Co-operative and Community Benefit Societies Bill [HL]

Lord Tunnicliffe Excerpts

Monday 13th January 2014 Lords Chamber

[Lord Newby (LD)]

My Lords, it is a pleasure to open the debate on the Bill. This is a consolidation Bill which brings together and modernises the law relating to co-operatives and community benefit societies, and other societies registered or treated as registered under the Industrial and Provident Societies Act 1965, with amendments to give effect to recommendations of the Law Commission and the Scottish Law Commission.

As a consolidation Bill, the Bill aims to remove ambiguities but does not seek to introduce any new policy or make substantial changes to law. It is still, however, an important step in reducing legal complexity for new and existing societies. In January 2012, the Prime Minister announced that, in support of the co-operative movement, the legislation dealing with co-operatives and other mutual societies would be consolidated into one co-operatives Bill. This Bill represents the Government’s delivery of that commitment.

The industrial and provident society sector forms a major part of the mutuals landscape, with a diverse mix of over 7,000 independent societies in the UK. Given their clear importance to the diversity and strength of the UK economy, the Government are keen to continue their support for the sector. This consolidation Bill is one element of the key reforms we are making to help ensure that industrial and provident societies are well placed to play a central role in the UK economy for years to come.

As part of the Government’s continued efforts to simplify and modernise legislation, the Law Commissions made a number of recommendations for modifications which have been incorporated into the Bill. For example, the language regarding the conditions for registration as a community benefit society has proved problematic. The Bill now clarifies this position and provides that a society may be registered as a community benefit society only if it is shown to the Financial Conduct Authority’s satisfaction that the society’s business is being, or is intended to be, conducted for the benefit of the community.

The Law Commissions also identified areas where some of the language used in the legislation was unnecessarily complicated. For example, there is no reason to distinguish between documents in electronic format and those in other forms. The approach has been harmonised in the Bill, with relevant sections applying to all of a society’s business correspondence and other business documentation in any form. The Bill has been warmly welcomed by sector trade bodies, particularly Co-operatives UK.

In addition to the consolidation Bill, we are taking further steps to modernise industrial and provident society legislation by commencing various sections of the Co-operative and Community Benefit Societies and Credit Unions Act 2010. The Government are also introducing a package of measures in support of co-operative societies through secondary legislation, and the consolidation Bill takes account of these measures. These are due to come into force in August 2014 and are: first, increasing the cap on the amount of withdrawable share capital that an individual can put into a society, which will increase from £20,000 to £100,000; secondly, allowing for troubled societies to enter insolvency rescue proceedings; thirdly, giving the FCA additional powers to investigate societies; and, fourthly, making electronic submission of registration documents simpler.

Following a public consultation earlier last year, all of these measures have been warmly welcomed by sector representatives. Co-operatives UK, the main industry trade body, has welcomed the changes, saying that:

“The appetite and commitment to do business the co-operative way has not waned”,

and that this is,

“a massive vote of confidence in the strength of the co-operative sector and recognises the movement’s ambitions for growth and development”.

This is a useful and overdue Bill.

[Lord Tunnicliffe (Lab)]

Will the measures that the Minister has just described come before Parliament, either as affirmative orders or as negative orders?

[Lord Newby]

My Lords, I believe that they will. I will confirm that to the noble Lord, but that is my understanding.

As I was saying, this is a useful and overdue Bill, which will allow the Government to continue their support for the mutuals sector, as underpinned in the coalition agreement where it sets out their commitment to foster diversity and promote mutuals. The Bill is a key part of wider legislative reforms aimed at strengthening the sector and encouraging increased investment in the country’s co-operative sector, allowing it to thrive. In short, this Bill is good for the mutuals sector, and I commend it to the House.

--- Later in debate ---

[Lord Tunnicliffe]

My Lords, before I commence, I wonder if the Minister has some information from the Box that he might share with me in response to my question.

[Lord Newby]

My Lords, I am extremely pleased to be able to reassure the noble Lord that the four measures that I referred to will be brought before Parliament shortly. One will be brought forward in an affirmative resolution and the other three in a negative resolution.

[Lord Tunnicliffe]

I thank the Minister for that response, which will make my brief speech even shorter.

At somewhat short notice we were asked if we would take this consolidation Bill and it fell to me as the sort of second tier on our team—because we have only two now—to look at it. I thought, “What is a consolidation Bill?”, so I looked it up and it seemed that the first role of the Opposition was to have a reasonable confidence that it was a consolidation Bill. The test is in the Companion at 8.205 and there are five reasons, (a) through (e), and it is fair to say that the Bill seems to fall among (a), (b) and (c).

The first thing I did was to get a copy of the Bill. I was just about to start reading it when I got another document, the table of origins, which convinced me that I should not read it. Almost fortuitously, the Printed Paper Office offered me a copy of the Law Commission report, and I have read that. I take the point that these Bills have to be looked at very carefully to ensure they pass the test for a consolidation Bill but, reading the Law Commission’s report a little bit carefully, its recommendations seem to fall within the overall requirement.

Certainly, when one goes on to read how this Bill will now proceed, to the Joint Committee on Consolidation Bills, where there will be detailed scrutiny of the origins of the parts of the Bill and the Government, through their witnesses, will have to assure the committee that it meets the test, we can be comfortable that this is a proper consolidation Bill and serves a useful purpose.

The thing about consolidation Bills is that no parliamentarian—except when you are in government, I suppose—can be other than joyful about their arrival. I cannot think of parliamentary language to describe much of our legislation but, having sat through so many variations of financial services Bills—FiSMA and so on—in the sure and certain knowledge that no reasonable human being using the source document could possibly understand it, consolidation Bills are a joy to the eye.

However, one has to ask: why this one? The Government’s response to the consultation offers the rather nice words that it will,

“consolidate existing IPS legislation in one place, and is an important step in reducing legal complexity for new and existing societies”.

I agree that it is an important step but I ask the Minister: why this Bill and not many others? Do the Government have a plan for a programme of consolidation Bills? I particularly hark back to the travail that he and I and others have been through with the various financial services Bills. I have to say that the Treasury did a splendid job of producing Keeling schedules and such things to help us but even with all that help it was an uphill battle. Will the Government bring forward further consolidation Bills?

The next area I was going to venture into concerns the merits of the other actions that stand alongside the consolidation Bill and are set out in the consultation document. Because of the Minister’s assurance that they will come in front of Parliament as either negative or affirmative instruments, I will not waste the time of the House on those issues now and will not ask the Minister questions he would have to promise to write to me about.

Accordingly, we broadly support the concept of a consolidation Bill. We wish it well and I wish the members of the Joint Committee who have to go through all this paperwork all the luck in the world.

Financial Services (Banking Reform) Bill

Lord Tunnicliffe Excerpts

Monday 16th December 2013 Lords Chamber

[Lord Tunnicliffe]

As an amendment to Motion A, leave out from “House” to end and insert “do insist on its Amendment 41”.

[Lord Tunnicliffe (Lab)]

My Lords, I speak on behalf of my noble friend Lord Eatwell. We are in but, we hope, moving towards the end of the worst financial crisis in most of our lifetimes. We will not agree on the reasons for this crisis, as we have proved when we have touched on it over the past several months. However, I think all noble Lords agree that some part of it related to the regulation and structure of the banking sector. We have had several White Papers on this subject and the Vickers report. We have had two financial Bills, of which this is the second. Half way through this process, there was a discontinuity when the LIBOR scandal changed the mood and grounds of the debate. We all hoped it was a one-off, just as we hoped RBS and Northern Rock were one-offs, but from that scandal onwards unease about the sector has continued to grow. Other banks—HSBC and the Co-op—were involved in mis-selling, but what really hit me was the latest report on the Lloyds Bank issue, which brought out how deep mis-selling has gone in these organisations. The FCA press release states:

“For a Lloyds TSB adviser on a mid-level salary, not hitting 90% of their target over a period of 9 months could see their base annual salary drop from £33,706 to £25,927; and if they were demoted by two levels their base pay would drop to £18,189—almost a 50% salary cut. In the worst example that the FCA saw, an adviser sold protection products to himself, his wife and a colleague in order to hit his target and prevent himself from being demoted”.

This final debate is about the whole issue of standards and culture. As a result of the LIBOR scandal, Parliament decided to set up the Parliamentary Commission on Banking Standards. As Mr Tyrie said in the other place today, its role was to,

“consider and report on professional standards and culture of the UK banking sector”.

We hope to tease out this issue by insisting on this amendment.

We are not happy—nobody can be happy—with the way this Bill has progressed. It started in your Lordships’ House 35 pages long and it was more than 200 pages long when it left. In the other place, it had a two-hour debate. The Minister had barely got to Amendment 41 in his winding-up before the debate was terminated by the guillotine. This is unsatisfactory. Other elements of the Bill have, in many ways, been a model of good practice which I hope will be taken up in future. My parliamentary experience is not long enough to be sure, but I think the Parliamentary Commission on Banking Standards is an innovation. It has been a good one, roundly approved by all sides of the House and I thank its members, two of whom are in their place tonight.

