Customs Safety and Security Procedures (EU Exit) Regulations 2019

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 26th March 2019 Lords Chamber

[Lord Bates]

I am afraid that I will probably disappoint the noble Lord, Lord Tunnicliffe. In this context, I should say that this is certainly not an objective or outcome that we are hoping will occur; we want to leave with a deal, ideally the withdrawal agreement that has been set out. I will deal with the contributions from the noble Lords, Lord Purvis, Lord Palmer and Lord Tunnicliffe, as best I can. There will be some gaps, so I give notice that I will have to write on a couple of points.

The noble Lord, Lord Palmer, began by asking me to stress the continuity element. I am very happy to say that that is what we are seeking to do. We are simply following the same process as with the onshoring exercise to ensure that we replicate what is there at present. Continuity is the objective. I suspect that the answer to the noble Lord’s subset of questions on number, amount or size of firm is that we are providing continuity of the existing arrangements. I will not be able to answer this evening the point about the innovative idea of firms with 100 employees dividing into two to somehow get around the requirements; I will write on that point if I may.

Let me deal with the noble Lord’s other point. If the UK leaves the EU without a deal, this instrument will remove the requirement for safety and security declarations for six months. He rightly questioned what assessment we had made of this. Taking this approach, the risk to safety and security will not increase after EU exit, given that goods from the EU are not currently subject to safety and security declarations. The transitional period does not apply to non-EU traders that already comply with the current safety and security regulations. After the six-month transition, businesses will be obliged to submit safety and security declarations.

The noble Lord, Lord Purvis, asked what information the Government will provide to businesses on EORI and how to register. I take his point about the level of registrations; of course, we wish it were higher. We have tried to make it as easy as possible to register. He has had the experience of doing it. Our belief is that doing it online takes five to 10 minutes. I do not know whether that corresponds with the noble Lord’s practical experience. I have not done it, but our feeling is that it can be done relatively easily. Businesses need to be aware that it will be important for them to do that in the event of a no-deal Brexit.

[Lord Tunnicliffe]

Will the Minister flesh out the word “important”? Can businesses trade if they do not have—I cannot pronounce the damn thing—this unique identification number?

[Lord Bates]

That is the whole point. We are saying that, in the event of no deal, they would require that to trade. It is a very serious commitment. If they are above the relevant threshold, that will be a requirement.

[Lord Bates]

Clearly, that is a risk. We have put out technical notices and engaged quite significantly with industry bodies on this. We have listened to the industry, which is one of the reasons why we have taken this approach on safety and security, with the six-month transitional period. We have tried to get the information out there as much as possible. However, we are concerned about that as an eventuality and encourage businesses to register, even at this late hour.

[Lord Tunnicliffe]

I hope the Minister will forgive me for pressing this point, but there is a world of difference between being concerned, with perhaps some irritation, minor penalty or whatever, and whatever proportion you want to take—say four-fifths—of the firms that would want to trade across this border not being able to in a fortnight’s time.

[Lord Bates]

Once they became aware of that situation, if that eventuality occurred, the remedy—to get the registration—is a fairly simple and straightforward process. We would like them to do it before then. That is why we have been encouraging them to do that—but we cannot force them to at this stage.

Financial Services (Miscellaneous) (Amendment) (EU Exit) Regulations 2019

Debate between Lord Tunnicliffe and Lord Bates

Thursday 21st March 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I will speak mostly about the first SI, if only to moan a bit. Paragraph 3.6 of the Explanatory Memorandum says that the Secondary Legislation Scrutiny Committee,

“noted that the legislation proposed to be amended by the instrument includes: four Acts of Parliament; seven ‘pre-EU Exit’ statutory instruments; 12 ‘EU Exit’ statutory instruments that have been considered by the House during the last six months; and several items of retained EU legislation”.

As far as I can tell, there are 36 amendments in this SI which have no themes or interrelationship. To get a feel for how difficult it is to work on the SI, paragraph 2.6 of the Explanatory Memorandum gives up almost altogether and says:

“Part 3 also makes minor technical amendments to correct the following financial services EU exit instruments. Further information on these instruments can be found in the EMs accompanying the instruments on legislation.gov.uk”.


If I threw all that in, it would take hours. Indeed, if one devoted just 10 minutes’ attention to each amendment, it would take six hours to read the thing.

The Minister said, rather grandly, that this had been considered by the House of Commons. I too noted that fact and leapt at the Official Report to give me some help. It told me that the Commons committee sat at 6 pm —that is quite keen—but adjourned at 6.11 pm, having completed its work. Members devoted 11 minutes to this SI. I am sure that, due to their natural brilliance, they scrutinised it fully, but I am rather slower than that.

There is a real problem of how we get proper scrutiny. I sought help from the Civil Service, as one is invited to by the Explanatory Memorandum. As I understand it, the amendments fall into three groups. One group corrects errors; I would value knowing how many of the 36 are error corrections. Another group makes previous SIs compatible with those created subsequently by other departments. So we have one bit of government making SIs that create complications in another; it is a bit brave to consider creating complications in Treasury SIs.

The third group comes from a review of the previous legislation. One worries about that until turning again to the Explanatory Memorandum. The Treasury has been consistent and kept paragraphs 7.1 to 7.8 identical in all its 50 SIs. Paragraph 7.4 says that these SIs,

“are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to the situation”.

Therefore, I want a categorical assurance that in these 36 amendments there is no new policy. If there is new policy hidden among them, will the Minister tell me what that new policy is?

Turning to the second instrument, I found almost the opposite to the noble Baroness, Lady Kramer. Not that I am suggesting that what she said was not valid, but I thought this was a commendable Explanatory Memorandum. It is a stand-alone document that one could understand and it seemed that it was doing what the SI should do. In other words, it was dealing with inevitable consequences, so I am content with it. I think the essence of what the noble Baroness was saying is that here is yet another bad consequence of leaving the European Union, and to that extent I totally agree with her.

[Lord Bates]

I thank the noble Baroness and the noble Lord for their scrutiny and questions on these points. I shall do this in reverse order because I am waiting for a little further inspiration about fintech—it is arriving. The noble Lord, Lord Tunnicliffe, is always assiduous in these matters and drifts easily between bus operations in Northern Ireland and financial services across the European Union in his scrutiny of SIs. He raises a very serious point: the first of these documents runs to some 26 pages, and 26 pages of Explanatory Memorandum, while the second has 11 pages and 14 pages of Explanatory Memorandum, so there is an awful lot of detail.

During this process—we are now nearing the end of it—we have worked on some 52 statutory instruments and have been grateful for the way the noble Baroness and the noble Lord have engaged with us very constructively over the past four to five months. During that process, of course, there will be consequential amendments that were not foreseen, because some of the 48 affirmative statutory instruments that have gone through this House were laid after the previous ones were made, and therefore changes need to be made. We envisaged, when we began this, what we call an onshoring process to ensure seamless activity, so that there is no disruption for UK financial services. We always envisaged the need for some instrument such as this at the end that corrected any errors and dealt with consequential changes. All the amendments are being made to ensure a functioning financial services regulatory regime in the UK, in any scenario, when the UK leaves. These amendments ensure continuity and clarity.

The noble Lord asked me to make the very specific commitment that no policy changes are involved in these: that is certainly the case. To make policy changes would be in contravention of the letter and spirit of the withdrawal Act and we certainly would not do it. The approach has been consistent. He asked about the number of errors. Around eight drafting errors in previous EU exit financial services SIs are being corrected in this measure.

The noble Baroness raised some issues around fintech and I appreciate her expertise in this area. Fintech is very much a jewel in the crown of the UK. We have some of the most amazing financial services firms in fintech, including start-ups in places, such as Shoreditch, around the City of London: it is a quite incredible and burgeoning industry and certainly one that we want to see continuing to expand. UK providers of online services to the EEA countries will need to continue to comply with a range of EEA countries’ individual legal requirements relating to online activities. The exclusion we are referring to here is limited to online-only activities. We expect that firms will use passporting rights rather than this exclusion; therefore, we estimate the number of fintech firms will be very small.

Financial Services (Distance Marketing) (Amendment and Savings Provisions) (EU Exit) Regulations 2019

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 5th March 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, we have no objection to any of these SIs. I have read them through as far as I was able, and they seem to be logical.

The distance marketing SI particularly caught my attention, because many citizens are subject to distance marketing that perhaps they do not really want. I note that the Explanatory Memorandum at paragraph 7.30, “Criminal offences”, states that various failures to abide by the rules of the regulation we are creating will be a criminal offence and that those guilty of it will be,

“liable, on summary conviction, to a fine not exceeding level 3 on the standard scale”.

I have a dilemma because, on the one hand, I am going to say that that does not sound very threatening, especially if you are a large firm—I think this relates to firms as well as to natural persons—and I would value it if the Minister would write me a letter on that. I also recognise that, if the SI sought to change that, I would argue that it was smuggling through a policy change. I am not suggesting that it should, but can the Minister clarify whether this is genuine consumer protection that firms fear or whether the punishments for offences are too low to be impactful?

[Lord Bates]

My Lords, having spent the past six months with the noble Lord in Grand Committee and here, I can assure him that the last thing I would ever attempt to do is to try to smuggle through some policy under his astute watch, because I would never succeed—and we would never attempt it, of course.

The noble Baroness, Lady Kramer, made a good point on this. It gives me an opportunity to put some additional remarks on the record—I know she was talking particularly about buy-to-let properties, but the principle will hold. By extending the scope of the distance marketing regulations to EEA firms in a temporary permissions regime, we are ensuring that UK consumers will continue to be protected by appropriate distance marketing regulations. Firms in the temporary permissions regime will be seeking authorisation, and it is therefore in their interests to comply with the UK’s marketing regime—that is not the answer. I am sorry about that. I will get an answer for her. I absolutely got what she was asking.

Financial Services (Gibraltar) (Amendment) (EU Exit) Regulations 2019

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 5th March 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, we have no objection to these two SIs, but I have two or three brief questions. The position is summed up in the Explanatory Memorandum to the first set of regulations, paragraph 7.21 of which surprised me. It states:

“The UK government will work closely with the government of Gibraltar to design a long-term permanent framework”.


My impression until I got to that sentence was that the provisions here would change the situation into a stable framework. I would be grateful if the Minister could give us a feel for the extent of difference between the UK system and the system in Gibraltar that means that this bespoke framework is needed, and particularly what will happen if it is not agreed by the end of 2020.

The Minister can respond in writing to my second comment if he would like to do so. I refer to the first bullet point in paragraph 7.15 on the second set of regulations. This is really a cry of anguish because one has slogged through so many of these SIs and has to read every one, and then one reads this final sentence:

“This framework will not apply to the automatic recognition procedure of resolution actions between the UK and Gibraltar”.


I do not have the faintest idea of what that means and not the faintest idea of how to find out what it means. I ask the Minister as a matter of sheer curiosity what it means, and I will accept a letter.

[Lord Bates]

I thank all those who have participated in the debate. Let me try to put a little more flesh on the bones of this process for the noble Lord, Lord Beith, and my noble friend Lord Deben. In the event of no deal we will be left without the necessary legislative framework because the European Communities Act will have been revoked and therefore the body of law will not apply in the UK. We need to make sure that we onshore the current law so that we get a measure of continuity. If that applies to the UK, of course it also applies to Gibraltar. The Gibraltar Parliament has therefore also had to pass its own version of the EU withdrawal Act and is having to go through the process of the onshoring regime, which is what we are doing here. We are in a sense being treated as two sovereign entities.

Let me put a little more structure on to my initial answer to the noble Lord, Lord Beith. As set out in the White Paper on the EU withdrawal agreement Bill, the Bill will amend the European Union (Withdrawal) Act 2018 so that the conversion of EU law into retained EU law will take place at the end of the implementation period instead of on exit day. While the UK remains subject to EU law and before the conversion of EU law into UK retained EU law, there is no requirement for most instruments relating to our exit from the EU to be in force. The intention is therefore that the EU withdrawal agreement Bill will contain provision to delay all relevant SIs that enter into force on exit day until the end of the implementation period. The Bill will also ensure that Ministers can revoke or amend SIs as appropriate so that they effectively deal with any deficiencies arising from the end of the implementation period.

Public Record, Disclosure of Information and Co-operation (Financial Services) (Amendment) (EU Exit) Regulations 2019

Debate between Lord Tunnicliffe and Lord Bates

Monday 18th February 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, looking through this statutory instrument to see whether there were any policy shifts, as far as I can understand it, the EEA countries have better protection for their confidential information than third countries do. This statutory instrument takes that special protection away and then requires agreements to be concluded. That would seem to be the wrong way around. I would have thought that the protection which the EEA states have—that before the information can be passed on, permission must be sought from the originating country—would be better extended to other third countries. This would be a better position for the management of confidential information than what is referred to in the Explanatory Memorandum as a series of agreements, followed by instructions to staff. It is a bit late to have a debate on such an obscure point but if the Minister were to read Hansard tomorrow and send me a letter on this point, I would value that.

[Lord Bates]

Again, I thank noble Lords for their scrutiny and questions. I give notice that I may need to write on one or two of them, if they would accept that, but I will say a little about how the negotiations are going. In my enthusiasm to communicate the details of this instrument to the House, I perhaps went a bit fast but I did indeed say that the negotiations were going well.

UK and EU authorities have made good progress in their discussions on a memorandum of understanding, which includes essential provisions for confidential information-sharing and co-operation. It is our hope that these will be in place by exit day. Both UK and EU regulators recognise the importance of effective co-operation and are working hard to finalise co-operation agreements. We fully expect these agreements to be in place by exit day, as part of preparations to deal with a no-deal scenario. More broadly, Members will be well aware of the top priority we have attached to putting in place a range of transitional arrangements, designed to mitigate the impact of no deal.

The noble Lord, Lord Sharkey—eagle-eyed as ever—spotted the gap between 5 pm and 11 pm. I am guessing that it is a standard cut-off point—a sort of close-of-business setting on the day in question—but perhaps that is not the case. I am told that exit day is defined in the EU withdrawal Act as 11 pm on 29 March, specifically; yes, I am aware of that. I think the point was made that it says 5 pm but there might be something else winging its way to me.

The noble Lord, Lord Sharkey, also mentioned confidential information and made a good point on that. Under Section 348 of FiSMA, “confidential information” means information which,

“relates to the business or other affairs of any person”,

that was received by the FCA, the PRA, the Bank of England, the Secretary of State or specified people instructed or employed by them for the purpose of discharging their functions; and it is not prevented from being confidential information because, for example, it has already been made available in public.

I will take advice from my noble friend Lord Young and perhaps just pause there with the assurance that I will write and follow up on this, and thank noble Lords for their contributions.

Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit) Regulations 2019

Debate between Lord Tunnicliffe and Lord Bates

Monday 18th February 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

When I read the SI with care, it seemed straightforward and to do its work. I was seeking to see if there was any new policy, and the new policy that I discovered was the Venezuela point. I hope the Minister will be kind enough to write to me explaining whether “all countries” has that worldwide application and why the Treasury does not perceive that there is any danger in such an extension. Other than that, I am entirely content for this SI to go through.

[Lord Bates]

I am happy to give the noble Lord that assurance; I will write and be clear on that question. I thank the noble Lord, Lord Adonis, for not pressing his amendment.

Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019

Debate between Lord Tunnicliffe and Lord Bates

Monday 18th February 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I am afraid that despite my efforts I can find nothing wrong with this statutory instrument. It seems to be perfectly straightforward and necessary to manage the situation. I thank the noble Baroness, Lady Kramer, for reminding us of the Libor scandal. It was a dreadful period in British financial services history, and we forget it too easily, I fear.

If my noble friend intends to divide the House on his amendment I make it absolutely clear that he will not be supported by the Opposition Front Bench. We would support a fatal amendment on a statutory instrument only in exceptional circumstances and only after very careful consideration of the reasons and widespread consultation. We will therefore be sitting on our hands if my noble friend divides the House.

[Lord Bates]

I again thank the noble Lord, Lord Tunnicliffe, for his responsible approach to these regulations. It is quite right that there should be scrutiny, but the amendment which we are now debating would effectively be fatal. It would prevent these regulations appearing on the statute book when their purpose is, as the noble Earl, Lord Kinnoull, and my noble and learned friend said, to avoid the type of abuse of market power and benchmarks that was sadly the case in the past. To avoid all the progress we have made in that in the event of no deal would be regretted.

However a number of points were made, including by the noble Lord, which should be responded to as part of the scrutiny, so I shall launch into them, if I may. The noble Earl, Lord Kinnoull, asked why it is important to have this SI in place. If it were not it would cause significant legal uncertainty and disruption for firms about how they were able to provide benchmarks for use in the UK and for other users about which benchmarks they could legally use. Many of them have already submitted applications or created business models on the basis of market compliance with the regime. That is why the noble Earl was right to cite paragraph 2.6 of the Explanatory Memorandum and my noble and learned friend was right to raise the importance of these regulations.

The noble Baroness, Lady Kramer, questioned the ability of the FCA to enforce these regulations given the previous situation with the Libor scandal. We do not accept that EU regulators are better regulators than ESMA. The EU regulation was created after the Libor scandal and introduced a comprehensive framework to ensure that the business integrity of benchmarks is maintained. We are confident that the FCA will enforce these regulations. She also asked about how EU and UK regulators will co-operate going forward. The FCA will use the information to ensure that on exit day any administrators or benchmarks which are on the ESMA register at 5 pm on the day exit occurs are copied over to the FCA register. FCA-approved benchmarks or administrators will be copied over permanently and those approved by other EU national competent authorities will be copied over for a temporary period of 24 months. This SI removes obligations in retained EU law for the FCA to co-operate and share information with regulators. The FCA will still be able to co-operate with EU regulators through the existing framework in the Financial Services and Markets Act.

The noble Lord, Lord Adonis, asked how we arrived at the number of firms affected by this SI. The number is the current number of approved benchmark administrators. The regulators that we are working with are seeking to understand the full range of administrators that will seek approval, but it is difficult to provide a final figure for the number located in the UK and the EU.

I think that that covers most of the points raised. Again, I thank noble Lords for their contributions on this SI. On behalf of the Government and the Opposition—and I am sure that on this occasion I speak for the Liberal Democrat Benches and perhaps the Cross Benches too—I express the hope that, despite the scrutiny that, rightly, is called for in the amendment, the noble Lord will not press it and will accept the regulations. It is necessary to put them in place in order to protect investors in this country.

Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019

Debate between Lord Tunnicliffe and Lord Bates

Monday 18th February 2019 Lords Chamber

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, I beg to move that the House considers the draft Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019—

[Lord Tunnicliffe (Lab)]

For once, it would be nice to get it right. The Minister is moving that they be approved.

[Lord Bates]

I am always very happy to take correction from the noble Lord. If he would like, I am happy to ask that the House approve these regulations.

Let me try again. The Treasury has been undertaking a programme of legislation to ensure that, if the UK leaves the EU without a deal or an implementation period, there continues to be a functioning legislative and regulatory regime for financial services in the UK. The Treasury is laying SIs under the European Union (Withdrawal) Act to deliver this, and a number of debates on these SIs have already taken place here and in the House of Commons. The SI being debated today is part of this programme.

The SI will fix deficiencies in UK law relating to the UK’s listing regime, prospectus regime and transparency framework to ensure they continue to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs laid under the EU withdrawal Act, providing continuity by maintaining existing legislation at the point of exit but amending where necessary to ensure that it works effectively in a no-deal context.

Turning to the substance of the SI, many noble Lords will be familiar with the prospectus directive, the transparency directive and the consolidated admissions and reporting directive, or CARD, and with related legislation that is implemented into UK law to set the listing regime, prospectus regime and transparency framework that regulate capital markets activity in the UK.

The transparency directive harmonises transparency requirements across the EU by requiring issuers with securities, such as shares and bonds, admitted to trading on a regulated market to disclose a minimum level of ongoing information to the public. It built on and amended CARD, which co-ordinates the conditions for the admission of securities to official Stock Exchange listing.

A prospectus contains information on an issuer that is seeking to offer securities to the public or is seeking admission to trading on a regulated market. The information they provide is used by investors to make investment decisions. The prospectus directive contains the harmonised rules governing the content, approval, format and distribution of the prospectuses that issuers must produce when securities are offered to the public or admitted to trading on a regulated market in a member state of the European Economic Area.

In a no-deal scenario, the UK would be outside the EEA and outside the EU’s legal, supervisory and financial regulatory framework. The UK legislation implementing the prospectus directive, the transparency directive, the CARD and related legislation therefore needs to be updated to reflect this to ensure that the UK’s listing regime, prospectus regime and transparency framework operate properly in a no-deal scenario. These draft regulations therefore make the necessary amendments to the retained EU legislation to ensure these regimes are operable in a wholly domestic context.

First, this SI will transfer responsibility for powers and functions currently within the remit of EU authorities to the appropriate UK institutions. Specifically, it will transfer powers from the European Commission to HM Treasury, such as the ability to make delegated acts pursuant to the relevant legislation. It also transfers powers to the Financial Conduct Authority from the European Securities and Markets Authority to create and amend certain binding technical standards. This transfer of functions mirrors the current split between the legislative power of the Commission and the regulatory role of ESMA.

Secondly, it alters the scope of the legislation by ensuring that, post exit, EEA issuers wishing to access the UK’s capital markets will be required to have their prospectuses approved directly by the FCA, as any other third country would have to do. Currently, EEA issuers can passport prospectuses approved by other EEA regulators for use in the UK. This aligns with the approach taken across other financial services SIs laid under the EU withdrawal Act.

The SI also introduces grandfathering arrangements that will allow any prospectus approved by an EEA regulator and passported into the UK before exit day to continue to be used up to the end of their normal validity, as well as supplemented with additional information. The end of validity is usually up to 12 months after the prospectus is approved.

Thirdly, this SI extends the exemption under the prospectus directive for certain public bodies from the obligation to produce prospectuses to the same set of public bodies of all third countries post exit. If a UK-only approach were taken, EEA state public bodies that are currently accessing the UK market would be obliged to produce a prospectus to issue securities in the UK that they would not be required to do to issue securities in EEA states. Additionally, extending the exemption to public sector bodies of third countries is consistent with the UK treating EEA member states and third countries equally.

Fourthly, as the explanatory information for this SI states, in a no-deal scenario, the Treasury intends to issue an equivalence decision, in time for exit day, determining that EU-adopted international financial reporting standards can continue to be used to prepare financial statements for UK transparency and prospectus requirements. This will allow issuers registered in EEA states with securities admitted to trading on a regulated market or making an offer of securities in the UK to continue to use EU-adopted IFRS when preparing their consolidated accounts. This decision is consistent with the Government’s approach to provide continuity following the UK’s exit from the EU. This has been welcomed by the industry and is supported by the Financial Conduct Authority.

Additionally, this SI removes obligations within retained EU law for the FCA to co-operate and share information with EU regulators, as this obligation, with no guarantee of reciprocity, would not be appropriate as of exit day. However, the FCA will still be able to co-operate with EU regulators through the existing framework in the Financial Services and Markets Act as it is currently able to do with all other third countries.

This SI makes further amendments to retained EU and UK legislation to ensure that the UK’s listing regime, prospectus regime and transparency framework operate effectively once we leave the EU. It is important to note that, while this instrument covers the UK legislation implementing the prospectus directive, there is no power to domesticate the provisions of the prospectus regulation that apply from July 2019 in the Financial Services (Implementation of Legislation) Bill. These additional provisions make significant changes to the prospectus directive.

Certain provisions of the prospectus regulation have applied since July 2017 and July 2018, with the remainder of the legislation due to apply from July 2019, after the UK leaves the EU. It is the Government’s intention to domesticate the remaining provisions as they will constitute the prospectus regulatory regime from July 2019. However, the EU withdrawal Act will only convert EU legislation into UK law that is already in force and applies immediately before exit day. Therefore, remaining provisions of the prospectus regulation will be domesticated via a statutory instrument laid under the Financial Services (Implementation of Legislation) Bill. The Bill, as currently drafted, requires the affirmative resolution procedure for every statutory instrument made under it, providing Parliament with an opportunity to debate and discuss each file that the Government are implementing. This change, I acknowledge, was as a result of the scrutiny the legislation received in your Lordships’ House, and we are grateful for it.

