UK Infrastructure Bank Bill [HL]

Lord Tunnicliffe Excerpts

Consideration of Commons amendments
Tuesday 14th March 2023 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister, both for her introduction today and for a helpful briefing held last week. When your Lordships’ House considered the Bill in the first half of last year, we were told that passing it should be a mere formality. The UK Infrastructure Bank was already operating, having made its first handful of investment decisions. The Bill was therefore essentially a technical exercise to give the organisation statutory underpinning. The Government resisted several sensible amendments, including one on worker representation on the bank’s board, partly on the basis that this legislation needed to be on the statute book quickly. I pause to note that the inclusion of a non-executive director at least moves in that direction. I thank the Minister, as I do for everywhere in the Bill where she has persuaded the Government to seek compromise.

However, in reality, it took some time for the Bill to get through the other place. The legislation having been introduced last July, Second Reading did not take place until November and Report not until last month. The delay was presumably the result of the Conservative Party’s summer of chaos, with a succession of Prime Ministers and Chancellors of the Exchequer, and—if I remember correctly—a short period when the noble Baroness was not a Minister on this subject. We are back to our familiar form. The extra time has seemingly allowed Ministers to reflect, in some areas at least, as evidenced by the various Commons amendments that we are debating today.

We welcome the clarifications around the definition of “public authorities” and the importance of costed plans should UKIB funds be used to support the work of water companies. The devolved provisions, which have facilitated the passing of legislative consent Motions—something of a novelty in recent years—are also welcome. We are also glad that the Minister and the Bill team have been persuaded of the merits of including nature-based solutions in the definition of infrastructure.

The noble Baroness, Lady Hayman, made a persuasive argument but, as we have often seen, that does not always lead to the Government making a concession. I pause again, however, to note, as happens with so many Bills, the extent to which she and her supporters are making incremental progress in embracing the green thrust. Even now, I have a bit of optimism that we might move quickly enough to save at least some of the planet that we now enjoy. It is good to see that thrust building on both sides of the House. I hope that in a couple of years the sides will change but, if one has that general direction in the membership and on the Front Benches, it is possible that we will get there. In another two years we may be passing green amendments that will amaze us when we look back five years, at when some official or other said, “You can’t put green in there because it is nothing to do with the Bill”. We have put green in here and have persuaded people that it is something to do with the Bill.

I understand the disappointment of the noble Lord, Lord Teverson, with regard to the circular economy, but that concept will become ever more apparent and he will no doubt have other opportunities to promote it.

I regret that the Government have overturned my amendment. Colleagues may think, “You would say that, wouldn’t you?”, but I remain unconvinced of the Government’s reasoning for removing their own levelling- up mission from the Bill. I reluctantly accept the offer to make changes to the bank’s framework document and articles of association after the Bill receives Royal Assent. It is not exactly where we want to be but it is a small step in the right direction.

Finally, we gladly accept the reduction of the interval between reports on the bank’s effectiveness. I was somewhat amused by this, as we were previously told that an interval of five years was simply not practical and could even somehow undermine the bank’s work.

Overall, while the Bill is a short, technical piece of legislation, the UK Infrastructure Bank could make a significant contribution to some of the big challenges that we face. We fully support the bank and, while there may be cause to revisit its mandate in the future, we wish it well in its work. Again we thank the Minister for her co-operation in bringing us to this consensus position.

[Baroness Penn (Con)]

My Lords, the Bill is mercifully short, so I shall also keep my remarks brief. I thank all noble Lords who have spoken today and who contributed when we took the Bill through its substantive stages in this House a while back. I reassure them that the time it has taken for the Bill to progress is not unusual: I was working on the skills Bill in this House, went off on maternity leave and was back in time for ping-pong, so it is not necessarily an unusual passage for a Bill in Parliament.

I reassure the noble Baroness, Lady Bennett, that the Government are committed to moving towards a more circular economy which will see us keeping resources in use as long as possible, extracting maximum value from them, minimising waste and promoting resource efficiency. I hope I made that clear in my opening remarks. When it came to including a legal definition of “infrastructure” in the Bill, that is where my remarks about the potentially imprecise nature of the terms lay, but it does not reflect a broader lack of understanding or commitment by the Government to that agenda.

I also reassure the noble Lord, Lord Teverson, that His Majesty’s Treasury is very much committed to ensuring that nature and climate change are on the agenda for the Government and that we meet our global goals, committed to both in terms of Paris alignment and the new framework agreed at COP 15 in Montreal at the end of last year. He knows better than most that we published the Dasgupta review that looked at the role of nature in our economy. We have had an amendment to the Bill today, and that commitment will be ongoing.

Most noble Lords were very kind in not replaying my words on the review period for the bank. All I can say is that it is always a pleasure to listen to the contributions of noble Lords and be persuaded of the art of the possible. I am pleased with the changes that we have been able to make to the Bill; I think these have shown how effective Parliament can be in scrutinising our legislation. The UK Infrastructure Bank has transformative potential, which I know is recognised and supported on all sides of the House. I beg to move.

Silicon Valley Bank

Lord Tunnicliffe Excerpts

Tuesday 14th March 2023 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, we recognise the indispensable role played by the UK life sciences and tech sectors. These drive growth and innovation across the economy, as well as creating and sustaining good jobs. We therefore welcome yesterday’s announcement that HSBC is buying the UK arm of Silicon Valley Bank.

As the Statement makes clear, this move protects SVB UK’s customers’ deposits, allowing them to bank as normal. That will allow a range of start-ups and scale-ups across the UK to continue their operations rather than having to deal with immediate financial and other pressures. We are grateful to officials at the Treasury, Bank of England and financial regulators for working at pace over the weekend to facilitate this agreement.

The collapse of SVB raises important questions about the risks taken by some financial institutions and their regulators. It is true that in the UK context the system established under the Banking Act 2009 has worked. However, my colleague Tulip Siddiq asked yesterday whether, at the time when SVB UK’s licence was granted, any assessment was made of the significant liquidity risks associated with SVB UK’s deposit base. I do not expect the Minister to answer that question today, but I should like an assurance that a review will be undertaken in due course or that Ministers will make themselves available to parliamentary committees for questioning.

Normal ring-fencing rules also had to be disapplied to allow HSBC’s acquisition. The Economic Secretary helpfully confirmed yesterday that this exemption will be permanent. Will the Minister go into more detail about any steps HSBC or SVB UK may be required to take in the future? If she is unable to do so today, perhaps she will write with further information prior to our debate on the “made affirmative” statutory instrument.

The Government are currently making significant changes to UK financial regulation. We support the broad thrust of this, as the financial services sector makes a significant contribution to the UK economy and its success will be key to future growth. However, as our many debates on the Financial Services and Markets Bill highlighted, we must balance risk and reward. Does the Minister have full confidence in all the regulatory changes proposed in that Bill and in the so-called Edinburgh reforms, which will come on stream later, or is it possible that the Treasury might wish to revisit some aspects of those initiatives in the light of recent events?

While the UK part of SVB’s collapse may have been addressed quickly, global markets have still been sliding as recent events are processed and questions are being asked about the risk level of similar institutions. Does the Minister agree that it is vital that we do everything possible to provide confidence in the UK’s financial system? With this in mind, and given the impacts of persistently high inflation and increasing interest rates on UK institutions, will the Government launch a systemic review of the risks facing the sector?

[Lord Fox (LD)]

My Lords, I thank the Minister for repeating the Statement, albeit in the graveyard shift: she could have got in a bit earlier. Having read through the details of the events of the last weekend, I can understand why the Statement veers towards the slightly triumphalist: the sale of Silicon Valley Bank to HSBC averted existential problems for a huge number of UK tech businesses, and I am sure the Minister and colleagues are pleased to have done this. We should congratulate the Treasury and the Bank of England, as well as Coadec, Tech London Advocates and BVCA on the industry side, all of which came together very swiftly over the weekend. But where do we go from here?

First, can the Minister confirm that there will be a full investigation, both to confirm how this happened and, more importantly, what lessons can be drawn? One lesson we can all observe is that bank runs in the social media age happen in hours rather than days: the speed with which the run on this bank happened points, I think, to future issues if we ever came to them. As we know, Silicon Valley Bank’s UK wing oversaw roughly £7 billion in deposits from 3,000 entities across the country’s important tech industries and, contrary to US reports, it was not ring-fenced from its US parent. My first specific question is how we ended up in a situation where a huge proportion of a vital sector of the UK economy was reliant on one regional US bank. I am sure the answer is not simple, but it is important. For example, accessing connections to venture capital may have led banks to SVB, but there is also evidence that the traditional UK banks just do not have the appetite to take up this kind of business. Where will the tech start-ups go now for funding, especially in an environment where capital is getting more scarce?

History tells us that, when interest rates rise as fast and by so much as they have during the past period, bad things nearly always happen. It is a near certainty that one of two outcomes will occur: recession or a bank crash—sometimes both. I am sure we all hope that the failure of SVB, the closure of Signature Bank and the Tory-created crisis in UK government bonds and the pension sector are just outliers and do not herald something worse. They may, indeed, be one-offs; however, it seems to me that the Government, the Treasury and the Bank of England have to err on the side of caution. Can the Minister assure us that the tone of this announcement does not indicate a sense in our financial institutions that their work is done?

The SVB crash epitomises the risks buried in our financial system as central banks rapidly lifted borrowing costs. SVB’s unhedged investments in long-term, fixed-rate, government-backed debt securities left it doubly exposed to rising interest rates because it reversed tech companies’ growth and hit the price of its securities. There may be other issues that unwind when investigation of this bank carries on—we will have to wait and see—but how did the US regulators miss the issue at the heart of SVB? Since the 2008 financial crisis, the focus has been on liquidity, although I would suggest that not even that has been particularly successful. Interest rates have grabbed little attention because they had not posed a significant threat in recent decades, but they do now.

Can the Minister confirm that the Government have asked the Bank of England to review the stress tests it conducts in order to take into consideration the rapid rise in interest rates? Can the Minister confirm that the tests will be extended into the so-called shadow banking sector, which is increasingly grabbing large slices of business traditionally carried out by banks? Can the Minister also assure your Lordships’ House that the necessary horizon scanning is under way?

I do not think anyone predicted the LDI issue in the autumn, and I do not think anyone pointed to a sector-focused regional bank like SVB being the source of a crisis. So where could the next crisis come from? I can offer three options in the current environment: insurance funds investing in illiquid assets; overvalued real estate; and private equity funds with opaque valuations. I am sure the big brains in the Treasury will be much better at navigating the complex and interwoven investment landscape and come up with a better list to enable them to avoid unpleasant surprises. Can the Minister confirm that there are people digging down into the systemic risks which are buried deep inside the highly complex finance systems and finance products that exist around the world today?

At the heart of this is also politics. Republicans have loosened US bank regulations in recent years and banks such as SVB had previously lobbied successfully to be excluded from the category of systemically important banks—that meant they faced lower capital and liquidity standards. We are not immune from the same political pressures in this country. The Edinburgh reforms announced late last year also point towards deregulation, not least in the plan to reform the ring-fencing regime for banks.

But more than that, and as the noble Lord, Lord Tunnicliffe, referred to, we can see this trend in the Financial Services and Markets Bill that is currently being debated by your Lordships. For example, Clause 24 in that Bill requires the FCA to help drive the international competitiveness of the economy of the United Kingdom, in particular the financial services sector—help drive the competitiveness of the economy. This creates a huge conflict of interest within the FCA, and in light of the SVB it looks at least questionable. Can the Minister confirm that this clause will be reviewed with a view to future amendment when the Bill comes back on Report?

Finally, after 2008 the Government and the financial sector all said “Never again”, and there were significant changes to the banking regulations; much of this was based on a report led by Sir John Vickers. Speaking today on the BBC, Sir John said that the country made advances in 2009 and we must not row back on these advances. He explicitly said that the Edinburgh reforms should be reviewed again and that ring-fencing should be maintained. I would remind the Minister that, failing anything better, the Government are the scrutiniser in chief, and the buck stops with the Government. Will the Minister listen to Sir John and halt the slide towards deregulation in this country?

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, as noble Lords have recognised, the course of events over the weekend was a good outcome for the customers of Silicon Valley Bank in the UK and an example of the Bank of England, in consultation with the Treasury, using powers granted by the Banking Act 2009, as part of the post-crisis reforms, to safely manage the failure of a bank and, in this case, facilitate its sale, which has protected those customers and taxpayers. I add my thanks to both noble Lords’ to the officials in the Treasury and at the regulators who worked tirelessly through the weekend to grip the situation and prevent real jeopardy to hundreds of the UK’s most innovative companies.

The noble Lord, Lord Tunnicliffe, asked whether any assessment was made of the significant liquidity risks associated with SVB UK’s deposit base at the time its licence was granted. Those authorisation decisions are for the independent regulators to comment on. However, requiring SVB to subsidiarise meant that it was independently capitalised from its parent in the US and had its own liquidity buffers. That brought the firm into the scope of the UK’s resolution regime. Had SVB UK remained a branch, it would have been resolved by the US resolution authority as part of action taken with respect to SVB.

That distinction is important to make in relation to a few of the points from the noble Lord, Lord Fox, in looking at the potential differences between the regulation and the regime in the US and the regime in the UK. However, there is read-across between the two. That is why we have measures in place to ensure that banks that are of systemic risk to different jurisdictions have cross-jurisdiction oversight, and that regulators work together on these matters.

The noble Lord, Lord Tunnicliffe, also asked about the ring-fencing changes made to facilitate the sale. To ensure the sale could proceed, the Government used powers under the Banking Act to provide HSBC with an exemption to certain ring-fencing requirements. This was crucial to ensure that a successful transaction could be executed, that the bank had the liquidity it needs, and that deposits and public funds were protected. We broadened an existing exception in the ring-fencing regime, allowing HSBC’s ring-fenced bank to provide intragroup lending to SVB UK. This should facilitate the smooth operation of SVB UK. In addition, SVB UK, which is now a subsidiary of HSBC’s ring-fenced bank, is not subject to the ring-fencing rules.

Both noble Lords spoke about the importance of doing everything possible to ensure that there is confidence in the UK’s financial system. We absolutely agree with the importance of that, which is why the UK authorities took such swift and decisive action this weekend to facilitate the sale of the firm. The noble Lord, Lord Fox, noted how quickly events unfolded. It is certainly true that the timeline including the weekend gave the time and space for such a resolution to be found, but that only adds to the point about the speed at which these events can take place.

