Electronic Commerce Directive (Financial Services and Markets) (Amendment) Order 2015

Lord Tunnicliffe Excerpts

Monday 2nd March 2015 Grand Committee

[Lord Sharkey (LD)]

My Lords, I will speak only to the first of the two orders before us. This order has the usual eye-catching name for such things: the Electronic Commerce Directive (Financial Services and Markets) (Amendment) Order 2015. A better and clearer name for the SI would be: “Closing a Gigantic Payday Lending Loophole”, because, as the Minister said, that is exactly what the SI does.

On 9 December 2013, in response to amendments put down by the noble Lord, Lord Mitchell, and by me, the Government finally accepted the need for strict control of payday lending. The FCA rules that followed capped the cost of payday loans and limited the number of permitted rollovers. They also created the conditions for real-time data-sharing by lenders in order to reduce the incidence of multiple simultaneous loans. The Treasury and the FCA are to be congratulated on that. Together, with some prompting from your Lordships’ House, they have entirely changed the nature of the payday loan sector in the United Kingdom. What started out as outrageous and cruel usury has been reduced to more or less sensible costs and more or less sensible limits. The capacity of payday lenders to inflict terrible damage, as they were doing, on the most disadvantaged has been severely reduced, and I am pleased to be able to say that many payday lenders have simply shut up shop in the UK as a consequence of the new regime.

I do not think that the situation is ideal yet because, for many of us, the number of rollovers is too high, there is not yet a proper real-time database of loans outstanding and there is no mechanism for automatically preventing multiple simultaneous loans. Of course, as we speak, payday lenders are busy changing their business models in ways that will require continued vigilance on our part. We will have to see how all that works out.

In the debate of 9 December 2013, I raised for the first time the question of what seemed to me a gigantic loophole in the proposed new regulations. This was the loophole to do with the e-commerce directive, which we are discussing. As the Minister said, this directive would allow any payday lender to avoid our regulation if they were based elsewhere in the EEA and were trading in the UK only electronically. This would mean that any payday loan company could continue to operate in the UK but entirely outside our rules, caps and limits if it were based in the EEA and had no bricks and mortar presence here in the UK.

I asked the Treasury at the time what it intended to do about this. I had subsequent conversations with the Minister and officials about the problem. This order is, as the Minister correctly said, the solution to that problem. It closes the gigantic loophole in the regulations. If payday loan companies based abroad now try to use the e-commerce directive to avoid UK regulation, they can now be stopped from operating in the UK or forced to comply with our rules if they want to continue to operate in the UK. This is a very good and very necessary step forward, and I am delighted that the Government and the FCA have acted.

As the Minister said, this new order adds to the protection against the immoral and unscrupulous exploitation of the most vulnerable people in our society. However, it is a Treasury order and it is written in the Treasury’s normal, deathless—meaning, obvious-on-the-face-of-it—prose, which means that there are just a couple of questions that I would like to ask the Minister.

New Regulation 11A lists the kinds of activities that the order will apply to. Can the Minister say whether this list includes debt management companies? I know that he is aware of the wholly unacceptable charges and practices of some companies operating in this sector.

New Regulation 11B (2)(a) seems a little ambiguous. It says that the authority must be satisfied that the incoming provider,

“directs all or most of its activity to the United Kingdom”.

The question is: how is “most” to be interpreted here? Does it mean “most” by weight of advertising, “most” by number of customers or “most” by the value of lending to those UK customers? How will the authority arrive at a measure of whichever interpretation of “most” it wants to use? I very much hope that my noble friend the Minister will be able to say that the FCA will be able to use all or any of the above interpretations and that it will be able to use, as a conclusive determination, whatever measures it considers reasonable.

Those are details but, in this area, detail is often absolutely critical. However, I do not want the detail to overshadow my congratulations to my noble friend the Minister and the FCA. They have closed a potentially very damaging loophole in the payday regulations.

[Lord Tunnicliffe (Lab)]

My Lords, I start by welcoming the noble Lord, Lord Sharkey, to our debates. The noble Lord, Lord Newby, and I feel flattered that we are now three instead of our usual two on these instruments. The noble Lord, Lord Sharkey, and colleagues on my Benches are to be congratulated on the campaign they have waged on this issue. The noble Lord’s description of the e-commerce directive and a gigantic loophole is absolutely valid, and I join him commending the Government on closing that hole. However, we believe that this is only part of the way forward. The payday scandal has been attacked in the sense that many unscrupulous operators have been driven out of the market, and that will go further, but we wish to promote safer and more ethical forms of lending. We will try to ensure that co-operatives and mutual ownership models are able to compete on a level playing field. We will look to give greater power to local authorities to eliminate the spread of payday lending shops in town centres, and we will want to investigate ways in which to support mutuals—for example, by improving the regulatory structure in which they operate and making available support from the British investment bank. The sad fact is that we have problems in our society that mean that short-term loans are needed. It is not just about driving out the bad guys; it is about creating opportunities for a new breed of good guys. We already have credit unions to turn to as an example.

On the second order—and I thank the Minister for showing us how the two orders fit together—the Explanatory Memorandum makes perfect sense, except for the part of it that he explained, which I am left having trouble understanding. Paragraph 7.1 says:

“To extend the scope of the limited permission regime in relation to ‘domestic premises suppliers’”.

I see the importance of extending the scope to domestic premises suppliers. I went to the order—and you know that you are driven to your limit when you actually read the order—and I found that,

“domestic premises supplier” means a supplier who … sells, offers to sell or agrees to sell goods, or … offers to supply services or contracts to supply services … to customers who are individuals while the supplier, or the supplier’s representative, is physically present at the dwelling of the individual”.

I am gripped of the importance of the regulations applying in those circumstances. The key issue is the caveat in sub-paragraph (3B), which says:

“A supplier who acts as described in sub-paragraph (3A) on an occasional basis only will not be a domestic premises supplier unless the supplier indicates to the public at large, or any section of the public, the supplier’s willingness to attend”,

and so on. It seems that the differentiation is on whether they advertise or not. If I have got that wrong, I would be grateful to the Minister for writing to me. I cannot see how the words of the provision translate to the picture that he has just described, with what I would have thought was almost peripheral to suppliers not being covered rather than this specific thing, whereby,

“unless the supplier indicates to the public at large”.

I do not know what that means other than that they are in the advertising business.

Finally, does the Minister know of any specific instances where the issues that the order remedies have manifested themselves, or is this anticipatory and intended to stop a problem before it arises? Is he satisfied with the FCA’s performance as a regulator so far, since it took up those responsibilities from the OFT?

[Lord Newby]

My Lords, I thank both noble Lords who have participated in this debate. I, too, congratulate the noble Lord, Lord Sharkey, on his persistence in this area and on drawing this issue to the attention of the Government for the first time, I think. When he first did so, it was by no means clear that there was a legal route which enabled us to deal adequately with payday loan companies which just moved offshore. He spurred the creative minds in the Treasury to come up with a legal route, so we are extremely grateful to him for that.

He asked a couple of very specific questions, including whether the provisions include debt management companies. The answer to that is yes, they do. He asked how one defines “most” and gave a number of contributory definitions of “most”. It is for the FCA to determine that definition on a case-by-case basis. It will take into account all the factors in deciding how to do it.

The noble Lord, Lord Tunnicliffe, spoke of the Labour Party’s wish to promote a safer and more ethical lending environment. I think we all share that wish. That is why we have taken action on payday lending and have taken a range of actions to promote mutuals and credit unions, including giving £38 million to the credit union expansion project and undertaking a review of how we can promote credit unions further. Credit unions are, in the medium term, probably the best bet we have for many people having easy access to proper financial services and small loans. A key thing now will be to get credit unions up to the ease-of-use level that the payday loan providers have. To be critical of the payday loan sector, its great strength and weakness is that it is so easy to use. It is not so easy to get access electronically to your credit union account or to loans via credit unions. One of the key things that the credit union expansion project is doing is improving back-office infrastructure to enable credit unions’ systems to be more user-friendly, particularly for young people who are used to electronic methods of banking. I do not think we disagree on that.

The noble Lord, Lord Tunnicliffe, asked about the definition of “domestic premises supplier”. The key is to ensure that firms selling in the home, where there is a risk of pressure selling, are subject to greater regulatory scrutiny. We are clarifying that this includes where firms promote themselves as being willing to visit consumers in their homes. That makes them a domestic premises supplier, irrespective of the number of visits they make. This will make it easier for firms and the regulator to judge on which side of the line they fall. I think—and I will write to the noble Lord if I am wrong on this—that there is a big difference between a company that sells in its shop or online and then just delivers stuff to your house and a company which comes and gives a quote in your house. That is the sort of distinction we are trying to make. If I can expand on that further in any helpful way, I will do so.

