Brexit: Financial Services (European Union Committee Report)

Lord Tunnicliffe Excerpts

Thursday 9th February 2017 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I too would like to express my sincere thanks to the noble Baroness, Lady Falkner, her committee and the members of the EU Financial Affairs Sub-Committee for producing this report as well as to all those who have spoken in this afternoon’s debate. I am grateful to the committee for looking at this issue first of all. Having read the report, I think it is clear this decision was a wise one, given the number of knowledge gaps that undoubtedly exist both in government and industry, and the lack of a strong evidence base which will be required.

In the months following the referendum, the overriding concern has been on what our future relationship with Europe and the rest of the world will look like. In that, there has been an implicit assumption that we have a sufficient knowledge, capacity and basis upon which to make such decisions. The people of this country voted to leave the European Union, and it is our duty to facilitate that. That being said, it will be a process that goes against all the natural instincts of the Houses of Parliament. We are not as institutions good at making a lot of difficult decisions quickly. It will be a strain. That is why reports like the one we are debating today are vital prisms through which we can explore such complex issues. But even such reports, produced and debated in such a short period of time, have to be considered in the current political climate. I wonder, for example, how different this report would have been if we had heard from the Prime Minister prior to its publication.

It will come as no surprise to noble Lords that I am interested in process. I am interested in the mechanics of the system. This report confirmed my suspicions that at present we are not sufficiently prepared for the monumental task of extracting ourselves from the European Union. I do not doubt the determination of the Government in wanting to maintain a strong and vibrant financial service sector here in the UK. However, I doubt whether they have the strategy to achieve this. I fear that, instead of a clear plan, the Government are clinging on to the notion that our position as a global leader in financial services is unshakeable.

Many noble Lords this afternoon have discussed this issue, and there has been a general conversation about being sensible, about this being two-sided and about Europe needing us as much as we need Europe. There have been conversations in Strasbourg and the rest of Europe where that impression has come across. The problem is that the negotiations will not necessarily be conducted by rational people looking at economic advantage; they will be conducted, dare I say, by politicians, who on occasions have been known to be irrational—indeed, tragically irrational.

Our lack of knowledge is well illustrated by passporting, which has become the issue to be discussed whenever Brexit and financial services are mentioned. Passporting is obviously related to equivalence—and, separately, the cliff edge—and those seem to be the key areas of concern. Why has passporting caught the imagination of so many people? Because it perfectly exemplifies our relationship with the EU. Passporting has become integral to the way in which banks operate. As Douglas Flint, group chairman of HSBC, told the committee,

“Everyone is affected by passporting rights to a greater or lesser degree”.


It also cuts across the most significant debates we will have about Brexit—notably, our membership of the single market, which the Prime Minister has confirmed Britain will no longer be a member of, as well as equivalence and regulatory divergence.

Despite all this, it appears that our knowledge of the system in which we are operating is limited. Before we can make a decision about where we want to go, we surely need to figure out what we have been doing and where we are. As the report states,

“It is striking that some firms do not themselves appear to be aware of their reliance on the current passporting arrangements”—


the implication being that they do not have a full picture of the reciprocal impacts that passporting has on both the UK and EU financial markets. I for one believe this to be a startling realisation. There is a responsibility on the Government and industry alike to rectify this deficit as quickly as possible.

In a Written Answer to my noble friend Lady Hayter on 24 January, the Minister stated that:

“Government ministers have met with a full range of institutions from across our financial services sector”.


It is encouraging that such conversations are taking place, but I wonder whether the noble Baroness could go into more detail than she has provided on meetings that related specifically to passporting rights. Do the Government share the view of the EU Select Committee about the awareness of passporting access across the industry? If so, I would be interested to hear how the Government intend to resolve this problem.

Given that the Prime Minister has made it clear that she has no intention of Britain remaining a member of the single market, could the Minister outline what implications the Government believe that will have for our ability to maintain passporting rights, and whether it will be a priority for the Treasury in the negotiations?

That brings me to the evidence base more generally. I appreciate that not all communications, let alone the detail of those communications, will or should be available for scrutiny. What I am asking for—and I believe that I am justified in doing so—is evidence that the Government are building the robust analysis and filling the gaps which the report made clear are so apparent. Can the Minister say whether, further to the request by the EU Financial Services Sub-Committee, the Treasury is modelling the effect of different scenarios on the deal that will be struck between us and the EU?

Related to that, will those models take into account the executive order signed by President Trump, which seeks to review the working of the Dodd-Frank Act? I know that the Government have been keen not to comment on the domestic policy of the US, but surely when minimum standards of financial regulation are at risk we have a responsibility to advocate measures which were designed to protect consumers.

Indeed, the report warns of the challenges associated with possible regulatory divergence between ourselves, the US and the EU. The UK has played an integral role in the design, implementation and management of financial service regulations. Do the Government intend that we continue to work with our European partners on regulation setting?

We have heard today some of the more intricate matters that the Treasury will have to consider. However, the point that I am trying to make is that, if we do not understand the basics of the overall industry, we will not be properly prepared to discuss the parameters of a debate on, for instance, as mentioned by a number of noble Lords today, our continued position as the European clearing centre, or—we have heard less of this, but it is important to London—as a hub for fintech development. Too often these basics are overlooked.

We must not confuse the mass of detail that we have for understanding the industry as a whole. The report left me with the impression that we do not have the necessary understanding of the industry to enter these negotiations, that the industry does not have a complete understanding of itself and that the Government have yet to find the tools with which to fill these knowledge gaps. I hope the Minister’s response will put my concerns to rest.

Bank of England and Financial Services (Consequential Amendments) Regulations 2017

Lord Tunnicliffe Excerpts

Tuesday 24th January 2017 Lords Chamber

[Lord Tunnicliffe (Lab)]

I thank the Minister for introducing these regulations—and my speaking notes go on to say, “and I thank those who have spoken in this short debate”, but it has been short indeed. As has been identified, this is an uncontroversial statutory instrument, which makes consequential amendments to legislation where references to the Prudential Regulation Authority are made. We understand that these are tidying-up changes and have no intention of opposing this instrument.

I do not wish to keep your Lordships unduly, but it is important to mention what we regard as the wider implications of the primary legislation. The PRA, established by the Financial Services Act 2012—an exercise in which I participated, as I have with every piece of legislation to do with it ever since; that is why I now look so old—will be de-subsidiarised, giving the Bank of England control over microprudential regulation. The board will be replaced by the Prudential Regulation Committee, which will sit on the same statutory footing as the Monetary Policy Committee and the Financial Policy Committee.

As your Lordships will recall, our main concern was to ensure that those in positions of power and authority within the banking sector were properly accountable. However, we also queried the Government's rationale for bringing the PRA within the scope of the Bank of England. I would like to make two points. First, I start from the same position as I did at the end of 2015, when what is now the Bank of England and Financial Services Act was going through your Lordships’ House. As I said on the second day of Committee on 11 November 2015:

“I think the Bank will move its emphasis from the Monetary Policy Committee towards the FPC”.


The nature of our economy is changing. The powers of the FPC, including controlling the creation of credit, are absolutely fundamental to how efficiently the money system supports the economy, and hence are fundamental to the economy. Under the system which the 2016 Act abolished there were at least checks and balances.

I went on to say that the PRA was,

“a subsidiary—an independent company … governed by company law—and, therefore, there has to be an arm’s-length relationship between it and the FPC. Under the various terms of the Act, the FPC can create various macroeconomic tools, which it then hands down to the PRA. It hands those down not through some side-channels or influence but, because of that independent legal status, in a very formal way to its subsidiary, and I think that is healthy. I do not believe that in effect moving the PRA closer to the Bank—and, by definition, closer to the FPC—is a good thing. The present separation is working, and I think we should continue it”.—[Official Report, 11/11/15; col. 2005.]

Indeed, one of the benefits of subsidiary status—I should know, having headed a subsidiary company of a large organisation—is that one gets to focus on the business, so that there are clear lines of responsibility. As was brilliantly articulated by my noble friend Lord Eatwell, the 2016 Act muddies these lines of responsibility and, as he said,

“renders the governance structure of the Bank of England opaque”.—[Official Report, 9/11/15; col. 1851.]

The lines of demarcation set out in the Act relating to the PRC seem to add yet another layer of bureaucracy and complication to a new system which for all intents and purposes was functioning as it should. What specific work has been done since the Act came into force last year to ensure the same levels of accountability and transparency, and how will those qualities be visible to the general public?

Presuming that the Government do not take of heed of my advice, the PRA will be abolished and the PRC created. When will this transition take place? The Act states that an order will be introduced by the Treasury to give effect to the Act. Should we expect that order by the end of this Session? I thank the Minister in anticipation for her response. I am in no way saying that we are not impressed by the performance of the Bank of England. Nevertheless, the reasons she gave seemed rather fluffy to justify giving up the clarity that the present subsidiary status provides.

[Baroness Neville-Rolfe]

I am grateful to the noble Lord for his support for the regulations—and, indeed, for his dedication to the scrutiny of the 2016 Act and its subsequent children. He feels that the Act made the governance structure of the Bank of England opaque. I disagree: I welcome the changes, because I believe they make that governance better and clearer. Before the 2016 Act the MPC was a committee, the PRA was a subsidiary and the FPC was a sub-committee of the court, which is, of course, the Bank’s board.

With the changes in the Act, all three are now policy committees established on the same statutory basis, with clear statutory objectives and processes. The noble Lord asked what had happened since the Act came into force to improve accountability and transparency. Since it came into force last year, the National Audit Office has been able to conduct value-for-money reviews at the Bank for the first time, and the MPC’s new practice of publishing its minutes has swiftly become a legal requirement. Once the new PRC is created it will have to report every year on its resources and the independence of its operations, and produce a separate statement of accounts to ensure that the industry levy is limited to funding PRA functions.

[Lord Tunnicliffe]

My recollection is that the MPC has to report eight times a year, and the FPC, in practice, produces a report at least quarterly. Will the Prudential Regulation Committee produce regular reports of its activity—more regularly than annually?

[Baroness Neville-Rolfe]

The current plan is that it will report every year on its resources and the independence of its operations.

I will respond to the noble Lord’s question on timing. The provisions giving effect to the transfer will come into effect on 1 March this year—very soon—to ensure that the transition is aligned with the Bank’s financial reporting year.

The Bank of England has come a long way since it was established in 1694 to finance the war of the Grand Alliance against France. At that time, it only had 19 officials, including two doorkeepers. Now the Bank of England, including the PRA, has about 3,600 officials and has picked up a few additional responsibilities in the intervening 323 years. These regulations play their own small part in that process. I thank the House again for today’s exchange and commend the regulations to the House.

Savings (Government Contributions) Bill

Lord Tunnicliffe Excerpts

2nd reading (Hansard): House of Lords & 3rd reading (Hansard): House of Lords & Committee: 1st sitting (Hansard): House of Lords & Report stage (Hansard): House of Lords
Thursday 12th January 2017 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I start by welcoming the Minister to the esoteric world of Treasury legislation. In the light of the debate so far, she is no doubt taking some comfort in the words in parenthesis after “Second Reading”, which read “and remaining stages”. The noble Baroness will not always be quite so lucky.