Both noble Lords also asked about the stress test system for banks and about launching a wider systemic review of the risks facing the financial sector, including non-bank risks. Of course, both noble Lords will know that that is the role of the Financial Policy Committee of the Bank of England, which is responsible for identifying, monitoring and addressing systemic risks to financial stability.

The FPC meets quarterly, following which a record of its discussions is published. It produces a biannual financial stability report setting out its assessment of the risks facing the financial system and its resilience. It looks at it for the non-banking sector, but also sets the scenarios and coverage used for stress tests within the banking sector. Those decisions remain with the Financial Policy Committee.

Both noble Lords also rightly pointed out that, while we reached a good resolution in this instance, it is of course right that we reflect on what happened and look at whether any lessons can be learned. I can confirm that the Treasury and the Bank of England are looking to work together to ensure that we reflect properly on the events in this case.

Finally, both noble Lords also referenced the reforms that we are currently taking through this House in the Financial Services and Markets Bill and through the wider Edinburgh reforms set out by the Chancellor in December. I assure all noble Lords that the Financial Services and Markets Bill introduces ambitious reforms for a financial services sector that will give the UK the ability to continue to grow and be internationally competitive with other markets, while adhering to the highest-quality regulatory standards. As my honourable friend the Economic Secretary to the Treasury said to the House of Commons yesterday, having good, healthy businesses that grow and are profitable is the best way to avoid jeopardy. The Bill and the Edinburgh reforms deliver that commitment. We are confident that our reforms will deliver a high-quality regulatory environment for our financial services sector in future.

[Lord Tunnicliffe (Lab)]

I know it is unconventional, but will the Minister advise us whether the lessons learned report is going to be published?

[Lord Fox (LD)]

The Minister is getting a job lot of questions. I was hoping to hear her say that the shift in danger has gone from being just about liquidity to being about a lot of things connected with interest rates. We saw that in the autumn and again this week. When I suggested that the Treasury talk to the Bank of England about stress tests, I was suggesting not that the Treasury did the stress testing but that we would all be much more comfortable if we knew that shift had been taken on board and would inculcate future stress tests.

Financial Services and Markets Bill

Lord Tunnicliffe Excerpts

Committee stage
Monday 13th March 2023 Grand Committee

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I rise to say a word in support of my noble friend Lord Sharkey. There are some more generalised and wider issues around this problem. We have the situation quite often—in fact, it is perhaps the norm nowadays—that whoever extends credit, whether for a mortgage or another thing, is not necessarily the same organisation that ends up holding it later on. It may be securitised, sliced, diced and sold on, or it may be sold on to a vulture fund because they are in trouble. The same sort of thing has happened with student loans, which have essentially been sold to vulture companies.

This raises the issue of what the Government’s terms are when they are doing the selling. I fully understand that they say they have to get the best value for the taxpayer, or whatever it is, but you cannot have value for the taxpayer at the cost of usury on a minority, and that is the situation that has arisen. It could impact on some with student loans, if the pressure to pay is different from how it was when the loans were elsewhere.

I have two questions. First, what are the Government going to do along the lines outlined by my noble friend to assist mortgage prisoners? More generally, what are they going to do when looking at mortgage terms that allow it to be sold on to anybody without any safeguards and other types of selling on, whether in distress or otherwise, that likewise essentially dispense with any kind of consumer credit or similar kinds of protections?

I am sure the Minister will recall that when we were talking about bounce-back loans and we had to dispense with some consumer credit protections, I warned that we might get bad behaviour as a consequence. This is part of the same picture and why we have such protections there in the first place, yet nowadays they are being seriously circumvented.

[Lord Tunnicliffe (Lab)]

My Lords, I do not come to this debate with a predetermined position but to listen and take a view after we have looked at the circumstances and listened to the Minister’s response. I would value a copy of the report that the noble Lord, Lord Sharkey, spoke about. I have a lot of sympathy for these individuals and note that their problems are undoubtedly exacerbated by—I do not know how to describe it—the Truss impact on loan rates in the UK, which must fall particularly heavily on those individuals. I await the Minister’s response.

[Lord Harlech (Con)]

My Lords, I thank the noble Lord, Lord Sharkey, for tabling this amendment, and all noble Lords for their contributions.

The Government have a great deal of sympathy for borrowers who are unable to switch their mortgage, and the Treasury has already worked extensively with regulators and industry to act where possible to support borrowers. For example, we have worked with the FCA to implement changes to its mortgage lending rules, removing the regulatory barrier that prevented some customers, who otherwise may have been able to switch, accessing new products.

However, we do not believe there are further practical and proportionate universal options than those already taken to reduce the rates paid by these consumers. Extensive work has been done to look into this issue, partly as a result of prior interest from this House, which has emphasised the complex and varied circumstances that consumers are in. Specifically, following commitments made during the passage of the Financial Services Act 2021, the Government worked with the FCA to conduct a report into mortgage prisoners, which was completed and laid before Parliament in November 2021. This report found that the vast majority of those with the 195,000 mortgages held by inactive firms are not mortgage prisoners, as they are already paying competitive rates for their circumstances or they would be able to switch if they took action to do so—if, of course, they met the risk appetite of active lenders, a point raised by my noble friend Lady Noakes. Others had different factors that might prevent them being able to switch, such as being close to the end of their mortgage term or having an account in arrears. The report found that only 47,000 were truly mortgage prisoners—that is, customers who are up to date with their mortgage payments and unable to switch to a new mortgage deal, but who could potentially benefit from lower rates if they were able to switch.

While I understand the difficulty that many of these customers are facing, capping the standard variable rates charged on mortgages with inactive lenders to help this limited group of customers would have significant implications for the wider mortgage market which cannot be ignored. Any action we take must also be fair to other borrowers in the active market, particularly those with similar characteristics and paying similar rates, who may be unable to access fixed-rate deals.

A cap for mortgage prisoners would therefore create an arbitrary division between one set of consumers and another. Capping rates would also restrict lenders’ ability to vary rates in line with market conditions—a key part of responsible lending. This is a material risk, which, as Ministers set out during the passage of the Financial Services Act 2021, could have financial stability implications. Those concerns were also raised by the London School of Economics in its November 2020 report on mortgage prisoners, which argued against the introduction of a standard variable rate cap. In view of these risks and the proportionate steps that the Government and the FCA have already taken to support mortgage prisoners, it is clear that an SVR cap is not an appropriate solution.

However, borrowers who have switched have seen significant savings. The FCA’s review found that take-up was affected by consumer inertia and limited lender risk appetite. Some 140,000 letters were sent to borrowers about the rule change, which resulted in only 700 calls to brokers.

The noble Lord, Lord Sharkey, raised the new report from the London School of Economics and Martin Lewis. The Government will of course carefully consider the proposals put forward in this report. I note that it recommends free, comprehensive financial advice for all, but I would like to provide reassurance that the Government are committed to helping people in financial difficulty. We recognise the important role that debt advice providers play in assisting people, including mortgage prisoners, who are in problem debt, especially with the increasing cost of living pressures that were raised by the noble Baroness, Lady Bennett.

This is why the Government have continued to maintain record levels of debt advice funding for the Money and Pensions Service, bringing its budget for free-to-client debt advice in England to more than £90 million this financial year. Furthermore, the Government have made a number of interventions, as a result of the financial crisis, to protect the economy and ordinary savers and businesses from the negative impacts of economic and financial instability. These include the interventions in Northern Rock and Bradford & Bingley, with their loan and mortgage assets ultimately held in the government-owned company UK Asset Resolution. It is right that the Government seek to achieve value for money for taxpayers as we exit the interventions made as a result of the financial crisis. The proceeds from these sales are not hypothecated and go towards supporting wider public finances.

The noble Baroness, Lady Bowles, sought to draw out the wider case of the Government selling on. I can say only that UK Asset Resolution sales met or exceeded best practice for customer protections. Firms had to agree to robust protections before their bids were considered. Inactive firms have and use a range of forbearance options for borrowers in payment difficulty, and many borrowers with inactive firms pay competitive rates.

However, the Government are consistently committed to looking for practical and proportionate options where they will deliver genuine benefits for affected mortgage borrowers, and where interventions are fair to borrowers in the active market and to taxpayers. In light of the request, we will be happy to facilitate a meeting with Treasury officials before Report. We will co-ordinate with Members’ offices to agree a time and place suitable for everyone.

While it is important that we do not create false hope, the Government will carefully consider the proposals from the LSE/Martin Lewis report. In light of this, I ask the noble Lord to withdraw this amendment.

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[Lord Tunnicliffe (Lab)]

My Lords, this group of amendments has a general direction which may be supported. It would be much better if the Government were to come forward with proposals in that general direction and improve the situation.

I, too, however, feel that there is some moral hazard. The extent to which victims are compensated draws attention from the fact that this is serious crime which, as I understand it, is growing exponentially. I hope that in looking after victims, which I am broadly in favour of, we massively increase our efforts to prevent fraud in the first place. I do not have a simple solution to that, but it is my understanding that the relationship between a preventive resource in the police and the banks is, compared to the general application to prevent crime, disproportionately low. More resource has to be put into combating this frightening industry. There is a sense of almost moral decay that allows this virulent industry to continue to grow. I hope that, while responding to the concerns of victims, there is also feedback to the Government as a whole that we must find a way to get on top of this very unpleasant crime.

[Baroness Penn (Con)]

My Lords, I recognise the keen interest across this Committee in the provisions in the Bill to tackle financial crime and fraud more generally, and, in this group of amendments, on tackling APP scams specifically and the related work of the Payment Systems Regulator to introduce mandatory reimbursement. The noble Baroness, Lady Bowles, said that she hoped that the sense of the amendments could be taken forward, or that the Government could provide reassurance to noble Lords that it will. I hope to be able to do so.

Measures in the Bill not only enable the Payment Systems Regulator to act on APP reimbursement regardless of the method of payment used, but also have a specific requirement mandating, within a specific timeframe, that they are taken forward under Faster Payments. We have sought within the Bill both to provide further powers for the regulator and to specify that it needs to act within a certain timeframe on the form of payments, which currently represents the largest form of fraud, not only by volume—97% of payments by volume—but by value. The figures I have are that Faster Payments account for approximately 85% of the value. The noble Lord and noble Baroness also mentioned CHAPS. That is the next highest in value, but it is about 4%, so it is right that we prioritise action on Faster Payments first. That does not rule out further action on other forms of payment further down the line.

I appreciate that we often have a debate on what needs to be in a Bill versus powers that, in this case, we are giving to the regulators to make rules. We have also heard during this debate about fraud how dynamic that situation can be, so enabling the regulator to update its response to approaching these questions through its rules is the right approach in this situation.

None the less, a lot of detail of the Payments Systems Regulator’s approach is in the public domain, and I hope it would reassure the noble Lord, Lord Vaux, on a number of his amendments that the approach being taken is consistent with many of the recommendations made by his committee. Indeed, having its proposals out for consultation on how mandatory reimbursement should work has provided an opportunity for all interested parties to comment.

Turning to the specifics in the amendments and hopefully updating the Committee on work that the PSR is taking in relation to each, I begin with Amendments 202 and 207, tabled by the noble Lord, Lord Vaux, on the scope of the requirement on the PSR to mandate reimbursement. As I have noted, under this legislation the PSR could act in relation to any designated payment system, but with a specify duty on Faster Payments which, as I said, accounts for 97% of scams by volume today. We expect the PSR to keep under review the case for action across other designated payment systems, in collaboration with the Bank of England and the FCA.

In relation to Amendment 204, on issues that the PSR should consider as part of its approach, I assure the Committee that the PSR has set out how it has considered these issues in its consultation. For example, as discussed, the PSR is proposing that the cost of liability is split equally between the sending and receiving banks, recognising that both parties have a responsibility in preventing fraud.

On Amendment 205 on the publication of data, the PSR is currently consulting on a measure to require payment service providers to report and publish fraud and reimbursement data. I was surprised to hear Green support for league tables. I did not know that they were supportive of them on schools, but in this case that data is important and the transparency we are talking about helps noble Lords keep track of how effective these provisions are once they are implemented.

Amendment 206 is on a duty to review. The PSR regularly reports on the discharge of its functions through its annual report and has committed in its consultation to a post-implementation review of its action on APP scams, to assess the overall impact of its measures for improving consumer outcomes. The Government will also monitor the impacts of the PSR’s action and consider the case for further action where necessary. While the Government recognise the intention behind the noble Lord’s amendments, we do not think it necessary or appropriate to further circumscribe the actions of the regulator in primary legislation at this stage, given the extensive consultation the PSR has undertaken on this matter and its responsibilities and expertise in this area as the independent regulator.

On Amendment 203, tabled by the noble Baroness, Lady Kramer, and spoken to by the noble Lord, Lord Sharkey, the Government’s intention, as already expressed in the legislation, is to ensure that more victims of APP scams across the Faster Payments system specifically, and wider payments systems in general, are reimbursed, and to enable the PSR to act in this area. The Government recognise that no one sets out to be defrauded and that APP scams are, by their very nature, convincing and sophisticated.

None the less, we also recognise that many banks take action to engage with their customers ahead of making a payment, and that questions of liability can be complex. As the noble Lord, Lord Vaux, set out, a blanket approach to mandatory reimbursement raises questions of moral hazard and the potential for APP reimbursement fraud itself to become an area of difficulty. This is a difficult balance to strike. While this amendment is well meaning, it will not help achieve effective resolution in these cases. We are confident that the PSR has the appropriate objectives, expertise and powers to develop proposals for APP scam reimbursement that both ensure strong protections for victims and incentivise banks to engage effectively with their customers to prevent fraud. In its consultation on its reimbursement approach, the PSR stated its intention to require firms sending payments over the Faster Payments system to fully reimburse all consumers who are victims of APP scams, with very limited exceptions. The PSR considers that this will ensure that victims are reimbursed in the vast majority of cases. In that regard, the PSR has already signalled its intention to set a high bar for customer liability—higher than currently applies within the existing code of voluntary reimbursement.

We do not believe that this amendment will improve outcomes for customers beyond the provisions already set out in the Bill, and it could impede the work of the regulator, which has already consulted on the proposals. I hope that noble Lords genuinely feel reassured by the level of detail in which the PSR and the Government have thought through these proposals, and acknowledge the ability to have a dynamic response in this area. I therefore hope the noble Lord can withdraw his amendment.

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This is quite capable of being solved, and I recommend urgent action to the Minister. This is quite capable of being done and put in place, and I strongly recommend that it is done as soon as possible, because it is causing very real harm among the Muslim community in this country, both students and those who wish to access finance for business, home loans or whatever.

