Critical Benchmarks (References and Administrators’ Liability) Bill [HL]

Lord Tunnicliffe Excerpts

2nd reading
Wednesday 13th October 2021 Lords Chamber

[Lord Agnew of Oulton (Con)]

My Lords, I thank noble Lords for their detailed and collaborative contributions on this very technical Bill. I would particularly like to welcome and thank my noble friend Lord Altrincham for his excellent and personal maiden speech. I know that his experience in financial matters will be of great benefit to us all.

The Bill reinforces the provisions in the Financial Services Act 2021 that provide the FCA with powers to oversee the wind-down of a critical benchmark in a manner which protects consumers and minimises disruption in financial markets. In doing so, it provides key support to the Libor transition and market confidence.

I will try to address a number of the questions raised by noble Lords this evening, but I will write on the more technical ones on which I may not be able to come up with the answers immediately.

I start with the noble Lord, Lord Sharkey, and his concern about the late running of this, so to speak. I accept his point that work could possibly have been done before the Financial Services Act 2021 received Royal Assent. The FCA feels strongly that it needs to follow an orderly and sequenced process to consult first on the framework for decisions and then on the decisions themselves, but I accept that the timing will be tight.

The noble Lord, Lord Sharkey, also asked why this year is taken as the cut-off. This date was selected back in 2017 after engagement with panel banks, so it has been in the works for quite a long time and there has been time for the industry to plan for it. We have had very close engagement with the US and the timings are aligned. It has now said that the new use of US dollar Libor rate will stop at the end of this year, following supervisory guidance from the US and UK and other international authorities.

The noble Lord, Lord Sharkey, also asked about the mechanisms for the synthetic rate to be smoothed. The FCA has confirmed that that is the approach. The synthetic methodology is based on a broad global consensus and it would cause significant market disruption to change course at this point. It is not clear that that would deliver better outcomes for markets or consumers. As discussed at the briefing yesterday, the smoothing has been put in place taking the five-year median rate, but I can write with more detail if the noble Lord would like, as I accept that this is an important issue.

The noble Lord, Lord Sharkey, said he was worried about congestion at the end of the year. We have been clear that the active transition is the main mechanism; we have seen a large transition away from Libor over the last few months. I take my noble friend Lord Blackwell’s point that the latest data shows that some 55,000 contracts are still outstanding, but they are moving quickly. The FCA has taken on board market feedback on distinguishing between contracts that can be amended before the year end and those that cannot. Every step it is taking is to minimise disruption, in line with the objectives.

My noble friend Lady Noakes asked about the cost of funds fallbacks. This legislation provides certainty on how references to the Article 23A benchmark should be interpreted in contracts and other arrangements in which the FCA has exercised powers under the benchmarks regulation to require a change in the benchmark methodology. Where a contract or arrangement has a fallback that is triggered by the temporary or permanent unavailability of Libor, Article 23FA provides that the benchmark continues to be available and consequently that it does not cease to exist, be published or otherwise be made available. This means that the cost of funds fallbacks, which are generally triggered by the unavailability of the benchmark, will not be triggered.

My noble friends Lord Blackwell and Lady Noakes asked what happens after the proposed 10-year period. The legislative framework put in place in the Financial Services Act 2021 allows the FCA to support the orderly wind-down of the benchmark. Specifically, it allows the FCA to impose a synthetic methodology to provide for the continuity of a Libor setting for the benefit of tough legacy contracts for up to 10 years. The Government will continue to work closely with the FCA and the Bank of England to support an orderly wind-down of Libor and will continue to monitor the risks in this area, given its systemically important role in the UK economy.

My noble friend Lord Blackwell asked about the shorter term, after a year. The benchmark regulation provides that the FCA can review the decision to compel continued publication of a synthetic benchmark after a year. The FCA has been clear about the expected direction of travel with regard to the sterling synthetic Libor rate and does not intend that it will cease automatically after a year.

The noble Lord, Lord Sharkey, and the noble Baroness, Lady Kramer, are concerned about FCA accountability and, linking to that, parliamentary oversight. The FCA must operate within the framework of statutory duties and powers agreed by Parliament. The FCA is also fully accountable to Parliament for how it discharges its statutory functions. This direct accountability to Parliament reflects the FCA’s statutory independence and the fact that it is solely responsible for everyday operational decisions, without government approval or direction, and so is primarily accountable for them. The legal framework ensures direct accountability of the FCA to Parliament, including through a requirement for it to produce annual reports and accounts which are laid before Parliament by the Treasury.

The FCA is subject to full audit by the NAO, which has the associated ability to launch value-for-money studies on the FCA. The FCA is subject to scrutiny from Select Committees. The Treasury is the FCA’s sponsor in government; it is responsible for the statutory framework of financial services regulation and for the continued effective operation of the FCA as part of that framework. The mechanisms for the FCA can be directly accountable to the Treasury. This includes direct controls over appointments to the FCA board and powers under the Financial Services Act 2012 to commission reviews.

The noble Lord, Lord Sharkey, and my noble friend Lady Noakes asked about safe harbour. The responses to the Treasury consultation earlier this year identified the risks that parties may look to contest the continued publication of synthetic Libor by its administrator, or to seek damages against the administrator. This risk might be heightened if other avenues of litigation are closed off to parties by the Bill.

Where the administrator of an Article 23A benchmark is subject to legal challenge for complying with statutory requirements imposed by the FCA under the benchmarks regulation, it could impose a significant unreasonable and unmerited burden on the administrator of an Article 23A benchmark. If faced with too much legal risk, the administrator may seek to resign from administering the benchmark, which in turn risks causing disruption. Such action could serve to erode parties’ confidence in using the benchmark, undermining the operation of the FCA’s powers to oversee an orderly wind-down of it.