The UK has played a leading role in shaping the prospectus regulation for the benefit of consumers and industry. It is welcomed by industry and acts to cut the cost to business of producing a prospectus in the UK.

The Treasury has been working closely with the Financial Conduct Authority in the drafting of this instrument. It has also engaged the financial services industry on this SI, and will continue to do so going forward. On 12 December 2018, the Treasury published an instrument in draft, alongside an explanatory policy note on 21 November 2018, to maximise transparency to Parliament and industry.

The Government believe that the proposed legislation is necessary to ensure that the UK’s listing regime, prospectus regime and transparency framework can continue to operate effectively post exit, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope noble Lords will join me in supporting these regulations, and I commend them to the House.

--- Later in debate ---

[Lord Bates]

In those circumstances, we would be dealing with a third country. We would not be part of the EEA, so we could not give them the terms that apply within the EEA at the moment. We had quite a bit of debate on this last time. They would be a third country like any other. We want to develop a very close relationship, but that is a matter for negotiation and discussion.

[Lord Tunnicliffe]

The suggestion that the EEA does not exist, because we are out of the EU, is surely not valid. Many regulations specify how they apply to different countries. It would be entirely available to the Government to say that the exemption for public moneys should apply to EEA countries and not to other third countries. It is an entirely possible outcome; I am not saying whether it is good or bad. I want to know why the Government have moved from the EEA to everybody, including Venezuela.

[Lord Bates]

To allow the House to make progress on this, I will seek some advice on that point.

Equivalence Determinations for Financial Services and Miscellaneous Provisions (Amendment etc) (EU Exit) Regulations 2019

Debate between Lord Tunnicliffe and Lord Bates

Monday 18th February 2019 Lords Chamber

[Lord Tunnicliffe]

Will the noble Lord consider my point on paragraph 2.1 of the Explanatory Memorandum? It assures us that these powers will be used in a narrow way to manage the transition and not to introduce new policy. That is quite a strong statement, but it is nowhere on the record and there is nothing in the instrument to limit the use of the powers mentioned in paragraph 2.1.

[Lord Bates]

The noble Lord did ask me to assure that that will apply, and I am happy to do so. With those assurances, and conscious that we will touch on many of these matters again later in the evening, I beg to move.

Financial Services Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019

Debate between Lord Tunnicliffe and Lord Bates

Monday 11th February 2019 Lords Chamber

[Lord Bates]

I thank noble Lords for their questions. It might be for the ease of the House to know that I have the advantage—I think—of having a flow diagram in front of me. It must be one that I can release; I am sure it is. It has something printed on the top which probably tells me that it should not be released, but I am happy to make this diagram available. I do not want to reopen the debate about whether the Official Report should be able to capture diagrams and schemes; that would be a heresy that would cause a debate way above my head and pay grade, so I shall stay way out of it. I will circulate that diagram to noble Lords and place a copy in the Library. I will also, if I may, write in detail on the points raised by the noble Baronesses, Lady Bowles and Lady Kramer. Perhaps the same letter could be used to do that.

On the points raised by the noble Lord, Lord Tunnicliffe, about the impact assessment, I can confirm that one was published on 8 February. On the point made by the noble Baroness, Lady Bowles, about the maximum time for extension of terms, the regime can be extended by no more than five years at a time.

[Lord Tunnicliffe]

I think 8 February was Friday, and I do not do Fridays.

[Lord Bates]

But the noble Lord was just telling us how he was working over the weekend. He does Fridays, Saturdays and Sundays. The Opposition Chief Whip is here, so he should not undersell himself. He is one of the most diligent Members of this House. We will certainly look at that point.

On why the CCP regime is non-extendable, the Bank will remain in close contact with CCPs to inform them of expectations during the run-off period. This task is expected to be manageable, given the relatively small number of CCPs that can be expected to be in a run-off.

The noble Baroness, Lady Bowles, also asked under what circumstances a firm may be moved from a supervised to a contractual run-off. The FCSR makes provisions allowing a firm to be moved from the contractual run-off to the supervised run-off and vice versa. For this to happen, a regulator would have to consider the matter specified by the FSCR, including whether the move is necessary for the protection of consumers. Only the regulators can move a firm between the SRO and the CRO; firms cannot choose whether to move.

I appreciate that there will be other points relating to this but, as I have given a commitment to write to noble Lords, I will conclude my remarks there for the time being, and commend the regulations to the House.

Solvency 2 and Insurance (Amendment, etc.) (EU Exit) Regulations 2019

Debate between Lord Tunnicliffe and Lord Bates

Monday 11th February 2019 Lords Chamber

[Lord Tunnicliffe]

I thank the noble Earl for that explanation and apologise for misunderstanding him.

The task we have is under Section 8 of the European Union (Withdrawal) Act, which is a very narrow task. My concerns are perhaps quite small and detailed, but I think that there is a fundamental concern about the process. There is a generality in political activity whereby what politicians do should be understood by a reasonably intelligent amateur—I am at least an amateur—and there is disquiet about the complexity of these three SIs. They are remarkably difficult to understand if one is not part of the industry. It is impossible to read the raw instruments. Much of them relates to FSMA 2000, which has been amended so many times that the original document is indistinguishable. Trying to understand the measure from the Explanatory Memorandum, in which I must trust because I have no other way of examining it, was difficult.

The Opposition will not oppose these instruments. As I read through them, they seem in general to do similar things, so I have no points to raise. However, paragraph 7.12 of the Explanatory Memorandum states:

“The European Commission’s responsibility for developing legislation will be transferred to HM Treasury which will be given power to make regulations for certain matters previously dealt with under Solvency II, e.g. the system of governance and risk management, methods and assumptions used in valuations and risk modules”.


That seems to be a pretty sweeping power which has been transferred. Does the Minister believe that is compatible with the withdrawal Act, particularly Section 8? What scrutiny, if any, will Parliament have of the exercise of these powers by HM Treasury? As set out here, they seem to be unrestricted.

Paragraph 7.13 says:

“EU assets and exposures held by UK insurers will no longer be subject to preferential risk charges when setting capital requirements for insurers that use the Standard Formula”.


At first sight, that sounds as though we are taking something away from the EU, that we are being beastly to them. It was only when I did further research that I realised that it has the opposite effect. As I understand it—I hope the Minister will be able to confirm this—the effect will be to increase the capital requirements for UK insurers, which will certainly reduce their profitability. As we know from previous debates, the objective of the withdrawal Act was to not introduce new policy. In his introduction, the Minister said that these instruments aligned with previous SIs. I do not think they do because, in order to stop cliff-edge changes in value, previous SIs have always had some sort of transition regime. If the effect is higher capital requirements, does that mean that UK insurers have been operating unsafely, with insufficient capital? If not, we will be introducing an increased burden on them. If my interpretation is right, why is there not a transition regime in order to make sure there is no cliff-edge change to that requirement?

Further on, in the section on impact, paragraph 12.3 states:

“UK insurers which use the Standard Formula for calculating capital requirements will be impacted by the removal of preferential treatment for EEA risk-weighted assets and exposures. Such insurers could face higher capital requirements unless they divest themselves of such assets and exposures. However, the government intends to legislate to provide regulators with powers to introduce transitional measures to phase in on-shoring changes to reduce the immediate impact on exit.


That hints that the Government are going to introduce a transitional regime through the regulators. Is that a proper interpretation of the paragraph? If so, when will the legislation alluded to, giving these powers to the regulators, come before the House? Why has this not been part of the SI?

Paragraph 7.15 of the insurance distribution instrument says:

“Regulations 6 and 12 of this instrument also transfer relevant legislative functions of the European Commission contained within Articles 25(2), 28(4), 29(4) and 30(6) of the IDD to HM Treasury. This includes the powers to make regulations about conflicts of interest, regulations about inducements, and regulations on assessments of suitability, appropriateness and reporting to customers, and specifying principles for product oversight”.


That seems to be a big bunch of powers. Will they be subject to any parliamentary scrutiny?

Finally, I was somewhat exhausted by the time I came to look at the conglomerates SI—we amateurs do have to work hard—but reassured by paragraph 7.12 of the Explanatory Memorandum which says:

“In practice this change will not have a material effect on financial conglomerates already operating in the UK”.


With that assurance, I have no questions on that SI.

[Lord Bates]

I thank noble Lords for their questions and of their scrutiny of these important SIs. I am sorry to have ruined the noble Lord’s weekend. I hope he got a chance to see the rugby.

[Lord Tunnicliffe]

I did.

[Lord Bates]

I hope that cheered him up a bit.

These are very detailed SIs but in your Lordships’ House there was a wealth of ability to understand them and raise some pertinent questions. The noble Earl, Lord Kinnoull, began by paying tribute to the parliamentary draftsmen and officials at the Treasury and the way they have worked with the ABI. I have witnessed that close working relationship and am grateful to the noble Earl for recognising it in his remarks. I do not have a note relating to his question about the insurance industry on the number of insurance brokers relative to the growth in the economy, and whether there is something about the competitiveness of the UK insurance market that we need to learn from. Those are interesting points and I will take his suggestion back to John Glen, the Economic Secretary to the Treasury and brilliant Cities Minister, who is looking at issues of competitiveness. I will then write to the noble Earl.

Most of the questions related to Solvency II, so I will group those and deal with the other ones as I go through. The noble Lord, Lord Tunnicliffe, asked about insurance distribution and why the Government need the additional powers in the SI. The instrument also transfers relative legislative functions of the European Commission contained within the insurance distribution directive to the Treasury. Any changes made to regulations by the Treasury would have to be approved by Parliament. I hope that that offers some reassurance.

The noble Baroness, Lady Bowles, asked whether the financial conglomerates regulations had resolved the problem of double gearing in the insurance model. FICOD has created new supervisory powers which increase standards of governance and oversight for the largest financial groups. This has helped address gaps that arise from the sectoral supervision of individual firms in a group, in particular the risk of double gearing, which can arise in the absence of robust, group-level policies on capital governance. As I was reading that, I wondered if it answered the question of whether the problem has been resolved. I think the answer may be yes, but I will say that we are working on it and I will write to the noble Baroness. I thank her for raising that point.

The noble Lord, Lord Tunnicliffe, asked about the transitional power referred to in the Explanatory Memorandum to the Solvency II regulations. This power can only be used to phase in the EU exposures changes that the noble Lord is concerned about; it cannot be used to avoid a cliff-edge impact. The power will complement transitional arrangements already approved by Parliament, including the temporary permissions regime. The noble Earl, Lord Kinnoull, asked whether we should have a review of Solvency II. The UK is putting in place all necessary legislation to ensure that, in the event of a no-deal exit in March 2019, there is a functioning legal regime. The Act does not give the Government the power to make policy changes beyond those needed to address deficiencies. That means, as far as possible, that the same rules apply. Let me extemporise a bit: the noble Baroness, Lady Bowles, made the point that the record of UK regulators in leading on Solvency II was widely acknowledged. I think that that is to be encouraged. In all likelihood, if our world-class regulators spot deficiencies in the new regime, they will keep that under review.

The noble Baroness, Lady Drake, asked whether we will be weakening standards. In many ways, as I have alluded to already, our intent—the Chancellor and many others have put this on the record—is to recognise that the UK’s reputation in financial services is earned because we have high standards, not because we have low standards. In a sense, there is a tension between the claim that we are going to be lowering standards and my noble friend Lord Deben asking whether we are going to be gold-plating standards, a question I will come to in a second. My noble friend asked about the definition of equivalence. The definitions that operate for each EU equivalence regime will not change and we will use the same criteria for making equivalence decisions in the future as the EU uses now.

My noble friend asked whether the regulators will have adequate resourcing for a no-deal scenario, a question picked up by the noble Lord, Lord Tunnicliffe. Figures on resources and any new costs are for the regulators to publish in their annual reports, which are laid before Parliament. I remain confident that the regulators are making adequate preparations and effectively allocating resources ahead of March 2019. They have actively participated in a wide range of groups in developing technical policy and regulatory rules and have chaired a number of committees and task forces, bringing their considerable experience in implementing EU legislation to bear.

The noble Baroness, Lady Bowles, asked whether there is a figure for EU holding of gilts compared to the rest of the world. To the best of our knowledge, there is no reliable data on EU firms’ holding of gilts; however, analysis by the regulators suggests that the capital impact of this change should not be significant.

My noble friend Lord Deben asked about gold-plating by the UK. Solvency II is a maximum harmonisation directive—I do not know whether that is another phrase my noble friend will pick me up on. There must be a level playing field across the EU and we are preserving these rules as much as possible. He also asked whether the instruments reduce the need for the PRA to co-operate and share information. The UK fully expects a high level of co-operation to continue after exit, as is currently the case with countries such as the United States.

The noble Lord, Lord Tunnicliffe, asked whether too much power has been transferred to the PRA. In the longer term we will need to review the regulatory framework in the UK, including the role of regulators and how far they should be accountable. He asked why we are increasing capital requirements under Solvency II —whether the current requirements are not adequate—and worried about what the past situation was. The prudential standards in Solvency II are not being altered. The capital standards that apply now are entirely appropriate and will be largely unaffected by exit. There are only two situations in which a firm may be required to hold more capital once outside the EU’s joint supervisory framework for group supervision. Some EU groups operating in the UK may be subject to an additional layer of supervision by UK regulators. He asked why we are giving new legislative powers on Solvency II to the Treasury. The EU withdrawal Act explicitly provides for EU functions to be transferred to UK bodies, which is what we are doing.

I will, as with previous secondary legislation, review the record of the debate with officials. Should I find that any points have not been covered adequately, I will write to noble Lords and copy in other Members. In the meantime, I commend the regulations to the House.

Financial Services (Implementation of Legislation) Bill [HL]

Debate between Lord Tunnicliffe and Lord Bates

3rd reading (Hansard): House of Lords
Wednesday 6th February 2019 Lords Chamber

[Lord Bates]

I thank the noble Lord, Lord Davies, for his comments. As he has set out, the schedule that we are up against here is pretty demanding. All of us on the Front Benches are in solidarity in recognising the demands of the work going on. It is also demanding on some of the committees of your Lordships’ House, which are having to do an incredible amount of work. I am thinking of the Secondary Legislation Scrutiny Committee and its sub-committees, under my noble friend Lord Trefgarne and the noble Lord, Lord Cunningham of Felling, which is doing a tremendous amount of work.

The noble Lord, Lord Adonis, asked about the progress being made. We have agreed that we will provide regular updates. We have approximately 60 pieces of secondary legislation that need to come through. Around 45 are subject to the affirmative procedure and, of those, 22 or 23 have made their journey through the House, with some benefiting from the scrutiny of the noble Lord himself. That is basically where we are: about half way. We have some 31 sitting days before Brexit, so it is a pressurised and demanding situation.

I turn to the point made by the noble Lord, Lord Foulkes, about the Delegated Powers and Regulatory Reform Committee. I thank that committee in particular because it has done an excellent piece of work. In fact, we almost took the committee’s script to express concerns about the extent of the Henry VIII powers, some of the wording and some of the files that were in flight and which we have just been talking about. I am pretty sure we have addressed all those concerns. If that is not the case, I will write, but from recollection we wanted to address all the points.

The noble Baroness raised the online community. Of course a number of pieces of legislation relate to online financial regulation. I cannot be specific about which ones are relevant but it is a crucial point. We have had many long discussions in Grand Committee in the Moses Room about statutory instruments that have a strong online financial services element to them and make a significant contribution to the success of UK financial services. We want that to continue once we leave the European Union.

[Lord Tunnicliffe (Lab)]

My Lords, perhaps I may say a word or two to put this discussion into perspective. This side hates the idea of a no-deal exit and so on, but the Bill is an outstanding example of co-operation by the Government. The Bill has changed massively from the one introduced at Second Reading. The Government facilitated discussions with the Minister and officials. It is now a much better Bill and, given its task, which we abhor, it is nevertheless a good Bill.

Financial Services (Implementation of Legislation) Bill [HL]

Debate between Lord Tunnicliffe and Lord Bates

Report stage (Hansard): House of Lords
Tuesday 29th January 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I support Amendments 3, 4 and 5. They are the product of ideas from all parts of the House: from the noble Lord, Lord Hodgson, and particularly from Lib Dem Members. Amendment 4 strikes me as a very important innovation. Other parts of the Administration may want to ponder what should be done here, because while it will all be down to the Government how they use it, it creates a mechanism by which we get will close to being able to amend an SI. Clearly, no great measures are going to fall because we have no great power to influence them and we all know that we are not going to vote on such SIs.

However, to be able to discuss an SI with the Government—obviously not on the Floor of the House but perhaps by approaching Ministers on particular issues—before it is laid would be an important step forward. Proposed new paragraph (b)(ii) and (iii), inserted by Amendment 4, is also important for making how such an SI is generated much more structured. I hope this will give real transparency to SIs, which can at times be very complex. I end by thanking the Minister for his efforts on the Bill and almost by celebrating, for want of a better term, the extent to which we have been able to come to consensus.

[Lord Bates]

I thank the noble Lord, Lord Tunnicliffe, for his last intervention. In effect, I think he was saying that in the way we have been working together we have perhaps somehow pioneered a new way of approaching financial secondary legislation. I am pleased that he feels that.

I am grateful to my noble friend Lord Hodgson for his support for the amendments. He was tempting the noble Baroness, Lady Kramer, to rehearse the vigorous and full debate which took place in Committee on these provisions. Perhaps I may step out of the middle simply to reiterate that the Bill is not the Government’s proposed long-term solution for all financial services legislation. The Government will take forward their proposals for a sustainable, long-term model in due course, when there will be lots of opportunities to discuss the important issues which have been raised.

Interchange Fee (Amendment) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 15th January 2019 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, last night, the House expressly rejected no deal in its vote. That is also Labour Party policy. These orders should not be necessary, but when the Government put instruments in front of us, our role is to ensure effective scrutiny of all SIs and to expose any serious concerns. We believe that this is consistent with our role as a revising and scrutinising Chamber. Having said that, and having listened to the splendid seminar on credit cards by the noble Baroness, Lady Bowles, which leaves me better informed, if not necessarily wiser, I have very few comments to make on this particular SI.

I start by expressing my sheer irritation with the failure to provide timely impact assessments. It seems utterly absurd. Paragraph 12.5 of the Explanatory Memorandum states:

“A full Impact Assessment will be published alongside the Explanatory Memorandum on the legislation .gov.uk website, when an opinion from the Regulatory Policy Committee has been received”.


That might have been snuck out in the past two or three days, but there is no reason to have an impact assessment if it arrives only after all the legislative procedures have been completed. We should have a thorough explanation from the Treasury as to why that is happening.

Once again, having said that, the Treasury produced guidance on these SIs—at paragraphs 7.1 to 7.9, I think—which are, word for word, the same in all Treasury no-deal Explanatory Memorandums. Therefore, I have had to read them in increasing detail. My favourite sentence is at paragraph 7.4:

“These SIs are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this situation. The scope of the power is drafted to reflect this purpose”.


As an amateur in this field, all I can do is try to test the SIs against that promise. It seems to me that the test is whether they are necessary and whether they obeyed the constraints of new policy. An interesting new area has been introduced by the noble Baroness: was there a better solution that still stopped within the test? I am persuaded that they are necessary; indeed, the Economic Secretary to the Treasury, as is required, signed a statement to that effect. I suppose that if they were left unmade, the credit card companies could rip the public off even more than where we are. I do not think that they introduce new policy, but the theme that runs through many of these SIs concerns symmetry and asymmetry. The noble Baroness has suggested that a better solution for the UK customer would have been an asymmetric solution. I will be very interested in the Minister’s response to that.

I note that the order comes into force on exit day. What I really want to know is how will the order be repealed if there is a deal. Can the Minister assure us that it is a genuine no-deal-scenario instrument and that it will be removed from the statute book if there is a deal? That seems the fundamental proof that it is a no-deal instrument.

My only other comment is that, because a no-deal solution is such a dreadful idea, virtually all these statutes create a situation in which the consumer is less well off; this is no different. As has been pointed out, consumers in the UK trading with a UK bank and suppliers will continue to enjoy protection, but there will be no protection overseas. I find it very sad that the Government believe that the chances of that happening are sufficient to require these SIs. I hope that we do not go down this road, because each of these little increments of loss of protection, particularly for consumers, is highly undesirable.

[Lord Bates]

My Lords, I thank the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe, for their scrutiny of these SIs and I shall seek to address the points they made. First, in relation to the noble Lord’s point on the impact assessment, in line with the better regulation guidance the Treasury considers that the net impact on a business will be less than £5 million a year. There is potential for limited costs relating to compliance reporting to the Payment Systems Regulator. Firms will benefit from the reduction in uncertainty under a no-deal scenario. Without this instrument the legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would substantially disrupt their businesses.

[Lord Tunnicliffe]

Is the Minister therefore offering a different reason for there being no impact statement from the one given in the Explanatory Memorandum? It seems that a different reason has been put forward.

[Lord Bates]

I will come to that point in a minute. There is a group of impact assessments before the Regulatory Reform Committee, the body within BEIS that reviews these. It is currently considering them and will publish an impact assessment on a wider group of SIs, including this one. If that is not the case, I shall certainly come back to the noble Lord. However, that is why it sounds as though there are two answers when in fact there is one.

Alternative Investment Fund Managers (Amendment etc.) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 15th January 2019 Grand Committee

[Lord Bates]

I thank the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe, for their questions and for their focus on and scrutiny of these important regulations.

I shall start with the impact assessment because there is a different answer to the usual one we have given of “de minimis”. The Government have undertaken an impact assessment on these instruments, which we hope to publish shortly. As a whole, these SIs will significantly reduce the costs to business in a no-deal scenario, as without them the legislation would be defective. In making these changes, we have attempted to minimise disruption to firms and their customers. We have identified the main costs to firms as familiarisation costs arising with the new legislation, transition costs because of changes in legal definitions and changes in the reporting requirements for firms using a temporary marketing permissions regime.

The noble Baroness, Lady Bowles, asked why the asset management stripping provisions have been contracted and how they will apply to EU AIFM firms in a temporary marketing permissions regime. Such firms will be able to market under the same conditions as they could pre-Brexit. That follows the consistent approach we have sought to take in drafting these SIs: by considering how they will work and consulting with the industry. They will therefore be subject to the asset-stripping provisions in their home member state, which of course—without wanting to give the noble Baroness flashbacks to her 20 trilogues in the European Parliament—will continue to govern such activities.

[Lord Tunnicliffe]

If I may gently challenge the Minister, he said that the Treasury has taken a consistent approach with these SIs but it has not. Sometimes it has chosen to be symmetric and sometimes it has chosen to be asymmetric. That may be perfectly reasonable if there is a good explanation—particularly for why it would choose an asymmetric approach—but such an approach, which at least disadvantages some parts of the UK’s financial services industry, should be justified by the fact that it gives greater benefits than not having that asymmetric approach available.

[Lord Bates]

I hear what the noble Lord says. On that particular point, I was referring to the general objective of the onshoring process in which we are engaged. This is to effectively onshore the current rule book to allow for no or limited disruption to UK firms—and, most importantly, their customers and clients—in the unlikely event of no deal. I accepted that point on the previous SI. I will reflect on the point raised by the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe, about how the choice will be applied in future—how it will be arrived at—and I shall copy them in on my letter.

The noble Lord, Lord Tunnicliffe, asked me to clarify how the passporting regime will work for third countries post-Brexit. The passporting regime between the UK and the EU will cease in a no-deal scenario. There is a third-country passport, which is currently not in force. The SI transfers to the Treasury the Commission’s function of appointing the day when this passport comes into effect. If in force, the third-country passport can be used to allow third-country fund managers to be authorised to manage and market funds in the UK.