[Lord Tunnicliffe (Lab)]

My Lords, there has been a series of powerful speeches. The Government really ought to react to this: either they believe what they have said they will do, or they do not. If they do believe in it, surely action could take place more quickly. The community concerned is now a very important part of our society, and it is crucial that we create an environment where its needs are taken seriously. It is particularly crucial that we do not create a situation where it is disadvantaged. I take the point about the gender issue, which is even more worrying, in many ways. I urge the Government to find some way of assuring us that they will act quickly.

[Lord Harlech (Con)]

My Lords, I thank the noble Lord, Lord Sharkey, for tabling this amendment on access to sharia-compliant financial services, including student finance. The UK is widely considered the leading western hub for Islamic finance. Institutions across the UK have been providing sharia-compliant retail and wholesale financial services for nearly 40 years, offering a range of products, including bank accounts, mortgages and insurance.

Last year, the Government expanded the scope of the alternative finance rules, which support equal treatment for sharia-compliant finance products, to include home-purchase plan providers and arrangements made through peer-to-peer platforms. This allowed for these products to be treated in the same way as conventional mortgages and loans for tax purposes, contributing to a level playing field for Islamic and conventional finance products. The Treasury is currently consulting on reform of the Consumer Credit Act, which will consider ways to make it easier to provide sharia-compliant consumer finance.

Within this context, the Government want to help ensure that higher education remains accessible to all those with the desire and ability to benefit from it. They remain committed to delivering an alternative student finance product compatible with Islamic finance principles and, more broadly, to ensuring equitable regulatory and tax treatment when compared to conventional finance. The Government legislated at the first opportunity to make a system of alternative student finance possible, taking the necessary powers in the Higher Education and Research Act 2017. However, a range of complex policy, legal and operational issues need to be resolved before a sharia-compatible product can be launched.

When noble Lords discussed this matter during consideration of the Financial Services Act 2021, my noble friend Lord True stated that the Government would provide an update alongside the Government’s response to the post-18 education funding review. As a result of that review, the Government have been progressing plans for introducing a lifelong loan entitlement, which will provide an individual entitlement equivalent to four years of post-18 education. This will significantly change the ways that students can access learning and financial support.

It is important that an alternative student finance product mirrors the mainstream student finance offer; therefore, it cannot be delivered until the LLE regulations and delivery specification are finalised. The Department for Education consulted on the LLE in February 2022 and sought views on barriers that learners might face in accessing their entitlement, including consideration of an ASF product. The Government’s response to that consultation was published last week; it provided an update on ASF and set out the Government’s aim to deliver an alternative student finance product as soon as possible after 2025.

Several Members, including the noble Lords, Lord Sharkey and Lord Tunnicliffe, and the noble Baronesses, Lady Sheehan and Lady Bennett, spoke about timespans—in particular, harking back to 2013. In September 2014, the Government published their consultation on a potential model that could form the basis of a new student finance product. The Government signalled in the consultation response that they would need to take new primary powers to enable the Secretary of State for Education to make alternative payments in addition to grants and loans. These were secured in the Higher Education and Research Act, which received Royal Assent in April 2017. Specialist consultants were appointed in October 2017 to provide advice on the range of issues that would need to be resolved for a new system of alternative student finance to be implemented.

Work has started to assess how the Department for Education can ultimately deliver an ASF product alongside the LLE. Our aim is that students will be able to access alternative student finance as soon as possible after 2025. The reason for that timespan is that a range of complex policy, legal and system issues will need to be resolved to launch an alternative student finance product. Most importantly, that includes procuring advice from experts in Islamic finance, who will be working with the Student Loans Company to better understand timescales for delivery of such a product. The Government are introducing the LLE, which will significantly change the ways students can access learning and financial support. The scale and complexity here should not be underestimated. The DfE is trying to replicate a system of student finance that delivers the same results as now and whereby students do not receive any advantage, or suffer any disadvantage, through applying for alternative student finance.

Furthermore, the ASF product will need to mirror the mainstream student finance offer to ensure that access to finance and the repayments expected from borrowers are the same. From the 2025-26 academic year, new students studying at level 6 seeking government financial support will do so using the Student Loans Company’s systems under new LLE regulations. The LLE regulations and delivery specification therefore need to be finalised before an ASF equivalent can be delivered. Finally, every “touch point” for students at the SLC—that is, marketing and information materials, application forms, online portals and correspondence—will need to be reviewed and modified to ensure sharia compliance.

The Department for Education is procuring advice from experts in Islamic finance to support delivery and planning of this product, and launched an expression of interest advertisement, which closed on 20 February, to understand the market capability to deliver this advice. The department is currently considering responses and next steps. The noble Lord, Lord Sharkey, raised the takaful. The advice will support the next phase of delivery of alternative student finance on the detailed design of an ASF takaful product, as part of the LLE, and on the delivery of ASF by the Student Loans Company.

In response to the request for a meeting, this is obviously something that will need to be done in joint consideration with the Department for Education. I cannot make promises for both departments but I will take the request back. As per the request in the previous group, I note that this would ideally be before Report.

I hope I have reassured noble Lords that the Government are committed to ensuring that sharia-compliant financial products are accessible. I therefore request that the noble Lord withdraws his amendment.

--- Later in debate ---

[Lord Jackson of Peterborough (Con)]

I will speak very briefly in support of the amendment moved by my noble friend Lord Moylan and those spoken to by my noble friend Lady Noakes. All noble Lords have spoken very well, and there is clearly consensus here. The specific issue here has trundled on for 10 years. I remember that when I served as treasurer of the 1922 Committee, this was an issue taken up by both the then chairman and, as mentioned by the noble Baroness, Lady Hayter, by Sir Charles Walker. I naively believed that we had resolved this issue by about 2017-18; obviously, that is not what happened.

This is about the limits of a permissive regulatory regime. It is clear that the Treasury and the regulatory bodies involved have not taken a blind bit of notice of the cross-party support in Parliament. This is not a niche issue that affects just us. In my case, I was affected because I was told by my mortgage provider that I was not going to be permitted to make mortgage payments, let alone make any withdrawals from a bank account. But this is also an issue of the civil liberties of our family members and extended family members. On that basis, we must take a very tough stance.

I come back to the particular point from the noble Baroness, Lady Bowles, about what we have the ability to do now that we are outside the EU—although my noble friend Lord Kirkhope is right that we must not recapitulate the arguments about Brexit. The noble Baroness’s point was astute, in that there is no proper risk analysis and risk assessment of all of these individual cases. A generic policy is applied across all individuals.

Frankly, let us be honest: the UK is one of the most open and transparent political systems in the western world. The noble Baroness, Lady Fox, is absolutely right that people are not attracted to public service if the fallback position is, “You’re a liar, a cheat, a crook and a thief if you go into public service”. It is important that, after 10 years, we make that appropriate point.

If we do not adopt my noble friend Lord Moylan’s rather benign amendment, a future Government may well take a much more draconian approach to this, both for the regulators and for the individual financial institutions. On that basis, they have a vested interest in sorting this situation out because, when the Financial Action Task Force proposals were published in 2012, they were not about asking people like the noble Baroness, Lady Hayter, to produce a premium bond certificate from 1957—I scarcely believe that it was 1957; I thought it might be a lot later.

This is an opportunity, and I hope that my noble friend the Minister makes, or at least commits to, those changes. This is not the first time that I have been compared to a brothel keeper—although that is normally in the other House—but my noble friend Lord Moylan makes a good point. This is an opportunity to right this wrong. This is not about us and it is not a niche issue: it is about civil liberties, decency, honesty, openness and transparency. We need action from Ministers on this.

[Lord Tunnicliffe (Lab)]

My Lords, after so many very good speeches, I will be short. My personal experiences vary wildly. I remember a four or five-page document for a credit card, and I remember the bank that most of my money is in ringing me up and saying, “What’s this extraordinarily large amount of money that has just come into your account?” I said, “You’re not going to believe this, but it is my son paying me back a loan”, which he had. I heard nothing more from the bank. That gives an insight into the disproportionate ways in which various institutions react to this, and much of the problem is in that behaviour.

Let us not get away from the problem: money laundering is serious. If you believe all of the thoughtful reports on it, it is serious in our City. It is absolutely valid that we take it very seriously. I understand from the professionals who regulate us that it is very subtle: a lot of it is done with seemingly innocent accounts moving relatively modest amounts of money in a highly managed way. It is a profession that is, sadly and unfortunately, probably absorbing some good brains in an evil trade.

One has to accept that getting the regulations right is very challenging. I take the general view I hear today that the regulations need further improvement. Clearly, that has to go in law. Therefore, I urge those who have put forward amendments to try to address the problem and put together a common amendment that may attract support across this House and the other place. Of course, it would be much better if the Minister came forward with her own solution.

We have to think about the other agents here: the banks and financial institutions. Sadly, they seem to work like many large institutions do. They take views about spending money and about their duties; frankly, all too often their duties are not to their customers. The moment a piece of complexity is built in, they end up with algorithmic solutions and basic statements that some algorithm has been offended here or there, and they take draconian solutions: they close or block accounts. This is absolutely unreasonable.

--- Later in debate ---

[Baroness Penn (Con)]

Okay—I was going to talk about the engagement that we have conducted so far and will continue.

My noble friend Lord Trenchard touched on my noble friend Lord Forsyth’s Amendment 234, but I am not sure whether anyone spoke to it specifically. In my response, I addressed the Committee’s desire to focus its attention on the statutory changes, and I am not sure we had a detailed discussion on the other proposals put forward here.

Noble Lords have made their position on the issue very clear. I hope that, to some extent, they have also heard the rationale for the Government’s approach and would agree with the desire to be in line with international standards in any action that we take in this area. As the noble Lord, Lord Tunnicliffe, said at the start of his remarks, we should bear in mind the context of the Government’s efforts, very much supported by this House—we are often pushed to go further by this House—in tackling issues of economic crime, which include money laundering. We have to recognise that London and the UK being such a centre for financial services, and the great benefits that that brings, also brings greater risks. It is right that we make sure that we have a regime that manages those risks as effectively as possible.

I shall write to noble Lords on the matters that I have mentioned, and any other matters in looking at this debate again, on which I can provide further clarity. I am sure that I will engage with noble Lords further on this issue ahead of Report.

[Lord Tunnicliffe (Lab)]

Would the Minister also engage with the banks and financial institutions to see whether they can improve their performance in being reasonable?

Financial Services and Markets Bill

Lord Tunnicliffe Excerpts

Committee stage
Tuesday 7th March 2023 Grand Committee

Finally, on Amendment 241A, I recognise that my noble friend Lady Altmann—I do not wish to embarrass her—is the most knowledgeable person in this House on the pensions industry. She is a great pioneer: some of the ideas that she has come up with have been very successful; others, frankly, were flyers that did not take off. I take this amendment seriously. I do not think it is constructed in the right way at the moment, but there is merit in it and it is well worth further work.

[Lord Tunnicliffe (Lab)]

My Lords, this is a cross-party group on the environment. It has no amendments led by Labour, but I have signed Amendment 199 in the name of the noble Lord, Lord Randall, on outlawing someone carrying out a regulated commercial activity that directly or indirectly supports deforestation risk commodities, unless relevant local laws are complied with.

I pay tribute to the noble Lord, Lord Randall, and thank Global Witness for its support on this amendment. My party is committed to securing the highest sustained growth in the G7. That means modernising our economy and financial regulation. We cannot deforest our way to sustainable growth nor a robust financial system.

Leaders across the City of London, along with BNP Paribas, Legal & General, Unilever and Tesco, are supportive of the measure proposed by the noble Lord, Lord Randall. Sir Ian Cheshire, former chair of Barclays and head of the Global Resource Initiative task force, has written to the Minister to remind the Government that the task force concluded its work in May 2022 by reiterating the need for new legislation to provide due diligence obligations for financial institutions equivalent to those that will be in place on supply chain companies under the Environment Act 2021. The Minister has previously argued that enhanced risk reporting eliminates the need for this amendment but the GRI task force has already rejected that argument. Sir Ian’s letter put this issue to bed when he wrote that risk reporting mechanisms, such as the task force on nature-related financial disclosure and voluntary net-zero pledges, are insufficient to prevent deforestation financing.

This expert backing and the desire of the British public to eliminate the scourge of deforestation are key reasons why this amendment has such considerable cross-party support. It would allow us to be global rule-makers, not rule-takers, when it comes to our financial system; I urge the Minister to take it seriously. Beyond Amendment 199, this group contains a lot of common-sense amendments that highlight the expertise of this Committee.

[Baroness Penn (Con)]

My Lords, I welcome this chance to continue this Committee’s important debate on amendments concerning green finance. As I stated in a previous Committee session, the Government are committed to fostering sustainable finance in the UK and will shortly publish an updated green finance strategy to that effect.

I will speak first to Amendment 168 from the noble Baroness, Lady Worthington. It is of course correct that all models have their limitations in depicting the real world but the Bank of England’s models have considered the views of experts in the field; they therefore do not need to be directed to do so. The scenarios used in the climate biennial exploratory scenario, or CBES, were formed by the Network for Greening the Financial System, an international network of central banks in which the Bank of England plays a prominent role. The scenarios have been produced in partnership with leading climate scientists, leveraging climate-economy models that have been widely used to inform policymakers—not to mention being used by and continuing to be used by the Intergovernmental Panel on Climate Change. These scenarios are updated continually by the Network for Greening the Financial System, which also ran a public survey welcoming feedback on its most recent iteration of climate scenarios.

It is also not the case that CBES is the PRA’s only tool to manage climate risk. It is actively using its position as a supervisor to ensure that firms are not materially undercapitalised for climate risks, setting out its expectations in its supervisory statement published in 2019. Furthermore, the PRA is an active member of two of the leading international standard setters: the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors. The Bank is actively participating in both forums to ensure that the regulatory frameworks for the banking and insurance sectors address potential gaps in the management of climate-related financial risks. This work will flow through to our domestic framework and at the same time ensure international co-operation on what is fundamentally a global issue.

I now turn to Amendment 199 in the name of my noble friend Lord Randall of Uxbridge, which is supported by other noble Lords in this Committee. The Government agree that the financing of illegal deforestation is a serious global issue that must be tackled. However, this amendment would involve implementing a new and untested regulation that would impose a broad supply chain rule on all regulated financial services firms. It would currently be very difficult, time-consuming and expensive for UK financial services firms to ascertain whether firms or products that they invest in are exposed to forest risk commodities in compliance with local laws.

