Mortgage Credit Directive Order 2015

Debate between Lord Tunnicliffe and Lord Newby

Thursday 19th March 2015 Grand Committee

[Lord Newby (LD)]

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

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

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

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

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

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

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

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

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

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

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

[Lord Tunnicliffe (Lab)]

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

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

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

Debate between Lord Tunnicliffe and Lord Newby

Thursday 19th March 2015 Grand Committee

[Lord Newby (LD)]

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

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

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

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

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

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

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

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

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

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

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

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

[Lord Tunnicliffe (Lab)]

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

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

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

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

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

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

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

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

that is, in June—

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[Lord Newby]

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

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

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

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

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

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

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

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

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

Debate between Lord Tunnicliffe and Lord Newby

Monday 2nd March 2015 Grand Committee

[Lord Newby (LD)]

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

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

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

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

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

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

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

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

[Lord Tunnicliffe (Lab)]

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

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

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

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

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

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

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

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

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

[Lord Newby]

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

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

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

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

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

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

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

Debate between Lord Tunnicliffe and Lord Newby

Monday 2nd March 2015 Grand Committee

[Lord Newby (LD)]

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

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

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

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

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

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

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

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

[Lord Tunnicliffe (Lab)]

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

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

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

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

[Lord Newby]

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

[Lord Tunnicliffe]

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

[Lord Newby]

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

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

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

Debate between Lord Tunnicliffe and Lord Newby

Monday 2nd March 2015 Grand Committee

[Lord Newby]

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

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

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

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

[Lord Tunnicliffe]

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

[Lord Newby]

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

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

Childcare Payments (Eligibility) Regulations 2015

Debate between Lord Tunnicliffe and Lord Newby

Wednesday 25th February 2015 Grand Committee

[Lord Newby (LD)]

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

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

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

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

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

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

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

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

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

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

[Lord Tunnicliffe (Lab)]

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

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

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

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

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

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

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

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

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

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

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

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

Employment Allowance (Care and Support Workers) Regulations 2015

Debate between Lord Tunnicliffe and Lord Newby

Wednesday 25th February 2015 Grand Committee

[Lord Newby (LD)]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[Lord Tunnicliffe (Lab)]

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

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

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

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

[Lord Newby]

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

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

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

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

Debate between Lord Tunnicliffe and Lord Newby

Tuesday 10th February 2015 Grand Committee

[Lord Newby]

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

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

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

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

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

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

[Lord Tunnicliffe]

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

[Lord Newby]

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

[Lord Tunnicliffe]

More than a bottle of champagne?

[Lord Newby]

Probably more than a case of champagne.

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

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

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

Tax Credits Up-rating Regulations 2015

Debate between Lord Tunnicliffe and Lord Newby

Tuesday 10th February 2015 Grand Committee

[Lord Newby (LD)]

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

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

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

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

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

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

[Lord Tunnicliffe (Lab)]

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

Armed Forces Pension (Consequential Provisions) Regulations 2015

Debate between Lord Tunnicliffe and Lord Newby

Tuesday 3rd February 2015 Grand Committee

[Lord Newby]

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

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

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

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

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

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

[Lord Tunnicliffe (Lab)]

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

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

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

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

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

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

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

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

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

--- Later in debate ---

[Lord Newby]

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

[Lord Tunnicliffe]

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

[Lord Newby]

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

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

[Lord Tunnicliffe]

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

[Lord Newby]

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

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

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

Debate between Lord Tunnicliffe and Lord Newby

Monday 15th December 2014 Grand Committee

[Lord Tunnicliffe]

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

[Lord Newby]

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

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

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

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

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

Immigration Act 2014 (Bank Accounts) Regulations 2014

Debate between Lord Tunnicliffe and Lord Newby

Monday 10th November 2014 Grand Committee

[Lord Newby (LD)]

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

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

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

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

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

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

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

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

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

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

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

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

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

[Lord Tunnicliffe (Lab)]

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

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

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

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

--- Later in debate ---

[Lord Newby]

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

[Lord Tunnicliffe]

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

[Lord Newby]

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

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

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

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

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

National Minimum Wage

Debate between Lord Tunnicliffe and Lord Newby

Thursday 6th November 2014 Lords Chamber

[Lord Newby]

My Lords, this has been looked at on a number of occasions and has always been rejected.