The noble Baroness, Lady Bowles, asked about opening up to third countries in the future, which is a pertinent question. This instrument deals only with the inoperability that comes with withdrawal from the EU in the event of no deal. However, the national private placement regime is a functioning regime for any third country to take advantage of.

Financial Services (Implementation of Legislation) Bill [HL]

Debate between Lord Tunnicliffe and Lord Bates

Committee: 1st sitting (Hansard): House of Lords
Tuesday 8th January 2019 Lords Chamber

[Lord Bates]

My Lords, I thank noble Lords on all sides for their constructive suggestions during this short debate. I am grateful for these contributions. The noble Lord, Lord Tunnicliffe, made a fair point about the approach we have taken on considering secondary legislation in Committee. We have brought through 16 statutory instruments so far—we have the joy of another four awaiting us in Grand Committee tomorrow afternoon—out of a total package of some 60, 47 of which will use the affirmative procedure. So there is an element of scrutiny. The noble Lord rightly focused on the provisions of the EU withdrawal Act, which is the substance of Amendment 7, but then we were dealing with known entities and rules.

In introducing this amendment, the noble Baroness, Lady Bowles, made a very fair point and the noble Baroness, Lady Kramer, added to it. If I am paraphrasing her correctly, she recognises that, had she not been there, the legislation coming across to us might not have been dealt with in the interests of the United Kingdom financial services industry. I agree with that, from what I know of her role on that committee in that Parliament. Her input—and that of other members—at that stage was vital in shaping the legislation which subsequently came across. We thank her for that service. She is no longer there and, in the scenario for the future files that we are dealing with, neither will her successors be. Therefore, there needs to be a difference in the way these are treated—between the narrow definition in the EU withdrawal Act, when we knew what we were dealing with, and directives and regulations into which we may have had no input and no responsibility for shaping. These could, potentially, be damaging to the UK financial services industry. There is a long way to go with this debate, but that is the crux of it.

I turn to Amendments 2, 4 and 6, the aim of which is to require the publication of a report three months prior to the exercise of the powers under the Bill. This report would need to explain any policy adjustment or decision to omit aspects of the originating file. The noble and learned Lord, Lord Judge, also referred to this. I reassure noble Lords that the Government’s clear intention would be to set out this information in the reports currently required by the Bill.

Further to that, as is standard practice, the Government would of course seek to engage with interested parliamentarians and the industry on the legislation before taking any statutory instruments forward. Where the secondary legislation omits aspects of any EU files, it would certainly be in the public interest to be open about the choices the Government have made in not implementing them.

Regarding the requirement to publish the reports three months ahead of each exercise of the power, the Bill currently sets the requirement that any implementing legislation be subject to the affirmative procedure. This would require laying the relevant statutory instrument before Parliament, and an accompanying Explanatory Memorandum setting out the policy intent, before the debate on the SI itself and well ahead of implementation. This is the established process for scrutinising such statutory instruments and for this reason it is the model we have chosen to follow.

I am also mindful of the fast-moving nature of financial services. In particular, there may be a need to respond quickly to market developments, and it may be important to avoid imbalances with the EU for even a short period—for example, where the files may be of a deregulatory nature. With respect, I suggest that a three-month gap between a report and laying is too long to respond to market developments. Such a three-month requirement would place at risk the basic aim of the legislation, which is to safeguard the reputation, competitiveness and efficiency of UK financial markets. However, having listened to the points that the noble Baroness, Lady Bowles, made in moving her amendment and to the subsequent points of the noble Baroness, Lady Kramer, the noble Lord, Lord Tunnicliffe, and the noble and learned Lord, Lord Judge, I am willing to consider, ahead of Report, exactly how a process might run in the future to keep noble Lords better informed. Just to manage expectations, we will probably regard three months as too long for what might need to be very fast changes to ensure that UK financial services are not disadvantaged, but I signal my willingness to discuss the issue with the noble Baroness and see whether we can find an acceptable way forward.

[Lord Tunnicliffe]

Does the Minister accept that the problem he faces is bigger than that? It is not just about this group but about the fundamental fact that we parliamentarians dislike secondary legislation that changes the law. He faces a significant defeat in this House if we cannot come to some compromise agreement that seriously limits the ability of the Executive to impose law upon this Parliament. It is important that he recognises that—otherwise, we will end up deciding what the Bill says, and that is usually not good in terms of using the law in the future.

[Lord Bates]

I am always willing to engage and it is helpful, if I may say so, to engage in that debate, because the point the noble Lord is making is more on general principles than on detail. I subscribe to that, provided that we can agree to recognise that what the Government are seeking to do here is to deal with, effectively, processes that I am not aware have ever been dealt with before. We may be giving an undertaking to implement certain directives and regulations over which we have not had control and of which we do not yet know the precise nature. That is a different challenge from the normal routine of the types of onshoring that we are doing with the other statutory instruments. I am prepared to accept the noble Lord’s point if he will recognise the difference that we are dealing with between those two different types: that would be helpful.

[Lord Tunnicliffe]

I recognise that there is a difference, but at the end of the day my noble friend Lord Adonis’s point is valid: in day-to-day life the world changes, we have to react quickly to it and, where needed, we have to enact primary legislation. We are not creating a new environment where the Government enjoy executive power to change the laws in this area; surely we are seeking only to manage the transition. I do not see that it is the end of the world if the Government see something develop in Europe, say it is wrong, and say that that will not be covered by this Act and that we will have to bring forward primary legislation. We have done it in the past and we will have to do it after two years; that is the way new ideas should be introduced to this Parliament.

[Lord Bates]

I hear what the noble Lord is saying. Without wanting to rehearse Second Reading again or to undermine any of the progress that I feel we have already made on this in Committee, I will conclude by saying that from my perspective, the noble Baroness has made a proposal to deal with the length of time and the reporting—to address the noble and learned Lord’s point—about where there are changes, what changes have been made and why, and whether that report could be received in advance of the statutory instrument being laid and then debated in the House. In the spirit of recognising the points referred to, I have said that I am prepared to look at that. Three months may be too long but I am prepared to have a discussion ahead of Report on whether another time period may be more acceptable. With that, I hope that the noble Baroness will feel able to withdraw her amendment.

--- Later in debate ---

[Lord Tunnicliffe]

My Lords, we are superficially attracted to this amendment and we await the Minister’s comments with interest.

[Lord Bates]

I thank noble Lords for their contributions to this debate. I shall begin by looking at what I think is an area of common ground: we all recognise the importance of the financial services industry to the UK. Perhaps I may pick up on a point made by my noble friend Lord Flight, that one of the main purposes of this Bill is to ensure that the UK remains an attractive and competitive place to do business, retaining our place as a world leader in financial services. To do this in a no-deal context, it is essential that the UK retains sovereignty over our rules. From the perspective of financial stability and protecting the UK taxpayer, it is essential that the Government, the Bank of England and the FCA have the tools available to ensure that the UK markets are appropriately and effectively regulated.

It would be wrong to set a condition over the UK’s regulatory framework that means decisions which are made about the UK’s future regime are determined through the lens of maintaining equivalence to the EU, irrespective of the quality of those rules and how future legislation and the market itself may evolve.

--- Later in debate ---

[Lord Tunnicliffe]

My Lords, we have an open mind on the amendments. The noble Lord, Lord Deben, hit the nail on the head in saying that the gap between primary legislation and the SI process is too wide. Since we are shovelling a lot of stuff into the statutory instrument process, this is a good time to consider some intermediate action. I do not move from my commitment to tighten up what is available for secondary legislation under this Act, and we will be pursuing that, but I shall listen to the Minister’s response with care to see whether this would be the occasion to make some progress in this important area and give two views of a piece of secondary legislation, instead of the usual process. No matter how hard the Minister and I, and colleagues on the Liberal Democrat Benches, try to give some life to the affirmative SI process, we know in our hearts that we are not going to vote against it because we are not going to provoke a constitutional crisis. Some process in between the two—this may be the right one—deserves careful consideration.

[Lord Bates]

I thank the noble Lord, Lord Adonis, for introducing his amendment, and all noble Lords who have spoken. I will touch on some of the points made, but before I do, perhaps I may say that, as we are moving rapidly through the different groups, it is important that we keep updating where we are. In earlier groups, I was responding positively to my noble friend Lord Deben’s point that the legislature needed to be better informed about the effects where changes are made and where we are derogating from existing directives that are in flight. I dealt with the concerns that had been raised by the Delegated Powers and Regulatory Reform Committee, and agreed to meet and talk further about them—so as we move along I do not want to lose sight of the fact that this is an unfolding story. Already, three hours into Committee, we have agreed to undertake and look carefully at some of the points raised.

I recognise the immense wealth of expertise which is here, not least in ministerial office from the noble Lord, Lord Adonis. I would not dare try to calculate the years of ministerial office represented by my noble friend Lord Deben, especially when I have my noble friend Lord Young of Cookham to my left; between them they could put up a cricket score of years.

There needs to be proper scrutiny; I accept that. The Secondary Legislation Scrutiny Committee already scrutinises all instruments laid before each House that are subject to parliamentary proceedings, and it is required to draw to the special attention of the House those instruments which are politically or legally important, or which give rise to issues of public policy likely to be of interest to the House. In addition, Standing Orders set out that the Joint Committee on Statutory Instruments must report on affirmative statutory instruments before debates can be scheduled. This is the established process for scrutinising statutory instruments, and it is a model we have sought to follow.

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[Lord Tunnicliffe]

My Lords, we have constantly been debating the same issue, which this amendment addresses from another direction. I am afraid that my experience of government producing annual reports is that, on average, they tend to appear every 18 months, rather than 12 months. I am not quite sure what the last report of the two does anyway, and the idea of one meaningful report every six months has a lot to commend it. Being prescriptive about its contents would also be quite useful, and I look forward to the Minister’s response.

[Lord Bates]

I thank my noble friend Lord Hodgson for ably introducing this amendment. A substantial part of my speaking notes is remarkably similar to those for Amendment 2, when I responded to the comments made by the noble Baroness, Lady Bowles, on early reporting. Again, we have made some progress, so let us perhaps just leave that on the record.

I will make a couple of specific points about my noble friend’s amendments, and those which the noble Baroness, Lady Bowles, has put her name to as well. These amendments would require the Government to lay reports on the use of the power every six months, rather than every year; to set out why the power would need to be used; and to include a table setting out the provisions of the EU legislation that have or have not been transposed into domestic legislation, as the noble and learned Lord, Lord Judge, mentioned in an earlier debate. Again, I can assure noble Lords that the Government’s intention has always been to set out such reasoning and detail as part of the reports referenced in subsections (8) and (9).

As to the frequency of the reports, the current drafting has been designed so that the reports will provide an overview of how the powers have been used in the first year, and how the Government propose to use them in the second year. The intention behind this is to allow enough time to pass for a meaningful report to be drawn together. I hope this helps to clarify the Government’s intention to be as transparent as possible in the exercise of these powers.

As with the amendments tabled earlier by the noble Baroness, Lady Bowles, I have listened carefully to the arguments being presented on all sides, and particularly in this instance by my noble friend Lord Hodgson. It may be that we need to consider further exactly how such a process can run, so that we can provide the House and Parliament with the necessary assurances that it seeks. In that regard, I ask my noble friend to withdraw his amendment, given my commitment that we will look again at this issue and seek to make some constructive suggestions on a new way forward at Report.

Payment Accounts (Amendment) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Lord Bates

Wednesday 12th December 2018 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting this instrument. When I first read the Explanatory Memorandum, I thought it was good and it convinced me that, broadly speaking, the instrument was doing its job. Then my noble friend Lady Drake decided to share her speech with me and I realised that perhaps I had not fully understood it, but by this point in the proceedings, the Minister had enough questions to answer anyway without me inventing any more.

The point that has come out of the last two speeches is important. The Government often conclude that an impact is minimal because it affects quite a small number of people. The problem with that attitude is that for the people it affects, it affects them 100%. If you cannot get a basic bank account, that is pretty close to catastrophic in the modern world, so I hope that the Minister will have good answers to my noble friend’s points.

My question is one that runs through many of these SIs—the lack of formal consultation. The consultation paragraph states that there has been discussion with “relevant stakeholders”. One has an uncomfortable feeling that the relevant stakeholders are in fact the financial institutions themselves and not the key relevant stakeholders—the consumers. I would be grateful if the Minister could tell us who the relevant stakeholders were and whether they included consumer representatives, and, if not, why not?

[Lord Bates]

I thank noble Lords for their contributions. They rightly focused on basic bank accounts and the impact on people who are potentially vulnerable. I will try to offer some reassurance.

The noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Drake, asked about the consultation. The Treasury engaged with UK Finance, the Financial Conduct Authority and the Payment Systems Regulator to ensure awareness of these changes. The Treasury published the draft instrument and Explanatory Note on 31 October. We also notified leading consumer groups after the publication of the draft instrument to ensure awareness of these changes. We have not received any questions since publication. That may well change as a result of noble Lords’ comments today.

The noble Baronesses, Lady Drake and Lady Bowles, asked how many consumers and basic bank accounts will be affected by the changes. Customers legally resident in the UK, whether UK citizens or otherwise, who hold a basic bank account at one of the nine designated providers will not be affected, as the SI ensures that the nine providers must continue to offer these to qualifying customers.

The noble Baroness, Lady Drake, asked specifically about the impact of the SI on consumers. The impact on the majority of holders of payment accounts in the UK will be minimal. Basic bank account customers may experience a reduction in service as their providers are no longer required to give them access to, for instance, non-sterling EU transactions, although they may still choose to do so if they wish. It will be at the discretion of the providers whether they continue to offer new basic bank accounts or keep existing ones open for customers resident in the EU. We expect that that will affect very few. I accept the point made by the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Drake, that it may have an impact on those people and I will try to give some reassurance in that respect.

The noble Baroness, Lady Drake, asked why it was necessary for the SI to remove the EU residency requirement. Maintaining that obligation on the nine basic bank account providers would be inappropriate in a no-deal scenario when the UK will no longer be part of the EU single market for financial services. She also asked what happened to UK expats who live in the EU and whether they could open new basic bank accounts. Eligibility for basic bank accounts is dependent on residency, not citizenship, so that would be a matter for the member state and the laws that apply there.

The noble Baroness, Lady Drake, requested an assurance that residents will not be in financial difficulty. The spirit of the 2014 agreement, to which I referred in the previous debate, is to provide for the most vulnerable in society. The Government expect banks to honour that agreement in making any changes. The noble Baroness also asked whether the statutory instrument prevents the cross-border opening of accounts. The changes in this statutory instrument only remove the requirement for firms to provide certain support to customers who wish to switch their payment account from the UK to the EU. They do not affect a UK customer opening an account in the EU.

Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Lord Bates

Wednesday 28th November 2018 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for presenting the instrument and I thank both noble Baronesses for the variety and depth of their questions. I tried to understand the instrument—I put quite a lot of effort into it—and I thank Treasury staff for helping us to do so. I came across a clear need for the maintenance of MiFID II in our law; I accept entirely the general direction of the instrument towards preserving it. Fortunately, I did not come into contact with the entire 900 pages, which is probably the only reason I can claim for still being sane.

I came across some of the concerns that have been expressed. The most worrying area, at least to me, is the temporary powers that the FCA is to have. Why has the SI not been delayed until we have sight of the FCA’s statement of policy on the use of temporary powers? No matter how expert one may be, we do not have a clear view of what powers we are giving away and what impact that may have. If that is not possible—clearly, that is the Government’s position—surely the statement of policy should be brought before Parliament. Its impact will be as big as that of granting the concept of temporary powers.

Can the Minister assure us that in those four years, the temporary powers will not be used to water down MiFID II? That seems an important step towards transparency in these intricate markets. I can see why the industry would want those watered down. It is crucial that the Government be able to assure us they will resist that, and that the temporary powers will not be used to water it down.

Finally, I would like to come back to the FCA having sufficient resources. In the past, the most detail the Minister has given is to say “it will have sufficient funds because it will be able to pre-set the industry, so funds are not a problem”. The noble Baroness hit the nail on the head: it is not about funds but available pools of talent. In the letter the Minister will undoubtedly write concerning this instrument, could we have some clarity, direct from the FCA, on why—in this very highly paid industry, where there is strong competition for talent—it is so confident it will be able to access the available talent to do the task required for this SI and the others considered today?

[Lord Bates]

My Lords, at this hour a letter is an attractive proposition. I counted some 27 questions, which is a pretty respectable ratio from the three distinguished speakers in this debate. I will try to deal with as many as I can in the time available. Clearly, I will have to read the Official Report with officials to see if there are any points we need to write on; I suspect there will be. Therefore, if we run out of time, I will include other answers in that communication.

The noble Baroness, Lady Bowles, asked why the amended thresholds which appear in Article 5(1)(a) and 5(1)(b) of the Commission of Delegated Regulation 2017/567—thresholds for determining which equity instruments are liquid—have not been changed. However, replacing references to Union data with UK market data in the legislation would change which instruments were classed as being liquid for UK market participants.

On the FCA not having the data, it needs sufficient time to build systems to analyse market data independently from ESMA. It estimates that this will take four years. As noted, the Treasury can end this period earlier if the transparency regime cannot operate earlier. The FCA does not have all the data relating to firms in the UK, as EU firms currently report back to their own competent authority and not to the FCA.

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[Lord Bates]

That is a good one for the letter. We will certainly address that point; it is a legitimate question to ask.

The noble Baroness, Lady Bowles, asked whether the FCA consultation was timed to come out after the debate should have occurred. No, the FCA operates completely independently of the Treasury. She also asked whether we had considered keeping the post-trade transparency even if pre-trade transparency is suspended. Simply replacing references to EU market data with UK market data in the legislation will result in significantly different calculations and thresholds for market participants. The FCA can use the data available to it. The intention is to maintain the outcomes of the transparency regime. Transparency will continue to operate during the temporary period.

The noble Baroness, Lady Drake, said that the instrument should not set bad precedents. It has been drafted in accordance with Section 8 of the EU withdrawal Act, and some policy changes are an unavoidable result of addressing deficiencies. We have sought to maintain the intended policy outcome of the legislation. She asked whether a sudden change in the requirement would be hard for firms to deal with. We have announced plans to grant the regulators temporary powers to phase in new requirements that would apply to firms in a no-deal exit. Those powers must be exercised by the regulators in accordance with their statutory objectives, as set by the FSMA. This is a sensible measure to ensure that firms have the time needed to adjust in an orderly way.

The question about whether the FCA has enough human capital to carry out its functions and responsibilities is interesting, I undertake to feed that point back to it, and it may feel better placed to respond. The FCA has reported to the Treasury that it is confident that it will have sufficient resources to operate the transitional transparency regime, due to the preparations that it is making. As it set out in its 2018-19 business plan, a significant proportion of its resources are already focused on the forthcoming exit.

The noble Baroness, Lady Drake, asked about the Secondary Legislation Scrutiny Committee report saying that the powers could have been made available to the House before the debate. Unfortunately this was not possible because the FCA had given priority to making regulatory rules fit for purpose in a no-deal scenario, to avoid significant disruption of financial markets. It would also be unusual for the FCA policy to be ready prior to the passing of legislation to which it relates. She also asked about the scale of what was covered—

[Lord Tunnicliffe]

In my experience it is not unusual for enabling legislation to be accompanied certainly by draft regulations. Often the House has demanded that, to give it proper comfort that it is right to give those powers.

[Lord Bates]

We are not talking about the secondary legislation; we are talking about the statement—but I take on board the noble Lord’s point.

The noble Baroness, Lady Drake, asked how many firms would be directly impacted by the SI. The answer is approximately 3,300 UK firms and 1,650 EEA firms. The FCA estimates that changes to reporting requirements and IT processes will affect approximately 1,500 branches of EEA firms, and that this will result in a one-off cost to business of £8.75 million.

The noble Baroness, Lady Drake, asked whether the statement would be ready. We have said quite specifically that it will be ready at least four weeks before exit. On views expressed by stakeholders, the Treasury has engaged with a wide range of stakeholders, representing large international firms as well as smaller UK businesses.

The noble Lord, Lord Tunnicliffe, asked whether the SI makes policy changes. The UK is putting in place all necessary legislation via the EU withdrawal Act to ensure that there is a functioning legal regime in the event of a no-deal exit in March 2019. He asked whether the FCA will have adequate resources. I covered that point in response to the noble Baronesses, Lady Bowles and Lady Drake. He also asked about the temporary permissions regime that applies for a limited period and who would decide when it ends. The length of the temporary permissions regime is determined in accordance with the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018, made on 6 November.

In a previous debate, the noble Lord, Lord Tunnicliffe, asked why the Treasury is solely responsible for the equivalence decisions, which relates to this debate. Across all financial services statutory instruments, the Commission’s functions are transferred to the Treasury. The transferral of equivalence powers is in keeping with this approach. Equivalence decisions are made by the issue of Treasury regulations. Regulations are issued by statutory instrument and subject to parliamentary scrutiny.

Again in a previous debate, the noble Baroness, Lady Bowles, asked whether the impact assessment is accurate given the cost to firms and how extensive MiFID is. The estimated costs of familiarisation have been calculated using the formula given at the end of the impact assessment and relate only to the cost of reading and understanding the instrument. Of course, affected firms will also need to familiarise themselves with a number of materials that are already published.

The noble Lord, Lord Tunnicliffe, asked a further question about whether temporary powers would water down MiFID II. The temporary powers are included to try to preserve outcomes for transparency. Without these flexibilities there would be a cliff-edge risk as to how the transparency regime operates. It would create uncertainty for firms and business, which we are trying to avoid.

With those responses, and the undertaking to study in detail the Official Report and to write on the specific questions raised, I beg to move.

Central Securities Depositories (Amendment) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Lord Bates

Wednesday 28th November 2018 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I will take the statutory instruments in order, starting with the central securities depositories regulations. A characteristic of these SIs is that they tend to have two parts. I wish I had the same interests to declare as the noble Baroness because then I would come to this knowing something about it. Starting from scratch is quite a battle. My analysis of these SIs is broadly that there is a bit about the transfer of functions and a bit about the transitional provisions. They are more or less in those two groups. The transfer of functions is unexceptionable, except that I am not at all convinced that the Treasury should be solely responsible for the equivalence decision. That is a view that I shall take all the way through. The noble Lord does not have to answer me on this SI because I will bring it up on the last one, by which time a note might have arrived from the Box.

The transitional provision is more complex in all the SIs, but in particular with this one. When you dig into it you discover that apparently there is only one UK CSD and its transition will be little more than a formality, which is good to hear, since these organisations are so important in our lives. Non-UK CSDs have a more complex transition process, but, as far as I understood it, that was okay.

Similarly, the transfer of functions for the trade repositories is straightforward, except for my caveat on the Treasury’s role. I understand that there are five UK trade repositories, covered by paragraph 7.18 of the Explanatory Memorandum. Once again, it looks as though that is pretty well a formality. I found the non-UK TRs transfer regime more complicated, but the one feature I saw is that some new TRs—if they ever emerge—seem not to be fully registered for up to three years. Can the Minister explain why such a long period is necessary?

[Lord Bates]

I thank the noble Lord and the noble Baroness for their scrutiny of the statutory instruments. I will respond first to the noble Baroness, Lady Bowles, who asked about the difference between the current system and the onshoring SI. Before the CSDR, the recognised clearing house regime under the FSMA applies. After exit and the end of the transition regime, the onshored CSDR regime, which is more extensive, applies for any CSD.

The noble Baroness asked for more detail on how that process will work. The Bank of England sent a letter to non-UK CSDs, setting out the process through which CSDs may notify the Bank of England to enter a transitional regime following the UK’s withdrawal from the EU. The process is proportionate and straightforward, with questions we do not expect to be onerous for CSDs to answer. Non-UK CSDs are encouraged to indicate to the Bank of England their intention to notify from the point at which they receive the letter—so the letters have been sent. The Bank of England will treat these indications as notifications at the point that the legislation is made. We are therefore confident that non-UK CSDs will be able to make these notifications in good time. One specific element is that a non-UK CSD will continue to be subject to the existing requirements under the FSMA until the Treasury has made a decision on jurisdiction. Once that happens, these CSDs will be required to provide an application to the Bank of England six months after the Treasury decision. There is a requirement for non-UK CSDs to notify the Bank before exit day of their intention to continue to provide services in the UK following exit.