In introducing this amendment, the noble Baroness, Lady Boycott, referred to the provisions in the Environment Act 2021. These provisions will apply to the supply chains of large UK corporates. However, UK-based banks and fund managers engage in lending and investment activities with companies in jurisdictions across the globe, not just commercial activity in the UK. There are currently no consistent, equivalent disclosure requirements to those that will be set out under the Environment Act 2021 in jurisdictions across the globe. Given that, capturing the activity of all of their customers and supply chains would not be as simple as adding an extra stage of disclosure to the regime set out in the Environment Act 2021, as had been suggested. However, I assure noble Lords that the Government are committed to addressing this issue and will work with the financial services sector and those with expertise in tackling deforestation to consider how we can make further progress.

--- Later in debate ---

[Baroness Lawlor (Con)]

I thank the noble Lord for his intervention. I do not have an answer—I am sorry to disappoint the noble Lord—but this Bill is not the place for that. Its aims and purposes are to make the UK sector more nimble and competitive internationally so that it can move ahead in a post-Brexit world and we can all benefit from a successful financial sector. Putting caveats, restrictions and obligations on a sector can add costs to customers, consumers and all who use these services. However, I think that that is a good aim and is good to do. We should have a special committee to see how we can encourage use, short of using the law as a big stick on one sector of providers. There are many ways that have opened up in the market that are already providing use, which I can discuss later.

[Lord Tunnicliffe (Lab)]

My Lords, this is a key group for the Labour Party politically; it contains four of our amendments. Amendment 180 would require His Majesty’s Treasury and the FCA to publish a review of the need for

“access to essential in-person banking services”

and to ensure

“a minimum level of access”

to them.

Amendment 181 would require HMT to

“publish a policy statement setting out its policies in relation to the provision of essential in-person banking services, including … support for online banking, and maximum distances people can expect to travel to access services.”

I would be interested to know the Minister’s view on the reasonable distance for an elderly or disabled customer to have to travel to speak to someone from their bank.

Amendment 182 is perhaps the most important. It would compel HMT to

“guarantee a minimum level of access to free of charge cash access”.

Amendment 184 would require the FCA to

“monitor and report on levels of cash acceptance across the UK.”

I set out the crucial importance of free access to cash at Second Reading so I will not do so at length a second time; well, that is what it says here. Nobody has more interest in being speedy than me, or perhaps the Minister, because we have to be here for every minute of this Committee. We are almost in our 27th hour but this group is different from anything else that we have discussed. The rest of it—I cannot think of a polite way of putting it—is about activity that takes place for people like us. Quite a number of people work in the finance industry; we are looking at the nuances of it and how politicians should be involved.

However, the issue of cash is about our society. It is about the poorest and least competent people in our society. Technology has been a substantial disruptor. It is a disruptor that particularly applies to finance. It has allowed financial transactions to become extraordinarily efficient and has created a whole new customer base of people who are comfortable with technology. They have access to a whole new marketplace. We know that the dynamics of that have probably been benign for society.

However, the other problem is that it has created a divide in our society. I ran an organisation that used to have a lot of cash; I am all too familiar with the tremendous impact of approaching a cashless society. In all the knowledge in the world, the last bits are the most expensive bits. Yes, the cost of transactions goes up and so on and so forth, but we cannot afford to create the divide in our society that is emerging. We must support all parts of our society seriously. We must recognise that, in their lives, people sometimes need all banking services. We must recognise that some people simply cannot envisage how to budget without physically seeing it in separate pots. It is clearly a natural reaction if you are running out of money. You can see it there and have confidence because you know that, if you go into the grey world of accounts, banks, overdrafts, loans and things like that, all sorts of horrible things happen. For that group in society—it is probably 10% of our society so it is a substantial number of people—we must find a way of maintaining the public service. We must achieve a minimum service.

The noble Lord, Lord Blackwell, said what all providers of service say: if you are not ultra-efficient, you load the inefficiency costs on to other customers. It so happens that being ultra-efficient does not do much harm to your profit line either. Big businesses such as banks pursue the maximisation of shareholder value. It is in the law. They are supposed to do it, for Christ’s sake. We should not be surprised when they do but I rarely see them turning into charities. We have got to find ways. We do not have to keep all the branches open; even I can work that out. We have to be much more inventive in how we service this need, which is still large, but the way we must do that is by creating duties on the purveyors of financial services as well as rights and constraints.

It is proper for the law to create duties to look after the poorer members of our society. That is why so many people have said that it is important for a variety of needs—resilience and so on—that we maintain it. The banks must play their part. They have enjoyed massive exploitation—I do not use that in a pejorative sense—of information technology, probably more so than any other section of our society. They must recognise that there has to be a cross-subsidy in this situation because we must restore financial equity to all our society.

[Baroness Penn (Con)]

My Lords, as we have heard in this debate, the nature of banking is changing. In 2021, 72% of people banked online, and 57% on their mobile phones. Meanwhile, 85% of payments were made without cash, up from 45% a decade earlier, and 86% of UK adults used contactless payments.

[Lord Tunnicliffe (Lab)]

Were 85% of the number of payments made without cash, or was it 85% of the value of payments?

[Baroness Penn (Con)]

I will check for the noble Lord because I do not have that level of detail in my notes. They say that “85% of payments” were made without cash, not “the value of payments”, but I should double-check to clarify for him.

In the light of these innovations in the way that we bank, the Government recognise that it is incredibly important that people are not left behind—we have heard that in today’s debate. Many people still rely on physical services: in particular, millions of people still rely on cash and need access to withdrawal and deposit services.

Working with industry, the Government are already undertaking positive action to support cash access in this context. For example, existing initiatives subsidise free-to-use ATMs in remote and deprived areas. Following changes in the Financial Services Act 2021, there is a new ability to have cashback without purchase services, enabling withdrawals to the penny that people request. Communities can ask LINK to assess whether additional cash services are needed, with several major banks and building societies funding new shared services. As a result of that initiative, over 70 communities are due to get new cash deposit facilities.

In that context, it is important not to underestimate the significance of the provisions contained in the Bill. It is the first time, in UK law, that we are protecting people’s ability to access cash. The Bill provides the FCA, as the independent regulator, with the responsibility and necessary powers to ensure reasonable provision of withdrawal and deposit services.

In evidence to Parliament, the regulator said that it anticipates taking account of reasonable access to free cash services for personal customers—subject to due process, which includes a requirement to consult on its rules. In using its powers, the FCA will utilise the wealth of data that it has collected, including on access at the regional level, and it must have regard to local deficiencies in cash access services and the Government’s policy statement.

The noble Baroness, Lady Tyler, asked about the policy statement. It is currently being developed, and we expect it to be published after the Bill completes its passage. It is important that it takes into account the latest available data and evidence ahead of its publication.

I have clarification for the noble Lord, Lord Tunnicliffe, on the statistic that I used, so I shall not need to write. I can confirm that 85% of the number, not the value, of payments were made without cash.

Financial Services and Markets Bill

Lord Tunnicliffe Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

I strongly support the amendments by the noble Lord, Lord Bridges, and I hope the Minister will take note of that. For all the intent—because I am sure there is some good intent behind the amendments by the noble Lord, Lord Lilley—I just do not see that they work. I do not see that something applied to the construction industry, which is pretty static, is at all applicable to an intensively, minutely supervised industry such as financial services—and anyway, we got Grenfell.

[Lord Tunnicliffe (Lab)]

My Lords, the most important thing to have come out of this debate, which is now in its fifth or sixth day—frankly, I have lost count—is that the regulatory environment lacks sufficient parliamentary scrutiny; there is enormous consensus about that idea. We have heard several solutions. At least three groups have touched on this issue, and I hope this is the last group to do so. I will go as far as saying that it is an interesting idea. I say that in the sense that I am representing His Majesty’s loyal Opposition, and at the moment we have some concerns about resource consumption, et cetera.

However, if we take all the ideas together, I am convinced that they can be moulded into an important step forward in involving Parliament, and involving sufficient resource to make that involvement effective. We should set about trying to do that. The noble Lord, Lord Turnbull, said this more elegantly than I will, but if you toss a bunch of amendments together and hope that they are internally consistent and capable of execution, you are kidding yourself. I fear that that is where we are at the moment. If we were to vote on all the amendments we have had over the last five days or so, that would not work.

What should happen now—it will be interesting to see whether it does, and I shall do all I can to encourage it—is that cross-party discussions take place, focused on taking the best ideas and putting them together in a way that will work and will have support. This has to be a coalition that is irresistible in the parliamentary process, and that is possible. When you look at that lot over there, this lot here and us, that is a hell of a force for the Government to try to ignore, so I hope we can find ways of bringing us together. I hope the Minister will want to join in that process at some point and will want to see whether we can achieve a consensus with the Government. I strongly advise her today not to close off options. Options have to be open to try to move into this area.

There seems to be a secondary area, which I will loosely call the Lilley area, about legal involvement. I clearly do not understand enough of what this is about; I suspect a lot of people do not. There is confusion and, from what I have heard experts say, it is a dangerous confusion. We should stick to that central issue of parliamentary scrutiny, properly supported to be effective—and the time has come.

Some of us slogged through a Bill, about a year and a half or two years ago—I am losing track of time—where we worked quite hard on this and made very little progress, as we got rid of all the EU rules and then put all the stuff in the hands of the regulators. Many of us felt uncomfortable that there was not more scrutiny, but we did not really come up with a solution. Clearly, we are in a solution-rich environment now; the trick is to bring it together into a solution that will work, and it must be done now. This is the last legislative opportunity, in my view, that we will see for some time, so I hope that cross-party discussions take place and that we can take a real step forward for the industry and for democracy.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I thank my noble friends Lord Bridges of Headley and Lord Lilley for tabling these amendments, and for their contributions to this discussion.

I will speak first to Amendments 160 to 166, tabled by my noble friend Lord Bridges. The Government agree, and have been clear, that more responsibility for the regulators should be balanced with clear accountability, appropriate democratic input and transparent oversight. The proposed creation of a new regulatory body to oversee the regulators—a so-called regulator of the regulators, although I know that my noble friend set out why he thought that term did not apply—raises further questions about how the accountability structures for the various regulatory bodies would operate. The Government would need to carefully consider how to ensure clear accountability to both government and Parliament under such a model.

The noble Lord, Lord Hunt, talked—it feels a long time ago—about the need for greater clarity on where accountability lies in this system. I am not sure whether it is clear that the addition of a further body to the system would provide greater clarity on where accountability lies.

Tax Credits, Child Benefit and Guardian’s Allowance Up-rating Regulations 2023

Lord Tunnicliffe Excerpts

Wednesday 22nd February 2023 Grand Committee

[Baroness Lister of Burtersett (Lab)]

My Lords, I wish to speak to the child benefit uprating regulations, which of course I welcome, as there had been fears that the Government would resile from the convention that the benefit should be uprated in line with inflation. Before we get carried away, however, it is important to remember that even after this increase, child benefit will be worth over 16% less than it was in 2010, due to its having been cut and frozen. Do the Government ever intend to make good that cut, the product of austerity policy, which disproportionately hit children in a number of ways?

Earlier this month in the Commons, the Financial Secretary to the Treasury emphasised that

“Child benefit is an incredibly important form of state assistance”.—[Official Report, Commons, 2/2/23; col. 200WH.]


Last year, in your Lordships’ House the noble Viscount, Lord Younger of Leckie, stated

“Child benefit ensures that families receive predictable, consistent support from the Government for the additional costs of raising a child”


and went on to say

“the Government are committed to making the benefit system simple and navigable for claimants. Child benefit is therefore a simple and well-understood benefit, paid at a consistent flat rate to parents”.—[Official Report, 8/7/22; cols. 1213-14.]

That is certainly true in theory, and was so in practice in the past, but try telling that today to those caught by the high-income child benefit charge which passed—I will not say celebrated—its 10th birthday last month. That 10th birthday was marked by highly critical pieces in the Sunday Times and the Telegraph, the latter referring to the charge’s bizarre rules. I resist the temptation to make the case against the charge in principle, other than to remind noble Lords that it is not only a parent’s child benefit that can be at stake but their pension credit, if they do not claim child benefit because of the charge.

Instead, I want to focus on the fact that the £50,000 to £60,000 income band, above which child benefit is withdrawn, is exactly the same in cash terms as it was when introduced 10 years ago. According to the Resolution Foundation, the recent note of which I am drawing on, if uprated in line with CPI the figures today would be £64,000 and £77,000. This total freeze in the threshold has serious, and in some cases bizarre, consequences.

The Resolution Foundation estimates that

“around 2 million families, or 1-in-4 … of those with children, will have some Child Benefit effectively partially or fully withdrawn because one person has an income over £50,000”.

This compares to one in eight when the charge was introduced 10 years ago. In other words, the proportion of those with children affected has doubled. It estimates that one in 13 families—that is 600,000—has someone earning between £50,270 and £60,000, and thus experience high marginal tax rates of 55% for one child, 63% for two children, and 71% for three children, with a further eight percentage points for each additional child.

The Resolution Foundation describes

“a relatively small, but rapidly rising, number of families”

who are in the bizarre position of being entitled to universal credit while also having their child benefit withdrawn. It argues that the result is

“truly punitive marginal deduction rates”

of 80% for those with one child, 83% for those with two children and 87% for those with three. In practice, the rates could be even higher, but I will spare noble Lords the additional complications.

UC recipients affected are likely to have high rents or childcare costs. In the absence of official figures, the foundation estimates that, from April, roughly 50,000 families will fall into the child benefit charge/UC trap, and that there could be 90,000 by the end of the decade. Can the Minister confirm these estimates, and say how the Government justify this state of affairs? Is the Resolution Foundation correct to say that the charge thresholds are currently set to be “frozen forever”, given that there is no statutory obligation even to review them? Will she take back to the Treasury the message that it is high time they were reviewed, even in the absence of such a statutory obligation?

The Resolution Foundation rightly describes this as “a serious design flaw”, and argues that

“no rational policy maker would ever have drawn up the current system”.

It warns:

“Unless we are to accept that ever-more families will face a £10,000 stretch of income where there is no point in seeking higher earnings, the Government will have to fix this situation”.


Not to do so, it suggests, is “unserious”.

I cannot believe that a Government who care so much about incentives and marginal tax rates are willing to countenance the continuation of a situation that can only get worse at the expense of a growing number of families with children. At the very least, the Chancellor should announce a rise in the thresholds in next month’s Budget.

[Lord Tunnicliffe (Lab)]

My Lords, I too thank the Minister for setting out these two instruments. I also thank my noble friend Lady Lister for her attention to the detail of these matters and to the ease with which an apparently rational change can compound itself through the complexity of the rules into extremely unhelpful marginal tax rates. I hope the Minister will give her some comfort that there will be some review in the foreseeable future of the very high marginal tax rates emanating from these complex rules.

