uncertainty lifts, the economy will start to pick up.