The noble Baroness asked about the familiarisation costs included in the regulations. I was looking at the algorithm in Annexe 5 and she made some points about that. I am happy to confirm that the familiarisation costs in the impact assessment cover only these instruments. They do not include FCA consultations or the broader impact of leaving the EU—just the specific provisions in this SI.

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[Lord Bates]

I certainly would not suggest that the noble Baroness has misunderstood anything. I will work my way through the pile: I have a feeling that I will have an answer for her very shortly.

She asked what would be amended if there were an implementation period. The legislation would not come into effect in March 2019 in the event of an implementation period. It would be amended to reflect the eventual deal on the future relationship, or to deal with a no-deal scenario at the end of the implementation period. Amendment would depend on agreement being reached with the EU.

The noble Lord, Lord Tunnicliffe, asked if was appropriate that the Treasury is the only body responsible for equivalence decisions. The Treasury takes the role of the Commission in equivalence decisions, but will be informed by advice from the FCA as necessary. As to why the regime will last for three years, the TRRs provide sufficient time for the FCA to be satisfied that the new TR fully meets the requirements set out in the draft Over the Counter Derivatives, Central Counterparties and Trade Repositories SI, of which he and I have fond memories and which was published on 22 October. Three years was judged the most suitable duration period, based on consultation with the FCA. The timescale aligns with other temporary regimes such as the CCP temporary recognition regime.

The noble Lord, Lord Tunnicliffe, asked specifically about the transitional regime for central securities, and the noble Baroness, Lady Bowles, also referred to it. The transitional period is intended to allow non-UK CSDs to continue to provide services in the UK after exit. UK CSDs that have applied for authorisation prior to exit day will be automatically entered into the transitional regime. There is a requirement for non-UK CSDs to notify the Bank before exit day of their intention to continue to provide services in the UK following exit. Any non-UK CSD that fails to notify the Bank may be subject to public censure. A non-UK CSD that has notified the Bank and entered the transitional regime can continue to provide CSD services in the UK on the current basis for a certain period. For a CSD that has made an application for recognition to the Bank of England, that period ends when the application is decided. For a CSD in a jurisdiction that the Treasury has determined to be equivalent and that has not made an application to the Bank of England, that period extends to six months after the Treasury’s equivalence determination. I think that is a partial answer to the question raised by the noble Baroness, Lady Bowles.

The noble Lord, Lord Tunnicliffe, also asked why the Government are not bringing into UK law the settlement discipline regime. Certain CSDR provisions on settlement discipline do not come into force until after exit day. As a result, they cannot be considered retained EU law and are beyond the scope of the European Union (Withdrawal) Act 2018. Returning to the question asked by the noble Baroness, Lady Bowles, she said that it seems strange that once a country has been found equivalent, more is required of that CSD. Equivalence is a decision on the alignment of another country’s regulatory regime. This is a decision of the Treasury. The recognition of a specific CSD is a more technical decision at the level of that CSD, and that is made by the Bank of England.

[Lord Tunnicliffe]

Before the noble Lord sits down, I am fascinated to know what “public censure” looks like.

[Lord Bates]

Of course, that would be what the regulators engage in in the rigorous upholding of the rules that govern activities in their respective areas, whether it is the Bank of England, the Financial Conduct Authority or the Prudential Regulatory Authority. Any reprimand of any shortcoming they observe would be regarded as a matter of public censure.

I am grateful to noble Lords for their comments. I commend both these SIs to the House.

Financial Services and Markets Act 2000 (Claims Management Activity) Order 2018

Debate between Lord Tunnicliffe and Lord Bates

Wednesday 21st November 2018 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I, too, welcome this statutory instrument and thank the Minister for introducing it. I also endorse what the noble Baroness, Lady Drake, has said, particularly her questions. I will not repeat what she said, but just observe that the regime will involve the Senior Managers and Certification Regime. I am sorry to hear that it is not as yet being used effectively. Perhaps the Minister will reduce our concerns. Perhaps it would be more top-of-mind if the reversed burden of proof originally in the scheme had been retained. Certainly, it is meant to be a regime which makes managers very clear of their duties, if not fearful. I endorse the idea of six bundled areas of responsibility being expressly divided into seven. I think that the noble Baroness, Lady Drake, asked whether there should be more than seven. It is a bit unfair of me, but I feel that the ombudsman becoming the financial ombudsman gives me a feel that he will be steelier and more effective.

The solicitor exemption depends on the exclusion that the activity is being carried on as part of their ordinary legal practice. The trouble is that we are talking about solicitors. They are paid to get around regulations. Who will be policing that boundary? Who will have responsibility for understanding what a particular solicitor is doing and saying, “Sorry, that should now go into the financial control”? The solicitors doing this work in the ordinary course of their business nevertheless need proper regulation. Is the Solicitors Regulation Authority up to the job?

Lastly, I understand that the CMRU staff will be redundant at a point when the FCA will, we hope, looking for similar skills. I would like to know the Government’s plans at a practical level for those staff.

[Lord Bates]

I thank noble Lords for their scrutiny of this SI and for their general welcome. I will try to address some of the key points and questions which have been raised.

First, the noble Baroness, Lady Drake, asked about estimates of numbers. According to the CMRU, there are current 1,238 authorised CMCs in operation. The overall number of authorised CMCs has been reducing on average by 10.9% per year for the past four years. The FCA’s modelling shows that it expects to take on 906 firms in 2019.

The noble Baroness, Lady Drake, and the noble Lord, Lord Tunnicliffe, mentioned the solicitors’ exemption and concern about potential regulatory arbitrage. The SRA and the FCA are in the process of updating their memoranda of understanding to ensure that the sector is closely monitored and properly regulated. The order contains a provision which disapplies the exemption from regulation by the FCA, should a CMC seek to avoid FCA regulation by employing a solicitor. That CMC will continue to be regulated by the FCA.

The noble Baroness, Lady Kramer, asked about solicitors, and not other regulated professionals, being exempt. Solicitors are already regulated by the Solicitors Regulation Authority. I understand the point that she made about that authority. The work of a solicitor advising on a claim is the same as, or very similar to, the work of a CMC seeking compensation for a consumer. As solicitors are regulated by the SRA for their usual activity, appropriate regulatory oversight is already present.

The Government have retained the other existing exemptions; we consider it correct that these bodies are not subject to regulation. That point was made by the noble Lord, Lord Tunnicliffe, and the noble Baroness, Lady Drake. The FCA will continue to monitor exemption from claims management regulation if it moves or migrates into other activities. Of course, it will also retain the right to come back with further suggestions.

The noble Baroness, Lady Drake, asked about the exemption for trade unions.

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[Lord Bates]

My Lords, I was just touching upon the code of practice for trade unions, in response to a point made by the noble Baroness, Lady Drake. The Treasury proposes to maintain the code for trade unions and will replace the MoJ on the monitoring board. The Treasury is working with the Trades Union Congress and Scottish Trades Union Congress at an official level and will publish the code in due course. The code is being amended, mainly to update it to reflect the transfer of regulation.

The noble Baroness asked about CMCs moving into other sectors. We will carefully monitor the effectiveness of CMC regulation and work with the FCA, the SRA and others to ensure that the sector is benefiting its customers. On the estimate of how many CMCs will not get authorisation from the FCA and what will happen to their cases, the number of CMCs has been declining, and I gave some statistics on that at the beginning.

The noble Lord, Lord Tunnicliffe, asked what will happen to the highly qualified CMRU staff. The CMRU and the FCA are currently agreeing the transfer of staff as part of their transfer scheme under the Financial Guidance and Claims Act. The details are still subject to discussion.

The noble Lord and the noble Baroness, Lady Kramer, asked whether the Solicitors Regulation Authority was up to the task. The SRA is subject to oversight by the Ministry of Justice and provides strict professional regulation. A memorandum of understanding between the SRA and the FCA is being reviewed.

[Lord Tunnicliffe]

My question was: who can call a halt and say, “No, it must transfer”? If you have a solicitor who is growing like Topsy, who will know that by now they should stop doing that and reregister as a proper claims organisation?

[Lord Bates]

That is something that I think the FCA would be liaising on. If it felt that its activities were aligned with a CMC then, as I mentioned earlier, that would mean it would have to continue to be regulated by the FCA. On the specific point, unless there is any inspiration on its way, I will write with clarification to the noble Lord.

The noble Baroness, Lady Kramer, asked if any action had been taken on CMCs doing their due diligence on data under GDPR. The FCA is in the process of updating and publishing its rules for the CMC regime. It will be working closely with the Information Commissioner’s Office, which is responsible for the oversight of data protection laws, to ensure that CMCs comply with the order, FCA rules and data protection legislation.

The noble Baroness asked whether the SRA was an effective regulator. The MoJ is responsible for the oversight of the SRA. The FCA and the SRA are currently reviewing their memorandum of understanding, and their conclusions will be published in due course. I think that covers most of the points.

Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 6th November 2018 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, unlike with the previous SIs, I feel that I actually understand what the regulations do, and the Minister has said nothing to shake my faith in that belief. They seem to have fallen within the overall government assurances, in introducing no policy change but smoothing the scenario, and I have nothing more to add.

[Lord Bates]

I suppose it passes as a small victory for the Front Bench when it is said that they have not actually said anything to shake the confidence of the spokesman for Her Majesty’s loyal Opposition. That is how we want to keep it: we want to keep the confidence of all parties that we are prepared and ready for all eventualities through this complex process of negotiation.

The noble Baroness, Lady Kramer, asked for some points of clarification. She asked how the €100,000 actually corresponds across. She said that there had been a devaluation of sterling, but that was not an instrument of government policy; it may be something that happened over time, as currencies fluctuate. The Prudential Regulation Authority already has a role in setting and keeping track of that link between the guarantee sums, and we envisage that that will continue. She asked how the Financial Services Compensation Scheme protection will be affected in general by EU exit and whether anyone will lose. The SI does not deal with consumers who are protected by the FSCS. However, I can confirm that FSCS protection for customers here in the UK being served by businesses of a UK-authorised firm will not change as a result of exit. What will change is deposit protection for customers in the EEA who have business with EEA branches of UK firms in future. It will be the relevant EEA authorities who are responsible for ensuring that these customers are protected. Details of the scope of FSCS coverage are set out in the rules by the PRA and the FCA.

The noble Baroness asked about our plans to keep ourselves in line with the level set for deposit guarantees. There are no plans for the coverage level to depart from the current level. The PRA stands ready to review in the event of any urgent circumstances which make such a review necessary. With those brief clarifications, I thank noble Lords again for their contributions.

Electronic Money, Payment Services and Payment Systems (Amendment and Transitional Provisions) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 6th November 2018 Lords Chamber

[Lord Tunnicliffe]

I thank the noble Lord for that.

The Minister knows exactly what I am going to say. On page 6 of the Explanatory Memorandum, paragraph 12.6 and beyond states:

“An Impact Assessment will be published in due course on the legislation.gov.uk website … The Treasury’s decision to publish the regulations without a final Impact Assessment aims to ensure that industry and regulators have as much time as possible to familiarise themselves with the regulatory changes”.


The reason the Minister and I are familiar with those two paragraphs is that they have appeared in every Explanatory Memorandum on Treasury SIs so far; and on every SI so far, the Treasury has failed to produce an impact assessment, despite the fact that it is promised in the body of the document. For the life of me, I cannot see why it would bother, given that we will have approved the SI by the time it arrives.

Let me turn back to the good news for the Minister. We are certainly not going to challenge this SI. I echo the view of the noble Baroness, Lady Kramer: it is good to see, as far as one can because of the sheer complexity of it, that it sticks with the Government’s commitment to make only the necessary changes to have a smooth transition. I cannot detect any effort from the Government in this SI to try to introduce any policy changes.

[Lord Bates]

My Lords, I thank noble Lords for their questions and their scrutiny. The noble Lord, Lord Tunnicliffe, is typically assiduous, as he is on all these matters—he has even gone through the 1,569 pages of the FiSMA, which is some achievement. We appreciate that, and we appreciate the noble Baroness, Lady Kramer, stepping in for the noble Baroness, Lady Bowles, at such short notice. Let me start by dealing with as many of the questions for which it is possible to get immediate answers, and I will then review the debate and write to noble Lords if necessary.

All three noble Lords who contributed commented on what is happening with the impact assessments. Five impact assessments have been prepared across the financial services SIs. Noble Lords will be familiar with the process for this: they go before the Regulatory Policy Committee, which is the non-departmental public body under BEIS, and it assesses the impact of the regulations. What we are trying to do is save British consumers and businesses the costs that would come into effect were we to leave with no deal and not have these statutory instruments in place. That would imply a cost. We are not being as bold as to say that the effect of the SI is to make a saving, but that is the reason why the attempts to quantify this have been challenging. However, they are under way, as I said.

Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 30th October 2018 Grand Committee

[Lord Bates]

I thank noble Lords for participating in this debate. It has lasted for 46 minutes, of which my introductory remarks were 13 minutes. In the 33 minutes, noble Lords have, by my calculation, managed to generate 24 questions which I will attempt to work my way through. I simply flag that up for colleagues on the Front Bench who are waiting for immediate business.

These are crucial issues. Noble Lords are quite right to raise them and seek further clarification. I commence by saying that I agree with the noble Lord, Lord Tunnicliffe, in this respect: this is not the outcome we are seeking or that we want or desire. It is not the outcome that we expect. We expect to secure a deal that will allow us to continue to have a good trading relationship in financial services with the European Union. We believe that that is in the interest of not only the UK but the EU as well. We are working very hard to secure that.

[Lord Tunnicliffe]

I want to explore that question a little bit further. Surely the test would be whether this is, in its elements, reciprocal to the privileges that EU firms will have as a result of this instrument.

[Lord Bates]

I will come on to that.

--- Later in debate ---

[Lord Tunnicliffe]

I am sorry.

[Lord Bates]

I do not want a 25th question; I will keep it at 24 and work my way through to that one. I have some remarks to address that particular point.

The noble Baroness, Lady Bowles, asked whether there could be a scenario in which a firm cannot be authorised within three years, which would extend the time limit. The answer is yes. The position is that although the PRA and the FCA have credible working estimates of the number of EEA firms that will apply to them for authorisation, there is an unavoidable degree of uncertainty about this process. That, coupled with the varying degrees of complexity in some of these firms’ applications, means that a power to extend the length of time is necessary. This will be crucial to mitigate the potential scenario in which some EEA firms cannot be authorised within three years from exit day, which could force the regulators to reject authorisation for the firms’ applications. Clearly, we do not seek that outcome.

The noble Baroness also asked whether there is enough flexibility to make equivalence decisions for CCPs. The powers in the EU withdrawal Act limit the fixing of deficiencies to retain EU law when the UK leaves the EU. It does not allow for policy changes beyond this element. The aim is to provide certainty to non-UK CCPs and their UK users during the period immediately following withdrawal from the EU. The criteria for recognition of non-UK CCPs will remain unchanged and will be onshore. This would allow recognised non-EU CCPs to resubmit the application used for EU recognition.

The noble Baroness then asked about the process for the joint assessment by the regulators. As set out in the statutory instrument, the PRA and the FCA would need to submit to the Treasury a joint assessment outlining the effect of extending or not extending the time period on the regime, on firms in general, on the UK financial system and on the ability of the regulators to discharge their functions in a way that advances their statutory objectives. That assessment would need to be submitted to Her Majesty’s Treasury no later than six months before the end of the regime. The Treasury would then make regulations to extend the duration of the regime only if it considers them necessary on the basis of the assessment.

The noble Lord, Lord Tunnicliffe, asked what protections would be available following exit day to UK customers who currently have access to the Financial Services Compensation Scheme. No one should lose FSCS protection as a result of this SI. If a UK customer is currently protected by the FSCS, they will be protected as long as the firm enters the temporary permissions regime.

The noble Lord also asked about the consequences for UK customers if a firm is denied authorisation. Any firms in the temporary permissions regime that are denied full UK authorisation by the UK regulators will lose their temporary permissions. Further legislation will be laid before Parliament at a later date to enable such firms to wind down their UK-regulated activities in an orderly manner. This legislation will ensure that the existing contractual obligations of these firms with UK customers can continue to be met. UK customers would no longer be able to enter into new contracts with these firms unless the firms had successfully reapplied for authorisation from UK regulators.

The noble Lord then asked what a firm being denied authorisation says about the passport regime and whether it suggests that it is not equitable, let alone equivalent. The EEA passport regime system is underpinned by the co-operation of EEA member states’ competent authorities. Each member state’s competent authorities supervise the activities of firms under its jurisdiction, even if those activities take place elsewhere in the EU. Once we leave the EU, we cannot rely on this co-operation continuing. We are therefore making these preparations.

--- Later in debate ---

[Lord Bates]

We may have misunderstood the point that the noble Baroness was making. I am very happy to undertake to write to her on that specific point and copy it to members of the Committee.

The noble Baroness asked why a CCP might not have been recognised within the initial period. While the Bank of England has credible working estimates of the number of CCPs that will apply to it for recognition, there is an unavoidable degree of uncertainty about this.

My noble friend Lord Lindsay asked whether third-country CCPs includes EU CCPs. EU CCPs will be treated as third-country CCPs post-exit. EU CCPs and third-country CCPs will be eligible for the temporary recognition regime if they were permitted to operate prior to 29 March 2019.

My noble friend Lord Kirkhope asked whether the regime could be extended continually each year. It is in everyone’s interest for firms to transition from the current system of EEA passporting rights to full UK authorisation as quickly and efficiently as possible. There would be no circumstances in which it would be desirable for the regulators or the Treasury to extend the length of the regime on a continuous basis. He also asked whether the negative procedure is an appropriate instrument. I respect the work of the Secondary Legislation Scrutiny Committee, whose report we have before us today. I addressed this in my opening remarks. We believe that the choice of procedure is appropriate, given the overall powers being scrutinised now through this affirmative instrument. The negative procedure would just be an extension of that. The power to extend the time period is not a provision which relates to fees and so would not, if made alone, attract the affirmative procedure under Section 8 of the Act, to which my noble friend referred. He also spoke about the process for registration with the PRA and its ability to deal with the volume of applications. I reiterate what I said to the noble Baroness, Lady Bowles: I am confident that the PRA and the FCA are making adequate preparations to deal with the scale of the challenge which they face, but it is a significant challenge.

The noble Baroness, Lady Bowles, asked whether the regulators may ask firms to apply for authorisation sooner than the two-year deadline set out in the statutory instruments if they so choose. The EEA Passport Rights (Amendment, etc., and Transitional Provision) (EU Exit) Regulations will give regulators the ability to direct firms to make an application for authorisation during a specified period within two years from exit day if they have not already applied for authorisation. This will help regulators manage the flow of applications in a smooth and orderly manner. I draw the Committee’s attention to the FCA’s recent consultation paper published on 8 October, in which it set out its intention to allocate each firm a three-month landing slot within which that firm will need to submit its application for UK authorisation. It plans to issue a direction shortly after exit day setting out which firms have been allocated to which landing slot.

The noble Baroness, Lady Bowles, asked how the two-year application period will operate. I dealt with that earlier but I did not cover one specific point: the two-year deadline for applications to be received cannot be extended.

The noble Lord, Lord Tunnicliffe, asked whether this is a one-sided arrangement and whether there will be any reciprocation. The Government are only able to take legislative action in relation to EEA firms’ passport rights to the UK; they cannot through unilateral action influence the status of UK firms. That is why we are seeking to agree a deep and special partnership with the EU, as well as an implementation period, so that important preparations can take place in an orderly manner.

The noble Lord asked what the impact on the financial services sector would be if there is a no-deal exit. Reaching a deal is in the mutual interests of both sides. We are focusing on the negotiation of the right future partnership based on a proposal published in the White Paper on 12 July. That White Paper outlined the Government’s position on financial services and Brexit. We propose a framework for financial services that will provide stability for the EU-UK ecosystem, preserving mutually beneficial cross-border business models and economic integration for the benefit of businesses and consumers in the UK and the EU.

The noble Lord asked what it says about the regime if a firm is denied authorisation. Once we leave the EU we cannot rely on this co-operation continuing and therefore we are making these preparations. It is important that these regulations go ahead so that consumers in this country have confidence in the financial services put forward here.

I have addressed the Financial Services Compensation scheme and I will now deal with one or two points relating to central counterparties. The noble Lord, Lord Tunnicliffe, made a point on the memorandum of understanding with the host state. Yes, there are a number of necessary steps for a non-UK CCP to be recognised in the UK. These include that the Treasury must determine that the relevant third country’s regulatory and supervisory framework is equivalent to EMIR; the bank must agree supervisory co-operation agreements or memorandums of understanding with relevant competent authorities of the CCP applicant; and the non-UK CCP’s application for recognition to be assessed by the bank must include information on its financial resources, internal procedures and various other relevant information.

The noble Lord asked what would happen if the central counterparty is not recognised. If a non-UK CCP were to continue to provide clearing services to UK firms without recognition, it would be in breach of a general prohibition under the Financial Services and Markets Act, which prohibits anyone carrying out a regulated activity unless they are authorised or exempt. The CCP would be guilty of an offence and subject to a fine or imprisonment. However, further legislation will be laid at a later date to enable such firms to wind down their activities in an orderly manner by being treated as being recognised for a short period.

I hope that has addressed many of the questions.

[Lord Tunnicliffe]

In the unlikely event that the Minister has missed anything, will he review his answer and, if he has missed the odd point, send a letter covering it?

[Lord Bates]

I am happy to give an undertaking to do that. We are in uncharted territory here—we have not been through this process before. The Economic Secretary to the Treasury, John Glen, is being incredibly diligent in engaging with the regulators on a regular basis and being guided through this process. That is why the announcement was made in December. We will continue to keep this under review. The noble Baroness, Lady Bowles, made a suggestion about how we might keep the House informed of developments and made particular reference to perhaps involving the Select Committees. If I may, I will take that back to the Economic Secretary to the Treasury because, in some of these areas, once we know the lay of the land—we hope it will not come to that but if it does—then we will clearly need to review these provisions. I am happy to take that suggestion back and include it in my answer to the noble Lord, Lord Tunnicliffe, which I will copy to my noble friends Lord Lindsay and Lord Kirkhope.

Online Marketplaces: VAT Evasion

Debate between Lord Tunnicliffe and Lord Bates

Monday 22nd October 2018 Lords Chamber

[Lord Bates]

I do not know whether he is domiciled in the UK any longer.

[Lord Tunnicliffe (Lab)]

My Lords, is this not a problem of HMRC resources? Is it not very difficult now to reverse the cuts that have been made in HMRC over the years? This is a clear example of loss of revenue to the Exchequer and the damage it does to the high street.

[Lord Bates]

I do not accept the premise that we are reducing the amount of money going into HMRC. Since 2010, as I said earlier, we have spent some £2 billion on closing that loophole. The increased yields which that has brought into the Exchequer are evidence that it is working.

Building Societies Legislation (Amendment) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Lord Bates

Wednesday 17th October 2018 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I join the noble Lord, Lord Wrigglesworth, in his comments on an impact assessment. I have to admit that rather than knowing that there is not one, I could not find it—but that may be a lack of skill on my part. I hope that the Minister’s answers may cover my concerns. On a lighter note, can the Minister confirm that paragraphs 7.1 to 7.8 of the Explanatory Memorandum are identical to the same paragraphs for the previous instrument? From my reading, they are. Will it be standard procedure for all Treasury SIs to have identical paragraphs 7.1 to 7.8? If they are to be identical, it will save an awful lot of time in reading them if I know that to be true.