The Minister outlined an increase in tax credits, child benefit and guardian’s allowance of 10.1%—that is, CPI inflation between September 2021 and September 2022. While acknowledging that further instruments are to come on other social security benefits, I will make some general points about the current economic context and the Government’s approach.

Families across the country have faced an incredibly difficult time of late, with household bills climbing significantly. Although there has been energy support for low-income households, there has not been equivalent help as they face soaring food, phone and broadband bills. Food inflation has been running at far higher than 10% for many months, leading many households to cut back and to a worrying number of parents skipping meals to provide for their children.

The Government’s reluctance to commit to the usual uprating process when asked has caused a significant amount of anxiety for social security claimants across the country. For months, successive Prime Ministers and Chancellors—we have had many of each—ducked the question and even floated alternatives such as lower percentage increases or lump-sum payments. We are glad that the current Chancellor finally did the right thing, but I hope the Minister will acknowledge that months of indecision were not helpful for household planning or people’s mental health.

The second instrument gives effect to the annual re-rating of national insurance contribution rates, limits and thresholds. Although the Autumn Statement fixed many of those rates limits and thresholds at the 2022-23 level, some of them—class 2 and class 3 contributions—were increased by 10.1%. This will bring tens of thousands of individuals into national insurance by the 2027-28 tax year. However, the Government have not been prepared to specify what the practical impact will be. The statutory instrument’s Explanatory Memorandum refers to a small tax increase in cash terms but, with household budgets as stretched as they are, any increase is likely to cause concern. This was the subject of a debate in another place, but Minister Atkins was unable to provide a figure. Can the Minister do so today?

We do not oppose these measures, so I will not detain the Committee any longer. However, once again, I hope that the Minister will acknowledge that the Government could have provided certainty sooner. Let us hope that they do better later this year.

[Baroness Penn (Con)]

My Lords, I thank both noble Lords for their contributions to today’s debate.

I am glad that the noble Baroness, Lady Lister, recognised the significant uprating of child benefit brought forward in these regulations. I note her point about the overall value of child benefit if you look at it over a longer time period. Child benefit is one of many ways in which the Government support families with children. Over the same period, we have introduced other significant measures, such as free school meals for infants and 30 hours of free childcare.

On the figures and analysis that the noble Baroness brought forward on the child benefit high-income charge, I am afraid that I cannot confirm them as they go beyond the scope of the regulations we are discussing, but I will take her comments back to the Treasury and ensure that they are considered properly.

Financial Services and Markets Bill

Lord Tunnicliffe Excerpts

Committee stage
Monday 20th February 2023 Grand Committee

[Baroness Noakes (Con)]

My Lords, I support Clause 27 and, in particular, its new Clause 3RC of FSMA, which allows the Treasury to require the regulators to review their rules. As the noble Baroness, Lady Bowles of Berkhamsted, said, I have added my name to her Amendment 78 because it is important to widen out the scope of the reviews which the regulators will have to carry out. I also support her Amendment 145 for the same reason and should have added my name to it as well, so that we cover both the PRA and the FCA.

A lot of the things that regulators do are grounded in the specific rules that they apply, which is the focus of new Clause 3RC, but it should also be possible for the Treasury to tell the regulators to review, for example, the cumulative impact of rules as they affect innovation or new market entrants or any particular segments of the financial services industry. The Bill as drafted simply does not give the Treasury that power.

My Amendment 79A in this group seeks to involve more parties in the review-initiation process. At the moment, it involves only the Treasury and the regulators. My amendment is designed for other voices to be heard and responded to by the Treasury; it would require the Treasury to “consider any representations made” by various sources. I have included all the statutory panels attached to the regulators, including those created by the Bill. These panels ought to have good insights into how the rules work in practice and their opinions on which should be reviewed should be heard, so my amendment says that the Treasury must consider representations from representative bodies, which would include all trade and consumer bodies involved in the sector.

My noble friend the Minister may well say that the Treasury will of course consider any representations made to it in respect of the review of rules and that it is quite unnecessary to put that into statute. I accept that, but only up to a point. The relationship between regulators and their sponsoring departments is often much too close and certainly has the potential to shut out anything that might be uncomfortable for either the regulators or the sponsoring department, or both. That is why the second leg of my amendment requires the Treasury to “inform the body” making the representations if it decides not to require a review.

I do not believe there should be any power for outside bodies to tell the Treasury what it should do, but there needs to be something to counteract the imbalance of power that the Treasury has. Transparency is often the best remedy and it is, in effect, what I propose in my amendment by requiring the Treasury to respond with reasons for not pursuing a particular review. If Ministers do not like the idea of transparency by the Treasury, my noble friend will need to be very persuasive when winding up this debate.

[Lord Tunnicliffe (Lab)]

My Lords, I will not make any specific comments on this group but I will comment on all that we are doing today—certainly the first three groups, all of which seem to me to have a common theme: the accountability of the Executive to Parliament. The degree of consensus between the amendments is almost historic. I said to my researcher, “I think I am in support of all today’s amendments.” She said, “You mean other than ours?”

[Noble Lords]

Oh!

[Lord Tunnicliffe (Lab)]

I will not get carried away—I will probably declare neutrality and opt out—but this issue is so important. I suspect that this Bill is much more constitutional than we expected when we first picked up the document. It is about filling in the space between primary legislation and secondary legislation in all these difficult areas relating to financial services. Members of the Committee have done a great job of putting together a series of proposals.

As far I can see, the proposals in this grouping are to use, in different ways, the age-old device of requiring reports. I can see the value of that. My own experience is that, because time goes on, they are not as effective as one might hope; however, once again, that is down to the membership of Parliament in particular. I support the general thrust of this group but I see it as part of our looking at the first three groups and, with or without the Government’s co-operation, working together after the end of Committee and before Report to try to achieve a common thrust that, if necessary, we can vote through in order to make the important step forward in the relationship between the Executive and Parliament that is so needed.

[Lord Harlech (Con)]

My Lords, the Government agree that the regular review of rules after implementation is essential to ensure that they remain appropriate and continue to have the desired effect.

The Bill makes a number of substantial changes to the regulators’ framework to ensure that such reviews will be an integral part of the regulators’ functions going forward. In particular, Clause 27 inserts a new provision into FSMA that will require the FCA and the PRA to keep their rules under review. To supplement this duty and ensure that there is a mechanism to require the regulators to conduct reviews of their existing rules where needed, Clause 27 also inserts a new power into FSMA for the Treasury to direct the regulators to review their rules where the Treasury considers it is in the public interest. Clause 46 inserts similar provisions into FSMA for the Bank of England in relation to its regulation of CCPs and CSDs.

I will speak first to Amendments 78 and 145 in the name of the noble Baroness, Lady Bowles. I assure her that the powers inserted into FSMA by Clauses 27 and 46 of this Bill already allow the Treasury to require these regulators to review a range of rules, entire regimes and interrelated rules, as appropriate, where that is in the public interest.

I turn next to Amendments 79 and 146, also in the name of the noble Baroness, Lady Bowles. In order for the Treasury to direct the regulators to review their rules, certain criteria must be met. One of the key criteria is that the Treasury considers the review of the rule or rules in question to be in the public interest. It will be important for the Treasury to work with parliamentary committees to understand the evidence base for whether it is in the public interest to exercise the power.

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[Lord Sharkey (LD)]

My Lords, I strongly support the amendment in the name of the noble Baroness, Lady Noakes, and observe that the Government have said, more or less consistently, that it is for Parliament to decide what form of scrutiny it requires. This acknowledges the importance of the issue. This is Parliament, and the amendment sets out a clear way ahead to establish parliamentary oversight. If the Government mean what they say, they will not oppose these amendments. They might join in a constructive discussion of how to make them better, but they will not oppose these amendments if they are to be at all consistent.

It is worth noting, though, that accountability and scrutiny are not quite the same. Even if we were to pass the amendments in the name of the noble Baroness, Lady Noakes, we would need to take a closer look at the delegated powers mechanisms that the Bill contains. As things stand, Parliament will have no meaningful say in whatever the new rules may be. Unless I have misunderstood, the proposed financial services regulators review committee will not be able to intervene as the new rules become law. We will need to think about that carefully as we make progress with the Bill.

[Lord Tunnicliffe (Lab)]

Can I say a couple of words about regulation and regulators? This is usually a political divide and I am proud to be on my side of it. I believe that society is the richer for good regulation; I am against bad regulation but in favour of good regulation. When one has good regulation, the problem is often that it is poorly executed. These financial regulators do the execution, so processes to hold them better to account have to be a good thing. That may include the distasteful fact—it may or may not emerge—that they are underresourced. Certainly, this sort of debate will bring out those sorts of issues.

I have to be careful here, but my general view is that this is really a rather good group. I shall consider it carefully and discuss it with colleagues across the House between now and Report to decide on the extent to which we will support it. I strongly recommend that the Minister does as asked and enters discussions with us, to see how much of this can be agreed and included in the Bill. We had a similar tussle two years ago when we did a big chunk of this and tried to draw in the regulators more. The regulators put down on paper that they were willing to talk to us more. The problem was that we did not have mechanisms in the House to take advantage of that. This would be a game-changer, by breaking through into that area and creating processes to have proper accountability and scrutiny—supervision is the wrong term—of these enormously powerful regulators, which are vital to the success of our financial markets, in terms of both opportunities and appropriate restraint to avoid catastrophes.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, I strongly support the proposals for a Joint Committee. As ever, the noble Baroness, Lady Noakes, has researched this well. I know she has been looking at it for a long time, because we talked about it back when we debated the 2021 Bill. I commend the thoroughness with which she has done that. I also welcome the amendment by the noble Baroness, Lady Lawlor. One thing about that proposal is that it would be slightly larger at 12 members, instead of nine. It is a different committee, as has been explained. I have done this kind of scrutiny and we really need to think what volume of it there will be—especially now, post Brexit.

After the financial crisis, when I was chair of ECON in the European Parliament, we did 40 pieces of major financial services legislation—directives or, if that Parliament wanted them to be more direct, regulations. That is a huge number, and the volume of rules that came out from them is even more huge. It is an enormous task for the regulators doing those rules and for those who have to scrutinise them. My committee, which did that scrutiny work in the European Parliament, had the advantage of doing the legislative side first and then moving on to the rules. Nevertheless, it had some 60 members so could specialise in small groups, rather as we do with a Committee of the whole House; we self-select a group. Some people would do banking, some would do funds and some insurance. There would be a happy band, probably only five or six, who developed extra expertise in the self-selecting sub-committees. Of course, within that idea of self-selection, you could run parallel informal sessions at the same time.

With our small committees, we will not have the ability to do that. There is no way we can emulate it, as we have already said. Nevertheless, we should think about the size of the committee we might want. I thought having 12 was better than nine, but maybe the number has to be odd. If you go to 13, that is not a happy number so let us up it to 15. Maybe that is as far as we can push it.

I think that a lot of the work of such committees will not be everyone wanting to get in on questioning somebody. An awful lot of such work is an awful, dreadful grind of going through document after document, and documents explaining the documents, then asking somebody what the hell it all means anyway. That is time-consuming. We should have a few more people concentrating on that, maybe with the opportunity to specialise. If we rotate the committee membership frequently we might lose that expertise, although in this House at least we do not seem short of people who can turn their minds to these kinds of things. I know that that is more of a comment, but maybe we can bear it in mind as we debate among ourselves what we will do on Report.

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[Baroness Bowles of Berkhamsted (LD)]

My Lords, I have two rather modest amendments in this group. They are again part of my drawing attention to the fact that there needs to be accountability to Parliament. All they would do is insert that, when a regulator does its consultation and is giving the notification to Parliament, it should mention and draw attention to the fact that issues have been covered by a parliamentary report. I know that the regulator will already have responded to a parliamentary report but it might have been some time sooner.

This is a relevant issue. Any sensible regulator would probably make the comment anyway but that does not mean you cannot put little pieces into legislation here and there that just remind people of the status of parliamentary reports. That is what these two amendments would do, with one for the FCA and one for the PRA. When those notifications come to Parliament, they would have to indicate when they have been covered by a parliamentary report. They would not have to say that they agree with it; one presumes that they would comment on it.

I will not say anything more about the scrutiny—I have said a lot already—other than that I basically agree with everything that everybody has said. We are all agreeing with one another. When the Minister has meetings to work out what concessions can perhaps be made, they will have to be substantial, not a little tweak. They will have to recognise the importance and magnitude of financial services—including the great power that they have, as has been said—and move towards what must be great accountability to measure up to that great power.

[Lord Tunnicliffe (Lab)]

My Lords, I hope I will be forgiven for not going through my various amendments. Their essence seems to be in the general direction of this group of amendments and I think it highly likely that, between now and Report, the supporters of this group will knock together a cohesive set of amendments to achieve our common objective. I know that the noble Lord, Lord Forsyth, finds it painful but we are agreeing with each other on this group.

One of the problems of society is that people grow old in waves. We are already running out of people who have forgotten about the last financial crisis. It was by a hair’s breadth that the economic system in the world did not fail. It took some brave decisions, in this country in particular and in the United States, to save the world from an economic catastrophe. This is different from the Intelligence and Security Committee but in no way is it less important. It is crucial to this nation.

We are suggesting that we in this House should be a backstop. That is not particularly surprising because that is what we do all the time. When the Government do not have a working majority, I believe that they are much more alert to what happens in this House because, suddenly, they are all there, they have their majority, they have got something through the House of Commons but then it runs into the Lords and new questions are asked. People spend a lot of time worrying about particular points. Yes, our role is a backstop, but we could not be one as the Bill is drafted at the moment because it sees two levels: the House of Commons level and the House of Lords level. This Bill brings us into parity of access. It is not nearly as comprehensive as the proposal from the noble Baroness, Lady Noakes, but it is a basic matter of equity to bring this on to a level playing field.

My next point concerns the issue of volume. The volumes will be very significant. One of the best things that the House of Lords does is its committees, where people actually put the time in. I really am quite pleased that I avoided becoming an MP. I only aspired to it before I knew what it was all about. Once you are an MP—I hope that ex-MPs will interrupt me if I am wrong—the first thing it is all about is getting re-elected. That requires a lot of work in the constituency and all that sort of thing. That is all part of the democratic process but the volumes need the sort of people who are in this House—as the noble Baroness, Lady Bowles, said, they almost self-select—to put the effort and energy in.