[Lord Tunnicliffe]

I thank the noble Lord for that promise. I find the description that he just gave entirely understandable and reasonable but then I look at the draft legislation. It takes a heroic understanding of words to move from those in the order to the explanation I have just heard. If nothing else, I shall value the letter that explains how you move in such a way.

[Lord Newby]

It will be a great pleasure to give the noble Lord something of such value. We will attempt to do that.

Finally, the noble Lord asked whether we were satisfied with the performance of the FCA in taking over the reins of the OFT. The short answer is yes. Looking at the payday loans element alone, the impact of the FCA, combined with the legislative procedures that have been put in place, has been very dramatic in a direction that most people would welcome. The relative speed with which it was able to get the cap agreed and implemented is an example of that. The short answer to that question is yes, but of course both the Government and Parliament will scrutinise carefully what it does in future.

Childcare Payments (Eligibility) Regulations 2015

Lord Tunnicliffe Excerpts

Wednesday 25th February 2015 Grand Committee

[Lord Newby (LD)]

My Lords, the regulations before the Committee today were laid on 13 January under powers set out in the Childcare Payments Act 2014, which introduced the new tax-free childcare scheme. They were announced by the Chancellor of the Exchequer at the 2013 Budget and will provide financial support to working families with their costs of childcare. Once the scheme is in place, the Government will meet 20% of eligible working families’ childcare costs up to an annual maximum of £2,000 for each child. Support will be delivered through childcare accounts, into which a parent will deposit their funds to pay for childcare and into which the Government will add a 20% top-up payment.

The regulations before us today were published for consultation between 14 July and 3 October last year, and I would like to put on the record my thanks to all those organisations and individuals who responded. As I will explain in a moment, the Government listened to the suggestions which were made and introduced some small but important changes to the way in which some of these regulations operate.

There are 18 regulations in all, but I am pleased to say that I do not intend to describe each of them in detail. However, I would like to give an overview of who will qualify for support once the new scheme is introduced. First, a person must be in the UK, over the age of 16 and have responsibility for looking after a qualifying child. It does not matter whether they are the child’s biological parent; they simply need to be responsible for their care. Secondly, the person responsible for the child must be in paid work, either for an employer or self-employed in their own business. If they have a partner, both partners will need to be in work. Providing support to the self-employed with their childcare costs is a significant, perhaps the most significant, advantage of the new scheme over the one it replaces; namely, the employer supported childcare scheme. As its name implies, that scheme was available only to people in employment.

The third eligibility condition is that the person’s income, and that of their partner if they have one, must be below the level which would make them liable to pay income tax at the additional rate of 45%. This currently applies to individuals with an income of more than £150,000 per year. Finally, someone will not be able to qualify for this scheme if they are already in receipt of support with their childcare costs from other government-funded schemes, most notably tax credits, universal credit and employer supported childcare. These are the eligibility conditions as they are set out in the Act. However, it is essential that the Government should retain the necessary flexibility to make adjustments to these conditions to ensure that the scheme remains properly targeted where it is most needed. This is why some of the detailed rules determining eligibility for support are set out in these regulations rather than in primary legislation.

I would like to draw the attention of noble Lords to some specific aspects of the regulations. First, regulation 5 sets out what is meant by a “qualifying child” for the purposes of the scheme. In broad terms, this is any child under the age of 12 or, in the case of a disabled child, under the age of 17. Regulation 9 defines what is meant by being in paid work for the purposes of the scheme. This is that a person will meet this condition if they receive as little as what someone would earn if they worked for one day a week at the prevailing rate of the national minimum wage, equivalent to around £52 a week, or £676 a quarter. Regulation 10 defines income in the case of self-employed parents. This broadly follows the well-established approach used for income tax purposes and is based on the net profit they generate from their business over the relevant period.

I will turn briefly to the ways in which the regulations have been amended following the consultation. Two significant amendments were made to the regulations as they apply to self-employed parents. The first concerns the requirement to generate a specified amount of profit every quarter. The point was rightly made that this had the potential to exclude self-employed people in very seasonal businesses where they are able to make a profit only at certain times of the year. To address this, the regulations were amended to give self-employed parents the option of meeting the minimum income level across a full tax year rather than in each quarter, as had been the case originally.

The second change applies to newly self-employed parents and again concerns the minimum income rule. The point was made that it is very common for new businesses not to make a profit immediately and that therefore it would be unreasonable to require them to reach the minimum income rule straightaway. The regulations were therefore changed so that someone starting out as self-employed will not be required to reach that level in their first entire year of trading. This will mean that they will not be disqualified from using the scheme as they struggle to make a profit when they are starting to establish their business.

A further change to which I would draw your Lordships’ attention concerns parents who are about to return to the workplace. The point was made during consultation that such parents need sufficient time to put suitable childcare arrangements in place before they start working. As originally drafted, the regulations provided a seven-day window during which a person could apply to open a childcare account in anticipation of starting a new job. The argument was made that seven days is simply too short to allow parents to make adequate childcare arrangements before they take up work after an absence. The regulations were therefore amended to allow someone to be treated as being in paid work where they have accepted the offer of a job up to 14 days before they actually start work. This will help to smooth the transition back to work and encourage parents back to the workplace.

Finally, I would like to refer to the position of those with responsibility for disabled children. As both the noble Earl, Lord Listowel, and the right reverend Prelate the Bishop of Sheffield rightly pointed out at Second Reading of the Bill, such parents can face significantly higher childcare costs than other parents. The Government are keen to ensure that this is reflected in the way that the new scheme will operate.

As I said at that time, the Exchequer Secretary to the Treasury made a commitment in another place to consider whether it would be possible to increase the maximum amount which families with disabled children could receive from the Government. I am glad to confirm that the Minister has honoured that commitment. She has said that such parents will be able to receive up to double the amount of support that other parents will be entitled to. This will mean that they will be able to receive support of up to £4,000 a year for each disabled child, rather than £2,000 a year as is the case for other parents. This change, which has been warmly received by the childcare sector as a positive step for disabled children and their families, does not feature in the regulations which we are considering but will be brought into effect by a separate instrument. However, given the interest shown in the matter at Second Reading, I thought that it would be appropriate to mention it now. I beg to move.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for explaining the regulations. I particularly thank him for the way in which the Government have reacted to the consultation by introducing some detailed changes. I also thank him for what he has said about disabled children, in giving us notice of further regulation to follow. I have only one or two points to make about these regulations, which we are not going to oppose as we see value in more money being put into the whole issue of childcare. First, I have a couple of detailed questions about them and then some questions about whether the right balance has been achieved in terms of the distributive effect that the Act has.

Of the two questions about implementation the first is about NS&I, which has been the chosen instrument for these accounts. If I have read the impact assessment properly, I believe that there could be 2 million such accounts. I understand that when NS&I introduced what I think were called pensioner bonds in the new year, it processed 30,000 accounts and its systems failed. Can the Minister assure me that by the time this scheme is introduced, the NS&I systems will be robust enough to cope with the volume?

Secondly, the choices that people will have to make between this, the current scheme which is being phased out and other potential state sources of support are really quite complex. The Government acknowledged this by assuring us during the debate on the primary legislation that there would be an online calculator to help individuals. I wonder whether the Minister can give us some indication of progress on the online calculator. I think that these regulations are expected to be rolled out in the autumn which, in terms of delivering things, is relatively close.

The substance of my concern is in regulation 15. The Minister does not have to look it up; it is the £150,000 regulation. These regulations existed in draft when the original primary legislation was debated.

I think this is the order that specifies that it will be £150,000. That is a large figure. Perhaps this is because of the paucity of my friends, but I do not know a lot of people on £150,000. Indeed, the figure could rise to £300,000 in a household with an affluent wife and an affluent husband together. That seems to be a pretty high figure. I wonder why the Government have chosen such a high figure, because of the subsequent distributive effects.

In effect, the order was debated when the primary legislation was debated in the other place. I draw attention to the Public Bill Committee in the other place on 16 October 2014, when Vidhya Alakeson, then deputy chief executive of the Resolution Foundation, said in evidence;

“Our analysis shows that 80% of families that will benefit from tax-free child care are in the top 40% of the income distribution. The evidence on how parents respond to child care investment is reasonably limited, but we know from self-reported surveys that parents with a family income of more than about £60,000 a year are not predominantly making work decisions and suchlike on the basis of the affordability of child care. The vast majority of this funding is targeted at those families, which suggests to me that you are unlikely to see much of a change in behaviour, but you will get a cost shift from parents to Government”.—[Official Report, Commons, Childcare Payments Bill Committee, 16/10/14; cols. 100-01.]