I thank the Minister for introducing this Bill and those who have spoken in this debate. I will do my best to follow the pension experts and my noble friends Lord McKenzie and Lady Drake, who did a far better job than I could ever hope to do in mapping out the implications of this Bill for the pensions landscape.

Labour supports measures that allow more people to save for the future. At a time when household debt stands at record highs and when having tens of thousands of pounds of debt is regarded as the norm for many young people, policies that can contribute to bringing about a culture change towards saving must be welcome. That being said, we are not sure that the two measures outlined in the Bill—the establishment of a lifetime ISA and the Help to Save scheme—will do what they are designed to do. More worrying is the concern from some sectors that they will undermine the progress that has been made, specifically on auto-enrolment.

I will pick up on three points that have attracted cross-party consensus and discuss some of the issues that have arisen since this Bill left the other place: how lifetime ISAs will impact the pensions market, appropriate advice services and the factors involved in the Help to Save scheme.

One of the most contested aspects of the Bill is the impact that these measures, particularly the lifetime ISA, will have on the broader pension savings market. The Minister in the other place has said that the new ISA and traditional pension products are complementary, but pension experts do not share that confidence. Indeed, in the case of one or two pension experts, particularly the noble Baroness, Lady Altmann, that is something of an understatement. We must avoid adding to the already complex quagmire that is the pensions landscape. These proposals came out of a government consultation on reforming pensions tax relief in July 2015, which seemed to acknowledge the scale of the challenge that reform would present without providing conclusions on how to tackle these challenges. Instead, the then Chancellor, George Osborne, stated that it was clear that there was no consensus.

We are concerned that these policies have been thought up without full consideration of the short and long-term implications. The FoI request by New Model Adviser confirms that the DWP has not carried out its own assessment of auto-enrolment opt-out rates caused by the lifetime ISA because there is a Treasury assumption that people will not opt out of workplace pensions. Therefore, it did not feel the need to carry out its own separate evaluations.

My colleagues in the other place asked the Government to consider reviewing annually the impact that the lifetime ISA was having on the rate of auto-enrolment. The response to the FoI request said that the DWP regularly meets the Treasury to discuss pensions and savings policy, but I wonder whether the Minister can expand on that and explain, in the light of this new information, why a review would not be appropriate. I believe that many of the fears voiced about the impact of this scheme on auto-enrolment could be sensibly assuaged if we knew that a regular review was being carried out. As Tom Selby, senior analyst at AJ Bell, said:

“At this stage we are totally blind to the number of people who could opt out of a workplace pension ... Ideally the government would have tested how the lifetime ISA will interact with auto-enrolment ahead of the product’s launch next year”.

The Work and Pensions Select Committee was unambiguous when it said:

“Opting out of AE to save for retirement in a LISA will leave people worse off”.

A review would ensure that if such trends were identified, the worst effects could be mitigated. It is difficult to understand how the Government can disagree with something that seeks to safeguard one of the few positive changes to have taken place in the pensions industry in recent decades. I would be grateful if the Minister could address these concerns.

I now turn to the issue of appropriate advice which should accompany the rollout of lifetime ISAs and the Help to Save schemes. The Work and Pensions Select Committee, which I have just quoted, was clear about the possible negative impact that switching to a lifetime ISA could have on a person’s finances. Therefore, it is crucial that such implications are widely known and that information about these products is easily accessible. The FCA has stated that investors in the lifetime ISA should be given a specific risk warning about incurring the early withdrawal charge, which would lead to them receiving less from their lifetime ISA than they paid in. There are clearly concerns about how the product will work in practice. I think that the following quotation speaks volumes:

“I consider myself moderately financially literate. Yet I confess to not being able to make the remotest sense of pensions. Conversations with countless experts and independent financial advisers have confirmed for me only one thing—that they have no clue either. That is a desperately poor basis for sound financial planning”.

That was Andy Haldane, the Bank of England’s chief economist. When he admits that pensions have become so complex that even he cannot make the remotest sense of them, I think it is time to reflect on the quality of the service being provided.

In Committee in the other place the Financial Secretary to the Treasury stated that people would be able to access the relevant information about these products through government websites, as well as by working with the Money Advice Service and its successor. What materials do the Government envisage that the MAS will produce, and how do they intend to ensure that, once the MAS is abolished, continuity in the accessibility and accuracy of information will be ensured? Furthermore, what correspondence have the Government had with the FCA regarding communication requirements? This concern has been echoed by a number of speakers in this debate. Surely we are entering an ever-more complex scene, with less and less assurance that the right advice will be available.

I turn finally to the Help to Save scheme, which has been designed for those in receipt of universal credit or working tax credits. As the IFS has stated:

“Key issue is whether those who use Help to Save will be the under-savers”.

The saving gateway scheme, piloted in 2010, offered similar support. However, the IFS evaluation found,

“no evidence of an increase in overall savings”.

Can the Minister explain how the Government have used this lesson and adapted the current scheme appropriately? Furthermore, can the Minister expand on the rationale for the two-year limit? It would be useful to get a better understanding of the Government’s thinking on this matter.

I will close as I began, by thanking those who have spoken in this debate. I look forward to the Minister’s response.

[Baroness Neville-Rolfe]

My Lords, I thank all noble Lords who have contributed to the debate today, and I thank the noble Lord, Lord Tunnicliffe, for his very kind welcome. I certainly look forward to working with him and other noble Lords in this esoteric and interesting area and bringing light to the issues.

I think we all agree on the importance of people having effective tools to help them save money. As the noble Lord, Lord McKenzie of Luton, suggested, saving is important and we need the right quiver of incentives—and I welcome his support for Help to Save. I think there is an equal consensus around the need to encourage more people to save. I take the point that there may be more to do to publicise the progress that we have made on defined benefit pensions, described by my noble friend Lady Altmann—who is in a great position to encourage pensions saving and to explain how valuable it can be. However, I do not agree with her conclusion on the lifetime ISA: it has been supported by many, including the ABI, individual members and, indeed, Martin Lewis.

I turn to the link between the lifetime ISA and automatic enrolment, which was first raised by the noble Baroness, Lady Drake. I am well aware of her great expertise on pensions and, indeed, her role in the seminal Turner commission report—I remember well that huge report, which was very authoritative, arriving on my mat when I was responsible for pensions at Tesco, where we really cared a lot about helping people both to have a good pension and to save for their retirement. Those of us who care about pensions can be champions, as the noble Baroness, Lady Greengross, said. I share her respect for the work of Business in the Community, as she well knows.

I stress that we are fully committed to supporting people through the pensions system. Automatic enrolment will help 10 million people to be newly saving or saving more by 2018. The lifetime ISA is designed to complement that. It gives young people more choice in how they save for the long term. It is not a replacement for pensions. The Government’s policy towards employers reflects this. Employers have a statutory obligation to contribute towards pensions under automatic enrolment, as well as a direct incentive. Neither is the case with the lifetime ISA. Our impact assessment, based on an OBR-certified costing note, is clear that we do not assume that anybody will opt out of a workplace pension to save into a lifetime ISA—as the noble Baroness, Lady Drake, said.

The Help to Buy ISA is similar to the lifetime ISA in that it gives a 25% bonus to support people to buy a first home.

[Lord Tunnicliffe]

May I check the logic of that? Is the Minister saying that the OBR has certified that it is a reasonable assumption that nobody will opt out as a result of a lifetime ISA, or merely that it took that as an input assumption in doing its analysis?

[Baroness Neville-Rolfe]

As with all impact assessments, it is an estimate. We looked at the Help to Buy ISA, which is similar to the lifetime ISA in that it gives a 25% bonus to support people to buy a first home. That has not led to a surge in opt-outs. Instead, opt-out rates for automatic enrolment are still much lower than the Government expected, as several noble Lords said; they are currently 9%. The overall programme assumption was, I understand, 28%. We will of course regularly monitor the lifetime ISA going forward to make sure that it is achieving its aim—as the noble Baroness, Lady Greengross, suggested, and indeed as we do with all important policy areas. But I am not convinced, to respond to the point made by the noble Lord, Lord Tunnicliffe, that we need a formal annual review.

The noble Baroness, Lady Greengross, asked how many people using Help to Save were eligible for automatic enrolment. We set out our expectations of take-up of Help to Save. I am afraid that, as with all forecasts, there is uncertainty, so at this stage we are not able to say how many of these people will also be eligible for automatic enrolment.

Several noble Lords talked about guidance and communication. The Government announced in October 2016 that they plan to replace the three government-sponsored financial guidance providers—the Money Advice Service, the Pensions Advisory Service and Pension Wise—with a new, single financial guidance body, which I welcome. Through creating a single body we intend to make it as easy as possible for consumers to access the help they need to get all their financial questions answered. For example, this could be through helping families to balance their household budget or for individuals considering their options in retirement. Consultation on the precise design of the single guidance body is currently live and closes on 13 February. MAS, TPAS and Pension Wise will continue to provide guidance to consumers until the new body goes live.

The noble Baroness, Lady Drake, raised the issue of pensions tax relief, as did other noble Lords. Our responses to the Treasury’s pensions tax consultation indicated that there was no clear consensus for reform and, therefore, that it was not the right time to undertake fundamental reform to the pensions tax system. But obviously the Government have moved, with the Bill, to encourage younger people to save through the lifetime ISA—and that was a key theme that came out of the consultation.

The noble Baroness, Lady Drake, raised the question of mis-selling risk, which was also a concern of my noble friend Lady Altmann. I agree that it is very important for individuals to have clear information on their products. That is why we will publish factual information about the lifetime ISA on GOV.UK, as well as working with the Money Advice Service and its successor to ensure that they make appropriate and impartial information available. As was said, it is the independent Financial Conduct Authority’s role to regulate account providers, including how they sell a product to consumers. It is currently consulting on the approach and has set out its proposals.

Having said all of that, the communication issue has come up under several different headings. If noble Lords would find it helpful, I will undertake to look through Hansard at the various points that have been made on communication and set out in a letter to noble Lords who have taken part in this debate just what our plans are. That will enable me, for example, to check with the FCA about its current plans and take account of any consultation responses that may already be available. We need to make sure that at the point of sale providers are transparent about risks, including any potential early withdrawal charge and with information on automatic enrolment. That theme came through from almost all noble Lords who spoke. It is a very important area. As has been said, this is a Money Bill, but that does not mean that we cannot set out how we see these things being properly communicated.

The noble Lord, Lord Sharkey, questioned the impact assessment. I understand, from checking with the experts, that it is correct. I was glad that he raised housing because it is an important area. The OBR has noted that the effect of the lifetime ISA on house prices is highly uncertain and its predicted impact is significantly smaller than overall house price movements. As we know, a number of factors can affect house prices, which will be subject to change in future years. For example, we are taking steps to boost housing supply. Following the announcement of £5.3 billion additional investment in housing in the Autumn Statement, we expect to double our annual capital spending on housing during this Parliament. We will publish a housing White Paper shortly, which I hope will address some of the supply issues the noble Lord raised and allow this House to have further exchanges on this incredibly important issue for the future of our economy and our industrial strategy. I believe the lifetime ISA is one way to make sure that first-time buyers have the support they need to get on to the housing ladder.