An impact assessment would have been useful because it tends to use plainer language. It would have been particularly useful in this case because I took an entirely different view of this instrument from that of the noble Lord, Lord Wrigglesworth. I did not put much effort into it because it seemed pretty benign and reasonably consequential. I did not see the risks, so perhaps I may ask the questions that the noble Lord asked—but rather more bluntly. What will happen if there is a deal, as this document’s commencement date is the exit date? Will it therefore still be alive or be deleted? Will all contracts in force on exit date between a building society and its members be secure thereafter? If they are entered into before exit date, will they continue in force after it? My reading was that they would, but it is an absolutely key point that they should. If you have foreign property as a result of a loan from a building society, is your security in the relationship and all that sort of stuff unchanged by this instrument? Does it refer only to new loans or not?

My reading of the instrument was that it would not have an immediate impact on a building society’s balance sheet, because the composition of that balance sheet would be unchanged by it. The instrument starts to impact on the balance sheet only as new contracts are commenced, which will then have different weightings and so on. Will all UK consumer protections stay in place, so that consumers will in no way have less protection as a result of the instrument?

[Lord Bates]

I thank noble Lords for their questions. Perhaps I may make one top-line comment at the outset, in order to assist. We are effectively seeking here to ensure that there is absolutely no change in the situation of the building societies in relation to their members and mortgages. The whole purpose behind this provision is to bring onshore that legislation which currently operates while we are members of the European Union, and to ensure that there is no break in or interruption to that work.

It is not anticipated that this SI will have any impact on savers or mortgage holders. On the question of the impact on balance sheets, which the noble Lord, Lord Tunnicliffe, asked, the SI will have no direct effect on either side’s balance sheets on day one. However, EU exit could more broadly impact on both sides’ businesses, in which case we could see changes reflected in balance sheets over time—but of course that depends on a number of factors, including the nature of a future relationship and future deal.

With regard to the wider impact on savers, the Government published a series of technical notices explaining what the consequences of a no-deal exit would be for most UK-based customers. We stated clearly that UK-based customers would not be affected. Where customers will be affected, firms including building societies will be expected to communicate that at the appropriate time. I stress again that building societies overwhelmingly deal with lending against properties and savers based in the UK, and that the provisions in relation to the treatment of property and land on which mortgages are granted in non-EEA states and EEA states are to ensure that there is consistency of treatment in future so that differences and problems will not arise.

Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018

Debate between Lord Tunnicliffe and Lord Bates

Wednesday 17th October 2018 Grand Committee

[Lord Bates]

I thank the noble Lords, Lord Wrigglesworth and Lord Tunnicliffe, for their questions. I guess that the noble Lord, Lord Tunnicliffe, and I are going to be spending many happy hours in this Committee over the next year, and I know that the noble Lord is always assiduous in the way that he prepares for these matters and in the questions that he puts. He is also right to say that this is an opportunity to provide scrutiny for these regulations and what is being put forward.

Many questions have been raised and I will go into a bit of detail in responding to each of them. The first issue is in relation to impact assessments. This statutory instrument would have no cost to business as it deals with the transfer of responsibility from the Treasury to the regulators. As a whole, these SIs will significantly reduce costs to business in a no-deal scenario. Without them, the legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would substantially disrupt their business.

In making these changes we have attempted to minimise the disruption to firms and their customers and to maintain continuity of service provision. However, it is inevitable that firms will need to prepare for changes made by these SIs and the Government have committed to providing the UK regulators with the power to phase in regulatory requirements that change as a result of exit. This will substantially mitigate the costs to firms and give them more time to implement the changes.

On the issue which, I suppose, is at the heart of this initial—

[Lord Tunnicliffe]

It seems to me that the Minister has just given a précis of the impact assessment, which is designed to satisfy us when we do not need one. I would have been much more comfortable if the document had said, “We do not intend to produce an impact assessment because the argument is simple,” and then printed his explanation, rather than receiving a document that says, “We do not have an impact assessment because we have not finished doing it yet and we will publish it later”.

--- Later in debate ---

[Lord Tunnicliffe]

On the same point, I draw attention to page 33 of the statutory instrument:

“Explanatory Note (This note is not part of the Regulations)”.


The final paragraph states:

“An impact assessment of the effect that this instrument will have on the costs of business, the voluntary sector and the public sector will be available from HM Treasury, 1 Horse Guards Road, London SW1A 2HQ and published alongside this instrument”.


I apologise for this, but if we are going to get impact assessments, the Government have to realise the irritation it causes to the Opposition and our colleagues in the Liberal Democrats if we do not have them published on time.

[Lord Bates]

I fully accept the point the noble Lord is making. There is no need to apologise, because the point is that there should be scrutiny. I am trying to explain that this SI would not be expected to have an impact on business for the reason that I have set out. Other SIs will have impact assessments published. This SI has been published in draft form and we have been engaging in consultation with the Financial Conduct Authority and the regulators. The Financial Conduct Authority and the regulators interact most with businesses and consumers and therefore they have already commenced work on that part of the process to ensure preparedness.

On that point, the noble Lord, Lord Wrigglesworth, asked how industry will be involved in the regulators’ role. The regulators will consult on their deficiencies fixes. The Financial Conduct Authority has published its first consultation and the Bank of England will follow.

On the key issue of where the powers in the SIs are derived from, it is Section 8 of the European Union (Withdrawal) Act. That Act was subject to considerable debate in Parliament, including debate on the nature and scope of the deficiency-fixing power delegated to Ministers. Part of that debate considered whether it would be appropriate for Ministers to subdelegate the power to non-ministerial bodies. Parliament decided to leave open the possibility of subdelegation. Subdelegation of the powers is provided for in this SI so that UK financial services regulators can fix deficiencies in EU technical standards and regulator rules in time for exit. Section 8(6) of the Act provides for the transfer of EU functions to an appropriate UK body.

On the amendments to principal financial services legislation, which the noble Lord, Lord Wrigglesworth, asked about, some deficiency fixes will be put into primary legislation through SIs. These will not change policy but will be technical in nature.

On how we have consulted industry in drafting these SIs, we have not carried out a formal consultation on these particular SIs. What they can do is strictly limited by the enabling power of the EU withdrawal Act to fixing deficiencies. Therefore, there are limited policy choices. We discuss EU exit preparations regularly with the industry. This engagement has been invaluable for understanding the impact of these SIs. We share draft legislation with the industry to allow stakeholders the opportunity to familiarise themselves with our approach and to test our understanding of the likely impact. We are also, where possible, publishing draft legislation in advance of laying it.

The noble Lord, Lord Tunnicliffe, asked how the regulatory changes will be put in the public domain. The regulators are committed to a fully transparent process for fixing deficiencies in EU technical standards. The FCA has already issued its first consultation on this. The regulators are required to publish all the instruments in which they will make regulatory changes to ensure that they are brought to the public’s attention. In practice, they will do so by publishing them on their website.

The noble Lord also asked whether there was any requirement for the regulators to report on how they are exercising these powers. All regulatory deficiency fixes will need to be approved by the Treasury. I accept the point he made about the circumstances and tests, and whether there was an impact on the Exchequer, but the EU withdrawal Act requires an annual report on the exercise of the powers under the Act. The regulators will provide this on their use of the deficiency-fixing power and on their post-exit responsibility for technical standards. Parliament will be able to scrutinise and question the regulators on the use of these powers through the Select Committee system, as it does now across a range of regulatory functions.

[Lord Tunnicliffe]

I do not know whether the Minister feels that he has answered the question, but does the Treasury have a supervisory responsibility other than through or in relation to the two reasons he just outlined?

[Lord Bates]

I have an answer to that and it will be ready in just a couple of minutes. It was on how the powers will be used.

The noble Lord also asked how regulators would co-ordinate with EU regulators after exit. This statutory instrument does not deal with the co-operation arrangements between the UK and EEA regulators. However, if the UK leaves the EU without a deal, the UK will fall outside the EU’s legislative framework for supervisory co-operation. The EU has confirmed that the UK will be treated as any other non-EEA country in this scenario. Common legislation will no longer be the basis for co-operation between UK and EEA regulators, but the UK’s firm intention is to maintain the current high level of co-operation that we have with EEA authorities. UK statutory powers have this under the FSMA. As some of the world’s most important regulators, the Bank of England and the FCA are well-established co-operation partners with non-EEA regulators.

The noble Lord asked what would happen to the statutory instrument in the event of a deal. These regulations will come into force on the day after they are made. This will allow regulators to prepare for exit day by making these changes. However, if we reach an agreement on the implementation period, for the duration of that period the UK will remain subject to EU law, including binding technical standards. It will also generally not be necessary to fix deficiencies in regulators’ rules until the end of the implementation period. The withdrawal agreement Bill will include provision to delay, amend or revoke SIs made under the powers of the EU withdrawal Act.

On the supervisory point the noble Lord asked about, the regulators may make an instrument to fix deficiencies using the powers delegated by this statutory instrument and an EU exit instrument only with the approval of the Treasury. In this case the Treasury can approve the EU exit instrument only if it is satisfied that the instrument makes appropriate provision to fix deficiencies arising from the UK’s withdrawal from the EU—in other words, that the EU exit instrument is not doing anything which could not appropriately be done by the Treasury using its own powers under Section 8 of the EU withdrawal Act. Similarly, the regulators may make an instrument to exercise any powers to make technical standards transferred to them by other SIs made under the 2018 Act only if the instrument is approved by the Treasury. For standards instruments, the Treasury may refuse to approve a standard instrument only if the regulators believe it would affect public funds or the instrument would prejudice international negotiations.

On the point which was made about resources—clearly we are placing a heavy responsibility on the regulators—the Treasury is confident that the financial services regulators are making adequate preparations ahead of 2019 and have an appropriate level of resources to manage their new responsibilities. We have worked extremely closely with the regulators in preparing this legislation. The current business plans of the FCA and PRA set out their priorities in preparing for EU exit and their plans for ensuring operational readiness. The regulators have considerable experience in this area. This means that the responsibilities of EU bodies can be reassigned effectively and efficiently, providing firms and their customers with confidence after exit. The FCA has published its first consultation on the changes it proposes to make using these powers.

The noble Lord asked about the sunset clause. Under Section 8 of the EU withdrawal Act, no government department would be able to make any regulations after 11 pm on 29 March 2021—that is, two years after exit day. Under regulation 3(3) of these regulations, Section 8(8) also applies to the regulators, so they will not be able to make any EU exit instruments to fix deficiencies after this date. This relates to a question which I dealt with in my previous remark. However, in supervisory situations—I have said this—regulators may make an instrument to fix deficiencies using the powers delegated by this SI only with the approval of the Treasury.

I hope my responses have gone some way to addressing the points and concerns raised by noble Lords in the course of this debate. As I said, this is the first of many debates on these issues, but this first statutory instrument is crucial and I commend it to the Committee.

Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) (Amendment) Order 2018

Debate between Lord Tunnicliffe and Lord Bates

Wednesday 18th July 2018 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing this order and the noble Baroness, Lady Kramer, for asking at least one of the questions that I had in mind, particularly on scale. I do not have quite the exalted background of the noble Baroness as being a member of the banking commission but, because I failed to duck, I have been involved with this legislation since 2010. I saw it through and feel a certain loyalty to it. When this conflict arises, like the noble Baroness, I want to see that conflict resolved. However, I did think, “Why are they going to spoil this beautiful banking legislation, which I have sought to understand over the past several years? Why can we not change the sanctions legislation?” I decided to try to understand the sanctions legislation to see if there was a way in which it could provide the flexibility rather than the banking legislation. I dived into Section 143(4) of the Policing and Crime Act 2017, but I have to say that, at that point, I hit a brick wall. For the life of me, I could not understand from that how the sanctions regime functions. I hope that the Minister can shed light on how the regime works—or perhaps he will write to me at some point.

To what extent has the alternative way of solving the problem been considered—creating flexibility in the sanctions regime to allow movements across the ring-fence that are required for other legal purposes and hence keep the accounts hosted on the right side of the ring-fence?

[Lord Bates]

My Lords, I thank noble Lords for their broad welcome for the order, and I recognise the expertise which they bring to this matter. I shall seek to address the points they have raised.

On the numbers and scale, which the noble Baroness, Lady Kramer, asked about, there is on the website a list of persons who are subject to financial sanctions. It has a long URL address, but it is helpfully set out on page 2 in the Explanatory Memorandum that accompanies the order. It does not list the numbers, but it does show where that information can be found. We are currently trying to get some numbers, because it is a perfectly reasonable question to ask.

The noble Baroness, Lady Kramer, also asked about the mechanism potentially to escape the sanctions. Clearly, we need to be very vigilant. The accounts are not moving; they are staying outside the ring-fence. As such, we believe that the opportunity for the kind of nefarious activity that has been suggested is minimised, but not totally removed.

The noble Lord, Lord Tunnicliffe, asked for beautiful banking legislation to be referenced in the Official Report, perhaps for the first time. He asked whether we could amend the sanctions legislation rather than banking legislation. We assessed whether there was a licensing option under existing sanctions legislation to resolve the issue, but concluded that there was not. Further financial sanctions legislation includes directly applicable EU regulations, which the UK does not have the power to amend unilaterally. In addition, it was important that this change was made to come into effect before 1 January 2019 so that banks will not be in technical breach of the ring-fencing regime once the legislation comes into effect.

On the need for specific legislation itself, as referred to by the noble Lord, Lord Tunnicliffe, we are committed to implementing a robust and successful regime. That means that we will act if we spot problems with the regime that cause conflicts in existing legislation. The Treasury and the Prudential Regulation Authority will continue to monitor closely the relevant banks’ implementation plans to ensure that they are robust. I think that those were the principal two points that were raised. I apologise for not having the information referred to by the noble Baroness, Lady Kramer, at my fingertips, but I hope that it can be found from another source.

[Lord Tunnicliffe]

Is there a possibility of the Minister sending us a letter on either of our points to develop his answer a little more?

[Lord Bates]

I can certainly do so. Noble Lords are very kind and courteous. It would be a courtesy to do it the old-fashioned way and send an email with summary statistics, rather than pointing to a URL address. That goes for any other points that have not been covered, of course.

Financial Exclusion

Debate between Lord Tunnicliffe and Lord Bates

Wednesday 4th July 2018 Lords Chamber

[Lord Bates]

Again, as another member of the ad hoc Financial Exclusion Committee, my noble friend initiated an important debate on the digital economy. We do believe that fintech, in which the UK is a leading force in the world, can be a powerful way of introducing significant change in this area for the benefit of those who need it.

[Lord Tunnicliffe (Lab)]

My Lords, the Financial Conduct Authority estimates that 2.7 million people are stuck with permanent overdrafts and are using them more than 85% of the time, thus incurring higher and higher charges. Can the Minister tell us what measures the Government are putting in place to end the cycle of persistent debt and whether they will commit to imposing a cap on overdraft fees?

[Lord Bates]

We have done a lot in that area, such as capping payday loans—those egregious payments. The Financial Conduct Authority has looked at the whole issue of buy to rent and is considering whether a cap is necessary. We have also done a number of things to try to help those with low incomes to improve their situation. My noble friend Lord Young took the Financial Guidance and Claims Act, which created a new single financial guidance body, through this House. All these measures are designed to improve the situation. We also announced our ambition to increase the number of people who have access to credit unions in this country from 2 million to 3 million.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2018

Debate between Lord Tunnicliffe and Lord Bates

Monday 25th June 2018 Lords Chamber

[Lord Tunnicliffe]

Can I check that point? My understanding is that these are not debt securities but asset-backed securities, and it is hoped that these platforms will change their rules so that it can be done.

[Lord Bates]

The securities that are there are allowed to deal with a variety of different securities; they are not limited in the asset class that they can use. It is simply a catch-all phrase to mean that they can be traded on those platforms. That is very much the view of the London Stock Exchange, which has drawn our attention to the fact that people are interested in using those particular markets for that purpose. This instrument will help the City of London to take advantage of these investment opportunities, which will create jobs and wealth for this country. I commend the order to the House.

Electronic Presentment of Instruments (Evidence of Payment and Compensation for Loss) Regulations 2018

Debate between Lord Tunnicliffe and Lord Bates

Wednesday 13th June 2018 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I, too, have worked my way through the instrument and the accompanying Explanatory Memorandum—I also spoke to James Evans of the Treasury—and feel that I understand it. I have no objection. It would seem a sensible, modern improvement to the system.

In looking around the instrument, I alighted on the fact that it is a further extension of the computer systems which underline modern banking. Reflecting on recent press comment, I started to look at just how many computer problems the banking system had had over recent years. I counted at least four for RBS since 2012, three from HSBC, three in Barclays, three at Lloyds and, of course, the recent TSB event where 1.9 million customers were locked out of their online and mobile services.

As we know, banks have a special role in our society. If they fail, the impact is not a mere difficulty, as it is when any large enterprise fails; it is catastrophic to our society. The Bank of England has put an enormous amount of effort into creating an effective resolution regime which, because I have been in this role since 2010, I have seen all the legislation on. It has a resolution directorate staffed with people ready to move in if there is a problem with a bank to solve it over a weekend. But the problem seems to me to be that, just as a bank cannot be allowed to fail for financial reasons, it is increasingly true that a bank failing because of its technical capability—because of its computer services—would have an equally catastrophic effect on society.

I therefore ask the Minister whether, as we hand further tasks to these ailing computer systems, the regulators have an equivalent regime to ensure that the banks’ computer systems will never fail.

[Lord Bates]

I thank the noble Baroness and the noble Lord for their questions. The noble Baroness is right to stress the importance of cheques continuing to be available. The evidence suggests that many voluntary organisations and charities, and some of the most vulnerable in our society, are the ones who rely on cheques the most, so it is important that their interests be safeguarded.

The noble Baroness asked about conflicting claims, and here we can draw on some historic legislation. The Bills of Exchange Act 1882 is explicit: should the payee’s bank compensate a customer for a loss in accordance with the proposed legislation, this does not preclude the payee’s bank recouping this payment from the party where actual liability lies. In addition, where there are competing claims, there is a process for resolving that issue. As I said, these regulations are very much a backstop to a system that we feel is already working quite well.

The noble Lord, Lord Tunnicliffe, who is always assiduous in going through the detail of such regulations, asked about the IT operations. He is absolutely right that, as we place greater and greater emphasis on IT systems, we should be cognisant that sometimes they can fail. The Cheque and Credit Clearing Company has assured the Government that the new clearing process will be as secure and reliable as the one we use now. The security standards used to design and build the ICS are industry-leading and were agreed by all the participants to the company’s security code of conduct. The ICS infrastructure has been fully tested and has been in live operation, processing digital cheques, since October 2017. It has already processed some 250,000 payments to date. Additionally, the ICS infrastructure operates out of two geographically distinct sites in order to provide resilience, and there is full duplication on both sites. Contingency plans and connectivity alternatives are available, should they be required. The infrastructure is 100% operated from within the UK.

I once again thank the noble Baroness and the noble Lord for their comments, and I commend these regulations to your Lordships’ House.

Cash Ratio Deposits (Value Bands and Ratios) Order 2018

Debate between Lord Tunnicliffe and Lord Bates

Wednesday 16th May 2018 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I agree that this is clearly a measure that is appropriate for statutory instruments, but I wish that it had not landed on my desk. Of course, we will not oppose this. This will not be the one in 1,000 occasion this afternoon, I am sure the Minister will be pleased to hear. However, after I had taken the trouble to half understand the scheme, I could not believe its bizarre nature. I could not for the life of me see why there was not a straightforward fee-based scheme. The scheme is planned to raise £169 million per annum. Why does the Bank not simply send the banks a bill and raise the money directly? My real fear—which is rather the opposite of that expressed by the noble Baroness, Lady Kramer—is: what if this formula is wrong?

The functions covered by this income are absolutely vital. The austerity programme that this Government continue to pursue would be even more disastrous for the economy if it were not for the monetary measures taken by the Bank of England. This funding supports the MPC and the FPC, which are effectively seeking, through quantitative easing, the bank rate and the controls it puts on the banks, to control monetary policy and create an appropriate stimulus over this period of austerity. I see that the Bank has said that if the money is insufficient, it will reprioritise efficiency savings. I have worked long enough in the public sector to know what an efficiency saving is—it is called a cut in normal language. I cannot think of any area of the Bank’s activity, together with the resolution and recovery regime, that is more important. It is essential that it is properly funded.

The formula set out on page 5 of the Explanatory Memorandum has a number of components which I am afraid I do not understand. The first thing that it assumes is that the income required is fixed at £169 million for five years. Once again, I ask: what if that is wrong? The next factor in the formula is the aggregate eligible liabilities, which are fixed at £2.8 trillion—I hope that I have counted the number of noughts properly—yet the impact assessment assumes, from the various analyses that have been produced, that this figure will go up by 2.9% per annum. Why is it fixed if in fact the Government, in analysing the scheme, assume that it will increase?

In fact, the only real variable in the scheme is what is called on page 5 of the Explanatory Memorandum the “portfolio yield”—that is, the estimate of the yield from investments. It is made up of three parts: 55%, 42% and 3%. The 55%, labelled “a”, seems to be the only seriously variable one. It is a 13-year moving average. Why 55% and why 13 years? The second element, labelled “b” in the formula in paragraph 7.17(c), is calculated on a six-month average, but it is calculated only twice and is then fixed for the rest of the period of this notice. The 3% at the end of the formula is a six-month average calculated every six months. This is a ridiculously complex way to collect a modest amount of money. I believe that the whole system by which this money is collected needs to be reviewed. The fee-based approach would be simple to introduce. You could apportion the burden on eligible liabilities, which have to be calculated with this scheme. My biggest fear would then be coped with. A simple system could guarantee sufficient funds for this vital area.

[Lord Bates]

I am grateful to the noble Lord for delving into the algebra in the formula of “i” over “el” times “py”, which we all know arrives at the answer of the funding that is required. Before dealing with the explanation for that, I will deal with some of the points raised by the noble Baroness, Lady Kramer. She mentioned the consultation. The Treasury ran an informal consultation between 20 December and 15 January, contacting all the eligible institutions. A relatively small number of institutions contributed; 19 responses were received on that part. When it went into the public realm, between 8 and 9 March, three responses were received. One should not be surprised; it is a highly technical measure, as the noble Lord, Lord Tunnicliffe, said. Those were the points raised.

There was a point about what was being done to improve efficiency. There were changes to the way the Bank was to work. Cost-savings measures include a comprehensive programme of cost-containment and reprioritisation, coupled with an increasing amount of transparency, so we can track what is being spent at the Bank. Those elements are commendable.

The total tax burden on banks and building societies from the bank levy is significant. In 2016-17, £3 billion was raised from the Government bank levy above the £1.6 billion from the bank corporation tax surcharge. Those are significant sums contributing to the Exchequer.

The noble Lord, Lord Tunnicliffe, has been, as always, assiduous in the way he has delved into the detail of the Explanatory Memorandum and the order, and raised a number of pertinent points. He says: why not just have a levy, rather than an alternative means of funding that involves this level of complexity? The review considered a range of mechanisms by which the Bank’s monetary policy and financial stability functions could be funded—in particular, whether a move to a fee-based model or levy would be appropriate. The review concluded that:

“Such a proposal was not possible within the scope of the existing legislation and in the current CRD review period. A fee-based model would require more in-depth analysis, starting from first-principles in terms of how costs could be apportioned in a fair and efficient way”.


The noble Lord also asked about the formula: what drives the variables and the weightings attached to them? There are different weightings in the order which reflect the Bank’s long-term gilt holdings and investments over time. The long-term gilt holdings make up 55% of the total pool, hence the weighting of 55% is applied in the formula. Gilts that would be purchased in the coming months make up to 42% of the pool. Additional gilts that would be purchased over the remainder of the scheme to replace those that have matured amount to 3% of the portfolio.

He then asked: what happens if the Bank’s costs are below those expected? Do banks and building societies get their money back? That is a good question. The budget to be recovered by the scheme over the next five years is fixed and reflected in the order. Any surplus generated by the scheme as a result of underspend by the Bank will be retained by the Bank and will build up its capital base. This will in turn support the Bank’s monetary policy operations. Proposed amendments to the scheme seek to ensure that the Bank’s income profile is smoother over the next five-year period. That should ensure that a surplus or deficit does not arise under the scheme. Once again, I thank noble Lords for their questions and support on this. I commend this order to the Committee.