Does the Minister accept the Resolution Foundation’s analysis that 80% of the benefit will go to the top 40% of households? If not, does he have some Treasury-based analysis to counter that claim? I know of no other analysis. So far, the Government have not revealed any analysis that they have done; there is certainly no distributive analysis in the impact assessment. Therefore, I have to take the Resolution Foundation’s statement as the best analysis available.

The scheme will cost, say, £600 million a year—it varies by year in the impact assessment, but it is £600 million-plus. Well, 80% of that is half a billion pounds, which is a not inconsiderable sum. Is it true that half a billion pounds is being directed at the top 40% of households? Was that the Government’s intention, was it a mistake or do they not know?

The position that we took in the other place during the passage of the Bill is that if the upper limit had been lower, money would have been saved that could have been used to increase the percentage relief to those who qualify. Therefore, the distributive effect would not have been this apparently amazing situation where half a billion pounds is going to the top 40% of the income distribution. The Minister’s colleague in the other place, Priti Patel, was pressed on the matter of distributional analysis. At the end of one of her responses—before she was interrupted—to the Public Bill Committee on 21 October, 2014, which is now some time ago, she said:

“Officials are discussing with colleagues across Government the possibility of considering the matter in more detail and of carrying out distributional analysis of all Government child care support. Much child care support is outside the Treasury’s remit and lies with the Department for Education, and many of the schemes that exist have been touched on in the Committee”.—[Official Report, Commons, Childcare Payments Bill Committee, 21/10/14; col. 164.]

That seems to me like a promise of a report about the distributional analysis of government childcare support. Am I right in interpreting it as such a promise? If so, when do the Government intend to produce such a report, which I think we would all find very interesting?

Employment Allowance (Care and Support Workers) Regulations 2015

Lord Tunnicliffe Excerpts

Wednesday 25th February 2015 Grand Committee

[Lord Newby (LD)]

My Lords, I am pleased to introduce the two regulations and the order standing in my name on the Order Paper. I can confirm at the outset that the provisions in them are compatible with the European Convention on Human Rights.

The changes to the NICs rates and thresholds and the extension of the employment allowance covered by these three instruments were announced as part of the Chancellor’s Autumn Statement on 3 December last year. In the Budget on 23 March 2011, we announced that for the duration of this Parliament the basis of indexation for most NICs rates, limits and thresholds would be the consumer prices index instead of the retail prices index. I can confirm that the basis of indexation used to calculate the changes follows that approach. The exceptions to this are the secondary threshold and the upper earnings and upper profits limits.

I will start with the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations. These are necessary in order to set the class 1 national insurance contributions lower earnings limit, primary and secondary thresholds and the upper earnings limit for the 2015-16 tax year. The class 1 lower earnings limit will be increased from £111 to £112 per week from 6 April this year. The lower earnings limit is the level of earnings at which contributory benefit entitlement is secured. However, NICs do not need to be paid by the employee until earnings reach the primary threshold.

The class 1 primary threshold will be increased from £153 to £155 per week from 6 April. The secondary threshold is the point at which employers start to pay class 1 NICs. In line with the commitment in Budget 2011, this is being increased by RPI from £153 to £156 per week.

From this April, the income tax personal allowance for people born after 5 April 1948 will be increased above indexation from £10,000 to £10,600, and the point at which higher-rate tax is payable will be increased from £41,865 to £42,385 in the 2015-16 tax year. As I mentioned, the upper earnings limit is not subject to CPI indexation. This is in order to maintain the existing alignment of the upper earnings limit with the point at which higher-rate tax is paid. The upper earnings limit will be increased from £805 to £815 per week from 6 April.

Employers have to pay NICs at 13.8% on earnings above the secondary threshold. In the Autumn Statement, the Chancellor of the Exchequer announced a zero-rate earnings band for employers’ NICs for earnings of employees under the age of 21 from 6 April. The introduction of the zero-rate earnings band for employees under the age of 21 is expected to benefit about 340,000 employers, helping to support the jobs of almost 1.5 million young people currently in employment.

The zero-rate earnings band applies only to earnings up to the equivalent of a new threshold called the upper secondary threshold, which is to be set at the same level as the upper earnings limit for the 2015-16 tax year. These regulations introduce the upper secondary threshold and set it at the same level as the upper earnings limit of £815 per week from 6 April.

Finally, these regulations also set the prescribed equivalents of thresholds and limits that I have mentioned for employees paid monthly or annually. Apart from the introduction of the zero-rate earnings band for employees under the age of 21, there will be no other changes to NICs rates in the 2015-16 tax year. Employers will continue to pay contributions at 13.8% on all earnings above the secondary threshold. Employees will continue to pay 12% on earnings between the secondary threshold and the upper earnings limit, and 2% on earnings above that.

The social security order sets the class 3 contribution rate for those paying voluntary contributions and the class 4 profits limits for the self-employed, as well as providing for a Treasury grant.

Starting with voluntary class 3 contributions, the weekly rate will increase from £13.90 to £14.10 a week for the 2015-16 tax year. Moving on to the self-employed, today’s order also sets the profit limits for class 4 contribution liability. The lower profits limit on which these contributions are due will increase from £7,956 to £8,060, in line with the increase to the class 1 primary threshold.

At the other end of the scale, the upper profits limit will increase from £41,865 to £42,385 for the 2015-16 tax year. This is to maintain the alignment of the upper profits limit with the upper earnings limit for employees. The changes to the class 4 limits will ensure that the self-employed pay contributions at the main class 4 rate of 9% on a similar range of earnings as employees paying class 1 contributions at the main rate of 12%. Profits above the upper profits limit are subject to the additional rate of 2% in line with the 2% paid by employees on earnings above the upper earnings limit. For completeness, I mention that the weekly rate of class 2 NICs, which are also paid by the self-employed, will increase from £2.75 per week to £2.80 per week from 6 April.

From 6 April, class 2 contributions will be due only if taxable profits for the 2015-16 tax year are at or above the small profits threshold of £5,965. This threshold replaces the class 2 small earnings exception and, along with the class 2 rate, was set in the National Insurance Contributions Act 2015.

The Government need to ensure that the National Insurance Fund can maintain a working balance throughout the coming year, which the Government Actuary recommends should be one-sixth of benefit expenditure for the year. The re-rating order provides for a Treasury grant of up to 10% of benefit expenditure to be made available to the fund for the 2015-16 tax year. A similar provision will also be made in respect of the Northern Ireland National Insurance Fund.

Lastly, I turn to the regulations relating to the employment allowance for employers of care and support workers. The Government wish to support individuals and families with the cost of care. These regulations will allow employers of care and support workers to claim the NICs employment allowance. As a result, they will be able to reduce their employer NICs bill by up to £2,000 a year. Claiming the NICs employment allowance is quick and simple. Employers, or their agents, simply tick a box in their payroll software to confirm that they are eligible for the allowance and wish to claim, and their employer NICs liabilities will be reduced accordingly. Employers need to tick the box only once and this will be transferred to future years as well.

In the first six months since its introduction, the NICs employment allowance has already been enjoyed by more than 850,000 businesses and charities. We estimate that a further 20,000 employers of care and support workers will benefit from the extension of the allowance. I commend the order and regulations to the Committee.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing the regulations and order. This is something of an annual feast, and I commend him for the speed at which he read out his speech. The same three statutory instruments were debated yesterday in the Seventh Delegated Legislation Committee of the other place, where the Opposition put their traditional questions and got detailed responses. I am going to give everyone encouragement by saying that I do not intend to ask exactly the same questions to receive exactly the same answers. I commend the Commons report of the proceedings to anyone present who is interested in those detailed questions.

I have a couple of questions on the first of the three instruments that we are considering—the Employment Allowance (Care and Support Workers) Regulations. Three questions asked in the Commons were detailed in nature, but the fourth question asked by my colleagues in the other place was: why have the Government made this change? They introduced the NICs employment allowance to aid small businesses, and we did not oppose that. At the time, there was a debate about the care issue. The Government resolutely set their face against that but then, rather suddenly, they changed their mind. I am genuinely curious as to which road to Damascus the Government went down to come to this conclusion. It is not a conclusion that we particularly dissent from but we are interested in whether there is any further logic behind the reasoning.

As far as I can see, the only problem with these regulations is that the decision to make the change seems to have been reasonably recent. I worry a little, as do my colleagues in the other place, about the extent to which it might induce tax avoidance, which both sides of the House are firmly against. It seems to me that the simplicity with which this allowance can be claimed, as the Minister outlined, is essentially, in tax avoidance terms, also its intrinsic weakness. The difference between a personal servant and a care worker seems somewhat semantic. I have read the regulations, and of course the employer or the person being cared for has to fall within the definition in them. Nevertheless, those definitions could be rather nudged by people who are seeking to avoid NICs. I would value some further comment from the noble Lord as to the extent to which the Government expect this to be used for tax avoidance, because somebody is going to use it. It is inevitable that any new tax or national insurance regulation will be exploited by tax avoiders. Somebody will use it. What are the Government going to do to make sure that does not happen? What additional resource is that likely to cost HMRC?