My noble friend Lady Noakes also asked about alternative benchmarks. The focus of this legislation is on providing legal certainty regarding the operation of the FCA’s powers to wind down this critical benchmark. Where contractual parties have acted in line with regulatory guidance to transition the contract to an alternative rate, the Government do not see that there is a need for further legislative clarity. The Government continue to encourage parties to contracts that reference Libor to transition those contracts to alternative benchmarks wherever possible, in accordance with regulatory guidance.

Several noble Lords, including my noble friend Lord Blackwell, asked about legal certainty. It is the Government’s view that it is appropriate to provide legal certainty as to how references to Libor should be interpreted in contracts or other arrangements, once the switch to the synthetic rate occurs. This legislation comprehensively addresses the risk of contractual claims relating to the exercise of the FCA’s powers to wind down a benchmark, as identified in response to the Treasury’s consultation on this matter.

It is important to stress how narrow the contractual continuity provision is. It does not protect the parties to the contract from all legal challenge. This would result in parties to those contracts not being able to challenge any element of that contract, and would be too broad. It simply specifies that where a contract references Libor, that should be read as referring to synthetic Libor. The effect of that is that legal claims cannot be brought on the basis that synthetic Libor is not included in the contract.

As the home jurisdiction of Libor’s administrator, the UK has a unique role to play in minimising financial stability risks and disruption to financial systems arising from the wind-down, both in the UK and globally. This plays to the comments made by several noble Lords in relation to London’s reputation as a financial centre and the unfortunate events that surrounded the problems with Libor 12 or more years ago.

In the UK framework, the FCA will be able to provide for the continuation of Libor settings under a synthetic methodology. Subject to the legislative framework in other jurisdictions, any change of methodology imposed by the FCA would flow through to global users of Libor contracts continuing to reference the rate. By taking this approach, the UK has provided a global solution rather than an approach that would have been effective only in the UK.

My noble friend Lord Blackwell asked about the methodology. Noble Lords will appreciate that setting this methodology is a responsibility that Parliament has granted to the operationally independent FCA, within the parameters established by the recent Financial Services Act. However, the FCA has an overriding responsibility to act in the best interests of consumers in this country. It is also important to note that the FCA’s approach is in line with the global consensus.

As we all acknowledge, and as I said in my opening remarks, Libor is mostly used by sophisticated financial operators, not retail investors. We estimate that there are only around 200,000 mortgages left on Libor, with that number estimated to fall to somewhere between 50,000 and 100,000 in the next few months. The synthetic Libor rate is a last resort and regulators have been encouraging markets to move to alternative rates for some time.

I remind noble Lords that the Financial Services Act 2021 allows the FCA to impose a synthetic methodology only if it considers it desirable to do so to protect consumers or protect and enhance the integrity of the UK’s financial system. Furthermore, the synthetic rate seeks to provide a reasonable and fair approximation of Libor while removing a major factor in its volatility: the variable credit spread, which has often spiked in times of economic stress. Reducing volatility will benefit consumers who pay interest with reference to Libor.

I will write to the noble Lord, Lord Eatwell, on his specific points; I am afraid that I do not have that information to hand at the moment.

This Bill is vital to the protection of consumers and the integrity of UK markets. I would be happy to arrange another detailed technical session in a similar form to the two we have had so far, because I am aware of how technical this Bill is. I hope that we have noble Lords’ support.

[Lord Tunnicliffe (Lab)]

My Lords, may I raise a bureaucratic point before the Minister sits down? He intends to put letters in the public domain through the medium of the Library. It would be convenient if he could simultaneously copy them to everybody who has participated in the debate and registered interested parties like me.

[Lord Agnew of Oulton (Con)]

I would be happy to do that. I am pleased to see the noble Lord, Lord Tunnicliffe, back here without Covid; we were worried that he might have had it. I will certainly do that.

Money Laundering and Terrorist Financing (Amendment) (No. 2) (High-Risk Countries) Regulations 2021

Lord Tunnicliffe Excerpts

Tuesday 14th September 2021 Grand Committee

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, the Government are committed to combatting money laundering and terrorist financing and recognise the threat that economic crime poses to our country. Illicit finance causes significant social and economic costs through its links to serious and organised crime, it is a threat to our national security, and it risks damaging our international reputation as a fair, open, rules-based economy. Illicit finance undermines the integrity and stability of our financial sector and can reduce opportunities for legitimate business in the UK. That is why the Government are focused on making the UK a hostile environment for illicit finance. As part of this work, we have taken significant action to tackle money laundering and terrorist financing, and to strengthen the whole-system response to economic crime.

Underpinning these efforts are the money laundering regulations, a key part of our legislative framework which set out a number of measures that certain businesses must take to combat money laundering and terrorist financing. These requirements include the need for businesses to identify and verify the people and organisations with whom they have a business relationship or for whom they facilitate transactions.

In addition, the regulations require that financial institutions and other regulated businesses conduct additional checks, or “enhanced due diligence”, on business relationships and transactions involving “high-risk third countries”. These are countries that have been identified as having strategic deficiencies in their anti-money laundering and counterterrorism financing regimes and which pose a significant threat to the UK’s financial system. The statutory instrument under discussion today updates the list of countries specified as high risk in the money laundering regulations.

I will explain the background to this instrument. At present, the UK’s list of high-risk third countries, specified in the money laundering regulations, mirrors those identified by the Financial Action Task Force, the global standard-setter for anti-money laundering and counterterrorist financing. The Financial Action Task Force updates its public lists of jurisdictions with strategic deficiencies following the conclusion of each Financial Action Task Force plenary to reflect changing risks and circumstances in these jurisdictions and in the global economy.

This instrument will therefore amend the money laundering regulations to update the UK’s list of high-risk third countries to mirror the Financial Action Task Force’s public lists. This will ensure that the UK’s list is responsive to the latest threats emanating from high-risk countries with inadequate counterillicit finance systems, and that the UK remains at the forefront of global standards on money laundering and terrorist financing. This update will therefore help to protect our national security and the UK’s reputation, and will protect businesses and the financial system from money launderers and terrorist financiers.