Scrutiny is not a negative process. Too often, in the way we run bits of society, it is a single heroic leader passing down the rules, but very good organisations encourage dissent in their top teams—not external dissent but internal dissent where people ask, “Do you really mean that? Have you thought through the consequences of that?” The effect of those processes is extremely benign. Either things get changed for the better or people understand what they are saying better and are able to present it better. Scrutiny is an extremely positive thing.

The mood that has got us here today has been around for years, I would say. We need a discontinuity; this group of amendments is the minimum discontinuity that I believe this House will tolerate. We will all be working across the House over the coming weeks to put together something that cannot be resisted. I hope that the Minister does not floor us by coming forward us early on in discussions with some sensible concessions to embrace the direction of this group.

[Baroness Penn (Con)]

My Lords, first, I will briefly speak to the government amendment in my name in this group—I feel I should—before turning to the substantive measures raised by the debate.

Amendment 151 corrects a minor drafting error in Schedule 7 to the Bill. The current drafting requires the PSR, when notifying the Treasury Select Committee of consultations, to set out how the proposals are compatible with the regulatory principles. However, the Financial Services (Banking Reform) Act 2013, which established the PSR, requires it to have regard to its regulatory principles. The Government are therefore bringing forward this amendment to Schedule 7 to align this Bill with that Act. The amendment also aligns the requirements on the PSR with those imposed on the FCA and the PRA through Clause 36 of the Bill.

I turn to the amendments tabled by my noble friend Lord Forsyth and the noble Lord, Lord Tunnicliffe. Through FSMA and, in respect of the PSR, as I just noted, FSBRA 2013, Parliament sets the regulators’ objectives and gives them the appropriate powers to pursue those objectives. I therefore agree with this Committee that Parliament has a unique and special role in relation to the scrutiny of the FCA, the PRA, the PSR and the Bank of England.

I also agree that effective parliamentary scrutiny provides a valuable service for consumers, firms and the regulators themselves. It can help ensure that the regulators’ resources are appropriately targeted to consider appropriate democratic policy input from Parliament and bring important public policy considerations into focus.

I recognise noble Lords’ point that regulators in this sector are in a somewhat unique position and the approach that we take to financial services regulation is somewhat unique in the level of delegation that we give regulators in their rule-making. The Government’s approach, through our FRF consultations and this Bill, is an attempt to recognise that somewhat unique position and role of regulators in this sector, their wide remits and their position as independent public bodies that are accountable to Parliament.

As I mentioned in the debate on the previous group, I will set out the rationale for the Government’s approach in the Bill and our consultations. Our intention is to ensure through the Bill that the Treasury Select Committee has access to the information needed to best scrutinise the work of the regulators. The requirements for the regulators to notify the TSC in Clause 36, and the PSR in Schedule 7, are in line with requirements elsewhere in FSMA that establish the TSC as the main committee for financial services business. This is intended to support more effective accountability and scrutiny of the regulators by Parliament as a whole.

The Bill requires that notifications sent to the TSC must be made in writing. As is usual practice, the Government expect this correspondence to be published. It will therefore facilitate broader awareness of the regulators’ consultations and enable relevant Lords committees to consider the matter. The clauses also require the regulators to respond in writing to formal responses regarding their consultations received from any parliamentary committee. The Government recognise the significant interest of this House and Committee in ensuring that all committees conducting regular scrutiny of financial services are adequately notified of the regulators’ consultations to ensure that they have the information required to conduct that scrutiny.

As I said in the previous debate, parliamentary scrutiny is first and foremost an issue for Parliament to consider. It is not for the Government to determine the best structure for ongoing scrutiny of the financial services regulators, but we do have a role in setting out the suitable mechanisms by which the regulators must give Parliament the appropriate opportunity to scrutinise the work of the regulators in taking forward their functions. I would like to reassure noble Lords that the Government have heard the points made in the debates today and that ahead of Report we will carefully consider the views expressed today.

I recognise the level of consensus among speakers in this Committee. My noble friend picked up my point and said that there was not a range of views on this issue. In the debate on the previous group—and we have touched on it in this debate—in some respects we are talking about the establishment of a Joint Committee of both Houses. If you look across both Houses, there is a range of views about how this should be taken forward. I will listen very carefully to the views of this Committee as we conduct our scrutiny of the Bill at this end—in our House—but, when I made that point, I was maybe pointing to the whole of Parliament, not just our end of it.

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[Lord Ashcombe (Con)]

My Lords, before I start, I declare my interest an employee of Marsh Ltd, the insurance broker.

I again find myself supporting my noble friend Lord Holmes. These amendments would ensure that the cost-benefit analysis panels are better equipped to undertake the necessary scrutiny of the regulators’ work by ensuring their independence from the regulators. As the Bill stands, all the powers are given to the regulators in controlling the membership, agendas and outputs of these panels, thus allowing the regulators to set and mark their own homework, as people have said.

These amendments would ensure that the CBA panels have the necessary independence from the regulators by giving them powers to set their own agendas and work programmes. Where appropriate, the work of the panels should be made public. The amendments would ensure that the panels have the powers and authority to gain access to the data and impact assessments on which the regulators propose to make their decisions, including a cumulative cost-benefit analysis to understand the cumulative impact of regulation. The panels would have powers to have two existing representatives—or a number that noble Lords so suggest—in order for the views of the prevailing market to be heard. Importantly, the CBA panels would be given the freedom to offer a view on the overall economic impact and effect on UK competitiveness of regulatory changes, including scrutiny over the regulators’ reporting on the competitiveness objective. Finally, the panels should have the ability to undertake pre-regulatory scrutiny of rules, with the ability to challenge the regulators and seek a response to new regulations coming into force.

[Lord Tunnicliffe (Lab)]

My Lords, I think I want to commend the Government on actually bringing in the concept of cost-benefit analysis panels. Generally speaking, the amendments in this group elaborate on that and probably make them better balanced. I will certainly be interested to hear the Government’s reaction to them.

We have Amendments 131 and 140 here, which would require the FCA and the PRA respectively to put on their CBA panels

“at least three individuals with experience and expertise in the field of economic crime, with one drawn from the public, private and third sectors”

and to consider

“any economic crime risks posed”

by any new rules they propose. These amendments have come from thinking at the other end and from the organisation Spotlight on Corruption. I thank it for contributing its expertise, and Emma Hardy MP for pursuing the amendments in the Commons.

These amendments are part of our overarching push to highlight the Government’s weaknesses on economic crime, mainly fraud. There are serious concerns from consumers and stakeholders across the board about the slowness of regulators in preventing and tackling the vast amount of economic crime in the system. The size of the prize is vast. Money laundering is estimated to cost the UK £100 billion a year and fraud costs us £137 billion a year. The regulators need to do much more. I hope the Minister will agree that having panel members with specific expertise in economic crime is one way to ensure this, given the perverse ingenuity of the criminals they are up against.

[Baroness Penn (Con)]

My Lords, perhaps it would be helpful to start with a bit of context behind the Government’s approach to the statutory panels and the new cost-benefit analysis panel established in the Bill. I will then turn to the specific amendments.

The FCA and the PRA are required by FSMA to maintain statutory panels as part of their general duty to consult. As noble Lords have noted, these panels play a vital role in supporting the PRA and the FCA in developing regulatory proposals. As noble Lords have also noted, robust cost-benefit analysis—CBA—is an important part of the regulators’ policy-making process. It helps the regulators to understand the likely impacts of a policy and determine whether a proposed intervention is proportionate.

Respondents to the October 2020 future regulatory framework review consultation recognised the value of cost-benefit analysis but expressed some concern about the rigour and scope of the regulators’ analysis. Several respondents also supported enhanced external challenge as an effective way to improve the quality of the regulators’ cost-benefit analyses. Clause 41 addresses these concerns by introducing requirements for the FCA and the PRA each to establish and maintain a new statutory panel to support the development of their CBAs. Clause 47 includes a requirement for the Bank to consult the PRA cost-benefit analysis panel in relation to its FMI functions, while Schedule 7 includes a requirement for the Payment Systems Regulator to consult the FCA cost-benefit analysis panel. The new CBA panels will have a crucial role to play in providing challenge to regulatory proposals and ensuring sufficient scrutiny of the regulators.

I turn first to Amendments 123, 129, 130, 132, 138 and 139, tabled by my noble friend Lord Holmes, and Amendments 125, 126, 134 and 135, tabled by my noble friend Lord Lilley. The Government agree that the composition of the regulators’ panels is important for ensuring that they can effectively fulfil their role as a critical friend to the regulators. In particular, the Government consider that the CBA panel should benefit from those with experience of working in authorised firms.

During the debate in the Commons, the importance of ensuring that the regulators’ statutory panels, including the new CBA panels, are made up of a diverse range of independent experts was highlighted. In response, the Government introduced Clause 44, which requires the FCA, the PRA and the PSR, when appointing persons to their statutory panels, to ensure that all members are external to the FCA, the PRA, the Treasury, the PSR and the Bank of England. The regulators’ existing panels are currently made up of external members so this requirement will ensure that the approach is standardised and maintained on a long-term basis. In addition, the Government expect the FCA and the PRA to publish responses to the CBA panel’s representations at appropriate intervals, although it would not be appropriate to fix in legislation specific deadlines for independent regulators that may not be deliverable in practice.

Turning to Amendments 131 and 140 from the noble Lord, Lord Tunnicliffe, I assure the Committee that the Government are committed to tackling economic crime, as we have discussed in previous debates. This is also a priority for the regulators. For example, since 2015, the FCA has prioritised its strategy to ensure that firms take adequate steps to prevent them being used for financial crime.

Section 1D of FSMA sets out the FCA’s market integrity objective while subsection (2)(b) makes it clear that, in advancing that objective, the FCA must ensure that the financial system is

“not being used for a purpose connected with financial crime”.

The Government therefore expect that consideration of economic crime will feature in the regulators’ considerations when conducting a CBA. This is reflected in the FCA’s existing published guidance for CBA, which sets out that, when considering the rationale for a regulatory proposal, it should be clear what type of market failure or harm it seeks to address—including, for example, economic crime.

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[Lord Davies of Brixton (Lab)]

I intended to make a second point about risk. Everyone tends to think about risk in terms of systemic risk—the finances of the country come under some pressure—but there is another risk that is not given sufficient attention, which is the risk that pension funds will fail to deliver the benefits that people expect to receive. That risk is given insufficient attention, but I hope it will be covered if there is a system where someone is given responsibility to look at risk. There is the risk of not getting out the benefits expected, as well as the risk to the financial system.

[Lord Tunnicliffe (Lab)]

My Lords, I do not particularly understand the technicalities that have been alluded to in this debate. I will just say a word or two about the bigger issue here, which is the problem that human beings as individuals and institutions have with handling low-probability, high-consequence risk. We know that younger human beings, particularly, gamble their lives on it in how they behave.

Of course, I was very close to this because, in 1988, I took over London Underground, which had just killed 31 people. In a sense, the syndrome that led to that was, “Well, it won’t happen”. The defence was that it was unforeseen—that is, the circumstances that led to that catastrophe were unforeseen. Yes, it was unforeseen because it was not looked for. It was not unforeseeable. That is the issue.

Anybody or any organisation—public bodies, in particular—that is responsible for big risks has a duty to pursue the low-probability, high-consequence risks. I think it was the noble Baroness, Lady Noakes, who said that this is about risk management. It is much deeper than individual bits and bobs. We have had centuries of knowing just how high the consequences of systemic risk can be. If these amendments can address this problem in the financial world, I hope that the Government will give them a fair wind.

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[Baroness Penn (Con)]

There is ongoing work to look at that question. There has been an interim finding, as it were, setting out a number of recommendations. At the moment what they do not do, in my understanding, is set out the need for increased or different powers. But the noble Lord makes the correct point that we then need to understand whether those powers were used in the most effective way to prevent something like this from happening in the first place. The point I was seeking to make was that, so far in its work in reviewing what went wrong and why, it was not a question of a lack of powers or the inability in its remit to make certain recommendations. That is not to say that that work has concluded or that all the action that we need to take after reflecting on what happened has concluded either.

I was talking about the FPC’s powers and responsibilities to look at risks emanating from all parts of the financial system, including non-bank finance. It has the powers to recommend and, under Section 9H of the 1998 Act, also to direct the FCA and PRA to implement certain measures as specified by Parliament in order to further its objectives. Furthermore, as the IMF noted last year, UK authorities have often taken the lead in international efforts to improve the surveillance of risks beyond the banking sector.

In dealing with Amendment 159, looking at the risk from the non-banking sector in terms of financial stability and echoing my words to the noble Lord, Lord Vaux, the Government’s position is not that those risks are all fine, managed and under control. It is that the FPC has the powers it needs to deal with those risks where it can at a domestic level. In the Chancellor’s annual remit letter to the FPC, he reiterated the importance of prioritising work with international partners to address the vulnerabilities associated with non-banks. The FPC welcomed this recommendation. I say to the Committee that we agree that this area has been identified for more work at an international level but, alongside this co-ordinated international work, the Bank will continue to take unilateral action to reduce domestic vulnerabilities where it is effective and practical to do so.

[Lord Tunnicliffe (Lab)]

Will the FPC go out of its way to seek out risks—not risks known at the moment or even evolving risks, but the possible risks that could lead to a catastrophic effect?

[Baroness Penn (Con)]

My understanding is that that is what the FPC does. One of the mechanisms by which it does it is through its stress tests; it operates regular stress testing of the banking system and has also undertaken stress tests of the non-bank system. For example, in the latest Financial Stability Report in December 2022, it included a specific chapter on market-based finance. In 2023 it will run for the first time an exploratory exercise to test the resilience of the financial system against a scenario focused on the risks associated with market-based finance. This is one route by which it seeks to explore and seek out what those risks could be, to help inform understanding of those risks and future policy approaches that should be taken to mitigate them.

As I have said, much of the work needs to take place at an international level, but I accept the point made by the noble Baroness, Lady Bowles, that we also need to take unilateral action at home to reduce domestic vulnerabilities where it is effective and practical to do so. That work is ongoing.

I hope I have dealt with the noble Baroness’s amendments and reassured noble Lords that the Government are conscious of the risks—including systemic risks—that can be posed by the non-banking financial sector. With the FPC, we are undertaking further work to ensure that we can better understand and explore those risks, and take domestic action where possible to mitigate them, but also lead the work internationally to ensure a co-ordinated response.

Energy Profits Levy

Lord Tunnicliffe Excerpts

Tuesday 7th February 2023 Lords Chamber

[Baroness Penn (Con)]

I can reassure my noble friend that the Government have been engaging with the sector, including independent, smaller oil and gas companies. We have included the investment allowance precisely to try to strike the right balance between funding cost of living support while encouraging investment to improve our energy security. My noble friend is right that we should look at the carbon intensity of production here in the UK versus the carbon intensity of importing gas from elsewhere.