The other thing about this is that, as far as I can see, it does not have an impact assessment and I am curious as to what the Government’s assessment is of the cost of this move. They estimate 20,000 may qualify for it and stress that it could be up to £2,000 per annum. I can do the arithmetic and I think that is £40 million per annum. I do not think there is an expectation that all will be at the maximum by quite a margin. I would value the Government’s estimate of the cost of this policy move.

[Lord Newby]

My Lords, I am grateful to the noble Lord, Lord Tunnicliffe, for his welcome of these SIs. He asked me a number of specific questions. Why did the Government change their mind? We saw the error of our ways. We listened to our stakeholders and they thought that this was a very strong idea, so we decided, in line with our general commitment to reducing the cost of care and helping with care needs, that we would make this change.

The noble Lord asked whether this opens up a big new scope for avoidance. Given the scope of the change, we do not anticipate that it will really broaden the scope for avoidance. HMRC uses its routine compliance checks to identify and tackle potential avoidance and we have an anti-avoidance rule in the primary legislation. The incentive for avoidance here is relatively small and we think that the benefits of introducing the scheme more than outweigh any small potential for avoidance.

The noble Lord’s final question was about the cost. We estimate it will cost about an extra £10 million a year. I hope I have answered his questions and that he will now be happy to support the measures.

Stamp Duty Land Tax Bill

Lord Tunnicliffe Excerpts

Wednesday 11th February 2015 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing this Bill, which, as he says, turns the “slab” system into a “slice” system. I will not dwell further on that. The old system created anomalies and distortions, particularly around the thresholds. The OBR carefully avoids saying too much about what the behavioural changes will be. There will certainly be significant behavioural changes around those thresholds, but what the overall effect will be is less clear. Nevertheless, the old system was in need of reform. I welcome these measures, and we are happy to support them.

I also welcome the fact that, through these stamp duty reforms, the Government are accepting that high-value properties are undertaxed. Labour would, in office, go further and introduce a mansion tax, which would raise around £1.2 billion—an estimate with which the Chief Secretary to the Treasury agrees. Labour’s mansion tax will apply only to homes worth £2 million or more. The vast majority of houses, even in London, are worth far less than this: the tax will apply to less than 0.5% of the homes in the country. The £2 million threshold will rise in line with the average rise in prices of high-value properties worth more than £2 million, so the number of properties paying the tax will not increase. If prime property prices continue to rise, by the time we are able to introduce the tax the starting point will be higher than £2 million.

Labour’s mansion tax will also protect those who are asset rich but cash poor. People in high-value homes who do not have high incomes—those who do not pay the higher or top rate of tax, and earn less than £42,000 a year—will have the right to defer the mansion tax until their property changes hands. Labour’s mansion tax will be progressive. Those owning properties worth £2 million to £3 million will pay only an extra £250 a month through this new tax—the same as the average top band of council tax. We think that owners of and investors in properties worth tens of millions of pounds should make a much bigger contribution.

In office, we will look at asking overseas owners of second homes in the UK to make a larger contribution than people living in their only home. It cannot be right that the foreign buyer who bought a £140 million flat in Westminster earlier this year will pay just £26 a week in council tax—the same as the average-value property in that council area.

Labour’s mansion tax will use a simple banded system. Valuations will not be needed for most properties: it will be clear which band they fall into. The Government’s new tax on properties bought through companies relies on owners submitting self- valuations to HMRC; so will the mansion tax.

We have a housing crisis in this country, and it can be addressed only if many more homes are built than are being built now. Labour will give our communities the powers they need to get Britain building again, ensuring that there will be at least 200,000 new homes a year by 2020—almost double the current number. We will also tackle land banking, so that developers with planning permission have to use it, and we will give local authorities powers to ensure that local first-time buyers can take advantage of new homes that are built in their area.

This Bill reforms a bad tax. We welcome that, but we urge the Government to go further and introduce a mansion tax, as we propose to do.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2015

Lord Tunnicliffe Excerpts

Tuesday 10th February 2015 Grand Committee

[Lord Soley (Lab)]

I apologise to the Committee and to the Minister for being two minutes late for his opening statement, having been in the Chamber for the Recall of MPs Bill. I then heard the call of the noble Lord, Lord Newby, so I thought that I had better do that instead.

There are just a couple of points that I want to make on this very welcome SI; I have no problems with the thrust of it. The last bullet point in paragraph 7 of the Explanatory Memorandum refers to the European Union introducing powers in 2017. When the European Union brings in those rules in 2017, will we then have totally new legislation to address that? As I understand it—the Minister will correct me if I am wrong—the European Union has not decided on the content of the laws that it wishes to apply but, clearly, if we do not apply it then we will find ourselves with a different set of regulations from those that apply in European Union states. I am not sure whether they will apply to all states, but certainly they will apply to many. I want to be clear about whether we will bring in that regulation here and adjust to whatever the European Union decides after 2017, in which case we will then have to come back to the Floor of one House or the other to pass new legislation.

My understanding is that any criminal charges relating to a breach of the European Union regulations would not apply in the United Kingdom. Any breach of any European Union rule could be a criminal act, as it is here under Part 7 of the Financial Services Act. If that is to be the case, would we make our criminal offence the same as it would be in the European Union? The Minister might need to think about that, but one can see the dangers in that we would have a criminal code operating in new European Union legislation that was different from the criminal code that might apply here in the UK.

The only other matter I wanted to raise is not minor in content but is very brief. It is about where this SI applies to small businesses under Section 11. I recognise that it is very unlikely to have a big impact on small businesses of any type, but it could. I want to make sure that the Government have consulted with not only the British Chambers of Commerce but the Federation of Small Businesses. Is the FSB aware of this? Has it said that it is relaxed about it, from its members’ point of view?

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting this order and explaining it to us. I also thank my noble friend Lord Soley for coming along to swell our numbers. We have had so many interesting debates just between the two of us that three is difficult to cope with.

As usual on these exciting Treasury SIs, which I am asked by my party to handle, I studied the paperwork with great care. The superficial presentation of the order seems to take seven indices and put them into the LIBOR legislation. I remember that to some extent from our time discussing the Bill, but I had a further look into it. The essence of the legislation is summarised in the August 2014 report by the Fair and Effective Markets Review, which led to this recommendation. It seems to me that the process in fact bears on submittance. On page 5 of the report there is a list of submitters’ responsibilities. The responsibilities of benchmark administrators are overwhelmingly to look at submitters and make sure that they are right. I am very happy to be corrected by the Minister if I have got that wrong.

Since we are using this LIBOR framework—or LIBOR-type acts—as a vehicle for this order, I first ask the Minister how well the FCA has performed its LIBOR role over the couple of years that it has been in place. I made the point about the division between administrators and submitters because if I have read the paperwork properly—I would be only too pleased to be corrected—only two of these indices, SONIA and RONIA, have submitters at all. The full effect of the primary legislation makes sense for those. Can I ask the Minister whether these are here for completeness, or has there been malpractice in these indices? Obviously you cannot prove negatives, but has any known malpractice taken place in the creation and management of these indices in recent times?

Moving on to the other five indices, looking first at ISDAFIX, as I understand it the objective is to make it mechanical. The report I referred to says:

“Where practicable, IBA plans to transition the calculation methodology from this polled submission model to an algorithm-based approach, using tradeable quotes from regulated trading venues as the input for the rate”.

That is the end of the important part of the quote. More recently, the impact assessment says:

“ISDAFIX will be transitioned to a different methodology before April 2015”.

That would create a situation where, as far as I can see, there would be just an administrator. It would be valuable if the Minister could confirm that. Can he also confirm that the transition to the algorithm-based methodology will be completed by April 2015? If that deadline is missed, what is the Government’s intention? Will they use this to supervise the old system, or will they delay the introduction of the new system?

I understand from the paperwork that the gold fixing system is once again in transition. Will the transition to the new gold fixing methodology be completed by 1 April? If not, what will happen?

I was fascinated to read that the WM/Reuters London 4 pm Closing Spot Rate is once again, as far as I can see, mechanical—that is, it is a derivation from publicly available information, or at least market-recorded information, which implies that it is a mechanical index. I am somewhat confused at this when in recent years, and indeed months, we have had scandals in the foreign exchange market. Perhaps these are markets that fall out of the control that the order seeks to relate to. If not, and the order does not relate to those scandals, what are the Government doing to ensure that those markets where we have had problems in the recent past are properly under control?