In summary, the instrument will update the UK’s high-risk third countries list. Businesses that fall under the scope of the money laundering regulations and which deal with these countries will be required to take extra scrutiny measures. This amendment will enable the money laundering regulations to continue to work as effectively as possible to protect the UK financial system and it will allow the UK to continue playing its full part in the fight against economic crime. I hope that noble Lords will join me in supporting this legislation. I beg to move.

[Lord Tunnicliffe (Lab)]

My Lords, I welcome the Minister to what is for me the first Treasury SI to be held physically since the pandemic began. There is also a sense of nostalgia that predates the Minister: namely, this SI is being conducted by only the Minister, myself and the Government Whip. It is a matter of “never mind the width, feel the quality”.

I am grateful to the Minister for introducing the latest iteration of these regulations. As he outlined, they enact the latest changes to the Financial Action Task Force’s list of high-risk countries for illicit finance, which come three times a year. The last time we debated this topic, towards the end of April, we also covered the logistics involved in defining key terms and ensuring that the UK can mirror the FATF’s list, now that we are outside the EU. Thankfully, the relevant corrections to domestic law have been made, which means that we do not need to revisit that topic in any detail. However, we find ourselves giving retrospective approval to a made affirmative instrument, when the Government’s stated ambition in April was to use the regular process.

Of course, we understand that the work of the FATF may not directly align with the sitting dates of our Parliament. We also accept that delays in bringing forward these regulations introduce a necessary and undesirable risk. While these occasions allow noble Lords to raise a series of related issues with Ministers, it seems unlikely that the Government or Parliament would wish not to enact these regulations when they appear every few months. With that in mind, and given the huge volume of secondary legislation that we now deal with, could the Minister and his department examine whether and how the process giving effect to changes in the FATF list might be streamlined or otherwise improved?

Speaking of peripheral issues, could the Minister also provide a brief update on the Government’s broader efforts in this area? In April, the noble Lord spoke of 52 joint actions being undertaken by the Government and private sector to tackle economic crime. He also referenced 17 extra staff being recruited to the UK Financial Intelligence Unit. How are those exercises progressing? I would be happy for him to write with the details, if necessary.

[Lord Agnew of Oulton (Con)]

My Lords, I thank the noble Lord for his participation in the debate today and for his normal, thorough consideration of the instrument under question.

I shall go to his query about the progress on the 52 actions that we have committed to in this area: 20 of those 52 have now been completed, and we are at a key point in the economic crime plan timeline. The Government recently published the Statement of Progress, which details progress made against the plan; it sets out the UK’s future priorities and outlines seven new priority actions that build on the original actions in the plan. It increases our level of ambition to combatting economic crime, supporting our growth and prosperity and enhancing our global reputation as a clean financial centre and a safe place to do business.

As the noble Lord requested, I shall write to him with further details on the work; there is a great deal going on, covering a number of departments—for example, reforms to Companies House to prevent the misuse of companies, which was set out in September last year. We are looking to introduce reforms to limited partnerships and how they operate, and a register of overseas beneficial owners. Likewise, the Home Office is shortly to consult on a number of economic crime-focused legislative changes to ensure that we have the right powers to share information and seize assets. However, as requested by the noble Lord, I shall put that into a letter so he has a full update.

On the pressure on bringing instruments forward, which will be reasonably frequent, I absolutely accept the noble Lord’s challenge. It is always a difficult balancing act to subject government to proper scrutiny in the parliamentary process but also not to clutter up the timetable. We will take back his comments and see whether there is a better way of doing it.

I hope that noble Lords have found the debate informative, albeit short, and that they will join me in supporting this instrument.

Capital Requirements Regulation (Amendment) Regulations 2021

Lord Tunnicliffe Excerpts

Tuesday 14th September 2021 Grand Committee

I hope I have given Members a comprehensive overview of this measure. I urge noble Lords to join me in supporting these regulations. In short, this measure enables the implementation of Basel III regulation that is key to the UK’s international standing. In addition, it irons out some of the wrinkles of existing EU regulation. Together, these measures will give UK firms certainty and therefore help them to flourish. I beg to move.

[Lord Tunnicliffe (Lab)]

My Lords, as ever, I am grateful to the Minister for introducing this statutory instrument. Unlike the last item of business, which was largely a formality, these regulations represent a significant shift in how the Government and bodies such as the Prudential Regulation Authority ensure that domestic financial regulation is fit for purpose.

During the passage of the Financial Services Act 2021, we spent many hours debating the proposed shift away from the capital requirements regulations to the contents of regulatory rules made by one or more of the Treasury, the PRA and the Financial Conduct Authority. We were told that this was the most efficient way for the UK to implement the new Basel standards, given that the EU no longer does most of the work on our behalf.

Many colleagues were nervous about the new process. This is not because it was an inherently bad idea to set rules domestically, rather than to rely on and continue to amend bits of retained EU law; nor was our concern around giving the PRA and FCA further powers, even if that warranted a higher degree of parliamentary oversight. Rather, there was a legitimate concern about the potential for unintended consequences when large parts of the existing capital requirements framework are revoked at the stroke of a ministerial pen. Indeed, some parts of retained EU law are being swept away entirely, with no requirements for certain revoked provisions to be replaced.