[Lord Tunnicliffe (Lab)]

My Lords, the thing that always strikes me about this debate is the theoretical level that it is held at. Very few of us could contemplate living on the minimum wage—I feel almost ashamed of my personal affluence when comparing it with the idea of living on £6 an hour—yet more than 5 million workers do so. The minimum wage is a good thing; it brings affluence to individuals, it improves the economy and it has not had any significant impact on employment. Will the Government join the Labour Party in our pledge to set an ambitious target to significantly increase the minimum wage to 58% of median average earnings, putting it on course to reach £8 before the end of the next Parliament?

[Lord Newby]

My Lords, the minimum wage may well reach £8 by the end of the next Parliament just through being uprated by inflation, so that is not a very ambitious target. The minimum wage is a very important floor but, for example, when I recently visited a textile factory in Leicester where the entire workforce consisted of Asian women, the managing director said to me when I asked him what the Government should do to support him: “Do not significantly increase the minimum wage, because if you do I will have to import products from eastern Europe and lay off all my workers”. Is that something that the Labour Party wants?

Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014

Debate between Lord Tunnicliffe and Lord Newby

Monday 21st July 2014 Grand Committee

[Lord Newby]

My Lords, I am grateful to the noble Lord, Lord Tunnicliffe, for those questions, because they enable me to clear up, I hope, the points that he raised. He asked whether agricultural products were included in the definition of “commodity”. The answer is that, just like a metal, agricultural products —such as pork belly, or whatever, futures—are an excluded entity, along with all other commodities.

The noble Lord asked me about how to define “simple”. I am slightly inclined to say that of course it is not easy to define “simple” simply. However, the simple instruments that ring-fenced banks will be permitted to sell to their customers are defined in articles 10 and 11 of the excluded activities and prohibitions order, so there is quite a long list there. The definition or underlying concept of “simple”, is that we are primarily talking about derivatives that do not complicate the resolution of a failing bank. Why do we try to keep to simple products? We want to make it possible, relatively easily, to resolve a failing bank. Therefore simple derivatives are primarily ones that are straightforward to value; that is what makes them simple, or relatively simple.

[Lord Tunnicliffe]

Can the noble Lord repeat what he just said? I think he said something quite profound, although he said it quickly: that, by definition, they must be instruments that would not complicate the resolution.

[Lord Newby]

Yes; they are derivatives that would not complicate the resolution of a failing bank. They would not complicate it because they are relatively straightforward to value. As the noble Lord can imagine, some derivatives are extremely difficult to value. If I can just slightly elaborate on that, the excluded activities and prohibitions order limits ring-fenced banks to selling forwards and futures, plus a small range of options. They may only sell derivatives to hedge against three types of common business risk, namely currency, interest rate and commodity risk. Those are the most common business risks in which the market for derivatives is most liquid and, because it is liquid in those areas, it is easier to value them. To ensure that derivatives do not have any of the features that make them hard to value, the order requires that options contracts entered into must specify the amounts that may be bought or sold under the option, be at a specified price, and exercisable on a single specified day; or, in the case of interest caps or floors, interest rates must be based on a specified principle sum for a specified period.

The order also requires that ring-fenced banks may only sell derivatives that can be valued on the basis of observable market data or of a type traded on exchanges, and whose fair values are based on level 1 or 2 inputs under international financial reporting standards. Such instruments are more liquid and could be more easily valued in resolution. Article 12 of the order creates those safeguards, as well as placing caps on the net market risks of the derivatives portfolio, the gross size of the derivatives portfolio and the proportion of the portfolio that can be made up of simple options. I hope that that has gone some way to satisfy the noble Lord on that front.