UK Convergence Programme

Debate between Lord Tunnicliffe and Lord Bates

Monday 16th April 2018 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, we are holding this debate today in the context of weeks of key Brexit debates ahead. It seems odd to be debating a Motion on the issue of convergence as we embark on weeks of debate about how we will leave the EU. I will not make this speech Brexit heavy but focus on what the Motion asks us to approve.

The Motion asks us to approve the Autumn Budget 2017 report and the most recent OBR economic and fiscal outlook for the purposes of Section 5 of the European Communities (Amendment) Act 1993. This is made difficult because we cannot be confident about what the economy will look like this time next year when, according to the Government’s Brexit timetable, we will no longer be a member of the EU—and presumably will no longer be holding this yearly debate. It is also made difficult by a number of other concerns.

I do not share the Chancellor’s view of light at the end of the tunnel, nor do the households for whom the squeeze on incomes and living standards is a daily pressure. The OBR forecasts from March are marginally better in the short term, but they have revised forecast growth down in both 2021 and 2022 since the Autumn Statement. Amid such uncertainty in the face of leaving the EU, how can we expect these to be revised up at any point? Last year, growth in our economy was the lowest in the G7 and the slowest since 2012. In the last quarter of 2017, GDP growth was just 0.4%. That means that Britain was the slowest-growing major economy across 2017, behind both Italy and Japan. OBR forecasts predict growth will fall below even the weak 1.7% level that the Chancellor spent most of the Spring Statement boasting about. So we are looking at having 1.5% growth in 2022, 15 years after the financial crisis, which is absolutely nothing to boast about.

This Government have missed every deficit target they have set themselves. Public sector borrowing is still higher than forecast a year ago, and debt is over £700 billion higher than when the Tories came to power. George Osborne’s target for a 2020 surplus is a distant memory. The Government may be quick to point to productivity growth. However, we know from the OBR outlook that stronger productivity has in fact reflected the fall in average hours worked in the second half of 2017, as the noble Baroness, Lady Kramer, said, rather than stronger output. The OBR forecasts in November actually revised down productivity and business investment every year for the next five years. We are lagging behind the rest of Europe, with the productivity gap between us and other G7 countries the widest it has been since 1991.

This Government are failing to support working people. We have an economy running on low pay and insecure employment. Some 60% of people in poverty in the UK live in households where someone is in work. Clearly something is wrong here. The Government say that the economy is growing, but the UK is the only major nation in which wages have fallen at the same time. Wages are still below their level in 2010 and wage growth is being outstripped by inflation. The IFS has said that real average earnings are expected to grow by just 3.5% over the next five years, meaning that their level in 2022-23 would be similar to 2007-08. The OBR has said that real earnings growth over the next five years is expected to remain subdued, averaging just 0.7% a year. Growth in real household disposable income per person is expected to average only 0.4% a year. The national living wage was once again revised down. It will not hit the £9 per hour that the Tories originally promised. In the Spring Statement, it was projected to be just £8.57.

The Government’s headline figures on the deficit exist only because debt is being pushed on to local councils, schools and hospitals. Our public services are suffering a government onslaught. National Health Service trusts will end this financial year £1 billion in deficit. Doctors and nurses are struggling and being asked to do more, while 100,000 NHS posts go unfilled. Recorded crime is rising, yet the Government have cut the number of police officers by 21,500 and the number of firefighters by more than 8,500. Our prison and probation services are in dangerous crisis, and yet another prison riot has been reported today.

This Government are responsible for the first real-terms per capita cut in school funding in 20 years and are today trying to deprive 1 million children of a decent school dinner. They have trebled student fees to £9,000 and abolished the maintenance grant, meaning that the average working class student leaves university heavily in debt. Local government will face a funding gap of £5.8 billion by 2020 and is drawing down more reserves. More children are being taken into care, yet children’s services alone are facing a £2 billion funding gap by 2020, while more than 1 million of our elderly people are living with their care needs unmet.

After eight years of failure on housing, from rising homelessness to falling home ownership, the Government have no plan to fix the housing crisis. Statistics released just before the Spring Statement reveal that housebuilding has still not recovered even to pre-crisis levels. The OBR was not able to adjust its forecast on housebuilding as a result of any policies in the Budget.

The Spring Statement missed an opportunity to prepare our economy for Brexit and was a missed opportunity to invest in the services that we as a country will rely on increasingly in the post-Brexit future. The Chancellor may have kept his promise of no new fiscal policies, but that means that struggling families with low pay facing benefit cuts to free school meals will have to wait until the autumn for any kind of relief. I am not sure that they can afford to wait that long.

[Lord Bates]

My Lords, the noble Baroness rightly pointed out that we have had a few of these debates. They tend to come down to a debate between the optimists and the pessimists, and I have to say that the Government and indeed I myself are very much in the optimistic territory on this. We believe that we can make a success of Brexit and that our best days are ahead of us. The forecasts which are made are not targets to be met but are there to be beaten. Evidence of that is in the OBR forecast last year, which was mentioned in the debate, and the Autumn Budget. The forecast for growth was 1.5%, but the actual outturn in growth was 1.8%, which is welcome and something we want to see continue to happen.

The noble Lord, Lord Tunnicliffe, accused us of failing to support working people. Well, there are a lot more working people around whom we are supporting with jobs. There are some 3 million additional jobs in the economy, and that level of employment is likely to increase over the period of the OBR forecast, so there is a significant amount going on.

The noble Lord also challenged whether we are doing enough on housing. The whole point and thrust of the Spring Statement and the Autumn Budget was in the housing area. I am sure that my noble friend Lord Young, who is of course a specialist in this matter and in his place on the Front Bench, is longing to leap to the Dispatch Box to correct the record on what incredible things we are doing to give people an opportunity to have a stake in the future.

The economy is 16.7% larger than it was in 2010, and the IFS has said that, by the end of this Parliament, government plans will see public investment increase to its highest sustained level in 40 years. As the noble Baroness almost anticipated that I would say, we have announced a £31 billion national productivity investment fund to tackle our productivity challenge head on, and we are seeing some encouraging signs in that area. Ultimately, while the people who have confidence in the economy may not be found on the Opposition Benches, they can be found in companies like Toyota, which has said that it will build the next generation of its Auris hatchback in Derbyshire; BMW, which has said that it will build a fully electric version of the Mini in Oxford; Boeing, which will open its first European factory in Sheffield; and Dyson, which has announced that it is to begin work on a second technology campus.

We on this side certainly take a positive view of the underlying strength of the economy, while not diminishing the challenges we face. They were set out in the Autumn Budget and expanded upon in the Spring Statement, and they are contained in the convergence document which is being presented to your Lordships’ House today and which I have no hesitation in commending for approval, should noble Lords so wish.

Customs Clearance Arrangements at UK Ports

Debate between Lord Tunnicliffe and Lord Bates

Monday 19th March 2018 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for repeating the Answer to the Urgent Question. According to the Guardian, Chris Grayling said:

“We will maintain a free-flowing border at Dover. We will not impose checks in the port … We don’t check lorries now; we’re not going to be checking lorries in Dover in the future. The only reason we would have queues at the border is if we put in place restrictions that created those queues. We are not going to do that. We will manage trade electronically. Trucks will move through the border without stopping”.


Does the Minister accept that it is both reckless and misleading for his colleague, the Transport Secretary, to imply that there will be no checks at Dover in the case of a hard Brexit? Can the Minister point out to the House other examples of countries that allow goods to flow through their borders unchecked without some form of customs agreement? Can he also explain to the House how HMRC will be able to implement customs checks post Brexit while the Government continue to close HMRC offices and when they have cut staffing levels by 17% since 2010? Finally, given the Government’s track record of delivering computer systems, does he honestly think that delivery of an upgraded system by March 2019 is in any way realistic?

[Lord Bates]

In response to the first question, what the Secretary of State for Transport described is pretty similar to what I said in the Answer to the Urgent Question about our desiring a frictionless border between ourselves and the European Union and a deep and ongoing partnership. Clearly, “frictionless” has connotations relating to particular checks which could be undertaken at roll-on, roll-off ferry terminals such as Dover, which are important to the economy.

On the second point, the noble Lord invites me to think about whether there are other examples which could be pointed to in this regard. But again, we are looking for something unique, innovative and different. We believe that it is possible; the fact that we are seeing agreement on the implementation period just today shows that it is possible with good will on both sides.

Finally, the noble Lord asked about HMRC and computer systems. That was one of the reasons why the Chancellor announced in his Autumn Budget that a total of £3 billion will be made available and, specifically, that £260 million will be made available to HMRC to prepare itself for the outcome. Therefore the resources are there. To touch on the point the noble Lord made about technology, that is interesting, because it is not as if at the moment the UK does not have any expertise in trading with the rest of the world. It does so quite frequently, and if you go down to Felixstowe or other places, you will see significant amounts of imports that come through and are dealt with in an incredibly efficient and effective way, using technology. We are seeking simply to take that technology and to give it wider usage so that it achieves our objective of a frictionless border that enhances both trade in the EU and for the UK.

Small Business, Enterprise and Employment Act 2015 (Consequential Amendments, Savings and Transitional Provisions) Regulations 2017

Debate between Lord Tunnicliffe and Lord Bates

Monday 22nd January 2018 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, before I start I should apologise for what is going to be a rather scrappy and rambling speech. The reason for that is that rather lazily I started to look at this instrument only on Saturday, and I have to say that I pretty much regret that I did so. I had great trouble in trying to understand it, particularly the Explanatory Memorandum. Either these regulations are important or they are a trivial tidying-up exercise, but I could not work out which. They seem to centre on meetings and notices. I shall quote from the Explanatory Memorandum:

“insolvency law reforms enacted in sections 122 to 126 of, and Schedule 9 to, the Small Business, Enterprise and Employment Act 2015”.

Paragraph 7.4 sets out what the principal changes are. As the Minister said, they concern the removal of physical meetings for creditors and allowing them to opt out of receiving certain notices. That seems unobjectionable until one reads, together with paragraph 7.5, paragraph 7.6:

“This instrument therefore takes a staggered approach to the amendment of the Treasury’s financial services legislation, disapplying the reforms for the majority of its special insolvency regimes”.


The special insolvency regimes are enormously important. They culminate in the Bank of England’s approach to resolution, which is a combination of several Acts. I see the noble Lord, Lord Young, in his place. We have battled over the bits and bobs of these Acts—well, battled is not quite fair, but sought to understand them and how they fit together. Of course, the consequence of the Bank of England’s approach is that banks do not become insolvent. They are resolved before that. It is already quite complicated.

I thought, “Well, why don’t I break the normal rule and look at the regulations?”. It is pretty desperate when you have to look at the regulations because they are, as usual, pretty indecipherable, especially as they run to several pages, despite an apparently simple purpose of disapplying something in a particular place. Since it was so long I thought I would pick on something that I think I know a little about. That took me to page 5 of the regulations on the Banking Act 2009. Regulation 6(3)(a) requires that,

“the entry for section 141, in column 3 at the beginning insert … ‘Ignore the amendment made by paragraph 36 of Schedule 9 to the 2015 Act’”.

This is a form of legislation that I have never come across before. I am used to instruments changing the law and so on, but to say to disapply a law, or to read it as though it has not been amended, which is what this says, creates immediate problems. You can get into the Small Business, Enterprise and Employment Act and find out what is to be disapplied, but you then have to try to find what disapplying the Act means. It means going back to the Insolvency Act 1986 to see which particular amendments to that Act were in force before April came along and it was changed to something that these regulations want to change it back to. I failed. I could get a copy of Section 141 as enacted in 1986 and I could look up the section that now exists until these regulations become active. It proved why I am not a lawyer: while the words are different, I could not find any difference in the meaning.

It seems that the essence of this is: what is the damage if we do not approve? I hope that smiling and shaking of the head from the Minister means that he will write to me rather than try to answer me. I would like an answer to this in writing if the Minister cannot provide it tonight: what damage to the insolvency regime—particularly in the Financial Services and Markets Act 2000, the Banking Act 2009 and the other Acts mentioned in the regulations—would occur if we were not to approve these regulations? If the damage is trivial, that is fair enough. If the damage is that it puts in doubt the working of the special resolution regimes which the Treasury has developed and put into law, it is very serious. If those regimes are seriously damaged, the resolution approach which the Bank of England thinks it has may be at risk

One problem with bank resolution is that it is something that one never does. The trick is for the industry to know about it and think, “That is going to be so painful, we will be careful enough not to get into that position”. So we do not have any case law. However, we nearly had some case law: the Co-op Bank was within a whisker of going broke. The resolution regime worked in that the creditors, those who were owed money by the bank, thought that they would get an even worse deal under the resolution regime than by putting together their own deal, so they put their own deal together within hours of the point at which they would have run out of money. The resolution regime therefore worked by virtue of its existence, but is it fatally flawed until we approve this instrument?

If that is the case, it means that the 2015 Act contains a serious flaw, and we need to know how that happened. Was there not proper consultation in developing the Act? I assume that the original parent of the Act was BIS, as it was known then. The developer of the special resolution regimes is the Treasury. It seems to be either some trivial tidying-up or a serious mistake, for which I would look to the Minister to apologise. One thing I think I can ask him to apologise for is the Explanatory Memorandum. As a politician of average intelligence—you might call that a bear of little brain—I found it impossible to work out just how important this instrument is or is not.

[Lord Bates]

I am grateful for those contributions and for your Lordships displaying your usual assiduousness in these matters, which, as I outlined in my opening remarks, are technical in nature.

[Lord Tunnicliffe]

We should be clear that “technical” does not mean “trivial”. “Technical” can be at the essence of whether the law is working.

[Lord Bates]

I absolutely agree with that. Often in legislation we deal with the overarching principles and leave the technical aspects, which are not trivial but very significant, to be worked out through secondary legislation, which is the purpose of our discussion here.

I shall come on later to the points raised by the noble Lord but want first to address those made by the noble Baroness, Lady Burt, who asked about the general genesis of the regulations. Due to the considerable volume of legislation affected by the 2015 reforms, this approach is necessary while the impact of reforms on these types of institution is further assessed and decisions are made about implementation. In many ways, that is about trying to learn as we implement so that we do not overcorrect what we seek to introduce. Today’s regulations are consequential amendments to the financial sector insolvency regimes to take account of the April 2017 reforms. Given the limited amount of parliamentary time available, there are currently no plans to consolidate the legislation. Stakeholders who are directly affected by the legislation and therefore need a more granular understanding will be able to purchase consolidated versions of it from commercial providers.

I come to the point raised by the noble Baroness about impact assessment. BEIS carried out an extensive consultation before bringing forward the insolvency reforms. BEIS received information in this consultation which refined the policy, and it helped the impact assessment process to quantify the cost of these regulations. BEIS further undertook a full impact assessment for the changes brought in by the wider reforms and for the impact on the economy as a whole. It is a very important part of those principles that that is considered in that way.

--- Later in debate ---

[Lord Bates]

I shall double-check, but my feeling is that those impact assessments were published earlier in the sequence of legislation and reforms that I mentioned. I shall double-check but if that is not the case, impact assessments are normally a matter of public record and they will therefore be made available. The noble Baroness also asked how the financial sector will benefit from these changes. Where these regulations apply the reforms, firms in the financial sector will benefit from a modernised and streamlined insolvency process. The benefits include removing unnecessary burdens, such as requiring a physical meeting of creditors. Financial institutions will not be directly affected by these. As to the impact these regulations will have on the financial sector, these regulations apply the reforms where appropriate, ensuring that the benefits of the reforms are extended to the financial sector. Where the regulations do not apply the reforms, there will be no impact on the financial sector. As I mentioned, an impact assessment was undertaken.

I come to some points raised by the noble Lord, Lord Tunnicliffe. He focused on recalling the impact of the Banking Act 2009 and asked what the impact might be on the Bank of England’s resolution of banking problems to ensure smooth working. The insolvency regimes for financial sector firms that we are discussing today sit alongside the Bank of England’s powers under the special resolution regime established by the Banking Act 2009. Today’s regulations are required to update and maintain consistency in the legislation that concerns these special insolvency regimes. The regulations do not affect or amend the Bank of England’s powers under the special resolution regime.

The noble Lord also asked about the drafting of the statutory instrument, basically saying that it is not acceptable because you need to see the Banking Act 2009 before it was amended. Today’s regulations are consequential amendments that amend the financial sector insolvency regimes to take account of the April 2017 reforms. Given the limited amount of parliamentary time available, as I mentioned earlier, there are currently no plans to consolidate the regulations.

[Lord Tunnicliffe]

The thing that worries me is that the language the Minister uses suggests a progressive improvement while in fact this instrument disapplies—it does not update; it “undates”, for want of a better term, although I do not think that there is such a word. It suggests that the conclusion has been reached that the application of the 2015 Act in the area of financial services is actually doing harm. Nobody is going to disagree with the 2015 Act to the extent to which it reduces bureaucracy, but this instrument says, if I have read it properly, that it will not apply in these circumstances. It seems a very unusual instrument for that reason, and the only logic for it is that there is harm in it applying—unless I have totally misunderstood the instrument and the Explanatory Memorandum.

[Lord Bates]

The noble Lord has not misunderstood it, but in my opening speech I said that what is proposed here is to disapply while application of the other measures referenced went ahead. I would have thought that that could be supported. I accept the noble Lord’s point that it is perhaps unusual to do it in that way. However, it has been done in consultation with the businesses that are affected, which believe that this is an effective way forward. Clearly, that is why we are legislating in this way.

[Lord Tunnicliffe]

May I press the Minister just a little more? I recognise that we will not resolve this tonight—and, of course, as ever, we will not cause a constitutional crisis and vote against it. However, I would be grateful if I could have a detailed response by letter from the Minister setting out what would happen if this instrument were not passed. What harm is being done by the fact that the 2015 Act currently applies and has to be disapplied to the position before the Act in a set of particular circumstances, with particular reference to the Banking Act and the resolution regime?

[Lord Bates]

I am happy to do that. I will write in detail to set this out, and I hope that that will be helpful for the record. I am also happy to copy that to the noble Baroness, Lady Burt, as some comments were made about the Explanatory Memorandum, which I hope will be covered as well.

I reiterate that the impact assessments have already been published, and I will provide in my letter to the noble Lord, Lord Tunnicliffe, a copy of—or more probably a link to—that impact assessment. I hope that, with those reassurances and the commitment to write, noble Lords will accept these regulations, which I commend to the House.

Public Sector Pay Cap

Debate between Lord Tunnicliffe and Lord Bates

Thursday 13th July 2017 Lords Chamber

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, I pay tribute to the noble Lord, Lord Haskel, for securing this debate, and to noble Lords who have taken part in it. In a spirit of trying to shed more light than heat on this issue, I thought it would be useful if, rather than leading off with my set text, I went straight into trying to respond to some of the key questions that have been raised.

A number of noble Lords questioned our commitment to the public services, saying that we were very happy to pay tribute to the workers when crises arose but questioning whether we were backing that up with resource. It will not surprise noble Lords to hear me say that we pay tribute to our public services, particularly given the horrific events that we have seen in recent months. Their performance has been utterly outstanding, as has that of the Armed Forces. How do we respond to that? We respond to the Armed Forces through signing up to the 2% pledge in NATO for defence expenditure, thereby investing in the Armed Forces. We speak up for our nurses and health workers in England, where we have responsibility, through an £8 billion increase in real terms in expenditure on the health service. We have protected expenditure on schools and protected front-line policing. As a result, we have seen that crime is falling, more patients are being treated than ever before and more pupils are being taught in good or outstanding schools.

The noble Lord, Lord Monks, and the noble Baronesses, Lady Blackstone and Lady Dean, spoke about nurses and the issues around nursing. It is absolutely right that the public sector review bodies should take into account the recruitment factors here. It is worth noting that they said:

“We do not see significant short-term nationwide recruitment and retention issues that are linked to pay”.


We have seen an increase of 13,000 in the number of nurses but there are also 52,000 nurses in training. That should be welcomed. The noble Lord, Lord Tunnicliffe, will probably not be surprised that I return to the following point. One needs to make comparisons when one talks about average pay in the public sector. The average pay might be set by a pay review body at 1% in terms of an increase but actual pay settlements in terms of pay progression have averaged between 3% and 4% in the health service. The comparison was made with other European countries. The OECD looked at the purchasing-power parity of the average salary of nurses and found that where, in the index, the UK was measured—

[Lord Tunnicliffe]

Would the noble Lord be willing to share with us by letter the source data for those statements?

[Lord Bates]

I can give that information. It was from the NHS Pay Review Body’s report of March 2017. It said:

“We do not see significant short-term nationwide recruitment and retention issues that are linked to pay”.


Returning to my key point about UK nurses, where the UK is measured at 100 in the OECD index, France, which was cited, is at 84.2. Therefore, I think that average salaries bear some comparison.

I want to turn in particular to the point made by the noble Lord, Lord Sawyer, about the importance of public opinion here—a view that I recognise. The Government are seeking to balance the opinion of public sector workers with that of taxpayers, who contribute to the maintenance of our public services. Frequent mention has been made of comparisons with real wages in 2010—the noble Baroness, Lady Blackstone, referred to that. Of course, 2010 is a particular point at which to make the comparison. The noble Lord, Lord Haskel, will recognise that if you make the comparison with the situation at the beginning of the great financial crisis of 2008-09, you get a different result, because at that point there was a significant reduction in private sector pay, which has recovered recently.

In response to a point made by the noble Lord, Lord Sawyer, taxpayers’ confidence is maintained by looking at reductions in the deficit. I know that that may be greeted by groans in some quarters of the House, although perhaps I am wrong about that, but we should bear in mind that the interest that we pay on the debt—£50 billion—is equivalent to the entire pay bill for the NHS. Therefore, it is simply not true to say that macroeconomic and fiscal responsibility does not have a bearing on the public finances. However, it is true to say that at present we have record levels of employment—we have never seen them at such a high level—and that in itself leads to pressure on recruitment in the professions.

It is also true that, because we are seeking to manage the economy well, interest rates are at historically low levels, and that reduces the cost of living. The noble Lord, Lord Monks, and the noble Baroness, Lady Kramer, referred to the fact that inflation has increased to 2.9%, which is outside the target. We believe that that is associated with short-term exchange rate issues relating to last year’s decision to exit the European Union and that over time the rate will return to being within the 2% target that we want to achieve.

The noble Lord, Lord Monks, quoted the Prime Minister at the party conference and referred to equity between public service employees’ salaries and the taxpayer—a point I mentioned in response to the noble Lord, Lord Sawyer. On 4 July—that is, last week—he said, “It’s all coming out of the same pot. Therefore, you have to, as a government, have a view on how much you are prepared to spend on pay and how much you are going to spend on the day-to-day running costs of the services you provide”. That is a very fair observation and we would go with that.

The noble Lord, Lord Haskel, referred to productivity, which I recognise is important. Between 2010 and 2016, total public service productivity is estimated to have increased by 3%, with growth of around 0.5% per year. This represents a longer, sustained period of growth in public service productivity since the start of the series in 1997. We have also invested £13 billion to improve productivity, supporting Charlie Mayfield’s work, to which the noble Lord referred.

I am very grateful to the noble Lord, Lord Adonis, for having given me notice of the points he raised, and I want to make sure that they are covered. He asked a number of questions about pay. I think that the House will have been in some shock as he quoted the numbers relating to public sector pay for vice-chancellors and the specific example of the University of Bath. The answers may not surprise him but I put them on the record. Universities are independent and autonomous institutions, and are responsible for setting the pay for their staff. As such, government does not have pay controls in place for senior university staff. The Government have no current plans to intervene in universities’ remuneration. Vice-chancellor pay is decided by official university remuneration committees, which include expert representatives from outside the sector. We expect these committees to examine robustly the evidence for pay increases for all relevant staff. As I said, I know that those answers—

Business: Exports

Debate between Lord Tunnicliffe and Lord Bates

Thursday 6th July 2017 Lords Chamber

[Lord Bates]

My noble friend will be aware, of course, that the export finance levels were doubled by the Chancellor in the Autumn Statement last year. That will be a significant increase. Some 279 companies had access to export finance and more than 70% of those were small and medium-sized enterprises—precisely the sorts of organisations that we need to encourage to do more.