I also commend the Government for the graceful way they have bowed to the wisdom of the commission and the size of our voting power. The combination of the two has been, in most places, most satisfactory. What is now left between the Official Opposition and the Government? One thing that is not left is the duty of care. We wish we had carried that amendment, which could have made a big impact on standards and culture in the future. Unfortunately, we were unable to persuade the House. We are left with professional standards and it is on these that we want to emphasise our differences. I wish the process had not ended up with 150-plus pages of the Bill being discussed in two hours in the other place. More extensive and thoughtful work on this area might have achieved the level of consensus that the Minister hopes for.

I wish to make four points about the amendment which are subtly, but importantly, different. The first relates to the term “licensing”: the amendment calls for a licensing regime. For 10 years, I carried in my pocket—actually it was a little too bulky for that, so I carried it in my briefcase—a licence to fly an aircraft and carry passengers. At one point in my career I was privileged to carry up to 400 passengers, so society imposed on me the requirement to have a licence. We were very serious about that licence, the validity of which cost three days a year to maintain. You had a simple, clear concept of what a licence was. It is therefore important that the word “licence” should be used. In the rest of industry, such as the railway industry, from which I come, the concept of licensing is growing in strength. It is a good idea and we should call this a licensing regime.

Secondly, the amendment requires that we,

“specify minimum thresholds of competence including integrity, professional qualifications, continuous professional development”.

The Government’s amendment does not set out that these areas must be specified in the regime. This is a modest, but important, difference.

Thirdly, our amendment sets out that there should be a set of “Banking Standards Rules”. These were referred to by the commission, in paragraph 107 of its summary of conclusions and recommendations, paragraph 634 of the total document. Paragraph 2.18 of the Government’s response states:

“The Government will also take forward the Commission’s recommendation to replace the existing statements of principle (and codes of practice) for Approved Persons with banking standards rules”.

We believe it is important that banking standards rules should be set out, with the implication that this is a universal document for all parts of the industry to know of and take account of.

Finally, our amendment calls for,

“an annual validation of competence”.

I am happy to be corrected on this, but the tone of the government amendment suggests that in the previous 12 months the individual has not been found out—been found to be incompetent—because it talks about issues, errors or problems being recorded and being passed on to other employers. We want this to be a positive thing. Just as it was in my day, when I had to prove my right to hold a licence, we want bankers to go through a similar process, which looks positively over the previous 12 months at the continuing professional development and professionalism of the individual, and validates that annually. For those reasons, I beg to move.

[Lord Turnbull (CB)]

My Lords, perhaps I might go back over the history a little. The banking commission found that the approved persons regime had proved pretty toothless and that virtually no senior figures had suffered any serious sanction, and recommended a two-tier system: the most senior tier would require prior registration, and the second tier would require the banks to attest that the people working for them were fit and proper.

Both the Opposition and the PCBS found that the original government proposals were unsatisfactory, and each put down their own amendments. The one put forward by the Government, which was supported by the PCBS, was passed—but so, too, was the Opposition’s Amendment 41. They are different in some significant ways, but they do not differ in their attempt to define the standards that this generality of employees in trading or serving the public should be asked to reach.

The Opposition’s amendment refers to,

“minimum thresholds of competence including integrity, professional qualifications, continuous professional development and adherence to a recognised code of conduct”.

The Government’s Amendment 53 contains something that is more or less identical. It refers to a “fit and proper” person who has,

“obtained a qualification … undergone, or is undergoing, training … possesses a level of competence, or … has the personal characteristics”.

On that there really is no difference at all between us. The difference is the mechanism by which this is achieved.

The noble Lord, Lord Tunnicliffe, prefers the word “licensing”. I cannot really tell the difference between that and “certification”. On the question of defining minimum standards, I have just explained that those are true of both these proposals. On the question of annual approval, in the Government’s case all these characteristics are,

“required by general rules made by the appropriate regulator in relation to employees performing functions of that kind”,

and the certificate issued is valid for 12 months—so, again, we do not really have any difference between us; or at least the differences are tiny.

As has been pointed out by the Minister, the one important difference is that in one case the enforcement goes directly from the regulator to the regulated person, and in the government amendment, which follows the PCBS’s approach, it is the bank—paradoxically called an approved person—that has to identify those people who are capable of causing harm to the bank, its customers or its regulation, and to ensure that they meet the right standards. You have to make a choice about which you think is the better system.

The Opposition’s amendment would involve the direct regulation of tens of thousands of people, and in the alternative system it would be the bank that is, in a sense, the first line of regulation, but according to standards that the regulator has set. I think that that is a superior approach, and therefore I will certainly support the retention of Amendment 53 rather than voting to allow Amendment 41 to prevail.

[Lord Flight (Con)]

My Lords, following on from what the noble Lord has just said, I would have thought that recent history suggested that regulators were not particularly good at being the bodies finding out the bad eggs in banking institutions. Most of the staff of the PRA have come from the FSA. They were the regulators for the period during which the banking system in this country took on board the awful problem of a lack of integrity.

There is agreement across the House and the country that the question is: how do we get integrity back into our banking system? I do not see that rules are going to do it. We should have focused more on the role of the shareholders of banks in making sure that their boards and executives are proper people, and on the role of the auditors in this area, but I do not see any sound basis for being of the opinion that the regulators are going to be much good at it.

I broadly support the concept of licensing, although I agree with the point: what is in a word? It seems to me that you can license people in regard to their academic qualifications and job experience but not for integrity. People have either got integrity or they have not. We want to get to a situation where the managers of our banks have got integrity and give key effort to making sure that their banks are run with integrity.

That leads me to the next big area. My view over 40 years in the City has been that the main cause of this trouble has been that an oligopoly was allowed to develop. If one looks at economic history, wherever there have been cartels and oligopolies, there has always been bad practice. One reason that the oligopoly got worse is that there was a mistaken view back in the 1980s after the failure of Johnson Matthey that led to the doctrine that the lender of last resort only stood behind banks that were too big to fail. That led to a shrinkage of the number of banks. Many, because they were not deemed to be covered by the lender-of-last-resort doctrine, were closed down.

I remember having extensive discussions and correspondence with the late Sir Eddie George on just that issue back in the early 1990s. What was allowed to happen was a moral hazard. The oligopoly was there with its ticket that it had lender-of-last-resort support and it took the view, “Make money in any way you like and pay the fines”—they were a natural cost of business if you were in breach. That led to a complete deterioration of the standards of integrity in the banking system. That is the truth of what I observed.

I repeat, I personally do not see the regulator as being a huge force in turning round integrity. Punishing those that basically act immorally is quite an important ingredient, but above all we need to get sound management into banks. Maybe the regulator has some role in helping that process, but bank managers must run their banks on the basis of integrity. How far down does the regulator go if he is responsible for ensuring that staff have integrity? It seems to me that this would not work.

[Lord Tunnicliffe]

I commend the noble Lord, Lord Flight, on his ongoing campaign for small banks and more diversity—not that I dissent from it, but it is consistent. What I have more trouble with is the concept of competence and integrity in the banking system, and the idea that somehow we should more readily trust the banks than the regulator. The banks have not got much of a record over the past three or four years in terms of either competence or, frankly, integrity. There is virtually no major bank that has not shown some errors in terms of integrity or shown some failure in competence or ripped off customers through mis-selling. The poor FSA might not have done brilliantly, but it did investigate these areas and produce perfectly sensible reports. As far as one can see, the FCA has got off to a good start. It is producing good and competent reports. I want to express my belief that the regulator is doing, and will continue to do, a good job.

The amendment is quite rightly interpreted as saying, “The regulator shall do”. If our amendment were to succeed, I could readily see some drawing back from that. My own experience in the airline industry is that the regulator creates the framework and checks the checkers—in other words, checks the senior management—but that the spreading of annual testing and so on goes into the companies in a trusting framework. There are ways of doing it without having thousands of inspectors around. Our general thrust is in the right direction. However, I get a sense from what is happening in the House tonight that the chances of me persuading people on this point are slim, so I will not press this to a Division. I beg leave to withdraw the Motion.

Motion A1 withdrawn.

Pensions

Lord Tunnicliffe Excerpts

Thursday 12th December 2013 Lords Chamber

[Lord Newby]

There are obvious limits to what government and Parliament can do, but I have always believed that one of the very important things that Parliament can do is to act as the bully pulpit and set out what it thinks is the correct way of behaviour. In terms of the financial institutions we have instituted, as the noble Lord knows, a number of pieces of legislation in this area but, as the Parliamentary Commission on Banking Standards pointed out, culture is very important—that is, the culture of the industry and also of consumers. A big problem around pensions in particular is that virtually no consumer understands the product that they are buying, which makes it very difficult for us to get people to accept responsibility. They find it very difficult to get to grips with a pretty complicated product.