I will address a number of technical points raised by the noble Baroness, Lady Drake. She asked whether the Government would commit to a 50% participation rate for Help to Save. The Government are not setting any specific target around take-up of Help to Save because we want opening an account to be an active decision by those who feel Help to Save is right for them. However, we will continue to work with the account provider and other interested parties to ensure that people are made aware of the scheme and receive the right support and guidance.

The noble Lord, Lord McKenzie, talked about eligibility for the under-25s. A person aged under 25 is eligible for working tax credit if they work a minimum of 16 hours a week and have a child or a disability—I am learning a lot from this debate. Our intention is to passport people into eligibility for Help to Save. This is a well-established way of targeting support at people on lower incomes. Importantly, it removes the need for people to complete a further means test to prove that they are eligible, which we know could deter people from opening accounts.

Surplus Target: Corporation Tax

Lord Tunnicliffe Excerpts

Monday 4th July 2016 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I will make four quick points. Does this announcement not show a woeful lack of contingency planning? How could any reasonable man who threatened a £30 billion punishment Budget a few weeks ago turn round today and say that what is needed is a corporation tax giveaway? Why was this announcement not made to Parliament and accompanied by a proper OBR appraisal? Given last week’s abandonment of the 2020 surplus, of which we approve, how can the Chancellor claim to be maintaining the UK’s financial credibility? Has a single target he has set since 2010 been met? Why has the Chancellor started a negotiation with the EU by declaring a tax dumping war? As the former World Trade Organization chief Pascal Lamy said,

“if you want a proper balanced, win-win relationship in the future, starting with tax competition is not the right way psychologically to prepare this negotiation”.

[Lord O'Neill of Gatley]

My Lords, in the interests of time, I shall try to be brief. In the framework that has existed over the past six years there has been a well-identified escape clause in the event that GDP is foreseen to go below 1% for four consecutive quarters. That is the circumstance in which our decision within the country last week has left us, hence the Chancellor’s Statement. On corporation tax, it is intended and recommended that that is an appropriate response to show to the world at large that Britain remains open for business.

The Economy

Lord Tunnicliffe Excerpts

Thursday 28th April 2016 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing this debate. I thank him particularly for his kind remarks about my late noble friend Lord Peston. I feel that Lord Peston as an academic would have enjoyed the early part of the Minister’s speech because of its generous use of conditional clauses, which I am sure he would have picked his way through with some relish.

While I expect today’s debate to be wide-ranging, I will focus on last month’s Budget as the most significant recent step. In many ways, when it comes to the latest Budget—and perhaps this is true of most Budgets—the devil is not only in the detail but, more importantly, in the details that were missing. The Budget was certainly a masterclass in creative accounting, but when we have an economy which requires investment and innovation, regional communities with desperate need of support and assistance, and families which feel abandoned and betrayed, we need, and indeed expect, more than political posturing. Instead, we got a Budget which revealed much more about where the Government’s true priorities lie. It laid bare the Chancellor’s failure and did nothing to tackle the underlying challenges which face our economy.

Very often, the details of Budgets unravel in the days following the Chancellor’s Statement, and unravel they did. The decision to cut the personal independence payment—PIP—the resignation of the Secretary of State for Work and Pensions, Iain Duncan Smith, and of course the U-turn, all in a space of a few days, or rather a few hours, reflects the scale of the failure of this Budget. If the Chancellor had not changed course on PIP, 370,000 disabled people would have lost an average of £3,500 a year, and while of course the U-turn is welcome, it leaves us with more questions than answers as to where the additional savings will be made.

However, plenty of decisions that were taken in this Budget will not be reversed. The Institute for Fiscal Studies and the Resolution Foundation both pointed to the figures, which show that as a result of the Budget the richest in society will receive a cash gain in this financial year of more than £250 a year. The next richest 10% will get £150 extra, and the next richest decile after that will receive a benefit of around £75. In contrast, the gains for those on lower incomes are small in comparison. In short, this Budget, as with previous Budgets, is helping the rich get richer and the poor get poorer. The cuts in tax credits and benefits changes made in the last Parliament meant that low-income households with children were the biggest losers as a proportion of their income, and that trend looks set to continue.

The Resolution Foundation analysis shows that 80% of gains from the Budget income tax changes go to the top half of earners. Its analysis of all major post-election policy announcements today shows that, by 2020, the poorest 30% of households are set to lose around £565, while the richest 30% are set to gain around £280. The poor are getting poorer and the rich are getting richer. How is this reasonable, just or fair by any standards? Can the Minister comment on these figures and on what this Budget is doing to the most vulnerable people in our society?

I suspect that many of the figures I have just quoted will be repeated this afternoon, and why should they not? It is extremely powerful data. However, too often we forget what these numbers mean in practice and what it means for the people behind these figures. I suggest to anyone who has not read it already that the Joseph Rowntree Foundation report into destitution—the first study of its kind in the UK—offers an illuminating reflection on the daily struggles, the psychological impact and the economic consequences of what poverty does to individuals as well as to their relationships with family and society. The report reveals that 1.2 million people, of whom over 300,000 are children, live in destitute poverty. Destitution is defined as:

“When someone lacked two or more basic essentials in one month”.

This means that, over that month, people had,

“slept rough, had one or no meals a day for two or more days, been unable to heat or to light their home for five or more days, gone without weather-appropriate clothes or gone without basic toiletries”.

We would find difficult to imagine these existences and levels of pain, and very few of us will have experienced them.

The most common causes of people being in this situation are the extra costs of ill health and disability, the high costs of housing and other essential bills, unemployment or a financial shock such as a benefit sanction or delay. Let us compare that with the situation at BP, where the chief executive, Bob Dudley, has just been given a £13.8 million pay package, despite the company posting its worst-ever annual losses this year. When you compare the cases of destitution and BP, the sheer absurdity of the situation is inescapable. We really are living in an age of extremes, and I am afraid that we have a Government who are exacerbating the problem rather than finding solutions.

While this Government may not be too concerned about failing the most vulnerable in society, at the very least I would have expected them to care about failing to meet their own targets, but they have failed on nearly every measure. They have failed to deliver on growth and productivity. GDP growth has been revised down for last year, this year and every year in the forecast compared with the Autumn Statement last November, as has productivity growth. I know that my noble friend Lord Davies will go into more detail on this in his closing remarks. They have failed on debt and borrowing. A year ago, George Osborne boasted:

“The original debt target I set out in my first Budget has been met”,—[Official Report, Commons, 18/3/15; col. 769]

but last month it was confirmed that that was no longer true. Public sector net debt in 2015-16 will now rise to 83.7% as a proportion of GDP, or £1,591 billion—£275 billion higher than he expected in June 2010. The weakening economy means that, over the course of this Parliament, George Osborne is now set to borrow £38.4 billion more than he planned just four months ago. The Government have also failed to deliver on investment. Public sector net investment is set to fall as a share of GDP from 1.9% to 1.5% over the course of the Parliament.

Yet, despite all those misses, the Chancellor has convinced himself that his Budget is a hit, because he claims that,

“in 2019-20 Britain is set to have a surplus”.—[Official Report, Commons, 16/3/16; col. 955]

Very few seem to share the Chancellor’s optimism, and with good reason. Both the OBR and the IFS have said that he has only a 50:50 chance of meeting that target. You can move around numbers for only so long before you run out of options. Indeed, if it were not for the Chancellor’s creative accounting, he would fail to meet his 2019-20 target. As Paul Johnson, director of the IFS, said in his opening remarks of the Budget briefing regarding the problems associated with unconvincing growth in the economy:

“It inevitably causes problems for the fiscal target—to get to budget surplus by 2019-20. Indeed these changes cost the Chancellor more than £13 billion in that year. He made up just slightly more than that £13 billion through policy measures. But this is a rather odd £13 billion. More than half of it is purely temporary—shifting tax revenues into that year and shifting capital spending out. The target would not be forecast to be met without both this shuffling of money between years and a wholly unspecified spending cut of £3.5 billion on top of the specific cuts announced in November. The Chancellor is confident that the efficiencies can be found to achieve this spending cut, but won’t be able to tell us where they will come from until 2018.

In the longer term the public finances are kept on track only by adding yet another year of planned austerity on the spending side. Spending in 2020-21 will be £10 billion less than planned”.

As well as this creative shuffling, the Chancellor has still not accounted for £2 billion-worth of public spending saving, as well as the £4.4 billion that the Government had hoped to save from PIP. Perhaps the Minister when he responds could provide more detail than the Chancellor was able to. If you want to read a Budget that offers a true reflection of the economic realities of our country, do not read this one.

Something different must be done, because while the Chancellor has focused on meeting his surplus target—a target he is just as likely to miss as to reach—the foundations of our economy are dangerously unstable. The figures published by the OBR—I am one of the few sad people who actually reads the document from cover to cover—on sectoral net lending show the stark reality of what is driving our diluted economic growth. Risky, unsecured lending by households is rising at the fastest rate since 2008. Households are expected to spend £58 billion more than they earn this year, rising to £68 billion by the end of the decade. This is up from the respective forecast of £41 billion and £49.2 billion in November’s Autumn Statement. The UK’s household deficit, the amount by which debts such as credit cards, car leases and student loans exceed our income, will reach 3% of GDP and stay there for an extended period. The Government may have reduced public borrowing, but they have subcontracted the task to households. As the OBR has said quite unequivocally:

“The persistence of a household deficit of this size would be unprecedented in the latest available historical data”.

Strong words indeed, and words that should be heeded, especially given the fact that if interest rates start to rise, millions of families will face serious hardship.

The truth is that it is a sad reflection of the state of our economy that this insecure lending has become the norm. As Frances O’Grady, General Secretary of the TUC, has said of this reliance on debt:

“Rising household debt signals that too many people are still struggling to make ends meet. With pay growth slowing, and households facing a lost decade on wages, it’s no surprise that more families are relying on borrowing to meet the costs of day-to-day essentials. Although employment has risen, wages are still worth less today than eight years ago. This has left families struggling to meet the rising cost of living. We need a recovery where families can afford to pay their bills and raise their children without relying on credit cards and payday loans”.

Today’s Motion is that this House takes note of the steps Her Majesty’s Government are taking to build a stronger economy. This Budget is one step that makes the economy weaker not stronger, and sentences millions of our citizens to long-term financial misery.

--- Later in debate ---

[Lord O'Neill of Gatley]

My Lords, the best news is that people were hopeful early this morning that we would be over by 4 pm and, unless I am particularly long-winded in my summary, we should achieve that. I start by thanking everybody again for their varied contributions. I have presented myself with an additional risk in summing up because of how I started out. I deviated deliberately from my normal style to highlight—despite some of the comments of the noble Lord, Lord Davies—some of our really problematic challenges, particularly on productivity and the current account. That has led, in a very stimulating manner, to many of your Lordships offering extremely thoughtful comments, as always. I thank you all and apologise in advance if I do not give the right credit to everybody for their important contributions.

I cannot resist saying I am particularly pleased that the noble Lord, Lord Haskel, referred to antimicrobial resistance because three weeks from today, I will present the final reports of the important independent review I have been undertaking. I look forward to having a chance to debate that in this place. I say that because from my brief time as a Member of your Lordships’ House, I am aware of our collective belief that we conduct ourselves on a higher level than the other place. But I gather that yesterday, there was a debate in the House of Commons on antimicrobial resistance, which is to be welcomed.