The noble Lord asked about consultation. Consultation was issued in July last year, and the summary of responses was released in December of last year. We also consulted widely with stakeholders, including the Association of Corporate Treasurers, the CBI, non-financial companies, law firms and, of course, the banking industry itself. As a result of that consultation, we have made some changes to the legislation that are largely technical, but which will ensure that ring-fencing is fully compatible with the needs of UK businesses. For example, we made some small changes to the definition of “simple derivatives”, made it permissible for ring-fenced banks to have exposures to non-systemic insurers, made a series of technical changes to ensure that exemptions for payments and trade finance are operable, and removed the caps on payments and trade finance exposures. We also prohibited ring-fencing banks from having branches in the Crown dependencies. Therefore that is relatively technical stuff, but it has improved the legislation and has been a good exercise.

The noble Lord asked how the supervisors would supervise. The PRA is the principal supervisory body. It is in day-to-day contact with the banks. If it feels that it is not getting adequate information from the banks, it has extensive powers to require further information from them if it has any specific concerns. If a generic problem were to arise, it would obviously be in a position to discuss with the Treasury whether any further changes were needed in terms of the secondary legislation or in any other respect.

As to the question of timing, as the noble Lord said, the end point for the final implementation of the ring-fence is 2019. The justification for that is so that we can get all the secondary legislation done by the end of this year, which we expect to be able to do. The PRA then has to produce very detailed rules to make sure that the system is clear and works in the way that we wish it to do. On the basis of both the primary and secondary legislation, we estimate that it could take up to two years for all those rules to be finally in place, and then a final two years for the banks to implement the rules. That does not mean that the banks will not do anything in the mean time, because making this change obviously involves them in a huge amount of effort, activity and cost, so they are beginning to think about how they are going to do it. We have always thought that this timetable is measured and proportionate. The very fact that the banks know that we are moving in this direction means that some activities that they might have undertaken in the past they will not undertake in the interim period because they know what the new rules will be and that they will abide by them.

[Lord Tunnicliffe]

I thank the Minister for giving way. Clearly, we would like to see this done more quickly, but I hear the Minister’s response. I presume that, alongside this, there will be a parallel activity by the banks to develop their own structure—the responsibility of directors and so on—and to be in a corporate shape for this structure. Are the Government, through the PRA, participating in or monitoring that development?

Banking Act 2009 (Banking Group Companies) Order 2014

Debate between Lord Tunnicliffe and Lord Newby

Monday 30th June 2014 Grand Committee

[Lord Newby (LD)]

My Lords, I am also pleased to introduce the Banking Act 2009 (Exclusion of Investment Firms of a Specified Description) Order 2014, the Banking Act 2009 (Restriction of Partial Property Transfers) (Recognised Central Counterparties) Order 2014 and the Banking Act 2009 (Third Party Compensation Arrangements for Partial Property Transfers) (Amendment) Regulations 2014. I will refer to the statutory instruments respectively as the banking group companies order, investment firms order, partial property transfer order and third party compensation regulations.

The financial crisis of 2007 to 2009 highlighted the need for the government to resolve failing systemic financial institutions in an orderly manner to protect UK financial stability and the economy. Moreover, resolution should be achieved without recourse to public funds. Since the financial crisis, a wide programme of financial sector reform has been under way at domestic, European and G20 levels. The reform has focused not only on banks but on investment firms and central counterparties, which also have the potential to cause major widespread disruption to the financial system.

Since 2009 a special resolution regime has been in place to deal with the failure of deposit-taking institutions such as banks and building societies. The regime gives the UK authorities a permanent framework, providing tools for dealing with failing banks and building societies. It gives the Bank of England a key role in implementing a resolution using the statutory resolution tools. The Financial Services Act 2012 widens the special resolution regime to include banking group companies, investment firms and central counterparties.

The powers provided for within the regime will enable the Bank of England, as resolution authority, to use the following tools to deal with the failure of investment firms and banking group companies: to transfer some or all of the securities or business of a firm or its parent undertaking to a commercial purchaser; and to transfer some or all of a firm or its parent undertaking to a bridge bank—that is, a company owned and controlled by the Bank of England.