[Lord Tunnicliffe (Lab)]

My Lords, unusually, the report of the Financial Services Consumer Panel on annuities is even more alarming than the press reports. Its final paragraph states:

“The chances of mass consumer detriment”—

I emphasise, mass consumer detriment—

“are, in our judgement, too high to trust to current market-driven solutions alone: hence our recommendations for further regulatory and government-led structural reform”.

Will the Minister commit to using the Pensions Bill to require a regulator to set best practice standards for those offering annuities and to require pension schemes to take responsibility for directing savers to brokers who meet those standards?

[Lord Newby]

My Lords, there is already the open-market option review, which brings together the Government, the regulator, providers and consumer groups. It is looking at how we can promote best practice. There is also an ABI code which, for example, requires insurers to no longer send out application forms so that people take out an annuity automatically with the company with which they have their pension pot. We are bearing down on this issue, and what the report that was produced only this week shows, is that there is further to go. However, we have the structures in a new regulatory framework, and we are determined that it will work.

Financial Services (Banking Reform) Bill

Lord Tunnicliffe Excerpts

Wednesday 24th July 2013 Lords Chamber

[Lord Tunnicliffe]

My Lords, I thank the Minister for his detailed introduction to the Bill. I also thank the Parliamentary Commission on Banking Standards—particularly Mr Tyrie, its chairman—for its excellent work. I particularly thank the Members of this House who were on the commission—the most reverend Primate the Archbishop of Canterbury, the noble Baroness, Lady Kramer, and the noble Lords, Lord Lawson, Lord McFall and Lord Turnbull, with whom we hope to work constructively to ensure that the Bill is not a missed opportunity. I praise their wise input into this process. It is certainly a good thing that the economic and financial services expertise in your Lordships’ House is so stellar in quality, given that the Government’s timetabling has left all the meat in the Bill to us.

I do not share the pessimism of my noble friend Lord Whitty and I hope that I am proved to be right. The consensus and enthusiasm that I have heard tonight to get into this Bill despite all the barriers and difficulties will mean that it will have an extremely good passage and that we will radically change and improve it. I hope that I am right but I can see the reason for his caution.

When Lehman Brothers filed for bankruptcy in New York in September 2008, it sparked a financial crisis which ricocheted around most of the major economies in the West. We saw reckless banking requiring vast taxpayer bail-outs. The public finances were irreversibly affected and the economy suffered. The Financial Services Act 2012 was part one of this Government’s response to the structural changes that they argued needed to be made. The Act abolished the FSA and established the PRA and FCA. My party supports the move to prudential regulation but continues to warn that there are numerous question marks over the role of the Bank of England as regulator, and its many and varied responsibilities. We wait to see what impact Mark Carney will have on steering this mighty ship.

If the Financial Services Act 2012 was the Government’s response to the regulatory side of the equation, this Bill would appear to be their attempt to offer some solution to the reckless banking side. As for the impact on public finances, social security bills are going up and more and more people are stuck in long-term unemployment. Things are not improving. It is true that all parts of our society have suffered: the citizen, the bank owner and the customer—as my noble friend Lord Whitty has just outlined.

I had not really thought about bank owners until last night, when I realised by accident that some time ago I had £10,000-worth of bank shares, or more precisely, I had a £10,000 Halifax ISA. I now have a £2,000 Lloyds ISA and I think that I am typical of many of the owners of banks, as well as their customers and as well as citizens. I do not want to go into this Government’s policies that have, in our view, exacerbated the crisis and, in their view, sought to mend it. There has been a self-denying ordinance in this debate to avoid party politics and I will stick to that ordinance because I think that the emerging consensus to get to the meat of this Bill is one that we should preserve.

At the end of the day, however, as my noble friend Lord Eatwell said, the impact on the real economy must be the test. The right reverend Prelate the Bishop of Birmingham talked about the need for new institutions to emerge, and the noble Lord, Lord Lawson, spoke about RBS and how a different RBS could come out of this crisis, contributing to the real economy. I hope that all of these aspirations are met.

The Bill is the Government’s response to the Independent Commission on Banking, led by Sir John Vickers, and it is intended to implement Vickers’s recommendations on structure, capital and loss absorbency. It is also meant to be the vehicle for implementing the recommendations of the Parliamentary Commission on Banking Standards, whose five reports—it is interesting that we had different figures, but I think there were five reports—on standards, ring-fencing, structure, proprietary trading, and culture, are a compendium of experience, expertise and advice in this field. This Bill, however, in fact lives up to almost none of these.

As my noble friend Lord Eatwell has made clear, it is a shell of a Bill. It is reliant on order-making powers, many of which we have not yet seen. It is entirely silent on standards, culture, customer choice and competition. I am pleased that so many noble Lords have seen the importance of filling in these spaces. The challenge before the Government is to give us the information to do this. The noble Baroness, Lady Kramer, made the point early on and my noble friend Lord Barnett said that, of course, Governments like order-making powers, but we must see much more substance in the Bill. My noble friend Lord Watson also touched on that. What the Bill does include is deeply flawed. The ring-fence rules must be reviewed and full separation powers included in the Bill as a bare minimum. The Government’s amendments on ring-fencing have been roundly criticised. My colleague in the other place put it rather succinctly:

“Five strikes and you might be out in six years’ time”.—[Official Report, Commons, 8/7/13; col. 73.]

The Minister has promised to offer a much more streamlined version—it has got to be a great deal more streamlined to be convincing.

It is fascinating just how many Peers came forward and said flatly that they were in favour of total separation. I listened to the speech of the noble Lord, Lord Lawson, with rapt attention, in particular when he touched on how the cultures were different. My noble friend Lord McFall said that he was in favour, as did the noble Lord, Lord Higgins, my noble friend Lord Hollick, my noble friend Lord Barnett, and the noble Lord, Lord Flight. My noble friend Lord Brennan painted a wonderful image of a lawyer-fest, if we do not have that backstop of full separation sitting behind that reserve power. These ideas were touched on further by my noble friend Lord Watson.

From this side of the House, we argue strongly—and let us face it, there seems to be absolute consensus on this point—that a fuller Bill is needed in response to the crisis and the banking standards. The Bill needs to address cultural flaws in the industry. I acknowledge that cultural change cannot easily be legislated for, but several legislative steps could make a difference and should be included. We believe that that there needs to be a proper fiduciary duty—a duty of care—on banks to operate prudently and to safeguard deposits. Individual responsibilities need to be clearly defined and appropriate criminal sanctions put in place.

At the macro level, the Government should also bring forward the proposals of the parliamentary commission concerning a new offence of reckless misconduct. We are also keen to see a review on setting up a financial services crime unit in the Serious Fraud Office.

My noble friend Lord Brennan spelt out how the industry will respond to the Bill when it comes into force. It will be about personal responsibility and consequences, and we have to think through how we shape the legislation. For instance, we are going down the difficult route of reverse assumption—in the sense of guilt and the need to create a defence. This is a difficult area but we did it in the Bribery Act and there are one or two other examples in legislation. However, it will have to be carefully structured.

In keeping with addressing the proper focus of the banking industry, it is time to look seriously at remuneration. The giving of grossly inflated bonus settlements while the majority of households and individuals in the middle continue to feel squeezed is not a scenario that we should comfortably see continue. We need to force bankers to think of their customers and of the consequences of their actions. We need a more long-termist approach, which could include powers to require elements of remuneration to be deferred for up to 10 years. To engender responsible behaviour, we need to look at professional standards in the banking industry and at whether bankers should be licensed. We need the confidence in our bankers that professional standards regimes have provided in other sectors.

The Minister said that there was a third pillar to this—the whole issue of culture. Many noble Lords touched on that. The right reverend Prelate the Bishop of Birmingham talked about the human or almost spiritual value in the culture. I cannot quite find the right word but perhaps we could refer to “human standards” in the culture. My noble friend Lord McFall talked about regulatory capture in the culture. In pondering this issue, I asked myself when it was that banking was great. It was great when it was based on trust. What do we mean by trust? We mean a willingness to trade in complete contracts because you know that the counterparty will not let you down. That trust completely disappeared in the crisis, and that is why banks stopped trading with each other almost overnight. Rebuilding a culture that works is a really difficult challenge. What do we have on the table so far? We have incentives through getting the remuneration right; we have regulations, which we know are difficult to get right in a holistic way; and we have fear—the fear of going to jail. We have to talk this over at considerable length, and we have to see what other shots are in our locker.

One issue that I certainly hope that we will look at is whether there can be more transparency. In many ways, transparency is a useful prop for a trusting culture. When people are seen doing things by their counterparties, wider society or regulators with a great deal more clarity and openness than is the case now, they behave differently. We will certainly want to probe whether transparency might be added to the list. It could be transparency in relations, remuneration and trade. Transparency in banking is key, and we need to see proper protection for whistleblowers.