[Lord Tunnicliffe (Lab)]

My Lords, between them, Shell and BP have made profits of £55 billion, and over the same period the net yield—that is, the gross yield from the tax minus the allowance for investment—is about £1 billion. Despite the incentives, I have not heard of any increase in planned investment and, as the noble Lord, Lord Deben, pointed out, BP has slashed its emissions targets. Is this the outcome the Government planned, or did they get their sums radically wrong?

[Baroness Penn (Con)]

I am sure the noble Lord would not want to conflate the global profits of those firms with the profits they have derived from their UK oil and gas production. As I have said, those are subject to a tax of 75%. We expect the combined tax take from North Sea oil to be £80 billion over the coming years. We think it is right that we have the investment allowance. The sector is made up of many different players and supports 117,000 jobs, around a third of which are in Scotland—jobs I would have thought Labour would want to support.

Financial Services and Markets Bill

Lord Tunnicliffe Excerpts

Committee stage
Monday 6th February 2023 Grand Committee

[Viscount Trenchard (Con)]

My Lords, I declare my interests as a director of two investment companies, as stated in the register. I support my noble friend Lord Moylan in his Amendments 55 and 241, to which I have added my name. My noble friend has explained the purpose of his amendments very well and he spoke persuasively on this subject at Second Reading.

I was involved in much of the privatisation programme of the 1980s, and the Government’s efforts to increase the shareholder base, especially the retail shareholder base, were rather successful. Regulation has increasingly stymied retail investors’ ability to buy equities and bonds since that time, and I strongly support my noble friend’s wish to bring back Sid. New issues of equities used to be widely available to retail investors, but additional regulatory requirements now discourage corporate treasurers from including retail tranches in public offerings.

Amendment 55 requires the PRA, in advancing its general objective, to minimise barriers to wider securities ownership. This will create a better balance of factors, which it must take into account without in any way weakening the stability of the UK financial system.

As my noble friend mentioned, the prospectus directive is a strong candidate for early reform, in particular its requirement for a minimum transaction amount in a corporate bond issue of €100,000, which obviously excludes most retail investors from the market.

I also support Amendment 241, for the reasons that my noble friend has well explained to the Committee.

My noble friend Lord Holmes of Richmond proposes a new financial inclusion objective for the FCA. I welcome the steps that the Treasury and the DWP have taken to support financial inclusion. Could my noble friend the Minister tell the Committee how the welcome decision to release £65 million of dormant assets funding to Fair4All Finance has improved access to fair, affordable and appropriate financial products for those in financial difficulty? How do the Government intend to honour their commitment to protect the long-term viability of the UK’s cash infrastructure as we move inexorably towards a cashless society.

The Money and Pensions Service, in its national well-being strategy published in 2020, set out an agenda for change containing various ways in which to help people manage their money more effectively. I welcome this and other steps that the Government are taking in this area. I am also mindful of the fact that the Government have legislated to create a consumer financial education body, and I ask my noble friend what plans the Treasury has for that body. I welcome what is being done, and I am not sure that it is sensible to give a further objective to the FCA in this area, because it would dilute the attention that the FCA must give to its existing objective and two new ones—both the one already included in the Bill, the competitiveness and growth objective, and that proposed by my noble friend Lord Lilley, the predictability and consistency objective.

I also have sympathy with Amendment 75, in the name of the noble Lord, Lord Tunnicliffe, on financial inclusion, and I look forward to what he has to say. When I look at the matters to which the FCA must have regard in furthering its consumer protection objective, I am surprised that retail investors are allowed to invest at all. I am not sure that Amendment 75 would help reduce the barriers to market participation by ordinary investors.

I have sympathy with Amendment 117, because I think it will help if the FCA has a duty to address the issue. But I cannot support Amendment 228 in the name of the noble Baroness, Lady Kramer, because it may unfairly prescribe a bank’s ability to decide within reason the businesses that it wants to undertake, and its obligations to its shareholders and depositors to invest their money wisely. I am also not sure how the noble Baroness would define low-income communities. Our markets have been adversely affected both by the impediments to new authorisations and by unwarranted restrictions on the businesses of licensed banks. The result of this is often the reverse of what is intended, by dissuading new entrants from seeking authorisation, which negatively affects competitiveness and consumer choice.

[Lord Tunnicliffe (Lab)]

I rise to speak to this group, particularly my Amendments 75 and 117. The group contains the important amendment which would give the FCA a “have regard” duty for financial inclusion within its existing consumer protection objective. The FCA’s and the Government’s argument is that its consumer duty means that it does not need a financial inclusion “have regard”, but there is a fundamental difference between the two. A consumer duty deals with people who are able to access products. I want to know how the FCA—and, incidentally, the Government—will be required to consider those who are not yet consumers.

We are not arguing for a new primary or even secondary objective, and very much want to wait for the outcome of the FCA’s consumer duty work. A “have regard” duty is the proportionate approach to ensure that those who are currently excluded are supported to become consumers and begin to benefit from the new consumer duty that we have heard so much about. We are not being radical or party political in this; we have Lib Dem and Cross-Bench support for Amendment 75. Nor are we alone: the Phoenix Group, a FTSE 100 company, is also arguing for the FCA to have regard to financial inclusion.

I hope that the Minister will consider this amendment favourably and, if she does not, I want to know why not, and what the Government will do to tackle financial inclusion issues, including the poverty premium—the fact that people who can pay for things only monthly rather than in an annual lump sum pay more.

We also have in this group Amendment 117, which

“would require the FCA to report on financial inclusion”

yearly. Perhaps the Minister would value having evidence on how to fix the manifold problems in this area, enabling HMT and stakeholders to feed in too.

--- Later in debate ---

[Lord Tunnicliffe (Lab)]

My Lords, it is obvious that there is a problem, because virtually everybody has spoken to a problem and said that it must be addressed. It seems to me that the speech the Minister just made was that it is all right, because all these things that the Government are going to do will make it all right. The beauty of the amendments that have been put forward is that somebody is expected to do something. If government has such an important role, who in government will be personally responsible for delivering the improvement that we all seek?

[Baroness Penn (Con)]

In government, the Financial Inclusion Policy Forum is jointly chaired by my honourable friend the Economic Secretary to the Treasury and a Minister from the DWP; I will confirm who to noble Lords, because I would not want to get it wrong. That is the forum by which the Government drive the work and bring other actors into this space to co-ordinate on issues.

We recognise financial exclusion and the need to promote financial inclusion as an important area of policy work. We recognise some of the gaps raised today. I would point noble Lords towards progress that is being made in some areas.

We have also heard today about a changing landscape and how we will need to continue our work to keep up with it. As use of cash changes, we are legislating to protect access to cash, but we also need to consider how we can promote digital inclusion, so that, as services move online, people can access them in the same way as they have been able to previously.

The point of difference is not whether there is a problem but whether it is for the Government to lead on co-ordinating the response to that programme, with an important role for the regulators, or whether it is the regulators that should have more emphasis on driving this work.

--- Later in debate ---

[Lord Hunt of Kings Heath (Lab)]

My Lords, I have Amendments 71 and 210 in this group, which deal with financial fraud. I very much support what the noble Baroness, Lady Bowles, said, and am sure that, between now and Report, there can be further discussions about the best way to embed in the Bill the tackling of financial fraud. As she said, we have two pieces of legislation going through in parallel, and we need to ensure that at the end of the day there is a concerted strategy to deal with financial fraud, which has been lamentably missing from our affairs over many years. The Bill certainly provides protection for victims of authorised push payment scans, but little else to address the growing and worrying problem of financial fraud.

We had a canter round some of these issues last Monday, when the Minister was very reassuring. She said that

“tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector”;

that

“strong punishments … already exist under the Fraud Act”;

that

“the police and the National Crime Agency already have the powers to investigate fraud, with the FCA providing strong support”;

and that

“The Home Office is investing £400 million in tackling economic crime over the spending review period, including £100 million dedicated to fraud.”—[Official Report, 30/1/23; cols. GC 123-24.]

She mentioned the Joint Fraud Taskforce on a number of occasions and said that the Home Office will shortly publish a long-awaited new strategy—which I think was briefed out in some of yesterday’s Sunday newspapers.

That is all well and good. The problem is that one needs an act of faith to believe that the Government have finally recognised that they have to grip this in a much stronger way than has been evident over the last 12 years. The figures from the NAO are stark: in the year ending June 2022, fraud represented 41% of all crime against individuals, and there were an estimated 3.8 million incidents of actual or attempted fraud against individuals. Yet the number of fraud offences resulting in a charge or summons was paltry. In the year ending March 2022, 4,816 fraud cases resulted in a charge or summons. Less than 1% of police personnel were involved in conducting fraud investigations in the year ending March 2020. The public know that it is just hopeless going to the police; the default position is that they have no interest and want to give no help whatever, apart from encouraging you to go to Action Fraud—which your Lordships’ Select Committee on fighting fraud renamed “Report Fraud”, because it is a completely useless organisation.

I am particularly concerned about the financial abuse of older people, and noble Lords will see that my second amendment in this group is tailored towards that. It struck me that the previous debate on inclusivity is very much related to some points that I wish to raise this afternoon. The excellent organisation Hourglass has pointed out that the impact of financial abuse on older people can be devastating, especially as so many of them are on limited incomes such as the state pension. There are so many examples of frail older people losing large sums of money or property that they have lived in for years, or incurring large debts.

In September 2021, Hourglass and Hodge Bank collaborated on a survey to gain insights into the scale of financial and economic abuse and the impact of the digital divide. The report noted that 14.1% of respondents indicated that an older person they knew or cared for had been a victim of financial abuse in the past year. Research also pointed to a significant number of older people falling victim to economic abuse, in part due to the digital nature of banking and the digital divide.

Your Lordships’ Select Committee report, Fighting Fraud: Breaking the Chain, published only last November, was explicit about the scale of the problem generally. It said:

“A person aged 16 or over is more likely to become a victim of fraud than any other individual type of crime, including violence or burglary”,


and that

“Even though fraud is a massive problem,”

it is hardly given any priority at all. Indeed, my understanding is that fraud statistics are removed from public statements on crime rates. I wonder why that is. We know that law enforcement is hopelessly underresourced for the fight against fraud. Law enforcement agencies and digital investigation remain outside the capacity of mainstream policing, despite police forces operating in a highly digitalised society.

The Select Committee points out that

“The organisational structure for policing fraud is complex and confusing”—


it certainly is for members of the public seeking to report fraud—and that

“The criminal justice system has also failed to keep pace with the threat, resulting in a significant decrease in the prosecution of fraudsters over the last decade.”


The Select Committee warns that

“The telecoms sector has no … incentive to prevent fraud and has allowed blame to be placed elsewhere for too long.”


Similarly, the tech sector does not do anything like enough to

“slam the brakes on fraudsters using online advertising and social media platforms to reel in consumers”

and must

“do more to verify the identity of those using online dating platforms before they commit romance fraud.”

The Select Committee makes the point that all these industries, which are doing very well and enable fraud to take place, do not fear any significant financial, legal and reputational risks for failing to prevent fraud.

When fraudulent payments slip through the net, it should not be the sole responsibility of the financial services sector—in particular, the victim’s bank—to pick up the bill, although I believe that banks need to do much more than they do at present. All stakeholders in the fraud chain, including the payee’s bank, must know that they have a duty to prevent fraud and to address their failings and the victim’s losses once it has occurred. Despite the Minister’s confidence, the Government have shown very little enthusiasm. It has taken so long to even produce a strategy, that one really doubts the commitment to taking this forward.

My first amendment would add to the list of regulatory principles to be applied to the FCA and PRA

“the need to promote the detection, prevention and investigation of fraud in relation to the provision or use of financial services.”

In a sense, this can be seen in parallel to the amendment in the name of the noble Baroness, Lady Bowles. My Amendment 210 complements and adds to my noble friend’s amendment by emphasising the strategy he proposes, which I very much support, but there are some special arrangements in relation to older people.

I am sure that we will want to come back to this on Report. I am sure that noble Lords with an interest in this can come together with a unified amendment—I almost said composited amendment, but I hesitate to use those wonderful words in your Lordships’ Committee. We have to persuade the Government that, once and for all, we take fraud seriously. We need to kick a lot of the regulatory bodies, including the police, into taking this seriously.

[Lord Tunnicliffe (Lab)]

My Lords, I will speak to my Amendment 209. This Committee is unusual, in that the level of consensus seems enormous. A lot of the differences are around how to achieve where we want to go, but the coming together should worry the Government.

I will say a word or two about fraud. My noble friend has set out the fraud world. The two features, certainly of personal fraud, which are supposed to solve the problem are compensation, and investigation and prosecution. I am not against the idea of compensation being clearer and more open, but this has the potential for moral hazard. I will say no more than that. The problem with the compensation solution is that it takes the incentive away from proper investigation into criminality and prosecution. That is a bad thing.

There is so much fraud that there is an industry, and that industry breeds its own criminality—I fear that somewhere in the Bahamas they are setting up a university course on it. That spreads the atmosphere or culture more widely. We know that London has a horrible reputation for financial criminality in general—for example, money laundering. This is bad. We do not want big chunks of our society, particularly bright, competent people, involved in criminality. From every point of view, we must up the effectiveness of prosecution—treating the fraudsters as criminals and, where appropriate, locking them up.

--- Later in debate ---

[Lord Tunnicliffe (Lab)]

My Lords, this group contains Amendment 120, signed by me, my noble friend Lady Hayter of Kentish Town, the noble Baroness, Lady Altmann, and the noble Lord, Lord Morse. Our amendment would facilitate further parliamentary and public

“scrutiny of the work of the FCA to protect consumers by requiring the Financial Services Consumer Panel to lay an annual report before Parliament outlining”

the extent to which the FCA is successfully fulfilling

“its statutory duty to protect consumers.”

We have included the provision that the Consumer Panel must comment on the “adequacy and appropriateness” of its use of its powers; the measures it

“has taken to protect vulnerable consumers, including pensioners, people with disabilities, and people receiving forms of income support”;

and its “receptiveness to the recommendations” of the panel. We need a mechanism to encourage the FCA to exercise its regulatory duties more readily and consistently.

This is all in the context of very serious FCA failings. I am thinking particularly of the British Steel pension scheme scandal to which the FCA was found to be “slow to respond” at every turn, according to the Public Accounts Committee. If the Government are inclined to reject this amendment, I would appreciate further work in this space in the interests of all those who have fallen foul of FCA failures. I urge the Minister to look seriously at this amendment, given its cross-party support across the House and in the other place.