If I am right in my understanding—I could have great humiliation in a few moments when the Minister explains to me that I am completely wrong—five out of the seven indices seem to be administrator-only. That raises the interesting question: what happens if there is an error? Surprisingly to me, not being a person of the City, there were no civil actions, as far as I know, as a result of the original LIBOR scandal. Looking at it from a distance, one felt that some parties may have been disadvantaged and there would be efforts by them to secure damages from the people who created that disadvantage. The only way there could be a problem with the administrator-only indices would be if there were errors. If there were, though, would the administrators have a commercial liability? If they did, who would pay? The administrators per se, as far as I can see, are not businesses of great substance; they are businesses created for the relatively modest task of administration.

I have a couple of other points. The UK is forging ahead of the EU in this area. I have no criticism of that; it makes perfect sense. My noble friend has asked how the thing will eventually come together, and I look forward to the response to that. However, have any other countries initiated legislation in these areas, and how does that legislation interface with the orders that we are looking at today?

My other question is: why seven? Were other indices considered? None is mentioned in the report, but do we know of other indices that were considered, what were they and why were they not included?

--- Later in debate ---

[Lord Newby]

I will write to the noble Lord if I am wrong, but I believe that if an EU regulation is passed which covers the same area as existing domestic legislation, it automatically supersedes it under the terms of the 1974 legislation.

As regards criminal charges and the criminal system, the relevant criminal code dealing with any charges will depend on which country the offences are committed in, so if an offence is committed in Germany it will obviously be dealt with under its criminal code, just as an offence committed in this country will be dealt with under our criminal code.

The noble Lord, Lord Soley, asked about consultation with the FSB. I suspect that there was no consultation with the FSB because the kind of businesses we are talking about here are not typical small businesses. I would be extremely surprised if any business that was going to be significantly involved with these indices were a member of the FSB. However, as I said, consultation was undertaken with those stakeholders which are most closely involved at present.

The noble Lord, Lord Tunnicliffe, asked a number of questions. He asked how the implementation of the equivalent LIBOR order had been carried out. That order came in in April 2013, but applies only to activity undertaken after 2013. The criminal cases taken in respect of manipulating LIBOR relate to an earlier period. The charge was conspiracy to defraud and there has already been one guilty plea. We have not taken any cases under this legislation yet as it relates to the recent period. We hope that since it came in there has not been the kind of malfeasance that would require us to use it. The other legislation was used for earlier offences.

On malpractice in relation to other benchmarks, the two benchmarks against which malpractice has occurred are the gold fix, where Barclays got into difficulty due to manipulation, and there was a case involving WM/Reuters in November last year. We are not aware of systematic problems going forward because the new regulatory regime is stronger than it was in the past. However, some problems have arisen with some of those benchmark areas.

The noble Lord asked about the ISDAFIX and whether the change of administrator would be in place in April this year, to which the answer is yes. On Gold Fixing and the change in the administrator, live testing of the new arrangements is imminent and, again, we expect it to be in place before April. He suggested that in future, because of the nature of the benchmark, administration has changed, and it will be virtually impossible for it to be manipulated—certainly not manipulated in the way in which it was in the past. Sadly, it is not quite as straightforward as that. The main change in the methodology is that, in the past, the indices were based on quotes, but in the future they will be based on trades. It is possible that trades could be made with manipulative intent. You could be making real trades with a view to manipulating the index. There is rather more to the system than just a passive, administrative procedure. If somebody wants to manipulate the index they will still be able to do it in theory, although it will be more difficult. That is leaving aside all the rules to try to stop them, but in theory it could be manipulated by trades with manipulative intent.

[Lord Tunnicliffe]

Am I right that in five of the seven indices the manipulation that happened in LIBOR, which was essentially submitters manipulating the index for their fellow bankers, and so on, would not take place? If someone tried to manipulate the benchmark, particularly in the five I mentioned, he would have to go to the market and alter things happening there. It would be a much more exposed position and probably a rather more expensive one.

[Lord Newby]

The noble Lord is absolutely right. The point I was seeking to make was that it is not impossible to do it but the costs of doing it are potentially greater.

[Lord Tunnicliffe]

More than a bottle of champagne?

[Lord Newby]

Probably more than a case of champagne.

The noble Lord asked what happens if there are errors and who would pay up. If there were an error in the way in which the system worked, the administrators would pay up. That is obviously different from what happens if damages are caused because somebody is manipulating the exchange. If the exchange itself causes errors to be made or makes errors, the exchange will be liable for those errors.

With regard to what is happening elsewhere, we are not aware of any other European country that is planning to do this. They are awaiting EU legislation. Of course London is a global centre for these types of index, which is why it is more important here than in some other financial centres in the EU.

Finally, the noble Lord asked why we went for these seven rather than going beyond. The view was that these were the seven most systemically important indices. We consulted on the scope and whether we should go further and the view taken was that these were the key ones and we should stop at seven. That was thought to be a proportionate response. I hope that I have answered the questions asked by noble Lords and that the Committee will feel able to support the order.

Tax Credits Up-rating Regulations 2015

Lord Tunnicliffe Excerpts

Tuesday 10th February 2015 Grand Committee

[Lord Newby (LD)]

My Lords, with these regulations it will be convenient to consider the two draft guardian’s allowance orders. It is a requirement that I confirm that the provisions contained in the orders and regulations before the Committee today are compatible with the European Convention on Human Rights, and I so confirm.

Before I start, the Committee should note an amendment to the Explanatory Memorandum to the Tax Credits Up-rating Regulations 2015. The rate of CPI to be applied to these regulations is 1.2%, in line with the rate of CPI published by the ONS, rather than the 1.3% that was mistakenly written in the original document. A revised Explanatory Memorandum and accompanying Section 41 report correcting the error was laid before Parliament on Friday 6 February.

The regulations increase the maximum rates of the disability elements of tax credits—that is, the disabled child and severely disabled child elements of child tax credit, and disabled worker and severely disabled worker elements of working tax credit—in line with CPI. This decision was taken to protect those benefits that help with the extra cost of disability. The regulations also increase the earnings threshold for those entitled to child tax credit only, after which payments begin to be tapered away. The orders increase by CPI the rate of guardian’s allowance, which is the payment made to provide support to those who look after a child whose parents are deceased.

Child benefit and other elements of tax credits will be uprated by 1% by the child benefit and tax credits uprating order 2015. This is a separate instrument and these increases are not before the Committee today.

The regulations and orders before the Committee protect the most vulnerable by ensuring that the guardian’s allowance and the elements of working tax credits and child tax credits designed to assist with the extra costs of disability keep pace with the change in prices. This Government have ensured that these elements of financial support paid to low-income and vulnerable households have kept pace with inflation and will continue to do so until the end of this Parliament.

The regulations and orders before the Committee today will uprate the disability elements of tax credits by CPI. The rate of guardian’s allowance will also be uprated by CPI. In line with normal practice, we are applying the rate of CPI from September 2014, which, as I said earlier, was 1.2%. I beg to move.

[Lord Tunnicliffe (Lab)]

My Lords, we do not intend to oppose any three of these orders, and I have no questions.

Motion agreed.

Armed Forces Pension (Consequential Provisions) Regulations 2015

Lord Tunnicliffe Excerpts

Tuesday 3rd February 2015 Grand Committee

[Lord Newby]

As I was saying, the modifications that we are making mean that for these purposes such individuals do not cease to be active members of their existing scheme until they leave their new scheme.

We are also making modifications to the regulations that govern contracting out, specifically those dictating the process that a scheme must follow to be contracted out. For the new public service pension schemes we have simplified the process, ensuring that the new schemes, and therefore their members, continue to be contracted out of the additional state pension until the end of contracting out in April 2016.

The second set of modifications that we are making to the Pension Schemes Act 1993 concern only the police, firefighters’ and Armed Forces pension schemes. These are needed to ensure that the 1993 Act is in line with the 2013 Act, which requires active and deferred members in these three schemes to have different pension ages. To give a little context, the 1993 Act says that schemes cannot calculate the pensions of deferred members differently from those of active members, while the 2013 Act explicitly requires the uniformed schemes to assign a different pension age to active and deferred members. That difference in pension age makes a difference in pensions calculation inevitable.

In recognition of the unique nature of these occupations, and following recommendations made by the noble Lord, Lord Hutton, the Government are implementing a normal pension age of 60 in these three schemes, while members of other schemes will have a normal pension age well above this, set equal to state pension age, which for the majority of members will be 68. The Government have also decided to implement the noble Lord’s recommendation for deferred members of the police, firefighters’ and Armed Forces pension schemes to have a deferred pension age equal to the state pension age as the need for early retirement does not apply once a member has left these services and is no longer performing that unique and physically demanding role. The modifications before us today enable this split pension age in the police, firefighters’ and Armed Forces pension schemes to operate in harmony with wider legislation on short-service benefits.