My noble friend Lord Eatwell said that there was a serious need for competition. Virtually everybody who has spoken has said that, including the noble Baroness, Lady Kramer, the noble Lord, Lord Sharkey, my noble friend Lord Hollick and the noble Lord, Lord Flight. My noble friend Lord Brennan pointed out that, in the face of the big four, building a challenger bank will take a generation.

We welcome the Government’s intention to ask the new regulator to explore the feasibility of account portability. This could be an important contributing factor to bringing greater competitiveness to the sector. Diversity and competition are vital, but they have gone backwards on this Government’s watch. We hope that the Government will heed the PCBS’s proposals that the Competition and Markets Authority immediately begins a full-market study of competition in the retail and SME sector. There are a number of other areas I will not touch on which have already been discussed, but leverage will have to be discussed and, in particular, the issue of proprietary trading.

The Government have suggested some key changes and made some quite good general statements, but we must probe them and find out what they really mean. They must stick to it and we must make sure they do. We will be watching like hawks to make sure that they stick to their promises and, indeed, go further. We will have enormous challenges—I will not call them problems—in handling the Bill. We will work through the usual channels, with the Government and other interested parties, as to how we structure this. Whether we like it or not, many of the debates in Committee will be “Second Reading debates”. That is not wrong: whole new concepts will be introduced and it will be entirely proper for the Minister presenting them to outline them in context and for them to be challenged within that wider context. It will probably be a good idea for us to discuss how to do that away from the Floor of the House, but it will be a big challenge to create the right structure to discuss the very wide areas that have been discussed. There are the real-economy consequences, the new investment vehicles and the points made by the noble Earl, Lord Caithness, which had never crossed my mind until tonight but will be useful. We heard about pay-day loans from the noble Lord, Lord Sharkey, and the issue of PPI.

We also have the point made by the noble Lord, Lord Higgins, and, I think, by my noble friend Lord Brennan, about the sheer density of the material in front of us. The noble Lord rightly said, “When I went to FiSMA and saw how it related, it did not make any sense”. No, it does not make any sense, because FiSMA has been modified ten times over since the copy he got from the Printed Paper Office. We need help from the Government on this. I believe it is called a Keeling schedule—they put one on the web for the Financial Services Act. I urge them to do that early and make sure that we can get a document so that, as the noble Lord said, he can go from the Bill to a document, the cross-references work and he can see what is happening.

This is not a particularly political Bill; but it is an incredibly important Bill. It will impact, frankly, on how we do business in the United Kingdom for decades to come. It is crucial that we get it right. I shall set out briefly where we will be coming from. The noble Lord, Lord Northbrook, set out the Opposition’s position reasonably accurately—I thank him very much for that; it saves me having to do it. The position in many areas of the Bill is a spectrum with a series of strands. The spectrum goes from light-touch regulation at one end to detailed, prescriptive, heavy-handed regulation at the other. Light-touch regulation did not work. It did not work here or in the US and we know that it has to be changed. Let us face it, the vast majority of the western world believed it was the solution. There are some people who can genuinely say that they said, “This is too hazardous”, all the way through, but they are very few. Many of us said, “It is working, it is producing the money, great”.

That is one end of the spectrum. I described the other end of the spectrum. In many ways the Banking Commission tried to be at the consensual centre of the spectrum, where it was optimal. We will bring forward amendments, probably between the Banking Commission recommendations and the more detailed end; we will be at the more intrusive end, probably. We will do that believing that it is a good place to be. We will be a listening Opposition, because there is so much expertise and depth of knowledge in this House on this subject. We want to see how those amendments fare and what counter-amendments come forward. We will look to form consensus with other Members of this House—with the Back-Benchers of other parties and the Cross Benches—and we hope, through the process of debate, to draw the Government into that consensus. At the end of the day, this Bill really needs the support and wisdom of all parts of the House. The Lords will work constructively in a cross-party way to ensure that the Government deliver a good Bill—or, if they do not, that Parliament will.

--- Later in debate ---

[Lord Newby]

My Lords, there is an issue about the timing of an ad hoc committee which produces a report to inform your Lordships’ debate. Agreement has been reached with the usual channels that we start Committee stage very soon after we come back and I am not sure that such an ad hoc committee would help. I will talk to colleagues in the Treasury and in another place to see how best we can facilitate proper discussion of secondary legislation, because, obviously, as everybody agrees, much of the meat is in the secondary legislation.

Can I reassure the noble Lord, Lord Barnett, that the banks had no part to play in drafting the Bill? It was produced by parliamentary counsel in the normal way. I should have said that draft secondary legislation was published on 17 July.

There was much discussion about standards and culture. The right reverend Prelate the Bishop of Birmingham talked about banks discussing doing what is right and about personal virtue. I agree with him that a wind of change is blowing through the banks and I am not as gloomy as a number of noble Lords have been about the extent to which the culture within banks may change. I would not put it any higher than that. I think there has been a big change in Barclays, and that is not a legislative change, it is because of the change of leadership and a change in culture.

In response to the commission, the Government propose to bring forward a number of amendments which specifically deal with standards and culture. These include a new senior persons regime for senior bank staff; introducing a new criminal offence of reckless misconduct; reversing the burden of proof, so that bank bosses are held accountable for breaches of regulatory requirements within their areas of responsibility; and giving the regulators new powers to make rules to provide enforceable standards of conduct for all bank staff.

Virtually every noble Lord who spoke has talked about the need to increase the degree of competition in the banking sector. I absolutely agree with the noble Lord, Lord Flight, that this is, if anything, the fundamental issue now facing the sector. I congratulate him and Metro Bank on its third birthday, and I congratulate him on the work that he is doing to increase competition in a very practical way.

Clearly, there is no simple way of getting to the state that most noble Lords would like, which is having a plethora of new banks providing effective competition to the existing big banks. What we have done, however, is to make it a lot easier for new banks to enter the market. In July last year, the Chancellor commissioned an FSA review of barriers to entry and expansion in the banking sector and the result of that review, in answer to the noble Lord, Lord Northbrook, is that for new banks we could see capital requirements fall by up to 80% over what was previously required. This is a big change and one of the many components that will be needed to transform the competitive landscape.

The noble Lord, Lord Eatwell, said that he was concerned about whether branches of EEA banks in the UK could arbitrage the ring-fence. EU passporting law makes branches subject to regulation and supervision in the home state, so UK branches of EU banks would not be subject to UK regulation or to ring-fencing, as the noble Lord said. The presence of EEA banks in the UK market at the moment is very small and we believe that domestic banks enjoy a strong home advantage, so there is not likely to be significant arbitrage. However, EU law has within it provisions to ensure that institutions cannot simply move to avoid regulation. We and the regulators will of course be keeping that issue very much under review.

A number of noble Lords talked about leverage—what an appropriate ratio should be, and where the power to set ratios should lie. There is a certain confusion about where powers lie at the moment. Although I am sure that we will discuss this at greater length later on, I would point out that the Government’s proposal, based on the Basel process, is that we would have a statutory minimum leverage level across the piece. However, the regulators already have the power to set a different leverage ratio for individual institutions, as we have already seen in the way that they have looked at Barclays and Nationwide—and completely without any political interference. That power will obviously continue.

The noble Lord, Lord Eatwell, drew a comparison between the 3% leverage ratio here and the 6% ratio in the US. We do not believe that these are even remotely comparable. Indeed, Mark Carney described comparing the two as being like comparing apples and oranges. I am sorry that I do not have time to explain in great detail why we believe that to be the case.

Electrification was possibly the issue that took most of your Lordships’ time. There are two issues here, given that we have agreed that in respect of an individual bank we will take powers in the Bill to enable that bank to be wholly separated. In respect of that, there has been considerable criticism of the provisions in the Bill on the basis that they provide too low a voltage, as the noble Lord, Lord Lawson, possibly said. We will be bringing forward amendments before Committee which seek to provide an appropriately increased level of voltage. I hope that they will commend themselves to your Lordships’ House.

In terms of total separation and a reversion to Glass-Steagall, our view is very straightforward. If ring-fencing were to prove ineffective, the only proper and democratic way to introduce full separation would be to return to Parliament with new primary legislation. However, given that it is a separate policy—not the same policy with a bit tacked on—we do not believe that the proposals in the Bill will be a failure. It would not be sensible to legislate for a failure that we do not think will happen; if we did that with every bit of legislation, the statute book would be many times its current length.

The noble Baroness, Lady Kramer, asked whether the Government had gone further than the PCBS on competition. It is a small thing, but we have recommended that the PRA and FCA review barriers to entry in a shorter time—the commission said two years; we have said 18 months—and that they publish annual statistics on the authorisation process so that we can see how things are going. The noble Baroness asked about game-changers in retail banking. The truth is that there will be no game-changer, but a series of small steps. The one step that will help is the seven-day switching service, which will be introduced in September and to which a number of noble Lords referred.

The noble Baroness also asked who will buy bail-in bonds. The Government have consulted on that; feedback suggested that there should be demand for bail-in debt instruments of the type that the ICB said banks should issue. Therefore we do not share her concern that there will be no effective demand for that.