I got to that point in my thinking and was seized by the fact that these are incredibly important regulations. In a sense, the presence in the Room is completely disproportionate to the importance of these regulations. As far as I understand it—I am not an expert in this issue—they are the regulations that secure the safety and stability of the financial systems. Therefore, I thought I had better give it a little more thought. I turned to a letter from John Glen. It was not sent to me; in simple terms, it was sent to my colleague in the Commons, Pat McFadden MP, but it includes me at the end. He sent me a copy of this letter, and therefore I take account of it. I quote the opening paragraph: “I am writing regarding the Capital Requirements Regulation (Amendment) Regulations 2021, which were laid on 12 July. This statutory instrument revokes elements of the UK’s capital requirement regulations to allow the Prudential Regulation Authority to make rules implementing the outstanding Basel standards.” That sentence seems to go to the essence not only of the SI but of the Financial Services Act we laboured over some months ago.

I read on. His next paragraph is all about taking away the rules relating to this area that were in statute, which is what we did with the Financial Services Act, and introducing the rules made by the PRA. It says: “The PRA near-final rules, which fill the space, have been published and you will be able to find them here.” The word “here” is a little blue thing with a line under it. By now I should have learnt that you do not press those, but I did, and I got to a six-page document, which had two parts. One was from 9 July, PS17/21, Implementation of Basel Standards. The other was from 12 February, CP5/21, Implementation of Basel Standards. As I understand it, the first is the current PRA policy and the other document was the invitation to consultation. Tantalisingly, having been introduced to this idea of near-complete rules, I found that the first appendix was:

“Near-final CRR RULES INSTRUMENT 2021”.


Once again I was daft enough to press this. While I had been shocked before, this really took my breath away, because the first page—I had the wit to print only one page at a time—said, in very light grey at the bottom, “Page 1 of 307”. I lost the will to live at that point. I thought: how do you scrutinise 307 pages?

I returned for inspiration to John Glen’s letter, in which he said: “I would encourage parliamentarians”—he is very optimistic using the “s”, I think, but still—“to consider these rules as part of scrutinising this SI. As we discussed during the passage of the Financial Services Act 2021, the PRA ran a consultation on its draft CRR rules from 15 February 2021 to 3 May 2021, which was open to all—businesses, public and parliamentarians—to respond.”

Those two paragraphs seemed to invite us to condition our approval of this instrument on the basis of what was to replace it. Once again, I felt that burden to see whether I could get any way to understand this document better. I am not sure how I got there, but I found a Prudential Regulation Authority document, policy statement PS17/21, Implementation of Basel Standards from July 2021. I thought: let us try that. I turned over the next page, and it has 84 pages. That has to be progress.

At this point, I ran out of time and energy. I thought, “We’re not going to turn this down. Four times since the Second World War, I think, has the House of Lords turned down a statutory instrument. What’s the point?” I thought, “A good compromise is just to read the overview.

I do not know how well the Minister copes with this stuff, but you have only to read the overview to realise that you need a degree in this language to understand it. I did flog through it and, in my ignorance, virtually everything I came across seemed reasonable until I came to paragraph 124. This disturbed me, because this SI is very important—the Minister may say that I have misunderstood its importance, but I think it is important. That paragraph refers to climate change. The world feels a bit rough at the moment—in everything from Afghanistan to the pandemic, it is not in a good place—but the problems we have now pale into absolute insignificance compared with what happens if we do not get climate change right. The odds are stacked against us, let us be realistic. In the UK, we are trying hard, but to get the big powers involved and get them to agree? It is pretty worrying.

I was greeted in paragraph 124 with the words:

“The PRA must also have regard to the target in section 1 of the Climate Change Act 2008 (carbon target for 2050) for rules made after Saturday 1 January 2022. As these rules will be final before that date, they are out of the scope of that requirement. In addition, during the consultation period for CP5/21, the Prudential Regulation Committee’s … remit letter was revised to recommend that the PRC should, where relevant and practical, have regard to the Government’s commitment to achieve a net-zero economy by 2050. As consultation was underway at the point the PRC’s remit letter was revised, the PRA could not consider this new have regard for these particular rules, as to do so would have caused an impractical delay to their implementation.”


That struck me as a real Sir Humphrey kick into the long grass. I was very worried that about the only paragraph I felt I could understand did not have the right feel about it. What is more, I was confused because at this point, for reasons I do not quite understand, I was inspired to read the de minimis instrument which is called for to prove that it is under £5 million per year. All it took account of was the time people took to read the document. It did not take into account the fact that if you get these things wrong, the impact on the financial system can be profound.

--- Later in debate ---

[Lord Agnew of Oulton (Con)]

My Lords, I thank the noble Lord again for his very thorough analysis of an immensely complicated subject. I will try to address his two substantive questions. The first was on the scrutiny of PRA rules and regulations by Parliament. I assure the noble Lord that Parliament ultimately sets the regulators’ objectives, and it is right that Parliament has the appropriate opportunity to scrutinise the work of the regulators and their effectiveness in delivering the objectives that Parliament has set them. The letter the noble Lord referred to was clear that we set out a reasonably long consultation period earlier this year and had substantive responses from the key players in the sector, and we have responded to those.

The regulator committed to sending these consultations and draft rules to Parliament during the passage of the Financial Services Act earlier this year. Consultation began in February so there has been a decent period to review and report on them. The PRA published its final rules in July—again, well in advance of this SI. The FSMA requires regulators to undertake these consultations and to consider and to respond to representations from Parliament as well as other stakeholders. Mechanisms for accountability, scrutiny and engagement are considered further through the further regulatory framework review. We should not rush to prejudge the outcome of the FRF review. The Government will bring forward proposals through a second consultation later this year.

On the noble Lord’s question about climate change, the Financial Services Act 2021 was amended to include a “have regard to” the net zero carbon target but its application was delayed until 1 January 2022. This means that the PRA does not need to have regard to climate change considerations in making the rules as a consequence of this specific SI. This delay will ensure that there is no unnecessary and impractical delay in implementing the Basel 3 reforms for 1 January next year, otherwise we would be in the unfortunate position where the regulators would have to reopen or restart their consultations which were first published, as I said, in February this year.