Let me quickly return to the issues raised. In my judgment, there generally continue to be signs that our economy is in fundamentally better shape than it has been for some time. However, as I have pointed out, particularly with respect to productivity and the current account, and especially given what lies ahead on 23 June, there are some considerable risks—not least because as an outward-facing economy we are strongly affected by all sorts of forces around the world, none of which I had or will have the time to go into, although many others mentioned them. I would point out that while we have been sitting here, we have had the first estimate of US GDP growth for the first quarter: 0.5%. That annualised number is much less than expected. Despite the comments about how supposedly disappointing our growth is, that means that our first-quarter growth was four times stronger than the United States’. Some of the issues we face—on productivity and otherwise—are affecting many parts of the world.

As I tried to do during the Budget debate, I am going to summarise the comments made by noble Lords today in the context of specific areas. I have identified five: the economy itself and its performance; the Budget and the appropriate policy; global trade, especially with respect to the EU issue; productivity; and distributional analysis/inequality.

Before I do that, let me address two specific issues that arose early on in the debate. I was challenged by my noble friend Lord Forsyth on the immigration issue and the contents of the HM Treasury document. I am rather pleased that, despite the length of our debate, others did not make the same point. Of course, as the Government have articulated clearly in the run-up to this referendum, we believe that net migration remains too high and we are committed to reforms to bring that down. Many examples of that can be given. I would also point out, as that document pointed out, that most evidence suggests net migration in aggregate is a net positive for our economy—if for some more than others.

On the topic of PIPs, raised by the noble Lord, Lord Tunnicliffe, I thought I put that to bed during the Budget debate but perhaps not all noble Lords heard what was said there. The figure of £4.4 billion over the course of the rest of this Parliament, which the noble Lord referred to, is really a minuscule sum compared to the considerable volatility that will arise from the OBR’s changing its view again—one of the few things we can really predict about the OBR. For example, over the course of the last forecast, the figure changed by £75 billion. While many people have been right to point out the huge dangers of forecasting, I have very strong confidence in one forecast: that it will change its assumptions for the next Autumn Statement and the next Budget. That will be much bigger than anything that has happened with PIPs. It is a shame that that debate took place in such an environment. As far as I understand it, the underlying intention is not necessarily to save money but to make sure that those most worthy of the payments are getting them and that the system is not being gamed in the way we suspect it is.

I turn now to the five issues. A number of noble Lords made important comments on the economy, including the noble Lords, Lord Northbrook, Lord Hain, Lord Suri, Lord Sheikh and Lord Davies of Stamford, and the noble Viscount, Lord Hanworth. I have touched briefly on some of the many challenges that exist. Despite what I have just said about the latest US GDP figures, I note last month’s purchasing managers’ indices—a highly important leading indicator of probabilities—which showed a noticeable pick-up in a number of countries around the world, including the US and China, although sadly not the UK, which in itself is interesting.

I smiled to myself with considerable amusement when I heard the noble Lord, Lord Hain, refer to the very optimistic-sounding view of Oxford Economics on productivity, compared to that of the OBR. Of course, the OBR was set up in a particular way. I imagine that some people, including me, hope that Oxford Economics is proved right, because the fiscal outcome would by definition be considerably stronger than that implied by the latest OBR forecast. We can agree or disagree with what the OBR says, but it was set up to serve the purpose of independence, which, in general, it does pretty well.

I cannot resist pointing out the irony in the comments made by the noble Viscount, Lord Hanworth, about the problems of manufacturing and the rather strange situation with foreign ownership. Ten yards to his left as I look, is the noble Lord, Lord Bhattacharya, who pointed out—as we do a little less often than we should—the miraculous development going on in our auto industry, most of which is owned overseas but is the most productive auto industry in the world, with record numbers of exports. If we could bottle that and do the same with a lot of other things, it would be pretty good for all of us.

I turn to the second topic: the Budget. I will end up repeating things I have said before, as have many noble Lords, but I will try to be brief. Most of your Lordships are aware that there are some who would like the pace of deficit reduction to be faster, while many—perhaps the majority here—want it to be somewhat slower. It continues to surprise me when I hear that said so often here. There is something called the full employment adjusted cyclical position. Many academics are saying that, at this stage of our level of employment, we should be in a fiscal surplus. The idea that we should suddenly do things that involve spending a lot more money, and ignore that issue—that we should not worry about the rainy day in the future—is very questionable. The Government, faced with the self-imposed constraint of the OBR, are trying to choose the right path of deficit reduction, with the goal of achieving a future surplus to support both the private sector and, in the areas where it is necessary, the public sector, but with respect for trying to lower the deficit.

I have to apologise to the noble Baroness, Lady Kramer, who raised an issue which I had not quite understood from her comments on the Budget debate: whether we should introduce a goal of a surplus adjusted for capital spending. It sounds very reminiscent of what was called the medium-term fiscal strategy, specifically adjusted for capital spending. In principle, it is of course a very important idea, and I will give it some thought and discuss it with colleagues. However, as that experience demonstrated, when times are tough it becomes rather convenient to redefine certain elements, and you end up with unintended consequences.

Topic number three is trade and the vital issue of EU membership. The noble Lords, Lord Newby, Lord Sheikh and Lord Bilimoria, among others, outlined the issues wonderfully and in a very clear style, which I admire—I want to borrow some of it next time I have to do the same thing. As I said in my opening remarks—and as I have done myself many times in the past—one can easily articulate a future in which the only place where any of us are exporting to is China. In fact, I once produced a chart showing that by the end of this decade, Germany will be exporting more to China than it will to France. I have occasionally added the joke that German companies would rather be in a eurozone with China than with France. That was a forecast. It is not going to happen by 2020, because China’s economy has slowed, but it could still happen in the future. I give that example because, despite how good Germany is at exporting, the Germans are not, so far as I am aware, thinking of leaving the EU because of the opportunities they might find elsewhere. However, that is the sort of risk that we seem to be putting to our electorate here. All of us here—and I detect that most Members of the House strongly agree —need to ensure that the people of this country are correctly informed about the risk they may be facing.

I should also add, because there is sometimes confusion of membership of the euro and membership of the EU, that there is often no more powerful voice than the one and only Martin Wolf, who earlier this week outlined 10 reasons why we should not leave the EU. As I am sure noble Lords know, he is not the most vocal supporter of the euro.

With respect to trade, it was very nice to hear the interesting comments of my noble friend Lord Sheikh about Africa and Islamic finance. Coincidentally, today in Manchester my ministerial colleague the Economic Secretary is hosting a big conference on Islamic finance, which involves participation from some of the most important policy-makers in the Middle East and others. We are very committed to that.

Topic four is productivity, which itself took more time and had more contributions than I will have a chance to do justice to. Very briefly, with respect to the very interesting comments of the noble Lord, Lord Mawson, about technology, young people and the health service, this is a major area where things will happen, the scale and dimensions of which most of us in this place, because of our age and minds, will not be dictating. But I share the noble Lord’s excitement, especially as it relates to giving the right mental and financial support to encourage young people to go down that unpredictable path of discovery. That is very important for us to do, and we are trying.

As that relates to education and skills, I will highlight something which I think has not had much coverage. Specifically in the Budget as it relates to the northern powerhouse, we set up the northern powerhouse education fund. It has not yet started, of course, because the Budget was just a few weeks ago, but it will be considering marginal initiatives in the education and skills space specifically to help some of the most challenged areas of the north.

In the same spirit, the noble Lord, Lord Mawson, also touched on health. We are pursuing many things on that front that again I think the Government should be very proud of. A particularly exciting one is of course the devolution of health to Greater Manchester. It will be very important for many parts of the country, particularly urban parts, to watch how this progresses, because of what it means for an integrated health approach that could help our society in so many ways.

On finance, as always, I listened really closely to the important comments of someone as experienced as the noble Lord, Lord McFall. I pointed out in my opening comments something that is not often understood. There are lots of measurement issues with productivity data, but as they are reported, we have seen a dramatic fall in the productivity of the financial sector. It is not obvious to me, as someone who spent so long in that sector, quite what is going on. We must be very careful that our desire to hold people to account, as we should, and punish them—as I think that parts of the Bank of England Bill will—does not smother the financial system from doing what it needs to in its connection to the rest of our economy, linking to some of the comments of the noble Baroness, Lady Kramer. That is a very important challenge and one that I and some of my colleagues are spending considerable time on.

In the broader context, let me turn briefly to long-termism, which the noble Lord, Lord McFall, talked about in a broader sense, as did the noble Lords, Lord Haskel and Lord Mair. That takes up an important part of my mental time, because I, too, believe that initiatives need to be considered. If you look carefully at some of our published documents, you will see that the number of words we are giving to it is creeping up. We are spending a lot of time thinking about the right way to try to change the incentive reward system by linking it to investment and productivity. Many ideas that I have heard here will play in my mind, and we will welcome many others.

To finish off on productivity, on both industrial strategy and R&D, when I was listening to the wonderful comments from the noble Lord, Lord Mair, which many have highlighted, in particular, but also from the noble Lords, Lord Bilimoria and Lord Dykes, many things that they talked about I spend much of my day talking about to research staff, including many of my officials. If I had time, I could proudly highlight what we are doing. We have directly supported the National Graphene Institute at the University of Manchester. There is advanced manufacturing at the University of Sheffield. Yesterday, I gave a speech at the launch of our direct support for sophisticated energy research involving the top six universities in the Midlands. I could go on and on.

Very lastly and importantly, I turn to the comments of the noble Lord, Lord Tunnicliffe, about distribution analysis and the underlying issues of inequality. We believe—with some justification, I think—that what is provided in the Budget is the fullest available evidence about how money is spent. I think the statistics show that 50% of the money that goes on welfare and public services goes to the 40% at the bottom. I repeat for the third time in this place: if you look at internationally credible, accepted and used measures of inequality, you will see that although we are more unequal then we should be, we are not as unequal as we were 10 to 15 years ago.

I would love to respond to the comments about my supposed howler on productivity. If it was as bad as the noble Lord said, I should be allowed out of this place because, although I have made many howlers in the past and will make many howlers in the future, if I was unaware that our productivity is inferior to that of Germany it would be a very bad howler, and I am sure that the noble Lord must have misunderstood.

[Lord Tunnicliffe]

The Minister has made claims about the impact of inequality before, and he referenced various international studies. Will he write a letter and put it in the Library referencing where I can see the arguments and the figures behind them?

[Lord O'Neill of Gatley]

I thought I did write—I apologise if that has not taken place—particularly because of the reaction to an Oral Question on this issue. But if I did not write, I will make sure that I do.

I conclude by saying that this has been a stimulating debate. I have heard many interesting things, particularly on angles with respect to R&D and the key interplay between the strength of our universities and the fact that we need somehow to get more of this R&D going from them into industry.

I will finish where I started. We have two quite clear, large economic challenges in our productivity rate and our current account. If we do not make the right decision on 23 June, they will cause us bigger problems than, luckily, they have as yet.

Motion agreed.

Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016

Lord Tunnicliffe Excerpts

Monday 7th March 2016 Lords Chamber

I finish by saying that the main worry I have—I referred to it earlier—revolves around the impetus for this going forward, which my noble friend correctly mentioned. We are trying to encourage people to trade themselves out of debt by getting more hours of work and higher pay, and we understand that the Government are attempting to assist that process. However, reading the IFS Green Budget 2016 for the upcoming Budget, it is quite clear to me that the people who are going to suffer most for the rest of this Parliament are the two deciles at the second and third points of the income distribution. That is exactly the 800,000 families that are going to be hit by this and exactly the kind of households and families that this Government want to support. I do not understand why we get this contradiction in policy, except to say that the Government, and, more accurately, the Chancellor, want £935 million as part of their £12,000 million reduction in the welfare budget. I hope that the Minister will go away and reflect carefully on this policy and give us a guarantee that it is not all going to fall over in three weeks’ time because the RTI computer process fails to function.

[Lord Tunnicliffe (Lab)]

My Lords, as has been outlined, the regulations before us today would reduce the tax credit income disregard from £5,000 to £2,500. We believe that it is right that we work towards developing a system which ensures that households do not incur tax credit overpayments. However, until such a point when real-time responsiveness can be guaranteed, it is surely justified that there is enough leeway in the system to reduce the shock of these overpayments and give households some time to readjust the family finances.

Thus far, the Government have failed to show that the system is resilient enough to cope with the reduction to the income disregard, having failed to provide your Lordships’ House with either an impact assessment or any evidence to support claims that the service mechanisms respond to real-time information. In inviting us to agree this order, surely the Government should have provided this information as a matter of course. In keeping with what I regard as standard practice, I would expect the Government to have produced an impact assessment to accompany these regulations, particularly in the light of public interest and your Lordships’ interest in this matter. However, that was not the case, and it was left to the Secondary Legislation Scrutiny Committee, to which we are indebted, to investigate further.

In responding to the committee’s questions, the Government admitted that this change will impact on 800,000 households next year—a figure which only adds to my disbelief as to why no assessment was produced. They also go on to say, without supporting evidence, that of the 800,000 people,

“none will be cash losers because their income will have increased”.

In the absence of further detail, the House of Commons Library has analysed the impact that the disregard reduction will have on a family’s income, and its findings directly contradict the claims made by the Government. The findings suggest, for example, that for a lone parent with two children the income disregard reduction could hit a household by as much as £1,000. Of course, this is just one scenario, but in the absence of any data to support the claim that there will be “no losers”, it certainly calls the claim into question.

There is also no explanation for why the Government have determined that halving the income disregard is appropriate. Why the £2,500 figure? Is it the average minimum salary increase of tax credit claimants assessed over previous years? Is it an amount that would provide an adequate cost-of-living buffer for those on the lowest salaries within the scheme? I would be very interested to hear the Government’s rationale. I hope that the Minister can give us some indication of why an impact assessment was absent as well as an assurance that, particularly in matters which attract such intense public interest, such documents will accompany future instruments.

I turn to the apparent improvements in tax credit delivery systems which the Government alluded to in their response to the Secondary Legislation Scrutiny Committee. It was suggested that it is now acceptable to return the disregard to the original level of 2003 because,

“the tax credit system is now operationally better able to cope … now that it has more up to date information on people’s earnings … HMRC are also making it easier to report changes quickly online, so that people will less often receive overpayments”.

Yet this is the third time since 2010 that the Government will have cut the income disregard and in every year since then the amount of overpayments has increased. That does not suggest to me that we have a system which can at present manage people’s changes in circumstance on a real-time basis. This cut will serve only to exacerbate such problems. That is not good for households which receive tax credits and nor is it good for our country’s public finances as a whole. Surely it would have been more sensible to wait for the introduction of universal credit, test the relevant systems and then explore the capacity of those systems to cope with real-time changes in people’s income.

These proposals have been poorly presented. I do not believe that the Government have given sufficient thought to how this reduction will impact on people who receive tax credits or given any consideration to how the mechanisms which process these claims will cope with the added demand. I hope that the Minister will make a serious attempt to address the specific points that I have raised and refrain from parroting the Treasury line that these measures will “make work pay”. As I have made clear, that has not been the focus of our concerns.

The Government must give assurances that a full impact assessment and evidence base will be provided for future instruments. I would be grateful if the Minister could also give a commitment to outline not only the ongoing improvements being made to the operational mechanisms used to calculate tax credits but what HMRC can do to help support those who receive overpayments. For example, where repayments are large, can they be spread over a number of years? Furthermore, can the Minister assure us that no unreasonable penalties will be levied against those who have been overpaid?

Your Lordships’ House has played its role in ensuring that full and effective scrutiny can take place, not only though this debate but, crucially, through the work of the Secondary Legislation Scrutiny Committee, which helped inform the discussion in the other place. I assure the Minister that we will watch developments in this area very carefully, as it is vital that we begin to see progress on addressing the overpayment of tax credits. Labour was well represented in the debate in the other place and made its position clear. The matter went to a vote and the Government succeeded. So the Government must now get on with ensuring that the real-time mechanisms live up to their promises.

In the coming weeks and months, I do not doubt that there will be issues on which we will have to go further than simply indicating our disapproval and will have to test the opinion of the House. However, it is our judgment as Her Majesty’s Official Opposition that today is not such an occasion.

[Lord O'Neill of Gatley]

My Lords, I thank those who have taken part so far in this debate. Each time that I have had the pleasure of standing here, I have always learned some interesting thoughts on whatever the topic is. I will try to respond to the things that I have heard as part of my closing statement. First, I will reiterate the broad framework.

This measure needs to be considered alongside the broader steps that the Government are taking, with their ambition for a higher-wage, lower-tax and lower-welfare society, which they were successfully elected to deliver in 2015. Under this proposal is the belief that work will always pay. In that regard, these regulations will reduce the degree of unfairness still persistent in the tax credit system. The reduction to the income rise disregard will reduce the instances where one family receives a higher tax credit award than another family with precisely the same income and the same circumstances. As I have already set out, it is also not unimportant to recall that this policy returns the income rise disregard to its original level.

With the introduction of real-time information, which each of the three speakers mentioned, the tax credits IT system is now more responsive and able to adjust to the fluctuations in family incomes in-year. I will return to that but, as the noble Lord, Lord Kirkwood, in particular mentioned, it is of course important that we try our best to monitor how that progresses. In the event that things do not turn out the way we expect, one would hope that a rational response would be to react accordingly. Before I come back to the specifics, it is also important to point out, as the noble Baroness, Lady Manzoor, herself said and other noble Lords touched on, that this is against the background where we are in any case migrating to universal credit. As part of that, a monthly system will be in operation and it is important to bear in mind that we are already in a position of travel. These new regulations reflect—

[Lord Tunnicliffe]

Will the Minister admit that the only possible rational response if the circumstances turn out as he has just described—and he promised a rational response—would be to return the disregard to the £5,000 level?

[Lord O'Neill of Gatley]

I am not sure that that would be the only rational response, but it would certainly be one of a number of ideas that one should consider in the event of any evidence that would subsequently accumulate as a result of the implementation of this regulation. Other policies could be thought of as well.

Bank of England Act 1998 (Macro-prudential Measures) Order 2015

Lord Tunnicliffe Excerpts

Thursday 19th March 2015 Grand Committee

[Lord Newby (LD)]

My Lords, this Government have undertaken the most fundamental programme of financial reform this country has ever seen. The Bank of England sits at the heart of this new system, with clear responsibility for maintaining financial stability. The Bank is supported by the firm-level supervisors: the Prudential Regulation Authority and the Financial Conduct Authority.

A key element of the new system is the Financial Policy Committee. The FPC is responsible for identifying, monitoring and addressing risks to the system as a whole. This macroprudential regulation was entirely absent from the system we inherited.

The FPC works to improve financial stability in two ways: first, through recommendations, which can be made to the regulators, industry, the Treasury, within the Bank and to other persons; and, secondly, through directions that can be given to the PRA and FCA. The FPC’s direction power is limited to macroprudential measures set out in orders like those currently before the House. The regulators must comply with a direction, but they will have discretion over its timing and implementation method.

The FPC has recommended that its powers of direction be expanded so that it may effectively tackle systemic risks within the financial sector. The Government agree with those recommendations and have brought forward the instruments that we are discussing today. These instruments will provide the FPC with powers of direction with regard to the UK housing market and a leverage ratio framework. I will discuss these powers in turn.

Owning a property is an aspiration for many people in the UK, and one which this Government support. However, we cannot be blind to the risks that can emerge from the housing market. More than two-thirds of previous systemic banking crises were preceded by boom-bust housing cycles, and recessions following property booms have been two to three times deeper on average than those without.

To solve this issue, we need to be clear about where the risks arise. They arise when people borrow too much and leave themselves vulnerable to changes in circumstances. Excessive debt can create serious difficulties for households and, given that mortgages are the single largest asset on bank balance sheets, it can result in significant vulnerabilities in the banking system. We all know from the experience of the financial crisis how important it is for the banking system to be resilient to all shocks, including those from the housing market. Excess debt can also force households to cut back on spending which can, in aggregate, create difficulties for the economy as a whole.

Let me be clear: there is no immediate cause for alarm. The FPC has itself stated that since taking action in June, there has been no increase in financial stability risk from the housing market. However, not to prepare for such events would be dangerously complacent. So we need to ensure the FPC has the tools at its disposal to deal with these risks should they arise, which is why we are giving the FPC far-reaching new powers over owner-occupied mortgages. Specifically, if the FPC judges that some borrowers are being offered excessive amounts of debt, they can limit the proportion of high debt-to-income—DTI—mortgages each bank can lend or, in extremis, simply ban all new lending above a specific ratio. Similarly, if the FPC is concerned by the risks posed by a housing bubble, it could impose caps on loan-to-value ratios. These additional powers over the housing market are commonly held by central banks in other countries, and the experiences of Korea, Singapore and Hong Kong confirm that DTI and LTV limits are efficient tools to address risks in the housing sector.

I now turn to the other instrument that we are considering today. The recent financial crisis revealed serious weaknesses in the existing framework of internationally agreed standards of capital adequacy. Banks in most jurisdictions were only required to meet risk-weighted capital requirements and were not subject to leverage requirements. In the lead-up to the crisis, some banks’ balance sheets expanded significantly while average risk weights declined. Firms’ leverage ratios were a useful indicator of failure during the last crisis, and the period immediately preceding the crisis was characterised by sharp increases in leverage. Firms with high leverage ratios have greater amounts of capital to absorb losses which materialise and have less reliance on debt financing.

There is international agreement that the leverage ratio is a crucial complement to risk-based capital requirements. The usefulness of the leverage ratio as a regulatory requirement has been recognised by the Basel Committee on Banking Supervision, which has included proposals for a 3% minimum leverage ratio in the Basel III agreement. Countries such as Canada and the US already impose leverage ratio requirements and have also committed to going beyond the Basel III requirements.

In the UK, both the Independent Commission on Banking and the Parliamentary Commission on Banking Standards have recommended that banks should be subject to minimum leverage ratio requirements. On 26 November 2013, the Chancellor requested that the FPC undertake a review of the leverage ratio and its role in the regulatory framework. In light of international developments, the Chancellor judged that it was an appropriate time for the FPC to consider all outstanding issues relating to the leverage ratio, including whether and when the FPC needed any additional powers of direction over the leverage ratio, and whether and how leverage requirements should be scaled up for ring-fenced banks and in other circumstances where risk-based capital ratios are raised.