The noble Lord, Lord Lawson, made a very eloquent argument for breaking up RBS into the good bank and bad bank. He knows that there will be a government response to that suggestion in the near future. He asked also about proprietary trading and believes that that is a bad idea. We believe that the ring-fencing method is superior to the Volcker-type rule in respect of prop trading and do not see a compelling case for a ban on prop trading in addition to the ring-fence. I can confirm that a difficulty in which an investment bank found itself would not threaten a high street bank. In terms of where funds can flow, it is a one-way valve: there would be no possibility of funding going from a ring-fenced bank back to an investment bank.

The noble Lord, Lord Flight, asked about the mis-selling of CDOs where that was being done, as I understand it, by foreign banks in this country. I can confirm that UK regulators could take action against any firm for mis-selling in the UK, including, obviously, foreign firms that were based here.

The noble Earl, Lord Caithness, talked about banks owning your money. He proposed what is essentially the same as full reserve banking and limited reserve banking, as it is known in the trade. The ICB has considered that issue and rejected the approach that he suggested.

The noble Lord, Lord Sharkey, asked whether the Government had gone soft on payday loan regulation: no, they have not. The FCA will be bringing forward proposals about how it intends to regulate the sector early in the autumn, which means that regulators are not waiting until next April to start to have impact. On central counter-parties, the noble Earl said that perhaps this is not the right Bill, and he is correct. The Financial Services Act 2012 extended the resolution powers in the Banking Act 2009 to systemically important investment firms, CCPs or group companies. Those powers will commence when secondary legislation has been laid in the autumn.

The noble Lord, Lord Northbrook, said that the SIs do not allow ring-fenced banks to provide export finance to SMEs. That is not the case. They can support UK businesses trading internationally. Obviously that is a very important issue for many small businesses.

I am extremely grateful to the noble Lord, Lord Tunnicliffe, for the constructive approach he took to the way we deal with this. I completely accept that we are asking noble Lords to work very hard over a relatively short space of time looking at a lot of new material. From the Government’s point of view, we will be making available all amendments and secondary legislation the moment we have them, and we are very keen that the House has the full opportunity to give all the proposals, not just those already in the Bill but those that will be coming forward, the maximum possible considered scrutiny.

[Lord Tunnicliffe]

A noble Lord asked that the amendments be accompanied by explanatory memorandum-type documents to help us understand them. Will the Government be providing those sorts of documents?

[Lord Newby]

I am very happy to give that assurance. Apart from anything else, Ministers will need such documents, so it is only reasonable that everybody else should have them, too.

The strength of this legislation will be due in no small part to the intense degree of scrutiny that it has already undergone and will undergo. It will be an onerous job, but I am confident that we will be able to strengthen the Bill further and look forward to further debates in the constructive spirit we have seen this evening. I look forward to the autumn, and I commend this Bill to the House.

Bill read a second time and committed to a Committee of the Whole House.

Banking: Regulation

Lord Tunnicliffe Excerpts

Thursday 11th July 2013 Lords Chamber

[Lord Newby]

My noble friend is clearly right in that respect. The previous Government started a process with regard to remuneration for senior bankers, which has been strengthened in several respects. One of the more encouraging developments in recent years is that as a result of that—and as a result of public pressure—the level of bonuses at RBS has fallen by 70% between 2010 and 1012, and at Barclays by 40%.

[Lord Tunnicliffe]

My Lords, the report of the Parliamentary Commission on Banking Standards says at paragraph 896:

“Remuneration requirements should, ideally, be mandated internationally in order to reduce arbitrage. The Commission expects the UK authorities to strive to secure international agreement on changes”,

and it goes on to describe the changes. The Government’s response on this paragraph is unclear. Will the Government be taking a lead internationally to secure the commission’s recommendations on this issue?

[Lord Newby]

The Government have taken a lead on remuneration levels—in particular, in seeing how remuneration levels can be more closely matched to risk. We are, for example, sympathetic to one of the commission’s proposals about linking remuneration levels not only to the immediate risk, but by making some degree of the remuneration relevant to what happens even up to 10 years after its level is set. So we are already taking the lead and will continue to do so.

Taxation: Tax Collection

Lord Tunnicliffe Excerpts

Thursday 4th July 2013 Lords Chamber

[Lord Newby]

My Lords, I agree that it is a good principle, but the problem we face at the moment is that large multinationals are able to order their affairs so that in some cases they end up paying virtually no tax, or nothing that is proportionate to the tax regime in any major country.

[Lord Tunnicliffe]

My Lords, the Government’s rhetoric on this subject is good, but we need an action plan to follow up that rhetoric. The Minister spoke about the OECD’s efforts, but what specific efforts are the UK Government putting into this problem? What additional resources will they be putting in and how do those additional resources sit alongside the 5% cut for HMRC in the CSR? Why did the Government resist the amendment in the other place calling on the Chancellor of the Exchequer to report on the progress on this important issue within six months? The abuse by these companies is expensive to HMG and an insult to the public. To get something done, we need a plan, resources and reporting.

[Lord Newby]

My Lords, as the noble Lord will be aware, Ministers get a brief for Questions which always has a section headed: “The Previous Government’s Policy”. I shall read out what the brief says under that heading:

“None—the taxation of multinationals is a relatively new area of policy”.

The truth is that this Government have put in an additional £1 billion and several thousand additional people to tackle this. The pace of change in this area of tackling abusive tax arrangements has never been at this level. The UK Government have led it and will be reporting frequently on it. Frankly, the argument that this Government have somehow been deficient in tackling this problem does not bear thinking about.

Cash Ratio Deposits (Value Bands and Ratios) Order 2013

Lord Tunnicliffe Excerpts

Monday 20th May 2013 Grand Committee

These changes are sensible and ensure that the Bank’s important monetary and financial stability functions are fully funded. I commend the order to the Committee.

[Lord Tunnicliffe]

My Lords, I thank the Minister for presenting this order. I would almost say that the scheme is essentially a tax on banks and effectively a charge—a way by which the Bank of England receives appropriate revenues to support its policy activities. My understanding from the paperwork—I briefly read the report—is that in essence the revenue from this scheme has proved to be significantly less than predicted. Essentially, the Bank got its forecasts wrong, and therefore it needs to adjust the parameters of the scheme to raise its income over the next five-year period.

The report says that the Government announced the setting up of a review on 18 September 2012. I just wonder how thorough this review has been, because it concludes that this scheme is the best way of going about this but there is little argumentation. It seems to be quite an elaborate scheme. Banks and building societies funding this policy activity is an entirely reasonable idea but the scheme does seem elaborate and I believe that it would bear a more careful review. Therefore, my first question is: in how much depth have the Bank and the Treasury looked at this scheme of requiring banks to place non-interest-bearing deposits with the Bank of England to fund the Bank of England? How much study has there been into whether this is the best way of doing it?

The increase in the levy—a de facto levy—is pretty substantial. As the Explanatory Memorandum points out, the expected revenue will rise from £436 million if the parameters have not changed to £657 million over the period under consideration. That is a 50% increase.

I note from the consultation that there has been no great squeal from the banks which will be paying it, and therefore one must assume either that these sums of money are lost in the roundings of such institutions or that the banks feel that the increase is fair. Nevertheless, it calls into question the efficiency of the Bank of England and whether, in what I loosely call the 2013 review, the efficiency has been properly considered.

In listing the outcomes of the review, the report goes on only to explain the parameters which have changed requiring a review and one efficiency saving, which is in the back-office joint operation with the PRA. Does the Minister feel that the efficiency of the Bank has been properly reviewed? Does he feel that there should be further mechanisms to review the level of funding of the Bank of England in the circumstances?

I have a very open mind on this. I think that the Bank of England should be as efficient as possible. Equally, however, given the tremendous change in circumstances and the responsibilities of the Bank of England, not only do we need an assurance that the Bank of England is as efficient as possible; we need an assurance that the resources are adequate to meet the exceptionally increased responsibilities now being placed on it. Has the Court of the Bank of England carefully considered the funding over the next five years, and can we be assured that the court feels that it is adequate for these new responsibilities?

I turn to my final question. This number might be too small but, again, it is in the roundings. The Explanatory Memorandum says that the larger institutions will have to top up their deposits with the Bank to the tune of £1.558 billion. To a mere mortal that is quite a substantial sum. I do not understand from the EM the extent to which this sum impacts on the balance sheet and capital reserves of the banks and the extent to which that will have an impact on their lending capability. The whole of industry, and in that sense the nation, is looking to the banks to lend more, to create more liquidity and to increase industrial activity. It is crucial that we do not see any significant impairment in the banks by the changed parameters in this scheme.

I would be grateful if the Minister could answer those questions. As I said, we do not want the Bank to be underfunded. We want it to be efficient and therefore, in the generality, we support the order.