The third set of modifications that we are making today relate to the Finance Act 2004 and ensure that members with service in both a new and an existing pension scheme who retire with an ill-health pension do not face unintended tax consequences. Specifically, they ensure that parts of the ill-health pensions available to members who fall ill are not measured twice for annual allowance and lifetime allowance limits simply because of the transitional mechanics for payment of ill-health benefits. Put simply, the modifications ensure that the tax regime will apply in the way intended by the Government to those members who move into the new scheme and then retire because of illness.

These are very technical modifications to wider pensions legislation that seek to ensure that civil servants, teachers, NHS staff, firefighters, police officers and military personnel can get the pensions that they expect without any unexpected effects as a result of tensions with the wider law. I therefore commend these modifications to the Committee.

[Lord Tunnicliffe (Lab)]

My Lords, the noble Lord, Lord Newby, and I seem fated to address technical and lengthy statutory instruments in front of a packed Committee, with the general public watching on with bated breath.

In representing Her Majesty’s Opposition in these circumstances, there seem to me to be two options: the one-hour option and the 100-hour option. The 100-hour option would mean tracing through all six documents and referring to, but not excluding, other laws and regulations made in 1992, 1993, 2004, 2006 and 2013 and sundry other modifications. Amazingly enough, I have not chosen the 100-hour option.

The one-hour option, of course, is to look at the Explanatory Memorandum and to see whether it is consistent and relevant, makes sense and so on. I have done that and I am pleased to advise the Committee that, in line with normal tradition, we will not be voting against these regulations when they come forward into the Chamber in a day or two’s time.

However, I felt a need to look behind the regulations. The way I did that was to look at the consultation. I felt that if the regulations were straightforward and fairly sensible and everyone involved with them also said that, then everyone would be happy. I looked into the consultation and it is fair to say that the consultees are content with five out of six of the sets of regulations. I shall therefore speak only to the one where the consultee—the Fire Brigades Union—is not content.

In response to the invitation to consult, it provided a letter dated 14 November from Sean Starbuck, its national officer. As I understand it, the union has three areas of concern. The first is that the benefits or value in its 1992 scheme could not be, as it were, crystallised and then imputed into the 2015 scheme. I am sure that there is a series of good pension words to more precisely express what I have said but we are all familiar with the system of pensions where you have a pension in one scheme moved to another scheme with a separate employer; there is then a calculation about the value of your accrued benefit, a calculation about the accrued benefits in the new scheme, money changes hands between the schemes and everyone is happy. As I understand the 2015 scheme, if you had worked in another firm or business, the state or—surprisingly in this case—the military, that is exactly what would happen. There would be a transfer of scheme value from, say, a military pension into the 2015 pension.

However, for firemen that is not possible. For firemen, as I understand it, one scheme ends and its value is deferred—I am sure that I have got the words wrong—until the point at which it is earned, and the service then starts in the 2015 scheme. The Fire Brigades Union took the view that it would be a good thing if that option was available to firefighters. Its view was that this should not be a problem because the very essence of these kinds of transfers is by definition cost-neutral. The money is calculated and moves over.

The union is particularly seized of that because, as I understand it—I confess I have not read the parent legislation—there is envisaged in the 2015 scheme a capability for partial retirement, which I gather everyone thinks is a good idea. That involves drawing some proportion of the pension but continuing to work on a part-time basis. It contends that the provisions that fall out of the various Acts and these regulations would make the partial retirement provision non-viable. Lastly, it contends that that does not honour assurances given by Ministers. It quotes in particular a Written Ministerial Statement of 28 October that states:

“Where firefighters are transferring to the 2015 scheme, they can be reassured that the pension they have built up in their existing schemes will be fully protected, and they can still choose to retire at the age they currently expect (which could be from age 50)”.

The Fire Brigades Union has had no formal direct response to its concerns, which seems to me to be of singular concern. In a sense, the union has had a partial response through the response in the Explanatory Memorandum. I mean “partial” in two ways: first, the response is incomplete, and, secondly, it affirms rather than proves that there is some cost. As the Minister said, the Opposition have more or less gone along with these regulations consensually because we recognise the financial problems and we are not seeking to burden the Government with more of them. However, the response affirms that it will be costly rather than arguing it through.

--- Later in debate ---

[Lord Newby]

My Lords, I am grateful to the noble Lord for his welcome of the regulations as a whole. Perhaps I may deal with the consultation and the Fire Brigades Union. The Department for Communities and Local Government undertook a short technical consultation on the draft regulations that we are discussing.

[Lord Tunnicliffe]

I noticed the word “technical”. I do not see suggested anywhere in the regulations the idea of technical. Obviously I have not read the Public Service Pensions Act cover to cover. It talks about consultation and I am not sure what is meant by the word technical in that context.

[Lord Newby]

My Lords, a key difference between these regulations and the main regulations being established under the Public Service Pensions Act is that these consultations cover only these technical regulations. The regulations we are talking about today are not the main scheme regulations. They are simply a series of regulations that enable the transition from the earlier scheme to the new scheme to go smoothly, without people being taxed twice or not taxed enough, and to make sure that, from the Government’s, the employer’s and the individual pension holder’s point of view, things move forward in terms of their entitlement, almost as though no new schemes were being introduced. That is why I used the word technical. Perhaps I should have said that they undertook a short consultation on the draft technical regulations, which would have been clearer English. As the noble Lord pointed out, the FBU submitted responses to that consultation.

As is always the case with these types of consultations, the department did not provide an individual response; it provided a response that covered them all. As the noble Lord said, it published its formal response in the draft Explanatory Memorandum which accompanied the draft regulations. Yesterday, a committee paper was circulated to members of the Firefighters’ Pension Committee notifying them of the outcome of that technical consultation. The noble Lord is right that that committee is coming to an end, but it is being subsumed into the scheme advisory board, which will be a body on which the FBU is represented and the purpose of which is to advise the department on the operation of the new scheme going forward.

[Lord Tunnicliffe]

My Lords, if it is technically possible, perhaps I could receive a copy of that circulated paper electronically so that I might have it in my in-tray by tomorrow morning.

[Lord Newby]

The noble Lord certainly can have a copy of the response sent to the committee. I am happy to give that assurance. That is what has happened. In terms of the FBU’s concern, its response proposed that these regulations should permit former scheme members who joined the new firefighters’ pension scheme to transfer 2006 scheme benefits into the 2015 scheme and allow 1992 scheme members to take their pension without having to retire or face a tax charge. The former would increase scheme costs and the latter would substantially increase costs, as 1992 scheme pension benefits will come into payment earlier and will be unfunded. It was open to representative bodies to put forward alternative scheme designs during the discussions leading up to the publication of the proposed final agreement to ensure that any increased costs were taken into account when setting the accrual rate in the 2015 scheme.

The department concluded that it was not appropriate to use these regulations, which are of a technical nature, to provide unfunded improvements to existing scheme benefits, as requested in the consultation. There is a process point about which regs would be the appropriate ones to deal with that issue. The department and the Government’s contention is that, as these are very technical regulations, they are not the appropriate regulations to do that. The main scheme regulations, if it were to be done, would be the way to do it. However, the Government are not convinced that it should be done. No doubt these issues will be raised again in ongoing discussions via the scheme advisory board between the FBU, the department and other stakeholders.

Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2014

Lord Tunnicliffe Excerpts

Monday 15th December 2014 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, this is a perfectly sensible order, which we support. It opens up the opportunity for a philosophical debate on sunset clauses—but because it is Christmas, I will not press the matter further.

Motion agreed.

Banking Act 2009 (Restriction of Special Bail-in Provision, etc.) Order 2014

Lord Tunnicliffe Excerpts

Monday 15th December 2014 Grand Committee

[Lord Flight (Con)]

My Lords, I would just like to put on record some concerns about the bail-in arrangements and what they are broadcast as achieving.

My first point is that, as the CEO of the Association of Corporate Treasurers recently said to the Lords EU Economic and Financial Affairs Sub-Committee, once there is any whiff of concern about a bank, any company will withdraw its deposits immediately. It is not going to hang around and wait for the bank to be subject to a bail-in. One thing that the bail-in arrangements do is actually accelerate the possibility of runs on banks. It will not be just corporate deposits; any form of lending to a bank will be subject to bail-in. If there is any whiff of trouble about that bank, that money will be withdrawn as soon as possible.