The powers provided for within the regime will enable the Bank of England, as resolution authority, to use the following tools to deal with the failure of central counterparties: to transfer some or all of a firm or its parent undertaking to a bridge central counterparty—that is, a company owned and controlled by the Bank of England—or commercial purchaser, and to transfer ownership of a CCP to any person.

The Financial Services Act 2012 also extends the bank administration procedure to investment firms and banking group companies. The bank administration procedure is applicable when, during the resolution of a bank, a partial transfer of property takes place and the “residual bank”—ie, the part left behind—is insolvent. This procedure ensures that the residual bank continues to provide services and facilities required to enable the transferred business to be operated effectively. The same procedure will be available for the residual part of an investment firm or banking group company. The instruments that I present today are required to underpin and bring into force the widened scope of the special resolution regime and bank administration procedure.

The EU’s bank recovery and resolution directive requires there to be resolution tools in place for investment firms and banking group companies, and the instruments presented today are consistent with this directive. There is widespread support for putting in place a resolution regime for investment firms, central counterparties and banking group companies. We first consulted at the end of 2012 on broad policy options, and subsequently took powers through primary legislation. Then, following extensive work on regime design with firms, the Government published detailed proposals on the secondary legislation in September last year.

The statutory instruments I am introducing today take into account the feedback we received from a wide range of stakeholders during the consultation period. These instruments put into place the necessary safeguards and definitions required before the special resolution regime can be extended to investment firms, central counterparties and banking group companies.

The first of these orders—the banking group companies order—specifies conditions which must be met by an undertaking to be considered a “banking group company” for the purposes of the special resolution regime. The aim of using resolution tools in respect of banking group companies is to ensure that resolution over a failing bank in the same group as the company is effective, and in particular to ensure that any intra-group service provision to the failing bank—for example, the provision of IT services—remains in place while in resolution. Subject to exceptions, the banking group companies which may be resolved under the special resolution powers are the subsidiary and parent companies of a bank, investment firm or central counterparty in resolution, and other subsidiaries of its parent companies.

The investment firms order excludes small investment firms from the scope of special resolution regime and bank administration procedure. Specifically, this instrument narrows the scope to investment firms of a type that is required under the capital requirements directive to hold initial capital of €730,000. Over 2,000 investment firms operate in the UK, of which 250 have capital above that threshold. The activities those firms are permitted to undertake, such as trading on their own account and underwriting financial instruments, taken together with the value of assets held on their balance sheet, means that a failure by such a firm could threaten financial stability in a way which the failure of a smaller firm would not. This order reflects that reality.

The partial property order places restrictions on the making of partial property transfers made in respect of central counterparties. This order provides legislative safeguards for the benefit of direct and indirect users of clearing services provided by CCPs. Those safeguards will provide them with greater certainty as to how a partial property transfer might affect their contractual rights, and ensure that there are appropriate restrictions and limitations on the making of a partial property transfer.

Finally, the third party compensation regulations put in place third party compensation arrangements in the event that some but not all of an investment firm has been transferred during resolution. This statutory instrument ensures that creditors are no worse off as a result of resolution action taken by authorities with respect to a failing investment firm which results in the transfer of part of the failing entity than they would have been if the entire entity had entered resolution.

I hope that I have assured the Committee that these statutory instruments represent a necessary step forward in putting an effective resolution regime in place for investment banks, central counterparties and banking group companies.

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing the statutory instruments, all of which relate to the special resolution regime. I have spent an enjoyable weekend trying to understand them, but it is clear that enthusiasm for such an exercise has not been widespread. Nevertheless, my understanding of them is much as the Minister has described them. The first, on banking group companies, seems to fill a hole whereby service-giving subsidiaries may fall out of scope during the resolution process. The order makes sure that they remain in scope and that the resolution does not end up being tool-less in that area.

I admit that I failed on the second order. Its general intent to exclude small companies is pretty clear, but why it defines small companies as those with initial capital of less than €730,000 in one part and then uses €125,000 as the threshold in another I cannot understand. If the Minister could enlighten me, I would be delighted by the depth of his briefing, but in all probability I shall receive another letter.