[Baroness Kramer (LD)]

My Lords, I am speaking a little earlier than I usually do on my amendments in case others want to join in on the Equitable Life issue. I thank the noble Baroness, Lady Altmann, for signing my first amendment; it is hard to tell what happened with the second. I hope she signed both of them. Yes? Fantastic.

I want quickly to follow up on the comments from my noble friend Lord Sharkey. Perhaps the Minister can clarify this for me. She will remember that the PPI scandal was widely spread across the industry. It was not unique to one or two companies, therefore no company that invested in that mis-selling was behaving as an outlier. Again, when interest rate caps were inappropriately sold to small businesses, it was not the action of one or two particular banks. It was industry-wide, therefore nobody was the outlier. Can she explain to me what this new consumer duty will contribute to enabling the FCA to act on these kinds of abuses? She will note that the FCA did not act until there was a major scandal and a huge amount of public pressure and pressure in Parliament because, when it looked at it, it could see no basis for action. Perhaps she might tell us how the consumer duty would have worked in those two key cases. I am sure that the Government must have tested those cases in coming to their decision to support the consumer duty, so I think she will be able to give us clarification on that.

Both of the amendments in my name arise out of the Equitable Life policyholder cases. I thank the Equitable Members Action Group, which has been frankly magnificent in support of the victims of the collapse of Equitable Life. It has fought for them in the past and continues to fight for justice.

Amendment 225 is a direct plea for compensation. When Equitable Life collapsed, 1 million people lost a significant part of their retirement savings. In 2008, the Parliamentary Ombudsman concluded that the victims’ losses were directly attributable to a decade of serious, serial regulatory maladministration.

The ombudsman made 10 determinations of maladmin-istration: one against the DTI; four against the Government Actuary’s Department; and five against the FSA, which

“resulted in the true financial position of the Society being concealed and misrepresented”.

I cannot think it extraordinary that, in a situation such as that, one would have expected the loss to the victims to have been remedied in full. In recommending redress, the ombudsman said that she would

“normally expect that, where appropriate, such a loss should be remedied in full”

and she called for the Government to

“fund a compensation scheme to put those people who have suffered a relative loss back into the position that they would have been in had maladministration not occurred.”

The Government later accepted that the amount of compensation to achieve that would have amounted to £4.5 billion but only £1.5 billion in compensation was announced by George Osborne. Some 37,000 with-profits annuitants were fully compensated but a further 10,000 received only £5,000—or £10,000 if they were on pension credit—because they took their annuities before September 1992. The vast majority of the victims—895,000 people who were not with-profits annuitants—received only 22.4% of their acknowledged losses. My amendment would carry out the recommendation of the Parliamentary Ombudsman and put everyone back into the position that they would have been in had maladministration not occurred.

This leads to my second amendment, Amendment 226, which would establish in law a requirement that, when the ombudsman finds maladministration by the regulators or government departments, all consumers affected

“are put back into the position they would have been in had that maladministration not occurred.”

Just imagine how we would react if a bank decided that, instead of paying the full compensation it owed, it would pay just a portion of it. I cannot see why the Government should be treated differently from an entity such as a bank. We would expect compensation to be paid in full.

How can we ask people to turn with confidence to the Parliamentary Ombudsman when recommendations are watered down after the fact? How we ask people to save when a rogue society—I think that describes Equitable Life quite well—cheats them? The Government make appalling mistakes to the level of maladministration —that is a very high bar; it is not a low bar—and then will not make it right. Many of the victims are now in their eighties and nineties so time is running out for justice; indeed, many have died without justice. That is the reason behind my two amendments. I very much hope that there is support for that perspective; indeed, I hope that we will finally see support from government.

In making a brief comment on the amendment proposed by my noble friend Lord Sharkey, on a return to a proper duty of care—it is one of the most important amendments that we are considering today —I want to stress, in this context, the private right of action. It seems to me that, without a proper duty of care or private right of action, we can never make banking institutions or other regulated financial services sector institutions live up to their full responsibilities to consumers.

Central Bank Digital Currencies (Economic Affairs Committee Report)

Lord Tunnicliffe Excerpts

Thursday 2nd February 2023 Lords Chamber

[Lord Tunnicliffe (Lab)]

I thank the noble Lord, Lord Bridges, for his introduction to this debate. He presented an elegant precis of the document. The noble Lord, Lord King, touched upon the magic word “digital”, and I think that is absolutely valid. The word is sprinkled around our society as somehow modern—digital has been around for a long time but it is hopefully modern. Both noble Lords and my noble friend Lord Desai had cynical concerns that this might take off in an uncontrolled way. My noble friend Lord Desai also brought up the issue of the smaller and poorer people. In this whole debate about money, currency and so on, they are not very well represented, so it is important that people such as my noble friend, and to some extent me, always remind us that all these schemes have a levered effect, particularly on poor people who depend on cash.

The noble Baroness, Lady Kramer, made an excellent speech, as usual, with the idea of introducing balance in something of a headwind. I take from what she said that, whether or not one thinks CBDC is a good idea, government has a duty to apply appropriate resources to understanding this area. The benefits of a central bank digital currency, CBDC, which the committee alluded to, such as providing the Bank of England with powerful new monetary policy tools, should certainly be explored, but its conclusion—that it has yet to hear a convincing case for why the UK needs a retail CBDC—seems to stand up. The report speaks to the financial stability risk. On this Government’s watch, millions of British consumers’ savings have already been put at risk by the collapse of cryptocurrencies, and crypto-related scams have hit record levels. We have an amendment to the Financial Services and Markets Bill which would compel the Government to update their decade-old national fraud strategy, and clearly digital currencies and related issues have to be considered.

Despite the real and tangible risks of private unregulated digital currencies, it seems the Government are committed to spending significant resources promoting crypto gimmicks, to great fanfare. I fear their exploration of CBDCs maybe a continuation of this pattern, wanting to innovate to distract from political turmoil over tax affairs and crumbling public services. Instead, I wish the Treasury would keep a red-hot focus on the cost of living crisis and avoid wasting precious resources on NFTs, for example, or on more consultations. What we need is action on consumer protection now.

Can the Minister enlighten us on how many Treasury and Bank of England officials are working on this during this most serious cost of living crisis? Are CBDCs appropriately prioritised? If the Government want to do something in this space, how about getting serious about building a robust regulatory regime that would attract fintech companies to the UK—a regime that would allow new companies to safely harness new technologies?

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I apologise for the delay; I was just organising my responses to the many questions raised by a short but expert list of speakers on this debate. I thank all noble Lords who have spoken today and thank the Economic Affairs Committee for its work in producing this really valuable report. A considerable amount of ground has been covered today and I will try to address specific points raised by noble Lords in my response.

Before I do, I might speak a little about the ambitions that lie at the root of this policy. We are living through a pivotal time for the future of money and payments. Rapid innovation is bringing fresh opportunities and considerations for individuals, industry and policymakers alike. As noble Lords are aware, like many countries around the world—as pointed out by the noble Baroness, Lady Kramer—the UK is actively exploring the potential role of central bank digital currencies. The Treasury and the Bank of England are working closely together to consider our next steps.

This work is a key part of a broader government agenda to ensure that the UK remains competitive and at the forefront of payments innovation. I have to disagree with the noble Lord, Lord Tunnicliffe, in his assessment of this issue. He pointed to creating a regulatory landscape for fintech. That is what we have done and continue to do through, for example, the Financial Services and Markets Bill that most of us are also debating on Mondays and Wednesdays. This is a key part of that landscape too and we need to be future facing when it comes to this issue.

The noble Baroness, Lady Kramer, pointed to the potential benefit of a CBDC in providing a better basis for cross-border payments, and I have talked about its importance in remaining competitive and looking at payments innovation. To try and answer the first question put to me by my noble friend Lord Bridges, at its heart, the question of a CBDC is about maintaining access to central bank money. This is available through cash, but that landscape is changing.

I also acknowledge at this point the concerns raised by the noble Lord, Lord Desai, about the implications of this work for access to cash. Key to our considerations will be ensuring that financial inclusion is at the heart of any technical design decisions on CBDC and we will also be considering the role a CBDC could play in increasing access to digital payments. Again, the noble Baroness, Lady Kramer, highlighted some ways in which that could be the case.

We acknowledge the importance of cash to many households across the country at this time, in particular more vulnerable households or those who may be more financially excluded. That is why we have taken action to legislate to protect access to cash. Again, that is going through in the Financial Services and Markets Bill that this House is currently considering.

With all that said, we have not yet decided whether to introduce a CBDC—a digital pound—in the UK, and we will engage widely with stakeholders on the benefits, risks and practicalities of doing so. The design of any UK CBDC is subject to further work, and a forthcoming Treasury and Bank of England consultation, due in the coming weeks, will set out some of our more detailed thinking. Crucially, any future decision will be based on a rigorous assessment of the benefits and what it means for public policy objectives.

Delivering a UK CBDC will require a carefully sequenced plan of work, which will span several years. The consultation will set out the Treasury and Bank of England’s assessment of the case for a digital pound. It will also set out further detail on the “platform model” proposed in the Bank’s 2020 discussion paper. This would mean that a CBDC would exist as a complement to cash and bank deposits, leaving a substantial amount of retail-facing business to the private sector.

If there is a decision to proceed, a development phase would follow the consultation. This would include the publication by the Bank of England of a technical specification. It would involve in-depth testing of the optimal design for, and feasibility of, a UK CBDC. Following this, a decision would be taken on whether to move into a subsequent build and testing phase, with the earliest date for any launch in the second half of the decade. We believe that this is an ambitious, yet feasible, timeline towards delivery and, as I have said, extensive stakeholder engagement and consultation will be crucial in making the decision to move to each stage of the timeline towards new issuance.

To address another question from my noble friend Lord Bridges around the role of Parliament in that process, we expect Parliament to be fully engaged through any possible legislation in an open and transparent manner to ensure that there is full and proper scrutiny of any proposals in coming years. My noble friend also asked about the work the Treasury and Bank of England have done on disintermediation and whether I could rule out the digital pound being interest bearing. Those are two of several risks and questions that need consideration in the design choices. The macroeconomic effects of a CBDC will be contingent on some of those design choices. For example, an interest-bearing CBDC could allow for more effective monetary policy transmission, while a non-interest-bearing CBDC could make the zero lower bound more binding, therefore reducing the strength of monetary policy. That is something that the Government and the Bank of England have not reached a decision on yet.

As also pointed out, one of the main potential macro risks could be that of bank disintermediation. In an illustrative scenario, the Bank estimated that the cost of credit could rise as a result of consumers reallocating from commercial bank retail deposits into a CBDC. This scenario was theoretical, and the Bank maintained that it was difficult to forecast with any certainty the extent to which a CBDC could cause bank disintermediation. The design choices of a CBDC could be used to reduce some of these macroeconomic risks. Specifically, holding limits and decisions on whether a CBDC would be interest bearing are features most likely to have an impact on this. So the potential effects of a CBDC on the macro economy are broad, and we fully acknowledge that. The Bank and His Majesty’s Treasury are working closely together to gain a clearer understanding of the potential impacts.

On privacy and security, maintaining user safety and privacy is of the utmost priority as the Government and the Bank appraise the case for a CBDC. Indeed, the UK, through its G7 work, has been clear that rigorous standards of privacy, accountability and transparency on how information will be used are essential for any CBDC to command trust and confidence. Fundamentally, the Government recognise that financial innovation must be safe and secure in order to benefit and win the trust of consumers, businesses and the wider economy alike.

My noble friend Lord Bridges and the noble Lord, Lord King, mentioned the benefits of a retail CBDC versus a wholesale CBDC. The Bank and the Treasury have chosen to explore a retail CBDC in light of the potential benefits I touched on before, including providing digital access to central bank money in a digital payments environment and greater efficiency and resilience in payments. With regard to a wholesale CBDC, as the noble Lord, Lord King has pointed out, banks already have access to electronic central bank money in the form of reserves, and that has been available for decades.

We are open to exploring innovative ways in which wholesale firms can use central bank money, and HMT and the Bank are working together to continue exploring the case for new and improved ways of facilitating wholesale settlement. There are three ongoing initiatives that we consider are likely to provide similar benefits to any wholesale CBDC. First, the Bank is already renewing its wholesale payments system, the real-time gross settlement system, which will improve the efficiency and resilience of domestic wholesale payments being made as well as offering increased interoperability.

Secondly, last year the Bank of England created a new omnibus account to enable private sector innovation in wholesale payments. These new accounts were announced by the former Chancellor in Fintech Week in April 2021 and will allow firms to create innovative wholesale settlement solutions of their own, docking into the Bank’s balance sheet to provide them. Thirdly, the Treasury has proposed a new sandbox for the use of distributed ledger technology in financial market infrastructures, a measure that we are taking through the Financial Services and Markets Bill. That will support firms wanting to use new technology to provide FMI services such as the settlement of securities.

My noble friend Lord Bridges asked about the cost of a CBDC and who will pay, and the noble Lord, Lord Tunnicliffe, asked how many people are working on the current project and what it will cost. The Economic Secretary has been clear that a UK CBDC is a major national infrastructure project, so the Government acknowledge that it is a significant undertaking. It will cost money to develop, although I am not in a position today to say how much as we are still in the early R&D phase of our work. Many government innovations to modernise come with a cost, and the upcoming consultation aims to ensure that genuine public discussion has taken place on both the potential benefits and the cost. While I cannot provide the noble Lord, Lord Tunnicliffe, with specific figures—if I can, I will write to him with them—that is the point on which I would close this debate. One of the UK’s strengths is remaining at the forefront of innovation.

[Lord Tunnicliffe (Lab)]

The Minister assured us that there would be parliamentary involvement in the introduction of any CBDC. Does that mean she is assuring us that it will involve primary legislation?

[Baroness Penn (Con)]

I believe we need to understand better the design and shape of a CBDC, but I am trying to give the strongest possible assurance on that point while not knowing the answer to some of the questions that will be in the forthcoming consultation.

As I was saying, one of the UK’s great strengths is remaining at the forefront of innovation. The landscape is changing quickly in this area and we are open-minded as to the right way to proceed. Many of the points raised in the Select Committee’s excellent report are exactly those we want to continue to consider in a very public and open way through the forthcoming consultation, and through collaborative work between the Treasury, the Bank of England and many other public organisations, so that we can get the answers right to many of the important considerations that need to be made. I do think this work has value, and it is important to ensure that we remain at the forefront of some of these areas. I commend that position to the House.