On 31 October last year, following almost a year of work and extensive consultation with stakeholders, the FPC published its response, The Financial Policy Committee’s Review of the Leverage Ratio. The review recommended that the FPC be given new powers of direction over the leverage ratio framework for the UK banking sector. The Chancellor agreed with these recommendations and, following a consultation on the implementation of the proposals, brought forward the instrument that we are considering today.

The instrument will grant the FPC powers to set: a minimum leverage ratio that all firms must meet; additional leverage ratio buffers for systemic firms, linked to their systemic risk-weighted capital requirements; and a countercyclical leverage ratio buffer for all firms, linked to the countercyclical capital buffer that is also set by the FPC. These powers will allow the FPC to ensure that firms are not allowed to take on excessive levels of leverage, that the most systemically important firms are more resilient than other firms and that resilience is built up for all firms when times are good. I beg to move.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing these two orders. The Minister and I meet like this quite regularly, just the two of us. I thank the noble Lord, Lord Ashton of Hyde, for making the government side look a bit more multiple, but only two of us are going to speak. Often we discuss rather minor orders, but I do not think that these are minor; they are absolutely fundamental to the work that we have done in the Chamber with the various financial reform Acts and in the creation and designing of powers of the FPC. These are probably the key ones that have come before us. I thought that they were the first, and possibly I am wrong about that, but I certainly do not remember any as important as this. I do not want in any way to suggest that we are other than supportive of the orders, but I have a few queries and the odd complaint.

The Lords Secondary Legislation Scrutiny Committee commented on what it saw as the inadequacies of the Explanatory Memorandum. It particularly pointed out the very trivial summary of the consultation. I agree with the committee in the sense that the explanation of these orders needs quite a narrative. I would have appreciated it if that narrative was in the EM, but in fact one has to go into the impact assessment—and then, really to understand, I found that I had to go back into the minutes of the Financial Policy Committee and its interesting review of the leverage ratio. As a Committee, our considerations would have been enhanced if we had been led down that path rather than having to discover it. In the middle of this process, I realised what a different world it is, because 10 years ago without the internet I would not have had the faintest idea what we were talking about. It is really very complicated to get at if you cannot get back to those source documents.

The one thing that I did find in the Explanatory Memorandums from the Treasury was a name and telephone number. I have to say that my experience of ringing those numbers has been very impressive under previous orders. This time, because his name came up first, because it is attached to the second order, I publicly thank Christopher Woodspeed for spending 40 minutes taking this amateur politician through the intricacies and giving some signposts as to where to go.

I shall be slightly repetitive for the Minister, to set the scene. In creating the FPC and the other institutions, we said to the FPC that it could have two toolkits—a recommended and a directional toolkit. The recommended toolkit is a “comply or explain” toolkit, while the directional toolkit is a “do it” toolkit. As I understand it from going back into the minutes of the Financial Policy Committee of 17 and 25 June, written up as one, the committee discussed the world and particularly alighted on the UK housing market. I do not suppose anybody reads what we say, so it does not matter, but I commend whoever produced the minutes of that meeting, because I found them very readable. They are a good read; they fit together and are pleasantly discursive.

When discussing the housing market, in paragraph 11 of the minutes, the FPC reminds itself what its job is—which I thought was quite clever to put into its minutes. It states:

“Under its primary objective, the FPC was required to ‘remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system’; legislation defined one source of systemic risk as ‘unsustainable levels of leverage, debt or credit growth’”.

Then the minutes describe a debate, which seems to have been a proper and interesting one. The paragraph that sums up where the committee got to says:

“Taking this evidence together, the Committee assessed that there was the potential for a large and diverse impact on aggregate demand from household indebtedness, with this risk more marked in relation to borrowers with higher levels of indebtedness. The Committee judged that the size of that impact on aggregate demand was sufficient to warrant intervening now”—

that is, in June—

“in the mortgage market, given current conditions and the potential upside risks to the FPC’s central view of the possible future path of the share of mortgages extended at high LTI multiples and hence to overall indebtedness”.

So the MPC had this conversation and produced a couple of recommendations. One was a stress test—about 3% over a period of years, and so on, which all makes sense—and the other is that:

“The PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5”.

Then there is a de minimis bit of it, and so on. As I understand what the Minister has said, those recommendations did their work. My understanding from reading the various documents and from what he said is that there is not a concern with the housing market at this moment, and I do not think it is seen as a concern in the future. I do not know whether I can confess this, but I actually read the Daily Telegraph this morning—it happens. In an article, Roger Bootle, chief executive of Capital Economics and, as far as I know, pretty politically neutral, says:

“Time and again governments take measures that boost the demand for housing without doing anything to increase supply. The result is higher house prices without accommodating a single extra family—hard-working or otherwise”.

I would like the Minister to confirm that the increased demand that the Budget put into the housing market is not expected to create any destabilising effect.

So we think that the FPC has stabilised the market. However, in October 2014—no, sorry, that was the other stuff; perhaps it was September 2014—the committee determined that it wanted to move its powers from the recommendation toolkit to the direction toolkit. Does the Minister feel that that is because the FPC envisaged instability; is it just going to take the directional power and put in the same figures as in the recommendation, to tidy things up; or is it going to do neither of those things but simply put it in a drawer, with the marketplace knowing it is in a drawer and that it can be drawn out at any time to direct the marketplace away from an unstable path? I would be interested in which of those three options the Government envisage the FPC using these powers for.

I turn to the other order. I read lots of stuff on this but found one document particularly useful. The Minister has the advantage of me as he works in the Treasury; for my part, I end up understanding a bit of this legislation for about a day and a half before we discuss it and then it goes out of one’s mind. The nice thing about the Financial Policy Committee’s review of the leverage ratio is that it takes you through all the background so you can see how all the bits fit together.

As I understand it, the second order, which creates the leverage ratio concept, rules and “calibration”—the word that the FPC used—will not bite with most firms because the capital buffer, if that is the right term, derived from the risk-weighted analysis is in most cases greater than the leverage ratio buffer that will be recommended. In that sense, the new leverage ratio sits there as a floor rather than something that is biting and acting on firms. But I understand, or at least I hope I do—this will be a confirmation of whether or not I have understood it; please forgive me, but I think it is quite important—that some firms, particularly ones that have high-quality assets with low risk, may in fact be caught by the leverage ratio, and that particularly includes building societies.

My next question is: are any problems envisaged from the tightening of the market, for want of a better way of putting it, that the biting of this leverage ratio on those particular institutions is going to lead to? Will there be any adverse effects on housing finance as a result of these ratios being introduced? Finally, as I understand it, a firm could respond to the leverage ratio constraint by changing its asset mix; by moving between different levels of risk, it would change its risk-weighted buffer and come down to this buffer. It is an invitation for firms to look at their asset portfolios.

What I did not understand is the impact that this is going to have on lending to SMEs. I think there is a political consensus that SMEs need to be encouraged and funded in this country. I am curious about the extent to which it is envisaged—I got mixed messages when trying to understand it from the documentation—that this will impact on SME borrowing.

The two orders have the potential to have an impact on growth. The impact assessment has some worked-out examples. They are not forecasts, I accept that, but they illustrate scenarios where there may be some impact on growth through the use of the ratios. The leverage ratio could have a similar effect—a reduction in lending and hence some impact on growth.

It was a particular joy to read the Daily Telegraph this morning. I rather assumed it would be wall-to-wall praise. I take the Guardian to think but I take the Telegraph for therapy—that is one way of looking at it—and it is free at the club. The front page of the business section reads: “Osborne’s bank raid” and concludes that he has done a bank raid of £9.28 billion. The article refers to the OBR report. I have not a chance to read the OBR report—I am saving that for my holiday; I am covering everything in sight today, am I not? But I think it is an incredibly well constructed document which has developed well over the years, and I now find that it is genuinely worthwhile reading as one of the best documents to give you a feel for the economy as a whole. The article says:

“The OBR said in its review of the Budget that the higher levy could ‘affect banks’ ability to meet capital requirements … the measures could affect the supply of credit and therefore GDP growth’”.

So you have on the one hand the Budget with the high levy and on the other these leverage ratios, which if they bite could have an adverse effect. Given the central scenario—by that I mean the scenario that the OBR uses for its next five-year plan—are these orders expected to have any adverse effect on growth? You can read stuff that suggests they do not but it does not definitely say that they do not. Given the central scenario that the Government are using—that is, the OBR scenario for the next five years—are these orders expected to have an adverse effect on growth and, if they do, did the OBR take account of that adverse effect in its documentation or would that need to be added?

This is the end of the Parliament. I am not going to say much about the next order because it is so reasonable I cannot find anything to say about it. We have had a lot of encounters and we are in a situation which I do not know how to remedy but I somehow feel is wrong. We have here some incredibly important orders but I am not sure that we are using the correct mechanism to do them justice. There are just the two of us discussing them. The noble Lord will have studied these orders carefully and been fully briefed and no doubt will hopefully have put his staff under some pressure in this respect, and I have put quite a lot of effort into it. However, I worry about the value of these encounters. I have been trying to think through the value of this encounter. One of the things you can do with an affirmative order is to resist it by voting against it. Realistically, that happens two or three times a Parliament. Very occasionally, you vote it down. In my recollection, that occurs once or twice a decade, so it is hardly our central business. You can seek clarification which sometimes tends to verge on a bit of a blood sport where you are trying to catch the Minister out. I would not try to do that because I know the Minister is so well briefed.

The real issue is scrutiny. One of the problems with scrutiny is that it is so difficult for the Opposition to evidence the fact that they have put effort into scrutinising the legislation and making sure that it does not contain any faults. The value of scrutiny lies usually not so much in scrutinising the order but creating an atmosphere so that back at the ranch—back in the Treasury—people know that the orders that they bring forward are going to be carefully examined, and therefore they are encouraged to be that much more careful and thoughtful. In a sense, all one can do is stand up and say, “We have scrutinised the order”. These orders are particularly unhelpful in that regard, as I cannot find anything wrong with them. As far as I can see, they are well crafted. They sensibly add to the FPC’s powers. As I say, I am disappointed that I cannot find anything wrong with them.

I then glanced down at the first page of the report, which happens to list the membership of the FPC as being the Governor, four deputy-governors—for reasons I do not understand, three were there because they should be there and one was there because she was there; that is roughly what it says on the front page—the chief executive of the FCA, a man from the Treasury and four non-executives. They spent a year doing this work and, if they cannot get it right, we are in trouble. I think that they have got it right.

In summary, I thank the FPC for its efforts and commend it on the results.

[Lord Newby]

My Lords, I am extremely grateful to the noble Lord for taking such trouble over these orders. He raised a number of points. He asked whether it was the first time that we had used the macroprudential powers. We previously legislated to grant the FPC a power of direction with regard to sectoral capital requirements. This was done through a similar order in 2013. The debate in your Lordships’ House was on 26 February 2013. The FPC was also granted the power to set the UK rate of the countercyclical capital buffer under the CRD IV in the normal way.