I assure the Committee that the PRA will still need to make rules to implement substantive reforms contained in Basel 3.1. I expect the regulators to use the powers again in future to update their rules: for example, to take account of new international standards or developments in the market. The PRA will need to have regard to the net carbon target in setting those rules.

I hope noble Lords will agree that these amendments strike the right balance between taking action on climate change quickly and taking swift action to reform our prudential regimes that aims to prevent a future crisis. I suggest that we write to the noble Lord to update him on the timetable for his specific concern on the net-zero targets.

[Lord Tunnicliffe (Lab)]

Before the noble Lord sits down, I recognise that what I have said is perhaps complex so I would be grateful if he would also write to me on whether he has any further reflections on how Parliament might be involved. The formal position, as I understand it, is that the PRA can now make regulations without seeking any formal authority from Parliament; indeed, that is almost the essence of it. I sense some degree of sympathy that somehow Parliament ought to be involved, so if he and the Treasury have further thoughts on that, it would be valuable if they could share them with me.

[Lord Agnew of Oulton (Con)]

Of course we will write to the noble Lord to provide a bit more clarity on that. Again, it is that difficult balancing act with incredibly complex regulations—as the noble Lord has so ably demonstrated as he has fought his way through layers of hyperlinks—and I recognise that.

The Prudential Regulation Authority has consulted on these rules. As I mentioned, in July it published the near-final version of the proposed rules, along with an accompanying policy statement. This set out how the regulator has taken into account the public policy factors in the Financial Services Act.

I hope that the noble Lord has found today’s debate informative. I will write to him on the specific items we have discussed. I hope he will join me in supporting this instrument and I beg to move.

Cash Network

Lord Tunnicliffe Excerpts

Tuesday 7th September 2021 Lords Chamber

[Lord Agnew of Oulton (Con)]

My Lords, the Post Office plays a vital role in supporting payments across the system. There are some 11,000 post offices, and some 95% of business customers and 99% of personal banking customers are able to deposit cheques, check their balances and withdraw and deposit cash. The banking framework allows banking via post offices.

[Lord Tunnicliffe (Lab)]

My Lords, the Minister’s answers seem to me to fail to sense the problem for minorities and people who are poor. My real concern about access to cash is how poor people will manage. For poor people, frequently cash is the only way they can budget—they are not up to systems and that sort of thing. There are not many of them, but society must be responsible for them. I have read the document on this that the Treasury has pushed out; it seems pretty reasonable when you read it, but the key issue is the charging. The system is losing free-to-use cash machines. To us, the charges look trivial, but when you are taking small amounts of cash out, proportionately they are eye-watering. Will the Government insist that the free-to-use network is maintained and possibly enhanced?

[Lord Agnew of Oulton (Con)]

My Lords, to reiterate my earlier point, there are some 40,000 cash machines that are free at the point of use; they are sustained through an interconnection charge between the banks. As for what the Government are doing, in the Financial Services Act of this year we legislated to allow cashback without purchases. That became law in June this year, and it is something where everyone’s interests are aligned: the retailer gets the opportunity to increase footfall into their shops and to reduce the cost of having to bank cash, which is expensive. We are optimistic that this will provide a wide range of additional outlets for cash.

Bank of England Act 1998 (Macro-prudential Measures) (Amendment) Order 2021

Lord Tunnicliffe Excerpts

Thursday 8th July 2021 Grand Committee

[Lord Tunnicliffe (Lab) [V]]

My Lords, this is one of the first statutory instruments arising from the passage of the Financial Services Act 2021. As well as looking at the changes introduced by this instrument, this debate provides an opportunity to briefly discuss some of the wider issues arising from the new legislation.

This order provides an update to the powers of the Financial Policy Committee, so that it can direct the Prudential Regulation Authority on matters relating to certain holding companies. We welcome this extension of existing macroprudential measures and the various consequential changes in the instrument, which ensure consistency in terminology, application and so on. We also understand the Treasury’s desire, as stated in the Explanatory Memorandum, to bring this instrument into force as quickly as possible and minimise any gaps that may exist in the FPC’s current powers.

As the Minister outlined in his introduction, this instrument also makes changes to the total exposure measure, or the overall leverage ratio, the framework of which is being transferred from the retained Capital Requirements Regulation to PRA rules. This was discussed when the SI was debated in the Commons earlier this week.

The comments of the Economic Secretary, John Glen, were extremely helpful in outlining the process to date, as well as ongoing and next steps. It was particularly useful to have confirmation that excluding Bank of England balances will make no material difference to the leverage ratio—that is, the amount of capital that a bank is expected to hold in relation to its overall loan book. One area where the Economic Secretary’s answer was slightly less clear was on whether he foresees the UK changing capital requirements now that we are outside the EU. The answer provided, that the Government’s objective is to

“align to the highest global standards”,—[Official Report, Commons, Delegated Legislation Committee, 6/7/21; col. 7.]

did not directly address the question from Pat McFadden, the shadow Economic Secretary. Can the Minister shed some light on this today?

At the beginning of my speech, I forewarned the Minister that I would make some general points. I will turn to these now. The changes in this instrument are clearly the first of many. Implementation of Basel 3.1, coupled with the Government’s desire to transfer other measures from retained EU law to domestic prudential rules, will mean a steady stream of regulatory changes in the coming months.

The Treasury will no doubt have a document containing the target dates and absolute deadlines for enacting each of these changes, as well as an indication of which parliamentary procedure—if any—they will be subject to. Can the Minister commit to sharing this work plan, to ensure that colleagues who wish to do so can engage at an early stage?

Following on from that question, now also seems an appropriate time to return to one of the big debates from the passage of the Financial Services Bill. The regulators are, separately or jointly, consulting in a range of areas ahead of exercising their expanded rule-making powers. For example, the Financial Conduct Authority launched its consultation on a new consumer duty in May, fulfilling the first requirement of Section 29 of the 2021 Act. Although the Minister was not intimately involved in that Bill’s passage through your Lordships’ House, he will be aware of undertakings from the FCA and the PRA that they would engage with Parliament as part of their day-to-day work. Although the FCA approached me, is the Minister satisfied that consultation exercises and draft rules that have emerged since the passing of the Act have indeed been brought to the attention of relevant parliamentary committees?