[Lord Newby]

My Lords, I am grateful to the noble Lord. I will attempt to deal with his questions. He asked about the basis of the scheme. There was a significant review in 2008 which considered whether a fee-based approach would be a better way of funding the Bank. That review concluded that the benefits arising from the Bank’s activities accrued to the whole banking sector and that it was not possible to apportion the service being received in that way to individual firms. That remains the case.

We asked the banks whether they agreed with that. Some 154 organisations were proactively invited to respond to the Treasury's consultation which ran earlier in the year, in February and March, and the Treasury received three responses. Broadly speaking, the responses were sympathetic to what was being sought. I think that we can take it that this is one of those cases where the banking community is not up in arms about what is proposed.

The noble Lord asked about efficiency and whether this will be properly reviewed, whether resources are adequate and whether the Bank is operating efficiently. The background is that the Bank’s real-term budget is not any higher now than it was in 2000-01, so there has not been a drift. It is fair to say that the Bank has not been subject to significant savings over the past year or two. However, the Government’s view is that the past year or two has been a period of almost unrivalled change in the financial services and regulatory architecture and in the role that we wish the Bank to undertake. Therefore, this was not the time to have a root-and-branch look at efficiency, particularly given that many of the efficiencies that we are talking about will be realised only when the PRA is up and running and it is possible to see how well the joint operation of the back-office activities is going and how much can be saved in that way. Between now and the next review, the Treasury and the Bank itself will look at efficiency afresh in the light of the new arrangements which are happening all around them and the new responsibilities that the Bank itself has taken on in terms of the FPC and direct regulatory roles. Yes, we are concerned about efficiency, but we need to get the balance right and we will be looking very carefully at that over the next year or two.

Finally, the noble Lord asked about the effect of the cash ratio deposits on the Bank’s ability to lend. The cash ratio deposits continue to count as assets for the financial institutions making them so they do not have an impact on the capital requirements. Obviously, however, they represent an opportunity cost as the cash is tied up with the Bank without a return. Nevertheless, as he suggested, this opportunity cost is relatively small. The best estimates of the extra return they will forgo is about £220 million and this will be split between 150 institutions, albeit not equally. Although this is a not-insignificant sum, it is insignificant compared with the £13.8 billion that the banks have drawn from the Funding for Lending scheme. Taken together, the banks are bearing a modest cost. I think that that is why they were content when we undertook the consultation.

I hope that I have answered the noble Lord’s questions. On that basis, I commend the order to the Committee.

Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013

Lord Tunnicliffe Excerpts

Monday 20th May 2013 Grand Committee

[Lord Newby]

My Lords, the Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013 set out the legal framework under which tax-transparent funds will be introduced to the UK. We are introducing two new vehicles, both of which will be subject to Financial Conduct Authority authorisation and which are collectively known as authorised contractual schemes. The first of these schemes is the co-ownership scheme; the second is based on existing limited partnership models. As a matter of course, I can confirm that the provisions in the regulations are compatible with the European Convention on Human Rights.

The UK investment management industry serves millions of customers all around the globe and is one of the UK’s success stories. It is a key part of the UK’s financial sector, managing £4.9 trillion of funds and earning an estimated £12 billion a year for the UK. About a third of European assets under management are managed out of the UK and the industry is a significant provider of high value-added jobs and skills, with clusters of expertise in London, Scotland, and across many UK regions.

However, this sector is about more than just the management of funds, it is also about where the funds themselves are located. The establishment of a tax-transparent fund vehicle is an important part of our programme to ensure that the UK remains competitive as a European centre for fund domicile.

Once introduced, these funds will be suitable for use in many roles, whether by themselves as stand-alone schemes, or as part of more complicated structures. Introducing them will also help to ensure that the UK is able to take full advantage of the opportunities presented by the Undertakings for Collective Investment in Transferable Securities IV—UCITS IV—Directive. That directive governs more than 70% of the net value of European funds for collective investment in transferable securities. The directive in 2010 enabled fund managers for the first time to operate cross-border UCITS master funds. That means that feeder funds from across different member states can invest into a much larger master fund, pooling their assets and thereby benefiting from economies of scale and greater investment diversity.

For that structure to work well, the master fund must be tax transparent. That means that there is no taxation of income in the master fund itself. The feeder funds and any other investors are then taxed as normal in their own jurisdiction on their investment return. In this way, the Exchequer does not lose revenue. Instead, investors pay tax as appropriate based on their circumstances.

As I mentioned, we are introducing two types of authorised tax transparent funds. Both of the types being considered are contractual funds under the UCITS IV directive. One type is the co-ownership scheme. This is a new type of fund structure in the UK, but is already in place and used extensively in other European member states.

Legislation being introduced separately will provide that for the purposes of UK capital gains tax, such funds will be treated as opaque. That means that the investors’ holding in the fund will be the relevant asset for investors’ capital gains tax purposes, not the underlying assets held by the fund. That will avoid some of the complex reporting and accounting requirements associated with investment in fully tax-transparent entities.

We are also introducing an authorised limited partnership scheme, which will be based on the already well-recognised unauthorised limited partnership vehicle currently used in the UK, and which will be fully transparent for both income and gains. Given the existing availability of these funds in other domiciles, there is commercial demand to have similar vehicles in the UK.

Once introduced, the tax transparent funds will enable UK fund managers to take advantage of the opportunities created by UCITS IV and establish master funds here in the UK. These funds will also be suitable for other purposes, and fund managers will be able to make commercial decisions over how best to employ them. For example, the new fund structure will also allow some investors, in particular pension funds and charities, to retain the benefit of lower rates of withholding tax on their foreign investments under double taxation treaties. These benefits cannot be retained if investment is made through non-transparent funds.

Whether forming part of a master-feeder structure or not, these new funds are an important part of our strategy to support the UK as a competitive location for fund management and domicile.

The Government consulted widely with industry to ensure that these vehicles are as competitive as possible. The consultation responses were strongly supportive of the introduction of the new vehicle. Many respondents have stated that the new structure would enhance the UK’s reputation as a fund domicile and help promote the UK investment management industry.

The instrument is to be made under the European Communities Act 1972 to provide for the formation of UCITS in accordance with contract law. Specifically, the instrument inserts a new Chapter 3A in Part 17 of FSMA to govern the authorisation and supervision of contractual schemes by the FCA. It extends to contractual schemes the FCA’s power to make rules for this purpose in relation to unit trusts. As with other authorised collective investment schemes, and to ensure consistency and coherence of tax treatment, the rules will also extend beyond UCITS to non-UCITS retail schemes and to qualified investor schemes. These latter more lightly regulated schemes will be within the ambit of the new AIFMD directive. As well as providing consistency with other UK funds, this will give greater flexibility to fund managers.

Other primary and secondary legislation is amended to provide for contractual schemes broadly in line with provisions already made for unit trusts and open-ended investment companies. The Limited Partnerships Act 1907 partly governs limited partnerships and is modified for the operation of partnership schemes. The Insolvency Act 1986 and insolvency rules and equivalent legislation for Northern Ireland are modified to enable co-ownership schemes to be wound up in the event of insolvency.

In addition to this legislation, there will be additional regulatory changes to bring the tax-transparent funds into effect. Regulations governing the tax treatment of UK resident investors in the new funds will shortly be laid before the House of Commons. These regulations will cover the capital gains tax, stamp taxes and VAT treatment of these funds. Regulations covering stamp duties and VAT are being made through the negative resolution procedure; the capital gains tax regulations are subject to affirmative resolution of the House of Commons. Before any new schemes can be launched it will also be necessary for the FCA to approve its own rules which govern their regulation. This regulation is necessary to ensure the schemes are operated in a responsible and appropriate manner.

These changes pave the way for the introduction of effective and competitive tax-transparent funds to the UK. These funds will help to provide improved returns to investors, as well as providing new opportunities to industry and strengthening the UK investment management sector. I therefore commend these regulations to the Committee.

[Lord Tunnicliffe]

My Lords, I thank the Minister for introducing these regulations and for the speed with which he read his brief. I have looked at the regulations and particularly at the impact assessment, as well as all the various issues related to the regulations, and it seems to me that they are good news for everybody who has been consulted—and they seem to be pretty good news in general. However, the consultation has essentially been with the industry, and a couple of words that I heard in the Minister’s speech were “lightly regulated”. We have had light regulation in the past, and, clearly, that is good for the industry, fund managers, and so on. But I seek an assurance that the regulations have been carefully checked so as not to increase the opportunities for tax avoidance and that there will be no increase in tax avoidance as a result of our approving the regulations.

[Lord Newby]

My Lords, I am grateful to the noble Lord for his speedy response to my speedy introduction. I think that I can give him the assurance that he seeks. In terms of tax avoidance, the great advantage of the new vehicles is that, by being transparent in the country of domicile, they ensure that each taxpayer is accountable for domestic tax payable in the country where they are based. So we are content that they will not become tax-avoidance vehicles.