The second point, which perhaps has not been learnt from the recent banking crisis, is that the key thing that hugely accelerated the downturn in the economy in 2009 was allowing the money stock and the money supply to contract substantially, just as happened in America in the 1930s. If you are going to do a bail-in on a bank and its capital is going to get exhausted, it will have to contract its balance sheet dramatically, all other things being equal. While I note the comment that the Bank of England will come in and help, effectively it would have to be the state that came in and recapitalised banks or, again, the result would be a massive contraction of the money supply if any of the major banks were in trouble and thus required bail-in. Unless that happened, again, it would have the knock-on effect of a major economic contraction.

The bail-in arrangements make sense—we know what they want to achieve, which is to eliminate or at least reduce the extent to which the taxpayer has to bail out banks in a crisis—but people are kidding themselves if they believe that it is as simple as that. Fundamentally, even as a result of how the bail-in arrangements operate, unless the Government are there to replenish capital—whether they do so as the Bank of England or directly—you would have a huge monetary contraction, which would be damaging to the economy.

[Lord Tunnicliffe (Lab)]

My Lords, it is a privilege to be in Grand Committee again—and its packed rows—to address some affirmative orders. I thank the Minister for setting out the orders and indicate, as a generality, that the Official Opposition welcome the ideas behind the various Acts and the orders that make them operational. I will not make a contribution on the individual orders, but just a few comments about the concepts that are swept up in the orders, taken together.

I put on record my thanks to Catherine McCloskey, who was unfortunate enough to have her telephone number beside her name in the Explanatory Memorandum. Although I have sat through most of these banking debates and participated modestly in some of the amendments, I have to say that if you are not continuously involved with this, the whole shape of this legislation is impossible to retain in one’s mind. As a result of her tutelage, I think I have a reasonable view of the shape of the legislation and the orders and that I can claim that the Opposition have done their duty in probing the overall direction of the legislation and the effectiveness of the orders in bringing that legislation into effect.

However, I have some comments. As I understand them, the orders give effect to the BRRD and refine it for the UK environment—a sort of merging of our thinking and the thinking behind the directive. Everything becomes effective from 1 January next year, which strikes me as a good piece of clarity. As I recall, it was originally envisaged that there would be a period of British-only rules and then European rules, and so on. I commend the Government on meeting those timetables.

--- Later in debate ---

[Lord Tunnicliffe]

Forgive my enthusiasm for money but it is a fascinating subject. The Minister says that the Bank of England has a series of tools in its locker. It would be unfair to ask him about them now but I wonder if he could do a small illustrative note to myself and the noble Lord, Lord Flight, about what particular tools he has in mind for that situation. Creating money supply would be a real challenge in those circumstances, and for us—and indeed the market—to know that the Bank of England had considered this and felt that it had the adequate armoury to tackle such a situation would be very good for my happiness and perhaps the wider happiness of the money environment.

[Lord Newby]

My Lords, I am very happy to write to the noble Lord in those terms. His happiness is always at the forefront of my mind.

The noble Lord, Lord Tunnicliffe, mentioned the effect of the exercise of these powers on funding for SMEs. In the immediate term, SMEs’ deposits would be protected, but in the aftermath of 2008 we certainly saw a big squeeze on funding for SMEs, which is now at best being only partially reversed. Part of the answer is that we are keen to see a much more broadly based and competitive environment so that SMEs are not forced, as they have been, to go to one of the handful of banks if they want funding. That is why we are so keen to see the establishment of new challenger banks for SME lending and the growth of peer-to-peer lending, which means that over a period we envisage that the proportion of SMEs that will be at risk from the small number of large banks will be greatly reduced.

The noble Lord, Lord Tunnicliffe, raised two broad questions about the way in which the orders will be implemented. The first related to the fact that it is virtually impossible to understand the orders because they amend other bits of legislation—how on earth is anyone to make any sense of them? We are in the worst possible position to make sense of them for the simple reason that, because the regulations are not yet in place, there is not readily available the kind of consolidated version of the Act, particularly the 2009 Act, that will rapidly be available via commercial databases—I was going to say “within seconds”, but more probably within a very small number of hours—after the orders have been approved. More generally, the National Archives is working on the production of amended versions of the primary legislation, which will be available to all, although I am not quite sure of the timing of that. If you are a depositor with a bank and you are worried about how this works, I would not actually direct you to the primary legislation in any event; even when it is consolidated, it is very difficult for the lay person to make any sense out of primary legislation all. People will need to look at the more general advice that will no doubt be available by googling “resolution”, “depositor protection” and the features of this scheme, because I am sure that many firms—banks and others—will have some commentary available on their websites as well. Of course, although I have not had a chance to look at it, I am sure that the Treasury will also have much relevant information available.

The noble Lord asked about contingency planning and resources. These are areas that he has, quite rightly, asked about in the past. In anticipation of him asking about them again, I have asked the Treasury the following questions. What is the name of the team in the Treasury and the Bank dealing with contingency planning? How many people are in it? Have they actually done any and, if so, what form did it take? The answer is that the financial stability group in the Treasury is responsible for identifying and analysing emerging risks to the financial stability of the UK and preparing and responding to them. In particular, it is responsible for the effective stewardship of government-supported banks; delivering structural reform in the UK banking system; developing the necessary legislation; and contingency planning for the possible failure of UK banks and putting those plans into action in the event of failure.

The group co-operates closely with the resolution directorate of the Bank of England. The resolution directorate co-ordinates the Bank of England’s resolution of failing UK banks. It also has responsibility for identifying the broad resolution strategy that outlines how a firm will be resolved, and for preparing the resolution plans that set out in detail how a firm will be resolved. The legislation introduced since the crisis requires banks to provide the authorities with information that will enable them to exercise their resolution powers and this includes detailed information about the firm and the identification of any substantial barriers to resolution that must then be addressed. This is an ongoing process, with the banks submitting information on an annual basis and the Bank of England updating its plans accordingly. The introduction of the recovery and resolution plans was a recommendation of the Turner review of the regulatory response to the financial crisis.

Immigration Act 2014 (Bank Accounts) Regulations 2014

Lord Tunnicliffe Excerpts

Monday 10th November 2014 Grand Committee

[Lord Newby (LD)]

My Lords, the Government recognise and welcome the benefits that migrants bring to our country. However, they also recognise the need to deter people from attempting to enter the country unlawfully and to ensure that those who are here illegally are encouraged to leave. As part of the Government’s reform of the immigration system in the Immigration Act 2014, action is being taken on illegal migrants’ access to services. Effective immigration controls require responsibility to be shared—between government, local public service providers, employers, landlords and other private service providers—for denying illegal migrants the means to establish themselves here unlawfully. That is why the Government are bringing forward this legislation to prevent known illegal migrants accessing banking products and services in the UK.

From 12 December 2014, banks and building societies will be prohibited from opening current accounts for illegal migrants unless they have first checked the applicant’s immigration status with a specified anti-fraud organisation or a specified data-matching organisation. Where this check identifies that the applicant is a “disqualified person”—that is, an illegal migrant that the Home Secretary considers should be denied access to a current account—the bank or building society must refuse to open the account. These measures will make it more difficult for illegal migrants to establish a viable life in the UK by closing the gateway to transactional banking and lines of credit.

The two orders we are considering today specify which current accounts will be within scope of the prohibition. The regulations will enable the Financial Conduct Authority to make arrangements for monitoring and enforcing compliance with the prohibition imposed on banks and building societies. Before discussing the detail of the instruments themselves, I will first remind the Committee of the Government’s intentions for the banking provisions within the Immigration Act.

The legislation is designed to prohibit banks and building societies from opening current accounts for those who are present in the UK and who require leave to remain in the UK, but who do not have it. The prohibition will apply only to illegal migrants whose details have been notified by the Home Office to an anti-fraud or data-sharing organisation. The Home Office has already specified that this will be CIFAS—the Credit Industry Fraud Avoidance Service. The Home Office will notify CIFAS of illegal migrants who have exhausted the immigration process and are liable to removal from the UK. This will not include people who have an outstanding application or appeal. The prohibition does not require banks and building societies to check immigration or identity documents presented by the customer. Instead, they will be able to undertake electronic checks against the data provided by CIFAS.

The decision to limit the scope of this measure to current accounts provided by banks and building societies ensures that the measure is proportionate. This will ensure that smaller deposit-taking institutions, such as credit unions, are not impacted by these measures. We have also decided that the prohibition should apply only to current accounts, as they serve not only as a product for day-to-day transactional banking but also as gateways to further financial services and lines of credit.