[Lord Tunnicliffe (Lab)]

My Lords, ONS figures show that Britain is currently the worst performing major economy in the world right now, so upskilling our workforce is vital. However, the LGA has recently stated that skills and employment funding is confusing, fragmented, untargeted and ineffective in its current form, where it is run by eight different government departments or agencies. How do the Government intend to better co-ordinate their haphazard approach to skills?

[Lord Bates]

I simply do not recognise this pessimistic view about the UK. We are the fifth largest economy in the world, according to IMF rankings; we were the fastest growing among the major economies last year; and this year we will be the second fastest growing among the major economies. Our exports are on the rise, our employment is at record levels and the United Kingdom is a fantastic place to do business. We produce some fantastic products that will be in demand—increasing demand, in my view—around the world.

Public Sector Pay Cap

Debate between Lord Tunnicliffe and Lord Bates

Wednesday 5th July 2017 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for repeating that Answer, although I regret its tone and what it shows about the Government’s attitude towards public sector workers. This is clearly an extensive and complex issue and I am therefore delighted that my noble friend Lord Haskel has managed to secure a debate on this very matter next Thursday, when we will have an opportunity to go into it in more detail.

The specific question that I put to the Minister today relates to the terms of reference of pay review bodies. Can the Minister tell the House whether those bodies are required to have regard for government policy with its 1% cap? If the answer is yes, surely the publication of such reports is little more than a publicity stunt.

[Lord Bates]

The answer to the question is yes, but it is not a publicity stunt. These are serious matters that are considered very carefully, as has been the case on many occasions for a long time. Public sector pay is set out in the Budget and that advice is contained in recommendations that are sent to the independent pay review bodies. They make their recommendations and then the Government respond, normally by way of Written Ministerial Statement, as we have done already. The situation in which we find ourselves is one of significant debt. It is worth remembering that the interest that we pay on our debt would cover the NHS pay bill in its entirety each year. These are not therefore inconsiderable matters; we ought to bear them in mind and, at the same time, try to strike the balance between fairness to those public sector workers who do so much in our society and country and having regard for the taxpayers who are paying their salaries.

Psychoactive Substances Bill [HL]

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 14th July 2015 Lords Chamber

[Lord Tunnicliffe]

My Lords, I am, albeit temporarily, on the same side as the Minister, and I am now confused. I think he said—some minutes ago, I grant you—that the Government had not ruled out the use of the word “synthetic”, but then he went on to rule it out. Can he be clear: are the Government thinking about adopting the word “synthetic”, and if so, in what timescale? If I misheard him, he now has the opportunity to be absolutely clear.

[Lord Bates]

I ask the noble Lord please not to go to the other side just yet but to stay with me a little longer. I was referring to the amendment of the noble Lord, Lord Paddick, and was talking about the use of the term “novel” in this context. That was the ACMD point, as opposed to the point about the use of “synthetic”, which I shall come to later and have already touched upon. Now the noble Lord, Lord Paddick, looks puzzled; perhaps I have lost him in gaining the noble Lord, Lord Tunnicliffe. Perhaps I may continue with what I was saying and then I will come to the specific point raised by the noble Lord.

I accept that while our target in this Bill is substances that are harmful when misused, or which have the potential to cause harm, the Bill seeks to define the effect of these substances rather than to make any explicit reference to their harms. Of course, the advisory council has a considerable and impressive track record in making these harm assessments. It is a scientific body of experts which for the last 40 years has been advising successive Governments. These amendments would require assessments of individual substances, or even groups of substances, for the purpose of bringing them within the scope of the Bill and its offences.

Our fundamental issue with that is that it would perpetuate the inadequacies and frustrations of our current approach under the 1971 Act. As the expert panel found, a substance-by-substance approach would not meet our core objective to get fully ahead of the market and scientific developments. It would allow the suppliers to adapt their range of substances on sale in response to new controls. That is exactly what has happened in the past and is behind the purpose of this legislation. Indeed, by driving innovation in the market, the current approach adds to the harms caused by these substances, as each new generation of psychoactive substances is more potent than the last. We need a change in gear—that is what the blanket ban will deliver.

Finally, Amendment 9 adopts a different approach again to how we define a psychoactive substance for the purposes of the Bill. Clause 3 enables the Home Secretary to make regulations, subject to the affirmative procedure, which add to or vary the list of exempted substances in Schedule 1. As we have previously debated, the regulation-making power in Clause 3 has been designed to future-proof the list of exempted substances and ensure that, for example, medicinal products are not inadvertently caught by the blanket ban provided for in the Bill. Schedule 1 contains broad categories of established substances and products that we want to exclude from this regime, mostly because they are already regulated by other legislation.

I turn to the specific point put to me by the noble Lord, Lord Tunnicliffe. He pointed to the advisory council’s concerns about proving psychoactivity as a point of law. I wrote to the noble Lord on this very issue, and he quoted my letter, in which I said:

“The Government is committed to supporting the law enforcement community in the exercise of their powers under the Bill. We will work with the national policing lead and College of Policing on the development of policing guidance”.

It is important to recognise that different powers in the Bill apply to different standards of proof. For example, the powers of seizure in Clause 42 operate to a “reasonable belief” test. An officer’s reasonable belief that a substance is psychoactive could be based on a number of factors, including the substance’s packaging, its markings or even whether the individual from whom it was seized appeared intoxicated and the officer could infer that the substance found might be responsible. The same “reasonable belief” test applies to the issuing of a prohibition notice or a premises notice. Applications for prohibition orders and premises orders are determined on the basis of the balance of probabilities.

In the case of a prosecution for an offence under Clauses 4 to 8—I think that this comes to the point that the noble Lord invited us to look at—we have the criminal test of “beyond reasonable doubt”. Clause 25, which is referred to in my letter, deals with the offence of failing to comply with a prohibition order or premises order. That clearly involves the civil test of the balance of probabilities. However, failure to comply with the order can involve a criminal sanction. Therefore, quite rightly the noble Lord came back and asked whether it was possible that we could end up with someone being caught between the two tests—the civil and the criminal—and facing a criminal sanction on the balance of probabilities test. As I understand it, that is at the heart of his concern. I can certainly give him the assurance that before any criminal sanction could be made under Clause 25, there would need to be proof to the criminal standard of “beyond reasonable doubt” that the substance involved was indeed psychoactive.

I hope that that clarification will help the noble Lord, Lord Tunnicliffe, with his concerns. I also hope that the point that I made right at the beginning to the noble Baroness, Lady Meacher, that we are continuing in a genuine dialogue with the Advisory Committee on the Misuse of Drugs, will allow her to—

--- Later in debate ---

[Lord Tunnicliffe]

Listening to the Minister, one might almost interpret him as saying that this is a balanced issue on which he needs more time to think and on which he wants to involve noble Lords. However, the only time when noble Lords will get another chance to debate this will be at Third Reading. Is the Minister saying that he may be able to take this away and shed more light on his conclusions at Third Reading?

[Lord Bates]

Look at the pace of events over the past week and the exchanges of correspondence that there have been. This is moving because we are genuinely exploring what the definition should be. Of course we will keep it under review for Third Reading and, should the Bill go to the other place, it is likely that, as a result of deliberations in your Lordships’ House, government amendments will be tabled in other areas dealing with other clauses. Therefore, through the normal process, we will get an opportunity to consider those Commons amendments should they be made. There will be opportunities for this discussion to continue with the ACMD in the proper way. However, I come back to the basic principle on which the noble Lord and I agree absolutely: we cannot have any more loopholes popping up so that people can exploit the gaps in the legislation. That is the whole point. We might as well not have the Bill if it will simply open up a number of new areas—be it botanicals or some other derivative—that can be used for the purposes that the Bill is intended to clamp down on.

[Lord Bates]

That would seem an elegant solution.

[Lord Tunnicliffe]

Is the Minister saying—I think he is about to get an answer from the Box—that he may well further consider this issue before Third Reading and that we should debate further at that point? That is very important to the noble Baroness in deciding whether to press her amendment.

[Lord Bates]

In responding on the Bill, I gave a number of examples of particular botanical substances that would fail the test of “synthetic”. Therefore, it is very much as my noble and learned friend has said. Those substances do not meet the harm threshold of the 1971 Act, but some natural substances are controlled under it. This is part of the confusion and discussion that is still to be resolved, but we believe that what we have at the moment is clear in terms of the intent of the Bill and that to insert “synthetic” at this stage would unnecessarily limit the scope of the Bill and potentially open up new loopholes, which would need to be closed down legislatively on another occasion.

Psychoactive Substances Bill [HL]

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 14th July 2015 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, as many noble Lords have pointed out, we had a wide debate on this issue in Committee. We were unconvinced by the argument at that time. We are unconvinced that an amendment to this Bill is an appropriate vehicle but, as ever, we await the government response with interest.

[The Minister of State, Home Office (Lord Bates) (Con)]

First, I thank the noble Baroness for moving this amendment and giving us the opportunity to return to this issue. I feel we will be returning to it often, as we have considered it often in the past. During the dinner break, I reread the Committee debate and used the time to look at the video that the noble Baroness, Lady Meacher, and the noble Lord, Lord Howarth, pointed me to when we met yesterday. It is a very moving story featuring testimony from a young boy in the United States with epilepsy who was taking medicinal cannabis to very helpful effect. No parent or grandparent would ever want to decry such examples, but of course they are individual stories or cases, and the duty in considering this is to look at the totality of the evidence. That is the duty of the Advisory Council on the Misuse of Drugs, which we have talked about a great deal, and of the Medicines and Healthcare Products Regulatory Agency, which needs to license and approve products for sale and use in the UK.

This amendment brings us back to some familiar territory. In responding to this amendment, I remind noble Lords that cannabis is a controlled drug under the Misuse of Drugs Act 1971 and listed in Schedule 1 to the Misuse of Drugs Regulations 2001. The 1971 Act will continue to regulate the availability of controlled drugs, and Schedule 1 to this Bill specifically excludes drugs controlled under the 1971 Act. The Government are already under a statutory duty under provisions set out in the 1971 Act to consult the Advisory Council on the Misuse of Drugs prior to implementing any changes to the classification of controlled drugs. Provisions in the 1971 Act also enable the advisory council, acting on its own initiative, to keep under review the situation with respect to controlled or dangerous drugs in the UK and to provide advice to the Government. To place a further statutory requirement on the Home Secretary to consult the advisory council in respect of the rescheduling of cannabis, as proposed in this amendment, will in the Government’s view amount to an unnecessary duplication. Moreover, by setting an arbitrary timetable, it would entail an unjustified diversion of the advisory council’s resources from more pressing tasks, particularly as the issue has relatively recently been examined by the council. Indeed, the advisory council has reviewed the evidence on the misuse and harms of cannabis twice in recent years. Its most recent report, published in 2008, confirmed its previous view that,

“the use of cannabis is a significant public health issue. Cannabis can unquestionably cause harm to individuals and society”.

As I highlighted in Committee, no compelling body of evidence has since been put forward to the Government to challenge the advisory council’s view or the Government’s position on cannabis. However, we have listened to the experiences of the noble Baronesses, Lady Hollins and Lady Meacher, and continue to listen very carefully to that evidence, as I am sure that the advisory council continues to do as well. Of course, we continue to monitor the evidence, but it is the Government’s view that the available evidence does not warrant a specific commission of the advisory council at this time. This position does not prevent the advisory council from reviewing the available evidence and providing further advice to Government on its own volition, if it considers that there is enough scientific evidence to warrant the legislative change proposed in the amendment.

In Committee, concerns were raised around the impact of the legislative framework on cannabis research, which was also raised in the meeting that I had with officials, along with my noble friend Lady Chisholm, on the issue of medical research. We were talking particularly about the difficulties involved in research. I said at that point, and I hold by it, that we remain very much open to receiving further evidence of the difficulties that might be there in conducting medical research. Certainly, if Professor Curran or other groups want to provide evidence—we have received a report prepared by the all-party parliamentary group—that will be considered very carefully. The Government attach the highest priority to bona fide scientific research, especially that which will lead to improvements to the future health and well-being of the people of this country. They are committed to removing unnecessary regulatory barriers that impede research.

The Government’s view is that the Misuse of Drugs Act 1971 and the regulations made under the Act already facilitate research in this area. It is therefore not necessary to move cannabis from Schedule 1 to Schedule 2 prior to its use in research or medicinal trials. Schedule 1 drugs are already used in research or medicinal trials. Where wider human trials are necessary, the Home Office can issue a general licence under the 1971 Act to enable prescribers to prescribe on a named-patient basis, pharmacists to dispense and patients to possess, as happened during the development of the cannabis-based medicine Sativex, to which the noble Baroness, Lady Hamwee, referred.

The Home Office licensing regime is aimed at enabling access to drugs under a framework that prevents diversion and misuse. The regime is not intended to create unnecessary barriers to research, nor do we believe that that is how it operates in practice. Where there is clear evidence that such barriers exist and that removing them will not increase the risk of diversion to the illicit market, we are open to reviewing them.

Indeed, the formalities for obtaining a Schedule 1 licence and the requirements that would normally apply to prevent diversion and misuse, such as safe custody, are in fact similar to those applicable to Schedule 2 drugs and most Schedule 3 drugs. A decision to grant a Schedule 1 licence will be based on an assessment of risk, which is specific to each individual application. This principle is no different from drugs in the other schedules under the 2001 regulations. It is also worth noting that controlled drug licences are not drug-specific and a Schedule 1 research licence enables an organisation to undertake research with all drugs listed in that schedule, subject to any ethical approvals where human trials are proposed.

--- Later in debate ---

[Lord Bates]

My Lords, I wonder if it would be helpful to the House if I were to move the rest of this large group of largely minor and technical government amendments, Amendments 27 to 50, formally. I flagged up these amendments in Committee and have written explaining the basis of them. There is one significant change in Amendment 50, which provides a new clause to ensure that Border Force officers can access relevant provisions in the Customs and Excise Management Act 1979 when they intercept psychoactive substances being imported into or exported from the UK, particularly by post. Unless noble Lords want clarification—

[Lord Tunnicliffe]

I am sorry. I was going to interrupt the Minister to indicate that we would be content if the amendments were moved formally. We are indeed content.

[Lord Bates]

I beg to move Amendment 26.

Psychoactive Substances Bill [HL]

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 30th June 2015 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, the Opposition are not minded to support Amendment 23. I thank the noble Lord, Lord Paddick, for setting out so clearly the intention behind it, which is to decriminalise the simple possession of all drugs listed under the 1971 Act and partially replace that with a drug awareness programme. I emphasise that we believe that education and treatment have to be an essential part of the whole programme that the Government must responsibly pursue to tackle the enormous problems that drug addiction produces, but we do not believe that this is the vehicle to make such a substantial change to the 1971 Act. If the Government were minded to go down this road, surely they would first have to conduct a major programme of research and a major consultation. They may choose to do that, and I await the Minister’s response with some interest, but we are not in favour of the delay that such a research and consultation programme would lead to. The Bill mends a hole in the 1971 Act with respect to psychoactive drugs, and it should be enacted as soon as reasonably practicable in order to attack this difficult problem.

[Lord Bates]

My Lords, I thank the noble Lord, Lord Paddick, for introducing the debate on this amendment and giving us an opportunity to contemplate in broad terms these two groups of issues: one around the experience of dealing with people with drug problems and the other looking at international comparisons and alternatives, and health and education. This is something that your Lordships’ House does incredibly well: drawing on people who have had practical experience, not just in the police, as the noble Lord, Lord Paddick, has, but in adjudicating, as my noble and learned friend Lord Mackay of Clashfern has done in difficult areas. Then there were the contributions from the noble Lord, Lord Brooke of Alverthorpe, and my noble friend Lord Cavendish about their own experiences in trying to assist and work with people coming to terms with addiction. It has been a very thoughtful debate.

I am conscious that I will not be able to cover all the points, but we have a meeting with all interested Peers on 7 July in Committee Room 10A between 4 pm and 5 pm. We will announce it on the all-party Whip—or the business managers will, lest I overegg my powers. It has been set up particularly so that we can hear from Public Health England and about what is happening in education and treatment. I agree wholeheartedly with the noble Lord, Lord Tunnicliffe, that that goes very much to the heart of the wider issue we are seeking to address. The point made by the noble Lord, Lord Howarth, about updating where the Government and Public Health England are with the wider drug strategy and building recovery programmes might be usefully discussed at that meeting, along with many other issues.

--- Later in debate ---

[Lord Tunnicliffe]

My Lords, for the avoidance of doubt, it is not the policy of the Labour Party to ban alcohol. I leave it to the Minister to enjoy the privilege of office and explain the intellectual case.

[Lord Bates]

Oh, that I could get away with that, although I can say that it is not the policy of Her Majesty’s Government to criminalise the consumption of alcohol. On that, we might be clear.

I understand the point made by the noble Lord, Lord Norton of Louth. He has spotted a certain lack of consistency in approach and wishes to draw the Committee’s attention to it. As a distinguished academic, he then invited me to put forward an intellectual case that would satisfy him. Of course, he knows that that will not necessarily be forthcoming.

As I listened to the debate, the thought occurred to me that the nearest you could get to an intellectual case would be to say that you would not necessarily be starting from here with alcohol. It has been enjoyed and endured, probably in equal measure, for about as long as people have been walking around in this great land of ours. Therefore, alcohol has been part of our culture and our society for millennia.

Psychoactive Substances Bill [HL]

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 30th June 2015 Lords Chamber

[Lord Tunnicliffe]

My Lords, just to revert to my original path, I do not agree with the noble Lord, Lord Howarth, on the burden of proof. We think that for the orders a balance of probabilities is appropriate. The only question I seek assurance on is that if any individual were to be either imprisoned or fined, it would be under the provisions in Clause 23—and my understanding is that under that clause the criminal standard of proof would be necessary. Providing that one has that assurance, we do not object to the burden of proof in the relevant parts of the Bill with respect to the order.

[Lord Bates]

I shall respond, first, to the point made by the noble Lord, Lord Tunnicliffe. Clause 23 would require the higher criminal standard of “beyond reasonable doubt”, so that is how the matter would be dealt with.

Turning to the point about appeals, I believe that, as proposed, Amendment 64A would be disproportionate, given the nature of prohibition and premises notices. These notices are the first stage of our graded response to tackling the supply of new psychoactive substances. They are intended as a final warning and can be issued by a senior police officer or local authority requiring that the subject of the notice desist from any prohibited activities.

A prohibition notice can be issued only if the relevant officer reasonably believes that the respondent is carrying out, or is likely to carry out, prohibited activity. Therefore, it cannot be issued without good reason, and the issuing officer must also reasonably believe that it is a necessary and proportionate response, given the circumstances. As I have indicated, a notice acts as a final warning. Breach of a notice is not a criminal offence and there are no other direct sanctions flowing from a failure to comply.

The noble Baroness drew a parallel with community protection notices and pointed to the fact that the Anti-social Behaviour, Crime and Policing Act 2014 provides for a right of appeal against such notices. Indeed, this amendment largely mirrors Section 46 of the 2014 Act, but there is an important difference between a community protection notice and the notices provided for in the Bill, in that breach of the former is a criminal offence—hence the right of appeal.

I am not persuaded that, in the absence of a direct sanction for breach, a right of appeal is called for. If the respondent takes issue with a prohibition or premises notice, they can make representations to the issuing agency, which could then, if appropriate, withdraw the notice in accordance with the provisions in Clause 14.

Where the relevant enforcement agency concludes that a prohibition or premises notice had been breached, it could decide to pursue a prosecution for one of the main offences or make an application for a prohibition order or premises order, as the case may be. If the respondent is charged with an offence, they will be able to defend themselves in court in the normal way. If an application is made for a prohibition or premises order, again, the respondent will have his or her day in court and will also be able to appeal against the making of the order. We therefore have judicial oversight where it is appropriate.

I have tried to set out the nature of our graded response to the trade in new psychoactive substances and to state why I believe that an appeal process is unnecessary in the case of a prohibition or premises notice.

The other amendments in this group seek to provide for the criminal standard of proof, rather than the civil standard, to apply when a court is considering making either a prohibition or a premises order—a point on which the noble Lord, Lord Tunnicliffe, sought clarification.

Clauses 17 and 19, which Amendments 65, 65A, 68 and 68A seek to modify, make provisions for the application process for prohibition orders and premises orders, outlining a number of conditions that need to be met for an order to be made. Proceedings under Clauses 17 and 19 are civil proceedings. Accordingly, it follows that the civil standard of proof should apply. The noble Lord suggested that, as the proceedings are part of the criminal process, the criminal standard should apply, but this is based on a false premise. The whole point of the civil sanctions in the Bill is to enable law enforcement agencies to adopt a proportionate response to any offending behaviour and, in appropriate cases, to seek to tackle the behaviour by action short of a prosecution.

The application of the civil standard to such proceedings is not without precedent. Under Part 1 of the Anti-social Behaviour, Crime and Policing Act 2014, the civil standard applies to proceedings in respect of anti-social behaviour injunctions. The civil standard also applies to proceedings under Section 34 of the Policing and Crime Act 2009 in respect of gang injunctions. Of course, if a prohibition order or premises order is breached, the criminal standard of proof would apply to any proceedings for an offence under Clause 23, as I stated.

One of the key purposes of these civil orders is to enable the police, local authorities and other law enforcement agencies to act promptly to nip problems in the bud before they escalate. If the criminal standard of proof were to apply, it would necessarily dictate that more time was required for evidence gathering and there might be little to be gained by applying for a prohibition order as opposed to pursuing criminal prosecution for an offence under Clauses 4 to 8. These amendments would circumscribe the current flexibility built into the enforcement powers in the Bill, to the detriment of communities and defendants alike.

Much the same arguments apply to Amendments 85A to 85C to Clause 28. The clause provides that proceedings before the court under Clause 18 or Clause 25 are civil proceedings—those clauses relate to the making or variation of orders on conviction. It is the case that such proceedings take place in a criminal court, but it is important to remember that a prohibition order or premises order, as with similar civil orders, is not a punishment. As such, they do not form part of the sentence of the court. These orders are preventive in nature and in these circumstances it is again appropriate that the civil standard of proof and the civil standard of evidence should apply. Given that these are quite properly civil proceedings, I hope that the noble Baroness and other noble Lords with amendments tabled in this group will, on reflection, consider that the civil standard should operate and, in the light of this explanation, that the noble Baroness will withdraw her amendment.

Psychoactive Substances Bill [HL]

Debate between Lord Tunnicliffe and Lord Bates

Tuesday 23rd June 2015 Lords Chamber

[Lord Bates]

Let me try to avoid the ambiguity in it. The expert panel recommended that there should be a blanket ban. A blanket ban in the Republic of Ireland had been operating for three years, so it had had an opportunity to look at that. It looked at New Zealand and what had been happening there as another example. I can also point to the report in March from the Health and Social Care Committee of the National Assembly for Wales, in which recommendation 13 of its inquiry said:

“The Committee welcomes the Home Office’s expert panel’s recommendation of a ban on the supply of NPS in the UK, similar to the approach introduced in Ireland”.

I also have a quote from paragraph 4.23 of the report from the similar expert group set up by the Scottish Government:

“The Group agreed that there are a number of benefits to the Irish model, which could strengthen the tools that are currently available and being used by agencies to tackle NPS supply in Scotland”.

What I am doing here is piecing together the information to show that we did not whistle this out of thin air. Some serious people—whether you agree or disagree with them—looked at what was happening in Ireland, and this was their conclusion on which they based their recommendation.