I used the phrase “more lightly regulated” in respect of one relatively small category of schemes. The schemes will be fully regulated and, because of the scale of investment involved, will be taken very seriously by the FCA. On that basis, I hope that the noble Lord will be happy with the regulation.

Financial Restrictions (Iran) Order 2012

Lord Tunnicliffe Excerpts

Tuesday 11th December 2012 Grand Committee

[Lord Newby]

My Lords, the Treasury laid the Financial Restrictions (Iran) Order 2012 before Parliament on 20 November under the powers of Schedule 7 to the Counter-Terrorism Act 2008. The order contains a direction requiring UK credit and financial institutions to cease business relationships and transactions with all banks incorporated in Iran, including their branches and subsidiaries, wherever they are located, and the Central Bank of Iran.

The direction came into force on 21 November 2012 and is in the same terms as that contained in the Financial Restrictions (Iran) Order 2011. The Treasury considers that the conditions required to give a direction under the Act are met. I propose to set out the reasons for this action and provide details of the restrictions and what their impacts are, including what measures have been undertaken to ensure that the UK financial sector can comply.

On the rationale for the order, the Government are clear that activity in Iran that facilitates the development or production of nuclear weapons poses a significant risk to the national interests of the United Kingdom. The order was given in response to this risk. The Government continue to have serious concerns about Iran’s proliferation-sensitive activities and these concerns are shared by the international community.

Recent reports of the board of governors of the International Atomic Energy Agency, the UN body charged with monitoring Iran’s activities, reported evidence of Iran’s nuclear programme being used for non-civilian purposes. A report issued on 16 November this year set out the agency’s concerns about the,

“possible existence in Iran of undisclosed nuclear related activities involving military related organisations, including activities related to the development of a nuclear payload for a missile”.

Information available to the International Atomic Energy Agency in 2012 further corroborated analysis indicating that Iran has carried out activities that are relevant to the development of a nuclear explosive device.

A statement issued by the IAEA to its board of governors on 29 November 2012 raised a further concern, setting out that Iran is not co-operating with an investigation into its nuclear activities. The Government view this with the utmost concern.

In response to the November IAEA report, the board issued a resolution stressing that due to a lack of co-operation from Iran it was unable to,

“conclude that all nuclear material in Iran is in peaceful activities”.

Despite intensive efforts throughout 2012 by the IAEA to seek to resolve issues relating to Iran’s nuclear programme this has been without concrete results. The board urged Iran to abide by its international obligations and called on Iran to engage seriously on the nuclear issue. These are concerns of the most serious nature, with far-reaching consequences for the UK’s interests.

The case for UK action is underlined by continued calls from the Financial Action Task Force—the global standard-setting body for combating money-laundering and the financing of terrorism—for countries to apply effective countermeasures to protect their financial sectors from money laundering and financing terrorism risks emanating from Iran. These calls were renewed with urgency on 19 October 2012 and noted FATF’s particular and exceptional concern about Iran’s failure to address the risk of terrorist financing and the serious threat this poses to the integrity of the international financial system. The FATF has not expressed such serious and ongoing concerns about any other country.

It is clear, therefore, that activities in Iran pose a threat to UK interests and in particular a threat to the UK financial system. Iranian banks play a crucial role in providing financial services to individuals and entities within Iran’s nuclear and ballistic missile programmes, as companies carrying out proliferation activities will typically require banking services. Many Iranian banks have been sanctioned by the UN and EU for their role in Iran’s proliferation-sensitive activities. Unfortunately, experience under existing financial sanctions demonstrates that targeting individual Iranian banks is not sufficient. Once one bank is targeted, a new one can simply step into its place.

Over the past year the Financial Restrictions (Iran) Order 2011 restricted the options available to Iranian banks in accessing the global financial system by removing the option of utilising the UK, which is an important global financial centre.

The 2012 order will ensure that the Iranian banking sector continues to have its access to the UK financial system restricted. This will make it more difficult for Iranian banks to utilise the international financial system in support of proliferation-sensitive activities. This action also protects the UK financial sector from the risk of unwittingly being used to facilitate activities which support Iran’s nuclear and ballistic missile programmes.

This action is in line with the Government’s dual-track strategy of pressure and engagement with Iran. The aim of the pressure track is to encourage Iran to begin serious and meaningful negotiations on the issue of its nuclear programme. It is also in line with action taken by the UK’s international partners. The US, Canada and the EU have all implemented new financial sanctions against Iran in the last year.

Importantly, the EU has announced steps to mirror the UK’s action. The UK strongly supports the decision made by the EU in October 2012 that announced its intention to implement a prohibition on financial transactions between EU credit and financial institutions and Iranian banks. This will see the key elements of the UK order mirrored throughout the EU. When this EU-wide prohibition enters into force, Ministers will review whether it is appropriate to have both the EU and UK prohibitions in place.

I would now like to explain the specifics of the order. Like the 2011 order, this order was made under Schedule 7 to the Counter-Terrorism Act 2008, which provides the Treasury with the power to give a range of directions to UK credit and financial institutions in response to certain risks to the UK’s national interests. The power under Schedule 7 enables the Treasury to respond to proliferation risks, as we have done in this case, as well as money-laundering and terrorist-financing risks, or where the FATF calls for countermeasures.

The restrictions apply requirements to persons operating in the UK financial sector, which includes FSA-authorised firms, credit institutions, money service businesses and insurers. Firms are required to establish whether any current or future business relationships or transactions are affected, and to take steps to comply with the requirements of the restrictions. Although the restrictions are only given to the financial sector, they will continue to make it difficult for other companies to trade with Iran.

The UK Government actively discourage trade with Iran. The value of UK trade with Iran has declined by 39% in the period between November last year, when the 2011 order was introduced, and September 2012, when the most recent figures became available, compared to exports in the same period in the previous year. Companies affected by the restrictions can apply to the Treasury for a licence of exemption. We will examine each licence application on a case-by-case basis. The restrictions contained in the order sit alongside the existing sanctions measures imposed against Iran by the UN and the EU. However, the restriction goes further than current existing sanctions, because it prohibits certain activities that would otherwise be permitted under those sanctions.

I will now provide some further information on the operation of the restrictions. The order was laid in Parliament on 20 November, and came into force on 21 November. The Treasury published a series of documents on its public website that notify the financial sector about the restrictions and provide detailed guidance on their implementation. These documents were also e-mailed to more than 13,000 subscribers to our e-mail alert system.

The documents published on the Treasury website on 21 November included six general licences that exempt certain activities from the restrictions. These general licences permit credit and financial institutions to provide financial services for humanitarian purposes, and personal remittances between individuals here and in Iran. Where outstanding business relationships or transactions remain, they also permit credit and financial institutions to manage the cessation of business in an orderly and controlled way. A general licence will ensure that all the transactions or business relationships authorised under the 2011 order will continue to be licensed under the current order. The Treasury may grant further specific licences to manage the impact of the order on third parties. This approach is similar to that exercised under last year’s order.

As the direction is in the terms contained in the 2011 order, there are no additional requirements on financial sector firms as a result of this year’s order. Firms will already have in place procedures and systems to comply with the 2011 order and obligations relating to EU financial sanctions and anti-money-laundering measures. This should assist in minimising the burden of compliance with the restrictions. As a result of the 2011 order, since 21 November last year firms have been unable to undertake new transactions or business relationships with banks incorporated in Iran. The UK financial sector will need to continue to ensure that it does not undertake new transactions or enter into new business relationships with any bank incorporated in Iran, including the central bank, and branches or subsidiaries of banks incorporated in Iran. Supervision of the financial sector’s compliance with these restrictions will form part of the existing supervisory regime of the FSA and HMRC.

I conclude by emphasising that this direction was given by the Government to respond to the continuing and severe risk that Iran’s nuclear activities pose to the UK’s national interest. Iran’s proliferation-sensitive activities are a serious and ongoing concern for the UK and the international community as a whole. It is vital that we continue to take steps to increase pressure on the Iranian regime and encourage Iran to begin serious and meaningful negotiations on the issue of its nuclear programme. For these reasons, I commend the order to the House.

[Lord Tunnicliffe]

My Lords, I will speak very briefly. I thank the noble Lord for repeating this speech, which at least gave me the opportunity to read it beforehand. The key questions here are whether this order is necessary and whether it is effective. The speech refers to a report issued on 16 November to the board of governors of the International Atomic Energy Agency and I have taken the trouble to read through it. It is, as the noble Lord suggested, quite chilling in nature. There is the reference to potential missile capability, to which he has already alluded, but there is also reference to things that have happened in the past year, particularly at Parchin where,

“information provided to the Agency by Member States indicates that Iran constructed a large explosives containment vessel in which to conduct hydrodynamic experiments”.

I have a passing understanding of how to make a bomb, and the one thing you need is the uranium we all talk about; the other is very clever explosives to make the uranium go critical and create the bomb. The existence of this facility is indeed chilling since it is very difficult to believe that it had any non-military use.