As the Minister said, the third order relates to recognised central counterparties. As he well described, if there is a resolution process with a central counterparty, it is possible that some parts of the central counterparty will be an ongoing concern while others will not. There may be differential equity between creditors. The rules seek to make sure that creditors are treated fairly in that situation—I think that that is roughly what the order says. The fourth statutory instrument is on the general rule on partial transfers: creditors are no worse off than if there had been a full bankruptcy or administration. Faced with orders of such stunning reasonableness, I can say no other than that we have no objection to them and wish them luck.

However, learning from the Minister at our previous outing together, I shall stray into the general area of the special resolution regime, as he did into that of mutuals when we were discussing a stunningly small order that we together approved. This has been a very fruitful exercise, because the importance of the special resolution regime is totally misunderstood. The special resolution regime happens only in dire circumstances. If a major firm is failing—let us say, a large bank such as Barclays—and approaching being not viable, we have dire circumstances. The regime set up for such circumstances is illustrated in a document that I have from May 2011, but I believe that it remains just as applicable today. It sets out the extent to which, in a recovering regime, the PRA would seriously interfere with the way in which such a failing firm would work. It would demand changes in management and the composition of the board. It would talk about capital distribution and limiting planned business activities. There would have been a massive amount of activity from the PRA before one approached the situation where the special resolution regime was going to happen.

Essentially, with a large firm—one of the big six, eight or whatever banks—the PRA would have been devoting a large part of its resources to making sure this failure did not happen. We are now facing a situation, where, despite all that effort—the stress test, all the new rules and so on—a firm is either no longer viable or likely to become so, and is put into the special resolution regime. It is put into the special resolution regime— if I have read the supporting paperwork correctly—by the PRA. The PRA, in consultation with the Treasury and the rest of the Bank, takes the view that this failure mode is likely to happen.

The Treasury is involved because one of the ways out of the mess is the way out we used last time. I think Alistair Darling and his people did a brilliant job, frankly, because they were faced with a catastrophic situation, with—as far as one can say—no real prior thinking-through by the regulatory authorities of what the right mechanisms would be. Indeed, as we know from later analysis, there was not even a lot of thinking about who was responsible and so on. They did a brilliant job with a very crude tool— essentially they nationalised the banks. This has the significant downside that the taxpayer ended up footing the bill. The whole objective of the special resolution regime is to create a series of more complex tools which allows resolution to take place without the taxpayer picking up the bill. The most recent part of that has been the extension to central counterparties, which have clearly emerged in analysis, and the bailing provisions, which move the problem to the creditors—to the industry—as opposed to the taxpayers.

If the Treasury decides that it does not want to go down that route, the Bank—no longer the PRA—is in charge of the special resolution regime. Its objectives, as far as I can see, are to maintain all the key functions as going concerns. That does not mean keeping the business alive as a going concern—that was the PRA’s task. The Government are clear that it is not a no-failure situation—they want failure to occur if that is the proper thing to happen. Nevertheless, the resolution regime provides a way of taking the activities forward in such a way that the public, the trading communities and society in general carry on having the banking facilities they need to survive.

The more you think about it, and about our experience of the last crash, the more frightening this scenario is. This looks as though it is a 60-hour exercise—when we have got to this situation we are thinking about close-of-play Friday and having it sorted out by Monday morning. That is a pretty challenging world to live in. I may have called it wrong; it may be being thought of as a more gentle process. However, one has to remember that we are contemplating using this process only in a situation which, at the moment, we cannot contemplate. Broadly, we are trying to put right all the things that typically lead to bank failure—through various ratios, protections and so on. From having read other bits of this stuff, I think that the thing that mitigates this mess is the extent to which the PRA will have amassed a lot of previously unavailable information, including specific information to help the bank in the resolution situation. This will mean that the bank will start with some information. I accept that most of this is about central counterparties, but given banks’ behaviour and the irregularities we have seen, one fears that in such a catastrophic situation it would be even worse than expected; in other words, despite all that information, when you dig into it you have got a real crisis.