Finally, although it may not be something he can provide in this debate, can the Minister give an update on the future regulatory framework review, which is considering issues such as accountability and scrutiny?

Customs Safety and Security Procedures (EU Exit) Regulations 2021

Lord Tunnicliffe Excerpts

Tuesday 22nd June 2021 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I am grateful to the Minister for introducing this statutory instrument, which follows on from several previous regulations relating to new customs procedures. As the Minister has outlined, this instrument extends waivers granted under the previous regulations for up to an extra six months. These waivers cover both imports from the EU, Norway and Switzerland and certain types of movements back to those territories.

It is fair to say that the first six months of our new relationship with the European Union have not operated as smoothly as the Government promised. The reality of new red tape, coupled with challenges resulting from the Covid-19 pandemic, had a noticeable impact on trade flows from 1 January.

Although there are signs of improvement in some areas, the data in others remains concerning. Last week, for example, analysis suggested that British food and drink exports fell by £2 billion in the first three months of the year. Sales of dairy products plummeted by a staggering 90%. The Government will be keen to label these as teething problems but those in the industry are less sure. The Food and Drink Federation, for example, argues that these figures are

“a very clear indication of the scale of losses that UK manufacturers face in the longer-term due to new trade barriers with the EU.”

It is worth reflecting on previous debates on this topic. When we debated one instrument in December, we were told that the powers in relation to exports were being granted purely as a contingency. The impression given was that the Government did not expect to use them. Indeed, the Minister said that the waiver would be applied

“only where absolutely necessary to avoid border disruption”.

At the time, I asked whether the Minister envisaged the extension we are debating today. In his response, he said:

“The Government have no plans to extend this contingency beyond the first six months of next year, as we do not anticipate that there will be any risk of disruption, as a result of the safety and security requirements on exports after that period.”—[Official Report, 10/12/20; col. GC 382.]

As the Secondary Legislation Scrutiny Committee notes in its fourth report of the Session:

“HM Revenue and Customs explains that these extensions are being introduced in response to feedback from industry that the pressures arising from the pandemic have affected their readiness for the introduction of full customs controls from 1 July 2021”.


While we have no doubt that the pandemic has had an impact on the ability of businesses to adapt, I am not convinced that HMRC’s explanation is complete. We are still hearing complaints about the Government’s new customs phone lines, for example. Ministers are also still being coy about the number of customs agents that have been recruited and whether their self-imposed target of 50,000 personnel has been met. Can the Minister provide an update on these projects? Does he believe that the required capacity will be in place by the end of the year? Is there a possibility that HMRC will decide to grant further extensions into 2022?

Finally, in that December debate we also raised concerns about safety, in light of HMRC’s admission that bringing certain contingency plans into force could have implications for border security. Can the Minister confirm that these matters have been kept under review during the operation of the customs waivers, and whether such risks have become a reality? Have any incidents occurred that the department would consider significant and, if so, will the Minister commit to sharing the details with us?

Finance Bill

Lord Tunnicliffe Excerpts

2nd reading & Committee negatived & 3rd reading
Tuesday 8th June 2021 Lords Chamber

[Lord Tunnicliffe (Lab)]

It is nice to rise to a few cheers. I am almost the penultimate speaker and there must be a sense of relief.

Let me begin by thanking the sub-committee of the Economic Affairs Committee on its report on new powers for HMRC. I must say that there was little surprise when the committee identified a number of shortcomings in how the Government had gone about their work in recent years. The report raises concerns that will sound familiar to many: the questionable timing of announcements, somewhat odd prioritisation of workloads and the often relaxed attitude towards best practice and evidenced-based policy-making. Given both the economic and moral case for cracking down on tax avoidance and other forms of non-compliance, the findings of the report are of concern.

We have taken note of the Government’s response and acknowledge that some of the recommendations expressed in the report are being or have been enacted. However, it is clear that there is more for both HMRC and Ministers to do if we are to close the loopholes and promote better behaviour. As always, we are confident that officials are doing everything they can to meet the targets set for them from above. It is a case of ensuring that departments are properly resourced and appropriately directed. When the Financial Secretary introduced the Bill in the House of Commons, he paid tribute to the work of officials in the Treasury and HMRC throughout the Covid-19 pandemic. He was right to praise them for the dedication and creativity that they have shown by turning new concepts into reality and putting money into people’s pockets in record time.

As the Opposition, we have not shied away from challenging the shortcomings of the various coronavirus support schemes or the Government’s wider handling of different aspects of the pandemic. However, as with the report on the powers of HMRC, any shortcomings rest ultimately with the politicians in charge. With a certain amount of bullying from within and without, some of the issues of Covid-19 support were addressed, but sadly some problems have still not been acknowledged and the patchwork of support has left many people in similar situations facing very different financial circumstances.

As we progress along the Covid road map, the Government will need to think carefully about when and how support is withdrawn from businesses and workers. It is also vital that lessons are learned to start closing the gaping holes that have been exposed in this country’s social security safety net.

The Financial Secretary referred to what he identified as three objectives underlying the Budget in March, all of which focused on defeating Covid-19 and rebuilding after it. We disagree fundamentally with his claim that his Bill will enact changes in taxation that will support all those objectives. Neither the Budget nor this Bill is sufficient to address the long-standing challenges to the British economy and to put us on a path to sustainable growth that would benefit all communities across the UK. Such challenges contributed to the UK having the worst downturn of any major economy at the height of the pandemic.