The noble Lord was concerned about the lack of detail in the Explanatory Memorandum. The full consultation response document was published on the government website, but I take his point. Those of us who sat through the many weeks and months of consideration of the background policy to these orders when we were putting the Financial Services Bill through your Lordships’ House, had it in our water almost that this was going on. For people who did not do that, which of course is the vast majority of people, it is very important that the accompanying documentation is as comprehensive as possible. I am sure that my colleagues in the Treasury will have noted that, although I am of course very pleased that the noble Lord found the experience of seeking advice from the Treasury so positive.

The noble Lord asked about the extent to which there was concern at the moment about housing and whether this was a precautionary measure or the powers were going to be used immediately. The FPC is clear that these instruments are necessary to tackle financial stability risks that could emerge in the future rather than any risks that we are facing at the moment. As it said in its 2 October statement, the recommendation in relation to these powers,

“relates to the FPC’s general ability to tackle risks that could emerge from the housing market in the future. The Recommendation does not reflect any FPC decision about the current state of the housing market”.

This is a recognition of the importance of the housing market in relation to financial stability, but there is no concern at the moment that the housing market is in such a position that these powers are needed immediately.

The noble Lord asked whether, as a result of the Budget, there was likely to be a further problem with house prices and these powers might be needed sooner rather than later. The key thing here is that we are not just introducing new measures for first-time buyers, for example, but are taking, and have taken, significant steps to boost housing supply, including the new planning policy framework and the most ambitious affordable housing programme for 30 years. Everybody accepts that we need to do more on housing, but when the FPC looked at the Help to Buy scheme in October last year, which people are questioning as a potential problem in terms of financial stability, it came to the conclusion that it did not represent a material risk to financial stability, that it had not been a material driver of recent house price growth and that its key parameters remained appropriate.

The noble Lord asked about the SME lending proposals. The Government and the FPC do not expect leverage requirements to have a material impact on lending to the real economy. At the margins, firms that are bound by leverage ratio requirements may be incentivised to increase SME lending relative to other types of lending, as SME lending often attracts a higher return than other assets that have lower risk weights, as the leverage ration is not risk-weighted. However, we do not expect this effect to be significant.

The noble Lord asked how the leverage tool would affect companies with low-risk assets, particularly building societies. As he pointed out, the key capital constraint for banks and building societies is the risk-weighted capital requirements rather than the leverage ratio. The FPC’s impact assessment suggests that only two of the seven building societies in its sample would need to raise capital to meet leverage ratio requirements. The majority of building societies in the UK use standardised risk models, which means that their average risk weights are above 35%. An average risk weight above 35% means that risk-weighted capital requirements will bind—take effect—before the FPC’s proposed leverage requirements.

Mortgage Credit Directive Order 2015

Lord Tunnicliffe Excerpts

Thursday 19th March 2015 Grand Committee

[Lord Newby (LD)]

Noble Lords might find it helpful if I start by outlining the background to the legislation. In February 2014 the mortgage credit directive—MCD—was agreed, giving member states until 21 March 2016 to ensure that it is implemented. The MCD has two broad aims: to protect consumers by setting minimum regulatory requirements that member states must meet and to promote the creation of a more harmonised European mortgage market.

However, the UK already has a strong regulatory framework in place to protect consumers in the residential mortgage market. Under this framework, the independent regulator, the FCA, has the authority to put in place, supervise and enforce a range of rules to ensure that firms act responsibly when conducting residential mortgage business. Since this framework was put in place in 2004, the FCA has been able to make incremental changes and develop a regime with strong consumer protections, tailored to the specifics of the UK market.

The MCD does not offer many additional benefits to UK consumers beyond those already provided. However, it does have the potential to increase the burden on business. In recognition of this, the UK’s approach throughout the negotiations on the MCD was to try to align the directive’s requirements with the existing UK regulations, in order to minimise the impact on UK industry and consumers. This strategy proved highly successful and the Government were able to secure a good outcome for the UK.

Once the directive was agreed, the Government set out an approach to implementation that was an extension of the earlier negotiation strategy. We decided to build on the existing UK regulatory regime, minimising the impact on the UK market, avoiding disruption and ensuring that the gains made from improvements in regulation over the past 10 years were not squandered unnecessarily. This approach means that implementation of the MCD will be achieved primarily through adjustments to existing FCA rules. However, there are areas where UK legislation has to be changed, and that is the purpose of the draft order under consideration today.

There are two main areas where the draft order makes a significant change. The first is to the regulatory framework for second charge mortgages. These are loans secured on property that is already acting as security for a first charge mortgage. The terms first charge and second charge refer to the priority of securities held by the lenders, where the second charge is subordinate to the first. Typical uses for this type of loan include debt consolidation and home improvements. Currently, the scope of FCA mortgage regulation is limited to first charge mortgage lending, with second charge lending regulated as part of the FCA’s consumer credit regime.

The Government previously committed to move second charge mortgage lending into the regulatory regime for mortgage lending on the basis that it is more appropriate to regulate lending secured on the borrower’s home consistently. This proposal was welcomed by the industry. However, it was decided that this move would be postponed to coincide with the implementation of the MCD and reduce the number of regulatory changes that firms would have to ensure compliance with. As a result, this draft order will ensure that, as of 21 March 2016, the FCA will be able to regulate the vast majority of secured lending under one regulatory regime.

The second area where this order will make a significant change is with respect to buy-to-let mortgages. Existing UK legislation excludes buy-to-let mortgages from the scope of FCA regulation. This approach is driven by two key considerations. The first is that, unlike lending to an owner-occupier, the borrower’s home is not at risk. Second is the acknowledgement that buy-to-let borrowers tend to be acting as a business.

The Government are committed to introducing FCA regulation only where there is a clear case for doing so in order to avoid putting additional costs on firms that would ultimately lead to higher costs for borrowers. However, while the MCD allows member states to exempt buy-to-let from the detailed requirements of the directive, it requires that member states using this option put in place an appropriate framework at a national level for buy-to-let lending to consumers. The Government have decided to use this option to put in place the minimum requirements needed to meet the UK’s legal obligations, as they are not persuaded of the case for the full conduct regulation of buy-to-let mortgages.

The order under consideration today sets out these rules and gives the FCA the power to register, supervise and enforce them in line with its existing statutory duties. This draft order has been prepared in close co-ordination with the FCA, industry and consumer groups. The overall approach we have taken has had broad-based support from all these groups and it has been extremely pleasing to see how we could work together to achieve a positive outcome for the UK. By delivering on our key objective and putting this legislation in place well in advance of the transposition date, we will give the mortgage industry the certainty it desires and the best chance possible of a smooth transition to the new regulatory framework.

The net cost of this draft order is expected to be £11 million in total over a 10-year period. However, it is also worth noting that the cost of taking a copy-out approach in this instance was estimated to cost £48.7 million more per year over the same period.

I hope I have persuaded the noble Lord that this statutory instrument will ensure compliance with the EU mortgage credit directive in a manner that minimises the impact on industry, retains the strengths of our regulatory framework for mortgages and ensures that consumers experience limited change as a result.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the noble Lord for introducing this order. He has persuaded me that it is perfectly sensible and that it achieves the objectives.

My sole comment relates to the tone of the description of our relationship with the EU in this matter. I would love to have heard a tone that said we were concerned about the health of the EU in these markets—because, in all probability, this is a good EU directive, taking the EU as a whole—and that we had secured appropriate freedoms to build on our own well developed market regulation. It is just a matter of tone, but one has to remember that the idea of having these unified directives is to clean up—though that is too hard a term—or to codify European markets as a whole; and, in general, that is a good thing. As far as the order itself goes, how it was created and how it has been evaluated, I am content.

Motion agreed.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No. 2) Order 2015

Lord Tunnicliffe Excerpts

Monday 2nd March 2015 Grand Committee

[Lord Newby (LD)]

My Lords, this instrument creates a new regulated activity in the Financial Conduct Authority’s regulated activities order. The new activity concerns the giving of advice on the conversion or transfer of a class of pension benefits known as safeguarded benefits, which are defined in the Pension Schemes Bill 2014-15, but are best understood as benefits that the Government have taken a decision to safeguard, because they offer a guaranteed income in retirement that is assessed to be particularly valuable. They include benefits commonly referred to as defined benefit, but also include benefits that offer other guarantees or promises. This new activity relates to a safeguard being created by the Pension Schemes Bill 2014-15 in the context of the new pensions freedoms announced at Budget 2014. The advice safeguard requires scheme trustees and managers to check that members have received appropriate independent advice before transferring or converting safeguarded rights into rights which can be accessed flexibly, and before paying an uncrystallised funds pension lump sum in respect of safeguarded benefits. This safeguard will ensure that members have fully considered the implications of giving up rights that provide a valuable guaranteed income in retirement. It is important that this safeguard is operational from 6 April 2015, when the new pension freedoms come into force.

In July 2015, the Government’s response to the consultation on freedom and choice in pensions committed that advice required under the safeguard would be provided by an FCA-authorised adviser. This instrument helps deliver on that commitment. This instrument provides for advice on the conversion and transfer of safeguarded benefits into flexible benefits to be regulated by the FCA in accordance with the regulatory framework established by the Financial Services and Markets Act 2000.

Without this order, the FCA would regulate only advice on transfers of safeguarded rights to contract-based schemes. The new regulated activity created by the instrument allows the FCA to regulate advice on all transfers of safeguarded rights and interests to trust-based schemes that can be accessed flexibly. The Government want to ensure that the consumer interest is prudently accounted for in the context of the new pensions freedom, and therefore this instrument has been brought forward to ensure the proper operation and consistent regulation of advice provided under the safeguard.

The approach of defining the appropriate independent advice required under the advice safeguard by reference to a new FCA-regulated activity was indicated during the Lords Committee stage of the Pensions Schemes Bill on 12 January this year. Amendments to the Bill were the made at Lords Report stage on 27 January to provide that the appropriate independent advice required by the Bill should be provided by a person who,

“has permission under Part 4A of the Financial Services and Markets Act 2000 … to carry on a regulated activity specified in regulations made by the Secretary of State”.

The House was informed in early January that the Treasury would lay an instrument to create the relevant regulatory activity. This is the order we are now debating.

The Financial Conduct Authority will set out in a forthcoming consultation paper the precise standards of advice it will require. This paper, which will be published very shortly, taken together with the Pension Schemes Bill, its regulations and this order, will ensure that the advice safeguard is robust, effective and fully operational when the pension freedoms come into force in April 2015.

I commend the order to the Committee and beg to move.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting this order. He has clarified my only concern of understanding. I wish I had had the conversation with him four or five working hours ago. As I understand it, the order does all sorts of bits and bobs, but its essence is in Article 7.8 which fills a hole in the FCA applying these standards to the transfer to trust-based schemes. It took me a great deal of time to find out the difference between a contract-based scheme and a trust-based scheme. I shall not repeat my understanding lest I have it wrong, but that seems to be the essence of the order.

The “Regulatory Triage Assessment – final stage” document offers three alternatives. Option 2 is:

“Amend the FCA’s Regulated Activities Order via statutory instrument such that advice on occupational transfers is fully regulated”.

It does not give a very convincing reason why it should not do this. It is not that we are not supporting this Bill. The Opposition have not opposed the general essence of what the Chancellor is trying to do, but the size of what is happening and the importance of quality advice cannot be overstated.