Since then, there has been considerable activity during 2012 which seemed to be either trying to hide or dismantle the facility. As the report says:

“In light of the extensive activities that have been, and continue to be, undertaken by Iran at the aforementioned location on the Parchin site, when the Agency gains access to the location, its ability to conduct effective verification will have been seriously undermined. While the Agency continues to assess that it is necessary to have access to this location without further delay, it is essential that Iran also provide without further delay substantive answers to the Agency’s detailed questions regarding the Parchin site”.

I quote those parts of the report merely to emphasise that, in our support of this order, we are sensitive to the fact that the situation with Iran has sadly not improved over the past 12 months, and therefore the continuation of the order is essential.

In his speech, the Minister said words to the effect that the continuation of the order was in line with the Government’s dual-track strategy of pressure on, and engagement with, Iran. He said that the aim of the pressure track was to encourage Iran to begin serious and meaningful negotiations on the issue of its nuclear programme. I wonder if the noble Lord has had any reports of any progress that has been made on the dual-track approach over the past year.

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[Lord Newby]

My Lords, I am extremely grateful to the noble Lord for his support of the order. I am not sure what to make of the fact that he knows how to make a nuclear bomb.

[Lord Tunnicliffe]

It is on the internet.

Financial Services Bill

Lord Tunnicliffe Excerpts

Wednesday 28th November 2012 Lords Chamber

Moved by

[Lord Tunnicliffe]

116ZA: After Clause 99, insert the following new Clause—
“Power of the FCA to make provision about regulation of commercial debt management
The FCA may make rules or apply a sanction to authorised persons who offer debt management services on commercial terms, or on terms that the FCA judge to cause consumer detriment.”

--- Later in debate ---

[Lord Tunnicliffe]

My Lords, I rise to move Amendment 116ZA on behalf of my noble friend Lord Stevenson, and I hope for a response from the government Benches which produces as much happiness as we have just enjoyed.

We considered the question of regulating debt management companies in Committee, but I make no apology for returning to this issue. We estimate that there are some 6.2 million families in this country in financial jeopardy and all the signs are that increasing numbers will need help, advice and solutions to their unmanageable debts over the next period.

At present there are a variety of providers. A number of companies operating on a strictly commercial basis compete for business with the free services provided by the charitable sector. While it is right that consumers have choice, it is important that those who need independent debt advice get it in a timely way; that it is transparent, with no hidden fees or payments; and all within a regulatory environment that ensures that all providers are working to the same high standards. The Money Advice Service has a great deal to do in this area, working with the existing major players.

This amendment calls on the FCA to ensure that our regulatory structures in this area are ready as soon as responsibility for this area transfers from the OFT; that they look forward as well as back; and that we do not miss the opportunity to protect consumers from the new problems as well as learning lessons from the past.

The Bill now contains good provisions for the transfer of consumer credit regulation from the OFT to the FCA. Despite the excellent work done to date by the OFT, the current licensing regime has arguably not provided consumers with enough protection, not least because the OFT has not been given the resources properly to police the industry. It has been argued that powers already exist in primary legislation, but that does not mean that the FCA will be ready and willing to move into these areas with the speed that may be required.

We are looking for a firm commitment in the Bill that the FCA will regulate commercial debt management companies along the following lines. The Money Advice Service needs to co-operate with stakeholders, where they share joint aims, forming partnerships to improve the long-term availability, quality, consistency, efficiency and effectiveness of the advice available. The FCA must ensure that the MAS is providing clear and directly enforceable standards for business conduct and the design of products. The FCA needs to set threshold conditions that will keep rogue firms and harmful business models out of the market. There need to be tougher sanctions, including unlimited financial penalties, enabling the FCA to build a credible deterrence strategy against bad practice. There needs to be more effective supervision and enforcement. The FCA needs the power to order firms directly to compensate their customers for losses arising from business conduct that falls below required standards and to ban misleading advertising, which the OFT has found is one of the main areas of concern in this market. We think that good commercial debt management firms would welcome such an approach. I beg to move.

[Lord Borrie]

My Lords, I congratulate my noble friend Lord Stevenson on putting forward this amendment —and, indeed, my noble friend Lord Tunnicliffe, who has taken his place today. As we discussed at some length on the previous amendment, self-regulation has been attempted in the field of debt management, but with only questionable effect. Multiple debtors can, of course, be tremendously assisted by debt management companies arranging how the debts can be paid off over a period in amounts that the debtor can afford. The debtor often cannot manage their cycle of debt sufficiently, so needs assistance. Some commercial operators have sought as best they can to raise their game, but only last week, the Office of Fair Trading decided to revoke the licence of First Step Finance, a member of the Debt Resolution Forum, which runs one of these debt management self-regulation schemes. I expect that responsible operators—they do exist—and consumers would benefit a great deal from a regulatory structure under the aegis of the Financial Conduct Authority in the new legislation.

In Committee, I made an intervention about debt management that I followed up with a letter to the Minister setting out my concerns. I had an extremely helpful response from him. He pointed to the powers that the FCA will have in 2014 to make rules of conduct on matters falling under its remit. In his letter, the Minister said:

“The FCA could, for example, impose restrictions or requirements on debt management plans where it considers that such rules are necessary or expedient to advance the consumer protection or competition objectives … Under the new regulatory regime, the Government will look in the first instance to the FCA as an independent and expert regulator able to put in place the right framework for debt management plans”.

--- Later in debate ---

[Lord Sassoon]

My Lords, this amendment is concerned with the regulation of commercial debt management services. It explores the extent to which firms that supply debt management services on commercial terms, or on terms that otherwise might cause consumer detriment, can be subject to specific rules or sanctions.

I am sorry that the noble Lord, Lord Stevenson of Balmacara, cannot be here but I well understand his concerns about the commercial debt management sector. However, it is worth saying in his absence, because we have touched on these things with him before, that he does an excellent job as chairman of StepChange, the debt advice charity which also provides not-for-profit debt management services. I share many of his concerns as they are reflected in the presentation of the amendment by the noble Lord, Lord Tunnicliffe.

Unscrupulous practices in the sector can cause real harm to vulnerable consumers struggling with debt problems—precisely those who desperately need help. However, I do not agree that the FCA should take action against commercial debt management companies just because they are offering these services on a commercial basis. The Government believe that it is important that consumers have access to debt management services to help them manage their debts where this is the right solution for them. But the Government also hold firm to the principle that consumers should have the choice to pay for these services if they wish to. They also acknowledge that there is a risk that not-for-profit debt advice and debt management providers may not be able to satisfy all the demand in the market.

In that context, I would like to highlight the important role of the Money Advice Service in signposting consumers to high quality, free-to-client debt advice services and in taking a strong strategic role in working with other organisations that provide debt advice to ensure that the market works effectively to help consumers struggling with debts. In April this year, the Money Advice Service took responsibility for the funding and management of face-to-face debt advice projects from the Department for Business, Innovation and Skills, and thus ensured the continuation of an important service which is currently on target to help around 150,000 people with debt problems this year.

Money advice and debt advice are, of course, two sides of the same coin. Promotion of financial capability and better money management will prevent people from getting into problem debt, while high-quality debt advice will ensure that those who find themselves with unmanageable debt are able to access appropriate specialist debt advice. In addition to funding and managing face-to-face services, the Money Advice Service has an important role in working with other organisations that provide debt services, in order to improve the availability, quality and consistency of the service available. The expectation is therefore that the Money Advice Service will continue to work with stakeholders such as StepChange, Citizens Advice, the Money Advice Trust and others to improve the long-term quality and effectiveness of the advice available. This will result in a more consistent sector, where there is agreement on what constitutes a full and effective debt advice service. This is clearly a challenging role for the Money Advice Service to undertake, and effective dialogue with its stakeholders and proper accountability will be key. So I encourage stakeholders in the sector to work with the service and to engage with its debt advice forum and the consultation on its business plan in the new year.

I, and the Government, entirely support the intent behind the amendment to ensure that the commercial debt management sector is subject to stronger supervision, more robust requirements and more stringent sanctions than is currently the case. The transfer of debt management company regulation from the OFT to the FCA will mark a significant shift in approach and powers. The FCA’s consumer protection objective will give it a strong mandate to take effective action to ensure that vulnerable consumers are protected from rogue debt management firms. That enables it to take action in the area of fees, if it believes that that is necessary and appropriate. With that, I hope that the noble Lord has the reassurances he seeks and feels able to withdraw the amendment.

[Lord Tunnicliffe]

I thank the noble Lord, Lord Borrie, for his remarks. I, too, am very sorry that the noble Lord, Lord Stevenson of Balmacara, is not here; he is not only our expert on debt advice services but, apparently, our expert on the wreck of the “HMS Victory”, sunk in 1744, and he is participating in a debate in the Moses Room.

I hear what the Minister says. He goes quite a long way towards what we are seeking to achieve with the amendment. Ideally, we would like it in the Bill, but with his assurances I beg leave to withdraw the amendment.

Amendment 116ZA withdrawn.