Despite our recent return to growth, which we welcome, and the continuing hard work of the British people, I worry that the Government’s lack of ambition on economic reform will hold us back vis-à-vis our international friends and competitors. The Chancellor’s last-minute decision to sign up to President Biden’s corporate tax proposals through the G7 communiqué is a clear example of his lack of ambition. The UK initially resisted the proposal, the only G7 member to do so, and while we witnessed a U-turn over the weekend, experts in the field have already identified potential loopholes.

Returning to the Budget and the Finance Bill, it is a shame that, rather than supporting front-line workers, the Government have essentially snubbed their heroic efforts in the past year and a half. We are all familiar with the paltry pay rise for NHS nurses, but other public sector workers have received poor pay settlements too. Rather than embracing opportunities around corporate tax, such as levelling the playing field for online and so-called bricks and mortar businesses, this Finance Bill enables a corporate super-deduction while freezing the income tax allowance. The latter will hit low-paid households that have been lifted out of income tax only in recent years. Rather than present proposals for welfare reform to put more money into government to ensure adequate funding for pupils to catch up with the education they lost during the multiple lockdowns, the Budget instead laid out plans to cut certain welfare benefits and slash departmental budgets. In sum, rather than delivering on warm words and promises on job creation, addressing the climate crisis or levelling up, the Finance Bill is merely a continuation of the political decision-making that has left so many feeling that the Government are not on their side.

The past year and a half has been tough for us all. We have had to make sacrifices and do things differently but Covid-19 has also exposed the very best of many: NHS staff, other key workers and those who played an active role in their local communities. However, there is also a need to help the unemployed back into work, address the ever-growing debt burden faced by many businesses and provide meaningful investments to put our economy and public services on a surer footing. This Bill and the Government’s broader economic policy do not meet those tests.

In the House of Commons, the Labour Party proposed several sensible amendments to make the legislation fairer. Rather than engage, the Government opposed measures to ensure that large multinationals pay their fair share, to increase transparency around the actual economic impacts of free ports, and to review the effectiveness of plans to prevent overseas entities funnelling dirty money through UK property. Think tanks and commentators of all political persuasions have been unimpressed by the lack of urgency on important issues such as these.

All that said, any noble Lord who has had the pleasure of participating in debates on Treasury statutory instruments will know that I am no fan of constitutional crises. It is not for the House of Lords to oppose the Finance Bill, and we have no intention of breaking that convention today. However, I was seized by the debate that broke out earlier about what we cover and the extent to which the Finance Bill creates cover for issues that arguably should be properly debated in legislation.

It is very interesting to sit back and see what the House of Lords does best. I think that the House of Lords, in a sense, divides its attention between the political and better legislation. I have been involved, over the past 11 years, with every bit of finance legislation that has gone through this House, usually at the junior level with stars helping me. What has emerged from that is the improvement that legislation has enjoyed in this House. It has been a really powerful step forward. It happens because thoughtful people bring up poor areas of legislation and, combined with the fact that the Opposition takes a political interest in it, focus is brought to bear on those areas and small changes and nuances are achieved. I think that the noble Lord, Lord Bridges, was in a sense referring to that, that the noble Lord, Lord Butler, was particularly referring to it, and that the noble Lord, Lord Forsyth, indicated some sympathy with it. I hope he and his committee might consider the extent to which the Government are starting to smuggle legislation that really should come to this House through the political process by hiding it in money Bills.

I also thought there were some interesting concerns about HMRC and the level of scrutiny. I headed a pretty large organisation; one of the problems with large organisations is the attractiveness of using your power to do things to people who are less powerful. Of course, you do it because it is good for you, but we need processes that test whether it really is. One of the worst problems in any complex society is that large organisations emerge because they are efficient but, because they are large, they have unreasonable power. We need proper, better processes—there was reasonable consensus on this during the Financial Services Bill we have just done—in the FCA, for political scrutiny, and better processes in the PRA.

On a more political point, I also felt that the concept from the noble Baroness, Lady Kramer, of the need for a more strategic approach from the Government was important. There have been lots of initiatives from this Government; we have disagreed with some and have supported others, but at no time have they seemed strategic. Two particular areas interested me. First, there is the failure to pick out sectoral initiatives; there are areas—I think the noble Lord, Lord Leigh, brought this out—in aerospace, for instance, where if we lose where we are now, no amount of money will get us back to the same place. There should be a stronger strategy for looking at where the weaknesses are. Secondly, there is this whole problem of debt; if debt is to be repaid—will it be?—it could become a millstone on the companies that should be bounding ahead. We need the best minds thinking about whether there is some way of turning that into equity, and so on.

There is much more to ponder. I hope that processes can be found for that pondering to be done in this House, and that we can be part of the legislative process. If anything makes the Government think, it is the fear of a vote going against them. I do not know whether anyone records this, but we do not actually like winning votes; we like persuading the Government to do good things because they are frightened of us winning votes. That is what happens—but anyway, I have something else to say.

It seems the Economic Affairs Committee’s conclusion that Ministers must do better applies more broadly than to tax avoidance policy. This Bill is yet another missed opportunity to grapple with the challenges our economy faces. Sadly, as is so often the case under this Administration, working families will pay the price for the Government’s lack of ambition.

Kalifa Review of UK Fintech

Lord Tunnicliffe Excerpts

Tuesday 27th April 2021 Lords Chamber

[Lord Agnew of Oulton (Con)]

My noble friend is right that finance is an inherently risky business; my great-plus-three grandfather and his two brothers founded Close Brothers, so risk is certainly in my genes. That is one reason why we are introducing the sandbox concept, whereby this technology can be tested in a safe environment without exposing the economy to any risk.

[Lord Tunnicliffe (Lab) [V]]

My Lords, in the Chancellor’s recent Written Statement on fintech, he speaks of a “scale-up visa stream” allowing qualification for a fast-track visa without the need for sponsorship or third-party endorsement. What criteria was used to select fintech for this fast track, and where else in the economy is it envisaged that scale-up visas will be introduced?