To the next point, I am very much with the noble Baroness. I happen to think that one of the things with which we got close to this, mentioned by the noble Baroness, Lady Hamwee, was the Modern Slavery Act. It is without doubt the piece of legislation in either place with which I am most proud to be associated. One reason why was because of the process in which it actually engaged. It listened to the people who were on the ground, it talked to people, it talked to the experts, it framed legislation, it had pre-legislative scrutiny and there was an ongoing system of monitoring. Also, the Government committed themselves to proper post-legislative scrutiny; we will need to look at that. Should your Lordships and Parliament determine that the Bill gets on to the statute book, in our plans, although there is no set time for it, in a period of three to five years and certainly within the lifetime of this Parliament there will be some post-legislative scrutiny.

The other point which I make in passing here is that, if our friends in the Republic of Ireland were to undertake an impact assessment of our politicking to tackle this, it might not look so sharp. They would say, “Well, what has the UK been doing popping around with temporary banning orders, and every time they tweak one molecule the perpetrators and the traffickers simply change the packaging and change the molecule? What a ridiculous system that is”. In a sense it can go both ways and we must be conscious of that critique of us.

[Lord Tunnicliffe]

Can the Minister go back to his point on post-legislative scrutiny? I think the House at a subsequent stage may feel much more comfortable with this Bill if he were able to make some time commitment about when that would take place. Clearly he cannot now but I would be grateful if he would consult colleagues and see if he can be a little more specific at a future stage.

[Lord Bates]

I am very happy to do that. We are in Committee and this is where the Government listen to the arguments—

--- Later in debate ---

[Lord Tunnicliffe]

My Lords, I shall comment briefly on this group. I hear the debate on Amendments 7 and 8 and will be interested in the Minister’s response. On Amendment 10, similarly, we will be interested in the Minister’s response.

On Amendment 9, I see this Bill—and I will be grateful if the Minister can flesh out whether he sees it in the same way—as a very narrow Bill. Broadly speaking, everything is illegal except the things that are defined as legal. Bringing in the word “significant” seems to me to be getting into significant bad and not significant good, and therefore we are into the area of legal challenges et cetera. The idea of the Bill, I think, is to be free from legal challenge and that is why it is formed in that way. The Minister will no doubt enlighten me.

The point of the noble Lord, Lord Howarth, on the process—of how the judgment will be made that a substance is psychoactive—is a good one. I would be grateful if either now, or perhaps in writing, the Minister could spell out how the Government envisage determining whether a substance is indeed a psychoactive substance.

[Lord Bates]

My Lords, these amendments seek to reframe the definition of a psychoactive substance for the purposes of the Bill. This Bill is designed to capture substances supplied for human consumption that have psychoactive effects. Its aim is to capture substances that are not currently controlled under the Misuse of Drugs Act 1971, but, as with all drugs when misused, carry health risks.

Subsection (2) provides that,

“a substance produces a psychoactive effect in a person if, by stimulating or depressing the person’s central nervous system, it affects the person’s mental functioning or emotional state”.

We accept that this definition has been drawn purposefully wide. The nature of this market and of experience to date shows that producers of the substances are constantly and actively looking for loopholes to exploit, thereby fuelling this reckless trade. This learning has been central to how we have designed this Bill and in particular our definition.

By using a definition based on a substance’s effects rather than the chemical composition of substances, this legislation will avoid the issues that we have continued to face with the Misuse of Drugs Act 1971. Many new psychoactive substances are still legal due to the speed at which they are produced, with manufacturers inventing new substances by tweaking chemical formulas in order to avoid the existing controls. The need to capture such a wide range of substances, and any that might be invented in the future, necessitated a broad definition. The definition is in two parts: the trigger and the effects. The main effect of psychoactive substances is on a person’s brain, the major part of the central nervous system. By speeding up or slowing down activity here, psychoactive substances cause an alteration in an individual’s state of consciousness.

Amendments 7 and 8 in the name of the noble Baroness, Lady Meacher, seek to restrict the definition of a psychoactive substance so that it captures only synthetic substances. The nature of this market and of experience to date shows that producers of new psychoactive substances are constantly looking for loopholes to exploit, thereby fuelling their reckless trade. There are any number of natural products—such as fly agaric mushrooms and salvia divinorum—that are openly on sale in head shops and elsewhere which are far from safe though they are not banned under the Misuse of Drugs Act 1971. The Bill should give us a proportionate way of dealing with these substances as well.

Amendment 9 seeks to import the definition of a psychoactive substance—

--- Later in debate ---

[Lord Bates]

That is a fair point, in that it is asking how this will be tested. We will come to those points because we are going to deal, to some degree, with medical testing and how it is possible to license some of these drugs so that they can continue to be tested. We were talking earlier about how universities and research institutions can continue testing on drugs such as cannabis. That is a key point: that testing will go on. I will make sure about that before Report.

[Lord Tunnicliffe]

May I take that as a commitment to write to noble Lords before Report? This has raised a very big question mark. Trying to hammer it out in words is too difficult; hammering it out on a piece of paper may give us much more confidence.

[Lord Bates]

I am happy to do that—let us set the matter out in writing. However, I want to state two basic principles that I hope that the noble Baroness in particular may just accept and will enable her to withdraw her amendment. First—going back to the first point—is that what is being sold in our streets and in head shops has never been tested on anything or anyone, yet is consumed by people in this country. That is the basis on which we are taking action. Secondly, we are mindful that the skilled perpetrators, manufacturers and distributors of this drug are in the sights of this legislation because we want to target them rather than the individual user. When they see a written definition they then go and find a potential loophole, something else appears on the market and the Bill becomes ineffective. We want to avoid that. Those are the two principles in play.

In the context of those two principles I am very happy to write with more detail on the mechanics of how that might be done, and perhaps a little more—looking at the Bill team—about the process we went through in consulting, to arrive at this definition. I hope that that will be helpful to the House and I undertake to do it before Report.

Modern Slavery Bill

Debate between Lord Tunnicliffe and Lord Bates

Monday 17th November 2014 Lords Chamber

[The Parliamentary Under-Secretary of State, Home Office (Lord Bates) (Con)]

My Lords, this has been an outstanding debate to be part of and to listen to. There have been 31 excellent contributions and it is absolutely right that, before I move on, I should mention three in particular—the maiden speeches. The noble Lord, Lord Cashman, spoke of this place, having just arrived, as being public life at its best. Many of us who have been here a little longer will understand and respect that. We welcome very much his journey from the East End to the West End and hope that he is as effective and successful here. My noble friend Lady Chisholm spoke of her personal experiences in this area, from her life as a nurse and from her time dealing with those with drug and alcohol issues. Again, I think that that experience will be helpful. My noble friend Lady Mobarik brings great expertise from the world of business, which will be crucial as we get into the area of the supply chain.

I have the easy task of summing up 31 speeches, to which I have—and I counted—42 pages of notes from the Box, in not more than 15 or 20 minutes. I say at the outset that it is an impossible task. I know that many noble Lords on the other side, who have stood where I have, realise that. However, I think that, following the debate, we should perhaps respond with a substantial letter, copied to all Members. That can be a basis, as we go into Committee, for examining the many issues in much greater detail.

I recognise the passion that noble Lords have brought to the debate. Many who took part spoke from personal experience, whether it was the noble Baroness, Lady Cox, speaking with international experience of freeing people from slavery in Sudan, the right reverend Prelate the Bishop of Derby, talking about his experiences in his diocese, or the noble Baroness, Lady Doocey, and my noble friend Lord McColl, with their experiences in this area.

Responding to my noble friend Lord McColl gives me the opportunity again, like the noble Lord, Lord Rosser, to pay tribute to the excellent work undertaken by the pre-legislative scrutiny committee. Often we complain about systems and processes for examining legislation in this place. I think that this might be one case where it is not complete yet but is heading in the right direction. As well as the pre-legislative scrutiny and a draft Bill, there was, as the noble Earl, Lord Sandwich, mentioned, the consideration by the Joint Committee on Human Rights, which also looked at the Bill. One of the comments that more or less summed up where we were on this was made by the noble Baroness, Lady Young of Hornsey. She began her remarks by saying that she hoped that I and the noble Baroness, Lady Garden of Frognal, who is with me on the Front Bench, would be gratified by the warm reception that the legislation had received. She then proceeded over the subsequent seven minutes to tell me all the things that needed to be added to it to make it acceptable. We can all see the gaps, but it will be a long process.

I was grateful to the noble Lord, Lord Rosser, for pointing out in his winding-up speech that this is not something that we have just alighted on. It has been a long-standing problem tackled by successive Governments. As the noble Baroness, Lady Goudie, pointed out, it will have to be revisited in future. The reason for that is interesting. I had occasion to visit the National Crime Agency’s human trafficking unit to receive a report from it. It is mind-blowing to think that the things that it was telling me about are going on in this country. If it had told me that these things were going on in Sudan or North Korea, which the noble Lord, Lord Alton, mentioned, I might have believed it, but they are going on in this country.

That was why it was so important that the Centre for Social Justice, referred to by my noble friend Lady Newlove, entitled its 2013 report It Happens Here. We need humility. We tend to look around the world to point out the gaps where other people are falling short, so removing the plank from our own eye is a good place to start. One reason driving that, according to the report’s analysis, was that our action against the drug trade and the movement of weapons, guns and contraband was so successful in closing those activities down that organised crime gangs were now switching to another commodity—trafficking human beings and exploiting them. That is horrific and certainly deserves the increased sentences that we propose.

I turn to some particular issues. Given the work that my noble friend Lady Newlove does across government as Victims’ Commissioner, it is important that victims are at the heart of this. She and the newly appointed commissioner should address it and make recommendations.

My noble friend Lord McColl and many other noble Lords referred to child trafficking advocates and the importance of including them in the Bill. A number of references were made to how Northern Ireland had spelt out the responsibilities and that that was a better way forward. Of course we will look at what Northern Ireland has done, but we have taken a slightly different approach. We have simply said that we will undertake trials across 23 local authority areas, working with Barnardo’s, which will have child trafficking advocates who will speak up for the children. We will learn from that and on that basis set out in regulations what those responsibilities should be. That is exactly the same as what has happened in Northern Ireland, except that there it has happened in primary rather than secondary legislation. We feel that it is more suitable to have those responsibilities, which may be subject to change over time, dealt with in regulations rather than in the Bill.

I absolutely accept the chiding of my noble friend Lady Hanham when she said that it was critical that the evaluation of this exercise should happen promptly and that we should not waste any time. Of course that is our intention. As the Bill progresses, we will come forward with some of our early thoughts about the timing of when all that will happen.

There was reference to the national referral mechanism, which was introduced by the previous Government in 2009. It is worth putting a couple of figures on the record. In 2009, there were 535 referrals on to the national referral mechanism. Last year, that had increased to 1,746. My noble friend Lady Hamwee was on to something when she talked about the importance of raising awareness about this issue. Sadly, too few people are aware that this is something that is happening right here.

That is the role of the new commissioner. The new commissioner has very much to engage with these forces, with local authorities, to ensure that those referrals happen and that prosecutions are brought. I very much subscribe to the view of the right reverend Prelate the Bishop of Derby when he talked about people seeing themselves as “slavery safeguarding leads”—that is a very good way of describing it. However, out of the referrals that have happened so far, 42% came through the Home Office, 25% came through the police, 21% came through NGOs—reference has been made to some of those excellent NGOs—but only 9% came through local authorities, 2% through the National Crime Agency and 1% through the Gangmasters Licensing Authority. There is progress, but attention needs to be drawn to this issue. The role of the commissioner is very much to ensure that those numbers increase and that the number of prosecutions increases. He has to report to Parliament each year and parliamentarians will have an opportunity to give their views on his progress.

There were comments from several Members on the period for reflection—about what the figure was, whether 45 days was too short and whether it should be 90 days, as was suggested. The Council of Europe convention which provides for this said that it should be 30 days. We have said here that it should be a minimum of 45 days. That is not a maximum: in fact it will go on longer than that in many cases. There is no maximum time for this but I reassure noble Lords that that element is there. However, again, we will come back to it and look at the appropriateness of it, and of course we will get feedback on it—a lot, crucially, from the child trafficking advocates. When they have undertaken their work they will be able to offer us some feedback about it.

Several Members—I think it was the noble Baroness, Lady Howe, who focused on this—spoke about the fine balance: whether it was a criminal justice measure or something aimed at victims. The answer has to be that it is both. The crucial element we are after here is to disrupt and prevent the organised gangs which are undertaking this work. Part of that is to do with this Bill; part of it was to do with legislation we passed in the earlier Serious Crime Bill, which has now gone down to the other place with amendments. That Bill looked at tackling and restricting the work of the criminal gangs behind these activities. That is an extremely important part of it.

Several Members also referred to the supply chain. I have already referred to the noble Baroness, Lady Mobarik, but of course the noble Baroness, Lady Kennedy of Cradley, led that excellent debate on 30 October which to we have referred. It is critical that we do this. I was mindful, when she was talking about it, that I myself had had some experience of dealing with suppliers overseas. Often, if you could only get people to apply the same standards to quality of product as they do to the terms and conditions of employment of people then the problem would be solved overnight. There is no question that people here demand the highest standards of quality—they do not flinch from that for one second, because reputations depend on it. We want them to take the same approach when considering the quality and the terms and conditions which they are applying.

I cannot remember exactly who it was but there was reference to the importance these days of brands. It may have been the namesake noble Baroness, Lady Kennedy of The Shaws, so I pay tribute to her work in looking at the human rights element in this and her experience in dealing with victims at first hand. Brand is absolutely mission-critical to any business. The impact of having one of those stories which, sadly, we regularly find in our newspapers—the effect of having loose practice in supply chains—can be tremendously damaging to brands. I would have thought that it would behove any director or senior management team of any company to want to protect their brand above all things. This is a key element and the more aware that the public are of it, the more that will come to the fore.

There was reference to the Gangmasters Licensing Authority, whose work was recognised by many people and which was introduced by the previous Government. It has been a success. After the horrific example referred to by the noble Lord, Lord Alton, of the deaths in Morecambe Bay of 23 Chinese nationals, the establishment of the Gangmasters Licensing Authority brought some order into a disorderly marketplace and applied some structures. One of the problems is that whenever any organisation is successful, we immediately want to broaden its remit. Before we do that, we have to be very careful that in seeking to broaden its remit into the other, vulnerable sectors that have been mentioned, we would not undermine the good work that it is doing already. At the moment, it is doing a very focused job in an excellent way and having a positive effect in the broader fight against exploitation. We want that to continue but it is something that we will keep under review. I am sure that we will come back to it in Committee and listen very carefully to the suggestions that are made.

Several noble Lords referred to the fact that there are far too few prosecutions. My noble friend Lady Hodgson asked me to confirm the paltry number of prosecutions which have been brought forward, compared to the scale of the problem of which we are aware. I think that the noble Lord, Lord Warner, also referred to our needing to do much more to increase the number of convictions. I know this is coming back to a criminal justice focus but there is no doubt that when people see regular, severe sentences being handed out which meet the scale of the crime, that will act as a deterrent effect—as has happened in other areas of organised criminal activity. To do that, it is absolutely critical that we provide more support to victims so that they feel that they can come forward and bring their concerns to the public without fearing that they will end up in the dock, when it is the criminals who have brought them here or exploited them. I think that a lot of the measures that area are broadly welcomed.

In terms of the statutory footing, I am running out of time so I will be into the territory of reaching for that letter faster than I thought. However, the international effort is really important and we are already talking about it with the Department for International Development, which I know was referred to, and the FCO, which is working to see what more can be done in tackling this, as well as the National Crime Agency, which is working overseas as well.

I should probably be drawing my remarks to a close there. Again, I apologise to your Lordships for not being able to address all the points which have been made. I hope that we have provided some reassurance that, in the words of the noble Lord, Lord Rosser, we are no longer walking by on the other side and closing our eyes to this problem. I look forward to debating all these issues and more in Committee and I am sure that they will be debated in the informed, constructive and engaged spirit that has made tonight such an impressive occasion. At the heart of our further deliberations on the Bill should be the victim. I have no doubt that the true mark of the success of the Bill, and our continued fight against modern slavery, will be fewer victims whose lives are blighted by modern slavery.

[Lord Tunnicliffe]

For the avoidance of doubt, is the Minister assuring us that he will write on all the points he has not covered and circulate that to all noble Lords who participated in the debate?

[Lord Bates]

I am very happy to give the noble Lord that assurance. Many hundreds of points have been raised, but the substantive points will certainly be covered and that will form the basis of our discussions in Committee. Fewer victims whose lives are blighted by modern slavery is what we all seek, and I commend the Bill to the House.

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

Finance Bill

Debate between Lord Tunnicliffe and Lord Bates

Monday 26th July 2010 Lords Chamber

[Lord Tunnicliffe]

My Lords, I thank the Minister for setting out in such detail the Bill and what it will do. I was tempted for a few moments to think that it would be exciting to go through all this detail and slog it out, clause by clause, in Committee, but I was reminded that it is a money Bill. As such, this afternoon is a formality. Nevertheless, it is an occasion when this House can debate the generality of the Budget. I will stick to that generality, rather than go into much detail.

The objective of the Budget should be to set a fiscal framework for the enhancement of the material well-being of the British people. That is how it should be judged. Does the Budget contribute to the expansion of the production of goods and services that define national well-being? Mr Geoffrey Dicks of the Office for Budget Responsibility told the Treasury Committee in another place that, “logically the chances of” a double-dip recession “have increased” as a result of the Budget. I think Mr Dicks is right, which raises another important question: why is the coalition proposing measures that most objective observers believe will harm the well-being of the British people? To answer that question we need to examine the coalition’s analysis of the crisis and its own justification for its destructive policies. Consider, for example, Mr Cameron’s statement:

“Nothing illustrates better the total irresponsibility of the last Government’s approach than the fact that they kept on ratcheting up unaffordable … spending even when the economy was shrinking”.

Thank goodness the Labour Government did ratchet up spending in the face of the worst financial crisis in 80 years. That is what saved us from entering the terrible recession that would have been our fate if the coalition had been in charge. Indeed, the coalition may take us there. Even now, government expenditure is vital to the maintenance of the fragile recovery.

In the face of the fact that government expenditure is necessary, Mr Cameron still argues that spending is unaffordable. The Budget and the Finance Bill herald massive cuts in the public sector. In his Budget speech, Mr Osborne said:

“What we have not inherited from our predecessors is a credible plan to reduce their record deficit”.—[Official Report, Commons, 22/6/10; col. 166.]

Contrast that with the report by the Office for Budget Responsibility, which demonstrates that the Budget put forward by Alistair Darling would have halved the deficit in four years, exactly the timeframe recommended by the G20 at its meeting in Toronto last month.

Consider also Mr Osborne’s statement that the crisis in the eurozone shows that unless we deal with our debts, there will be no growth. Contrast that with the fact that the UK has the lowest debt to GDP ratio of any major EU economy, that the average maturity of British government debts at 14 years is significantly more than double that of any eurozone economy and that the cost of government borrowing in Britain has been falling all this year. There is no comparison. Mr Osborne said:

“Because the structural deficit is worse than we were told, my Budget today implies further reductions in departmental spending of £17 billion by 2014-15”.—[Official Report, Commons, 22/6/2010; col. 171.]

Note that the Chancellor refers to the structural deficit, not the actual deficit. The structural deficit is a theoretical construct that relies heavily on contentious assumptions. The OBR clearly states that the actual deficit is less than Alistair Darling estimated in March, and the rate of growth of the economy is slightly higher—a fact borne out by second-quarter figures. In other words, the overall economic position is better than my right honourable friend estimated, not worse.

To sum up, it is not true that the overall fiscal position is worse than that presented by Alistair Darling in March. It is not true that the overall economic standing of the UK is comparable with that of major eurozone countries, let alone Greece and Spain. It is not true that the Labour Government had no plan to deal with the deficit. Of course, we have serious economic problems in this country; how could we not when we have just gone through the worst world recession for 80 years and when we have suffered massive convulsions in the financial sector? However, it is our contention that the massive cuts in public expenditure trailed in the Budget will make the situation worse.

There is one crucial question that the Government must face: with the withdrawal of public sector demand planned by the Government, where is the demand in the economy going to come from? The OBR seeks to answer this in the Red Book. It sees only 1.1 per cent coming from private consumption, compared with 1.9 per cent in the boom years. Even 1.1 per cent is likely to be generous as unemployment increases and real pay is cut. Instead, the OBR forecasts that growing business investment will make a positive contribution of 1.1 per cent to the growth of GDP—three times greater than in the boom years—investment in housing will contribute twice as much as in the boom years and the contribution of net trade will be 1.1 per cent, when it was negative in the boom years.

These heroic assumptions are difficult to believe. Of course, the Liberal Democrats will believe them—they have to to keep the coalition together—but do the Tories really think that they are credible, or are they just a cover for the old-fashioned slash-and-burn politics with which they are so comfortable? Their goal is not simply to cut the deficit—Alistair Darling’s proposals did that—but to shrink the public sector, whether it be education, transport or, of course, support for the poor. The Tories want less public sector to make way for tax cuts to come.

One specific measure in this Bill on which I wish to comment is the broken promise on VAT. The Budget announced that VAT would rise from 17.5 per cent to 20 per cent in January 2011. This will cost each household in the country more than £500. Labour rejected a VAT increase as part of our deficit reduction plan and chose to increase national insurance contributions instead.

[Lord Bates]

My Lords, I am grateful to the noble Lord for giving way, but on that point is he familiar with the comments made by Alistair Darling on the “Andrew Marr Show” on Sunday, when he said that he favoured increasing VAT and not increasing national insurance contributions? Does the noble Lord agree with him?

[Lord Tunnicliffe]

My Lords, regrettably, I did not watch the “Andrew Marr Show” and did not hear Alistair Darling’s precise words. Therefore, I will not comment on them.

Before the election, the Liberal Democrats warned that the Conservatives would raise VAT. Nick Clegg said, “Our plans do not require a rise in VAT, the Tory plans do. Their tax promises on marriage and jobs may sound appealing, but they come with a secret VAT bombshell”. In fact, their election campaign was based on it. During the campaign, the Conservatives repeatedly denied they had plans to raise VAT.

“We have no plans to increase VAT”,

said George Osborne in the Times on 10 April 2010. VAT rises are unfair and regressive, as both David Cameron and Nick Clegg know. David Cameron has made an absolute promise that VAT is regressive and hits the poorest hardest. Nick Clegg shares this view that raising VAT would be regressive and penalise the poor.

I touch upon an area that is difficult given our Budget and expenditure structure. I commend the Government and the OBR for the comprehensive analysis in both the Red Book and subsequent documents that have been released, although some of it is based on assumptions I do not find particularly credible. However, this Budget will change the shape of our society, and we will not see that change until the spending review in the autumn, although we can be sure that it will be significant. The Budget anticipates £83 billion less public expenditure in 2014-15, which is more than £1,000 for every man, woman and child. Some of this will come from efficiency, as Alistair Darling’s Budget assumed. Some will be payments by cash transfer, and they are analysed in the Budget documentation. Yet a most important part will come from the non-cash value that we as citizens get out of society. That is what is so weak about the Budget process; the value that is withdrawn by these non-cash items is undoubtedly regressive.

The non-cash items pay for education—everything from Home-Start to universities and research. Cuts in these areas will hit poor people who have to go through state education and use things such as Home-Start. They will come from policing and justice. Yes, some efficiency will be available, but there will also be less policing and fewer justice facilities. They will come from social services such as home helps and respite care—the things that support lonely older and poorer people. They will come from programmes to protect the environment and from the arts, culture and sport. They will come from transport, which needs revenue support to maintain services to all our citizens and specialist support for the bus pass scheme so valued by our older citizens.

This Budget and its consequences in spending cuts will make our nation less secure. It will hit the poor and weakest most. It will leave society as a whole poorer and more fractured. It will leave it a less happy society, attacking those things that cause society to be at peace with itself. History tells us that, once the Tories start cutting, they will not stop. Sadly, these damaging measures may not achieve the Tories’ ultimate goal of tax cuts for the better-off because that depends on an economic recovery. This Budget and Finance Bill make recovery less likely. Without sustained recovery, no significant group of citizens in the country can achieve significant improvement in their material well-being. That is how this Finance Bill should be judged.