I believe it has been estimated that perhaps some 500,000 defined benefit scheme holders may seek transfers almost straightaway. I think that a firm called Hargreaves Lansdown has done that. Given the very sudden discontinuity that will occur in April, is the Minister confident that the advice industry has the capacity to meet people’s needs? Does the pensions industry have the ability to meet the apparently thousands of transfer requests that it will face? Is the Minister happy that the mechanisms are available to protect the public from fraudulent operators? Does the Minister think that the Government have done enough to educate the public on the size and challenge of the changes they face? I happened to come across an article in the Observer this weekend which was rather less than reassuring. It said:

“Figures from insurance company Zurich show that, while the average length of retirement is 25 years, over half the population believe they will be retired for 20 years or less. Most people also predict they will not live beyond 85. But figures suggest half of people retiring now could live to 90 or beyond”.

That does not show an appropriate level of public understanding in facing this significant change. The noble Lord’s colleague, Steve Webb, the Minister in the other place, did not exactly use resoundingly assuring language in the article. He said:

“We wouldn’t be doing it if we thought it was a disaster, but you do take a risk when you trust people with their own money”.

I wish that his tone had been slightly more reassuring—I hope that the Government have a rather greater aspiration than the avoidance of disaster. I hope that in the short time left before April they will do their best to improve the level of education among the general public so that not too many people make decisions that they subsequently regret.

[Lord Newby]

The noble Lord is quite right to describe the order as filling a hole in the regulatory structure. That is exactly what it does. He talked about two separate changes that are taking place from 1 April. The relatively narrow one in terms of the number of people we think are likely to take advantage of it is the flexibility for people with a defined benefit scheme or other safeguarded scheme to move to a more flexible scheme. That is what the order covers. People in that category are required to take advice via a regulated adviser. We think that the majority of people with safeguarded pensions will find, on taking that advice, that it is in their best interests to retain them. However, it is for them, in discussion with the IFA community, to decide on a case-by-case basis.

I was asked whether there are enough properly qualified people to do the work. There are about 20,000 registered IFAs and around 7,000 of those are pension transfer specialists so it is quite a body of people. Given all the other changes that have taken place in the financial services sector, the concern of the IFAs in recent years has been that there was not enough work to go around—or would not be in future—on their old model of operating. I suspect that for this category of people, there will be adequate advice.

The article to which the noble Lord referred and many of his later comments were about the more general freedoms under which, from April, people will no longer have to take an annuity. There is a different and larger challenge there in terms of providing support for people in that category. As the noble Lord knows, we are setting up a completely new guidance service to advise people in that category. That service will have three strands—web-based, telephone and face-to-face—and is being developed by my colleagues in the Treasury. When I talked to them about this earlier, they assured me that they feel they are on track to have enough people and adequate systems in place to deal with the very large number of requests they will get.

One other thing that my colleague, Steve Webb, said about the change on 1 April was that he suggested people spend the day in bed rather than worry about changing their pensions literally on day one. It is important that people take time to get not just the guidance but also to think about how they want to dispose of the funding they have in their pension pot.

I completely share the concern of the noble Lord and several commentators that many people do not understand pensions at all. They have a pension but that is about all they know about it. One of the great potential benefits of this change and the fact that everybody will get free guidance is that it will help people to understand how a pension works. I think there is a view in a lot of people’s minds that a pot of money called a pension is somehow different in some mysterious way from any other pot of money. The truth is that it is a pot of money available for them to dispose of, now pretty flexibly. People will need to confront their own mortality, possibly in a way that they did not feel they needed to in the past. That is undoubtedly a challenge to people but one that they should face up to, and not just because of how they deal with their pensions. It also affects a whole raft of ways in which they think about their later years. For many people on the normal retirement age, that period will be 30 years or more—a third of their life.

It is a challenge. We are putting in place robust, we hope, measures through the guidance systems in terms of these safeguarded pensions—the subject of this order. That advice will ensure that people get the level of support they need to take the correct decisions and enable them to get the very best out of their pension savings. Of course, at this stage we do not know whether our systems will be as robust as we hope they will be. We do not know quite how people will respond to this. However, I think we have behaved responsibly in not only opening up the freedoms but also putting in place a system to ensure that people can exercise those freedoms in a responsible manner for their own benefit.

Financial Services and Markets Act 2000 (Banking Reform) (Pensions) Regulations 2015

Lord Tunnicliffe Excerpts

Monday 2nd March 2015 Grand Committee

[Lord Newby (LD)]

My Lords, these regulations ensure that a ring-fenced retail bank cannot be liable for pensions obligations arising from other parts of its wider banking group. These regulations are the final piece of secondary legislation necessary to bring about the ring-fencing of retail banking from investment banking. In completing this process, these regulations represent the final piece of legislation needed to complete the biggest ever overhaul of Britain’s banking system.

On election, the Government set themselves the task of fixing the banking system following the worst banking crisis in the entirety of British history. In 2010 we set up the Independent Commission on Banking—the ICB—led by Sir John Vickers to consider the options for structural reform of the banking sector. The ICB recommended ring-fencing core retail banking services from investment banking and trading.

Ring-fencing will insulate crucial core retail banking services, such as the taking of personal deposits, from shocks originating elsewhere in the financial system, and will make banks simpler and easier to resolve. This will help curtail the implicit government guarantee enjoyed by banks that are seen as too big to fail, and will protect taxpayer money from ever again being used to provide solvency support for failing banks.

One of the recommendations of the Independent Commission on Banking was that ring-fenced banks should not have any liabilities to group-wide pension schemes. The Financial Services (Banking Reform) Act 2013 gave the Government the power to ensure this, and these regulations exercise that power. They require ring-fenced banks to make arrangements to ensure that they do not have any shared pension liabilities with other group members or outside companies—with the exception of other ring-fenced bodies within the same group, and wholly owned subsidiaries. The regulations also give powers to the banks and to the trustees of banks’ pension schemes to ensure that the necessary changes can be made, and set out the role of the regulators, the PRA and the pension regulator for monitoring and assessing the changes.

The regulations are a necessary part of ensuring that there is a robust ring-fence in place protecting core banking services. Any shared pension liabilities could pose a huge risk to the viability of the overall ring-fence and could threaten the ability of the ring-fenced bank to maintain the provision of vital services. Collectively, the large banks run their pension schemes at a deficit that reaches the multiple billions of pounds. This means that were a non-ring-fenced investment bank to fail, the ring-fenced bank could suddenly be left with a large pension liability in the many millions, or even billions, of pounds that it might be unable to pay.

Although implementing these regulations will have some transitional cost to the banks, the measure is clearly good value for money. The cost to the banks is hard to estimate, but the Treasury expects it to be in the tens or low hundreds of millions of pounds. This is relatively small in comparison to the cost of the broad ring-fencing package.

Furthermore, ring-fencing itself is the best strategy for structural reform of UK banks. The plan to ring-fence UK banks is based on the comprehensive work of the Independent Commission on Banking. The mechanisms by which ring-fencing will help financial stability are clear. The ring-fenced retail banks will be insulated from shocks elsewhere in the financial system. They will have higher capital requirements, which will improve their resilience. Ring-fencing will make banks’ structures simpler and will provide additional options to the regulator for a bank to be restructured, which will help resolution in the case of failure. By ensuring economic and operational independence, ring-fencing will achieve the objective of complete separation of retail banking from investment banking while still allowing the bank to benefit from its relationship with the wider banking group.

We firmly believe that this is the most cost-effective and proportionate option, and one that will ensure the long-term stability of the sector. The regulations play a key part in building a robust ring-fence and a stable banking sector, and I commend them to the Committee.

[Lord Tunnicliffe (Lab)]

My Lords, I sat through the creation of the Act to which these regulations relate. Broadly speaking, it had cross-party support. This is, as the Minister pointed out, a key element in completing the picture and therefore I welcome it. However, having spent several years serving on the Merits of Statutory Instruments Committee of your Lordships’ House, I can only join in its complaint—it is now called the House of Lords Secondary Legislation Scrutiny Committee—from its 26th report, published on 10 February. The committee said:

“In the EM, HMT gives limited information about the consultation process which was held from July to October 2014, referring only to a number of technical changes made in the light of consultation responses, as well as to two substantial changes in order to limit the burden on the banks and regulators. Though the draft Regulations were laid on 21 January, HMT had not published the summary of responses by 10 February. We are clear that Departments should publish their consultation summaries no later than the time of laying the instruments concerned before Parliament, as we set out in the report of our inquiry into Government consultation practice. In our view, Parliament should be asked to consider secondary legislation only when Government have provided adequate information, including about consultation, to support such consideration”.

I agree with the comments in that report. I believe that that general principle should be kept to and I am disappointed that the Treasury, in this particular case, has failed.

Also, what progress is being made in this whole ring-fencing process? As the Minister will recall, there was a degree of scepticism from our Benches and other places that the timescales that the banks had to create their ring-fence structures were extended. Can the Minister give the Committee some indication of what progress the banks are making in that extended timescale and what processes the Government and presumably the PRA, the FCA or whatever is the appropriate combination are putting in place to ensure that the banks are progressing towards their ring-fenced state and that we do not once again end up in a situation where too-big-to-fail institutions land us with a fait accompli and say, “We haven’t done it yet: we’ll do it later”. With those comments, I have no objection to the regulations in principle because, as the Minister said, they complete the picture to create ring-fenced entities.

[Lord Newby]

My Lords, I thank the noble Lord for his comments. On the consultation and the publication of the consultation response document, I am sorry that it was not published earlier. It has now been published. Compared with most SIs that we take through your Lordships’ House, this is actually—though important—quite short, and has a single purpose.

[Lord Tunnicliffe]

I also take the point that compared with the importance of the SI this is a modest point, but to a poor opposition spokesman like myself, without a wonderful array of staff behind me, if a document is not signalled in the EM I have great trouble actually finding it. While I am sure that the statement has been published and is right, surely it should be a matter of discipline that it should be published before it is laid, and every effort should be made to make sure that any documents referenced are referenced in the Explanatory Memorandum.

[Lord Newby]

I agree with the noble Lord. It is very difficult from the document itself to gain any sense of where pressure points or disagreements might be, and things should be published promptly, as the rules suggest.

The noble Lord asked how the ring-fence process is going. This is the final piece of secondary legislation required to implement ring-fencing. By passing it now, we have fulfilled our commitment to legislate for ring-fencing by the end of the Parliament. Further ring-fencing rules, which do not require legislation, are now being consulted on in two consultation papers and being put in place by the PRA. The PRA’s first ring-fencing consultation closed in January, and it is on course to publish its second consultation paper later this year. The big banks that have to implement ring-fencing are fully engaged with the PRA and, in January, gave their initial plans for ring-fencing to the PRA. So there is a bit of an iterative process going on between the drafting of rules and the banks’ own thoughts about how best they might do it. The other thing that has been happening is that Lloyds and RBS have been making changes to their business by winding down certain of their activities, both in terms of geographical spread and contracting some of their investment banking activities in anticipation of ring-fencing coming into effect. As far as we are aware and can see, both the regulators and the banks appear to be on track to have the ring-fencing successfully implemented in due time by 2018.