[Lord Agnew of Oulton (Con)]

My Lords, these concepts are still being designed and I will be very happy to update the noble Lord when more information is available. However, the key emphasis of scale-up is to attract global talent and boost the fintech workforce, so it will be focused on the skills these people can offer our country.

Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2021

Lord Tunnicliffe Excerpts

Tuesday 27th April 2021 Grand Committee

[Lord Tunnicliffe (Lab) [V]]

My Lords, I am grateful to the Minister for introducing this measure and to other noble Lords who contributed to the debate. The statutory instrument, although a formality in many senses, returns us to an area that your Lordships’ House has taken a great interest in over a number of years. This instrument has been laid under the “made affirmative” procedure. While we are never huge supporters of that way of doing business, I am grateful to officials for providing a justification in the Explanatory Memorandum. It is useful to know that the relevant firms were forewarned of the change. It is also reassuring that the Government have acted swiftly to align with the list agreed by the Financial Action Task Force.

This is another of the areas affected by the UK’s withdrawal from the European Union. We have always tried to play a constructive role as the Government seek to replicate or redesign the structures that came through EU membership. Given the extent of cross-border transactions in the modern age, tackling money laundering necessitates international co-operation such as that provided by the FATF. Despite the use of “made affirmative” procedures, it seems that this mechanism for specifying high-risk countries works. Whether other aspects of the Government’s new regime will function as intended remains to be seen; we will keep a watchful eye on this in the months ahead. Of course, this list will need to be updated periodically to reflect any changes made by the international task force, as is acknowledged in paragraph 6.3 of the Explanatory Memorandum. Can the Minister confirm the anticipated procedure for future change?

If I may, I want to ask about money laundering matters separate to the designation of high-risk countries. While other commitments limited his involvement in the Financial Services Bill, he will know that the topic was explored in Committee. In response to amendments from my noble friend Lord Eatwell, the Government outlined several steps that are being taken to strengthen the UK’s hand in this fight. Can the Minister provide a progress report on these initiatives either in his response or in writing? He will be aware that, in recent years, the FATF has made a number of recommendations to the UK Government. We would not expect all these changes to occur overnight but I am sure that noble Lords on all sides would be comforted if signs of progress were able to be seen.

We must leave no stone unturned in our fight to combat money laundering and terrorist financing. Designation of these countries under the new UK regime is a welcome first step, and I look forward to the Minister’s response on the Government’s wider efforts.

Recognised Auction Platforms (Amendment and Miscellaneous Provisions) Regulations 2021

Lord Tunnicliffe Excerpts

Thursday 15th April 2021 Grand Committee

[Lord Tunnicliffe (Lab) [V]]

My Lords, I am grateful to the Minister for introducing this statutory instrument, and to the noble Lord, Lord Bourne of Aberystwyth, for his contribution to this short debate. While the instrument is not formally labelled as an EU exit document, it nevertheless deals with one of the many issues arising from our withdrawal from the European Union and its various structures and policies. As the Minister outlined, the instrument makes changes to the UK legal provisions to reflect the fact that we are no longer part of the EU Emissions Trading Scheme. It then puts in place other provisions linked to the auction platform of the new UK Emissions Trading Scheme ahead of its first use later this year.

For some time, industry has sought certainty over the direction of travel on carbon pricing. It had not been clear whether the UK Government would operate a stand-alone ETS, some form of linked scheme, or an alternative approach such as a carbon tax. The decision to launch a UK ETS may have come later in the day than we would have liked, but it is one that we support. Maintaining the cap and trade principle will be important as we seek to reduce emissions in a manner consistent with meeting the 2050 net-zero target. It was not clear that alternative options such as a carbon tax would offer the same benefits as an ETS. In addition, while I will shortly turn to questions of how the UK’s scheme will work in practice, I can see that it makes sense to retain an approach that relevant companies are familiar with. However, it is regrettable that the regulations are being brought forward only now. The first auctions may not take place until later this year. It surely would have made more sense for the Government to spell out the detail and establish mechanisms further ahead of time. That would have provided greater clarity and certainty to all involved.

Establishing new markets and trading systems is always difficult, especially if you are to achieve early buy-in from companies, which generally require long lead-in times. I am sure that the Minister will be able to cite examples of engagement with business, but I cannot help observing that last-minute policy-making seems to have become one of the hallmarks of this Administration.

The relative size of the UK ETS when compared with the EU scheme raises a variety of questions. Going it alone also introduces an element of risk. Indeed, I am sure that the Minister is familiar with the concerns of the Committee on Climate Change, which pointed out potentially significant challenges in achieving market stability and liquidity.

Why has the UK set the auction reserve price at the level it has, when the EU scheme has seen prices rising sharply in recent months? We acknowledge that the auction reserve price is higher than the level initially proposed and are mindful of the need for it to be set at a level that creates a robust market and ultimately drives down emissions. With that in mind, how will the Government keep the price level under review? What importance, if any, will they place on price fluctuations within other emissions trading schemes around the world? Can the Minister provide an update on whether the UK is looking to link its scheme with others, as suggested in the White Paper published in December? Another consideration is the sectoral coverage of the UK ETS. Do the Government see a case for expanding the number of sectors covered by the scheme and, if so, when can we expect to hear more about it? If a decision were to be made this summer to include agriculture, for example, what kind of timescale would we be looking at for implementation?

I realise that many of these questions are better directed at the Department for Business, Energy and Industrial Strategy, so I am happy to wait for an answer in writing. However, in the hope of bringing the focus back to the Treasury, could the Minister comment briefly on the role foreseen for the Financial Conduct Authority? What additional knowledge or resource, if any, does the FCA require to fulfil its new responsibilities? Are the Government confident that this will be in place come the first auction?