I should make it clear that, in the view of the Government, a current account is intended to be used principally for conducting day-to-day banking activities. Such an account would be expected to provide functionality to hold deposits and make withdrawals without having to give notice. It would also typically enable the customer to receive and make payments through a number of different methods, including by cheque, direct debit, standing order, continuous payment authority or other electronic payments. Withdrawals, money transfers and other payment transactions can typically be conducted through various channels, including ATMs, branches and online, mobile or telephone banking. Many current accounts also have overdraft facilities. For the purposes of the Immigration Act, “current accounts” should also include basic bank accounts.

The prohibition does not apply to savings accounts, which, in the Government’s view, are intended to be opened for the primary purpose of accruing savings and not for day-to-day transactional banking, although they may provide some of the functionality described above. Savings accounts have been deliberately excluded from the provision as they do not act as a conduit to further financial products in the same way as current accounts. This will also ensure that smaller institutions which only offer savings accounts are not unduly burdened.

I now turn to the statutory instruments themselves. Following initial publication of the Bill, the banking sector raised concerns that the range of current accounts within scope of the prohibition might be too broad and could include accounts that were outside the Government’s initial policy intention. For example, concerns were raised that accounts of large companies would, unnecessarily, be covered by the prohibition. The Government’s intention through this legislation has been to stop illegal migrants from opening current accounts in order to prevent them accessing other products such as credit cards, mortgages or mobile phones, and thereby establishing themselves illegally in the UK. We have listened to the concerns raised and agree that the legislation, as it stands, goes further than necessary to achieve this aim.

The effect of the two orders, taken together, is to limit the scope of the prohibition to current accounts that are operated by or for consumers, microenterprises—that is, companies with fewer than 10 employees and an annual turnover or balance sheet total of no more than €2 million—and charities with an annual income of less than £1 million. These categories are consistent with the definition of a “banking customer” already in common usage in the banking sector and set out in the FCA’s existing Banking Conduct of Business Sourcebook.

Including consumers, microenterprises and charities within the ambit of the prohibition is also consistent with the distinction that the FCA already makes between the conduct of banks and building societies with respect to these retail banking customers and to other customers such as large corporations. This will make it easier for the banking sector to comply with the Act and for the FCA to enforce the prohibition at Section 40 of the Act. By retaining microenterprises and charities within the prohibition, the amendment will also make it more difficult for illegal migrants to circumvent the prohibition set out in Section 40 of the Act. Illegal migrants will be unable to set up as a sole trader, for example, in order to open a current account.

In summary, the Government believe that this approach strikes the right balance between ensuring that the prohibition is appropriately targeted and minimises the burden on businesses while still preventing obvious avoidance schemes.

I turn to the monitoring and enforcement of the Act. It is important that a relevant body is equipped with the necessary authority and powers to monitor and enforce the requirements in the Act. The Immigration Act 2014 (Bank Accounts) Regulations 2014 therefore give the Financial Conduct Authority the power to monitor compliance with the Act and to further investigate firms when necessary. As the conduct regulator for deposit-taking institutions, the FCA is well placed to regulate, monitor compliance with and enforce these provisions. The regulations require banks to provide the FCA, at the latter’s direction, with information in respect of compliance or non-compliance with the requirements of the Act. They will also oblige firms to retain records relevant to compliance or non-compliance for a minimum of five years. It is also important that there are proper sanctions against individuals or institutions that fail to comply with the Act’s requirements.

That is why we are equipping the FCA with the power to levy financial penalties, of such amounts as it considers appropriate, on any firm that it considers has breached the prohibition in Section 40 of the Act or breached a requirement of or under the regulations. The regulations will also allow the Financial Conduct Authority to restrict the deposit-taking permissions of an institution that it considers has contravened a relevant requirement and to publish a statement naming any such institution. These sanctions will act as a clear deterrent and help to ensure compliance with the prohibition imposed on banks and building societies. I commend the regulations to the Committee.

[Lord Tunnicliffe (Lab)]

My Lords, the Opposition will not in any way oppose these three statutory instruments, but we have some small questions. The impact assessment created more questions than it answered. First, how many people will be impacted by these regulations? The impact assessment states, I think, that there are 60,000 disqualified persons and then uses a questionable bit of logic to suggest that 2,000 of them might be impacted. Does the Minister agree with that estimate or feel that the actual figure might be somewhat less?

The impact assessment implies that the net present value of the cost of the exercise is £2.7 million. I had some trouble between the pages but I think that that is what it states on page 8—that there will be £2.1 million set-up costs and £0.6 million of ongoing costs at net present value. It is difficult to feel bad about that £2.7 million as it will be paid for by the banks, but, nevertheless, it is not an insubstantial sum if the impact is going to be de minimis. The impact assessment leads one into even greyer territory when it comes to the benefits. A benefit prayed in aid was that there might be fewer people to seek out and move out of the country, and the impact assessment offered an incredibly precise estimate of the cost of exiting a disqualified person, with a range from £400 to £60,100. That is a pretty heroic estimate with no indication of where in that range these individuals might fall or how many of them there might be.

I am trying to envisage a situation whereby any individual would come into this position. It seems to me that the provision could only apply against an individual who, for all other reasons, could reasonably expect to open an account with a bank. As I understand it, when one is an asylum seeker, you may open a bank account if a bank will allow you to open a bank account. There is no prohibition against an asylum seeker opening a bank account, and these orders create no such prohibition, if I have understood them properly. I would be delighted if I am wrong. My understanding is that if you are an asylum seeker and you can satisfy a bank in every other respect, the fact that you are an asylum seeker is not a reason for prohibition.

It seems to me that any asylum seeker of sufficient sophistication to intend not to leave the country when they become a disqualified person and who wants to have a current account will have the wit to set up the account before they become a disqualified person. We know from today’s Question Time that the period that they are an asylum seeker as opposed to a disqualified person is frequently very long. It seems to me that most people who are in this situation will disappear into the black economy and not need a bank account. However, the small number who are going to do this period as a disqualified person in a sophisticated way which requires a full bank account will surely have set up a bank account beforehand. As I understand it, the order does not require a bank to close an account when it is notified that somebody who has a bank account has become a disqualified person. I would be grateful if the Minister would tell me if I am right or correct me for the record.

--- Later in debate ---

[Lord Newby]

My Lords, I am grateful to the noble Lord, Lord Tunnicliffe, for his support for these regulations. He asked how many people are likely to be affected by them. The impact assessment has made an estimate of approximately 2,000 people. As it happens, it is estimated that, in 2013, almost 2,000 people were the subject of Home Office data shared with CIFAS, who were then refused current accounts in 2013. So, in 2013, getting on for 2,000 people were refused current accounts. On the basis that this legislation extends the scope of the scheme to some number of—

[Lord Tunnicliffe]

In 2000, as I think the Minister has just quoted, this scheme was not in place, so I assume that those 2,000 people were refused for other reasons, such as their creditworthiness, or as potential launderers, or whatever. It was nothing to do with their being asylum seekers, as I understand the logic.

[Lord Newby]

Not with being an asylum seeker; but banks that were already signed up to CIFAS were already, before this legislation, as a matter of course, referring to CIFAS as regards whether a person was an illegal immigrant. The banks that were doing that already were refusing about 2,000 current accounts in 2013. It is reasonable to expect that the figure will be 2,000, or something slightly more than that, as we expand the number of banks and building societies that are covered by the scheme. It is obviously impossible to know exactly, but that gives you an idea of the order of magnitude. You are almost certainly talking about a small number of thousands rather than a few hundred or tens of thousands. I think that that must be the scale of the impact of the legislation or the process.

The noble Lord asked whether, given the cost of implementing the scheme, it was worth it. We believe that it is worth it. The annual cost to banks and building societies is only £200,000, which is relatively modest. The set-up cost, although greater in the overall scheme of things, is relatively modest.

The noble Lord asked about the situation of a legitimate asylum seeker who is going through the process and opens a bank account. What happens if, at the end of the process, they are not given asylum and are required to leave the country? We have taken the view that only new bank accounts should be covered by these regulations, and therefore if there is an existing bank account which it subsequently transpires is operated by an illegal immigrant, the law under these regulations will not require the bank to close that account. The view was and is taken by the Government that the approach we are adopting is proportionate and that to go beyond what we now propose would impose an unnecessary burden on the industry.

The noble Lord asked about one-in, two-out. I am told that this qualifies as one-in but, of itself, it is obviously not contributing to the two-out because it is a new regulation. The Government are committed over a period, taking all the activities of government, to end up with two out for every one in. This is an in, but there are lots of other outs, including some of the measures going through in the Deregulation Bill, almost literally as we speak. As the noble Lord is aware, the Government are absolutely committed to reducing the burden of regulation and we believe that the broad approach of having two out for every one in makes a major contribution to that effort.

With those responses, I hope that I have satisfied the noble Lord, and I commend the regulations to the Committee.