Failure would be catastrophic. The impact assessment that accompanies the orders quotes the banking commission as saying that a failure could have net present value of 63% of GDP. That is an enormous impact and would be one of the most catastrophic events that could hit the United Kingdom, short of war. It is difficult to think of anything worse than the financial services of this country in collapse.

Who is actually going to do this resolution exercise? The situation is better than previously because the Bank now has a series of tools, but it is more complex because of the complexity of the tools. The answer is: the Bank of England special resolution unit, headed by Andrew Gracie, who reports to a deputy governor, Sir Jon Cunliffe. I have looked briefly at the CVs of those two men and they are successful and respected public servants. But the questions I have for the Government are: how big is their support? How big is this unit? How prepared is it? How developed are its systems?

Looking through the reports, both of the PRA and of the Bank, it is difficult to see. We can see one or two favourable things and one or two slightly worrying things. The favourable thing is the point I raised more than two years ago about the quality of staff of the regulator and the Bank of England. Mark Carney has made a big point of making the development of people one of his key aims. I am really pleased to see that sense of the value of people, and great chunks of his report are about that resolution. What is less happy is the level of staff turnover. There is 8.1% staff turnover at the Bank and 11.6% at the PRA. The thing that worries me most in the reports is the relative lack of saliency about the special resolution regime and the resources needed to support it.

I have spent most of my career in environments where one faces catastrophic low-incidence events. I started as an aeroplane driver—getting that wrong can be pretty catastrophic—and moved into the rail industry, where, sadly, we did have catastrophic events that killed large numbers of people; I ended it in the nuclear industry. What you learn from those industries is that if you are facing a low-incidence high-consequence event, it is not natural to worry about it and therefore you have to put in place special regimes that focus on it; it has to become almost obsessive.

My questions for the Government are: how are they assuring themselves that the Bank is up to this massive challenge? How does the special resolution unit train and practise for this challenge? That is how other industries I have been involved in face up to these things; they specifically train for them. In 3,500 hours, one engine stopped and that was not very exciting; every simulator detail, engines were stopping all over the place. That is how you do it: you practise for the catastrophic. What exercises have been conducted to test the unit and its systems? You can learn an enormous amount from the conducting of exercises and simulations, which, instead of being a theoretical exercise, come much closer to reality as you play out the events in a real-time way.

What pan-government exercises have been conducted? One of the problems of high-level emergencies is that senior people in government are introduced into the emergency, usually with absolutely no understanding of the series of decisions that they are going to face. You can get into that situation if you do not have a system of pan-government exercises to ensure that everyone knows what they are doing.

Lastly, what mechanisms have been put in place to work with our US and European partners in such an emergency? I gave the Minister a brief overview of the questions that I would be working through but I do not expect detailed answers to all of them. Still, after he has given his general reassuring reply—that is what he is paid for, really, so I expect nothing less—I would value it if he read the report of this session, looked at the questions, talked to people in the Treasury and at the Bank and produced a more researched, thoughtful reply. I cannot stress enough that you have to put the systems in place to assure yourself that, in the unlikely event that a low-incidence high-consequence event actually happens, you will be prepared for it.

[Lord Newby]

My Lords, I am grateful to the noble Lord for having taken so much time to grapple with these extremely technical orders. On the difference between €730,000 of capital and the €125,000 of capital, the reference in the order to €730,000 refers to initial capital while the €125,000 is operating capital. However, the €730,000 figure is accepted across the EU as the slightly arbitrary point at which a firm is potentially significantly important. If I have got that wrong, I will write to him. He raised a bigger point, of course: how can we be sure that, if we are faced with a catastrophic event, we deal with it in a competent manner? One of the challenges here is that, slightly differently from when the noble Lord was an airline pilot or indeed running the Underground, the number of variables that can go wrong or interact with each other in a banking crisis is very high. It is not as though you can plan for 10 eventualities; there will be many more variables than that.

We have tried to put in place a legislative framework that gives us the powers we need; you cannot deal with these crises if you do not have the powers, and that is what the plethora of legislation over the past few years seeks to do. We think that we have an adequate infrastructure—or, rather, a superstructure—in place, with the PRA and the other changes at the Bank and the greater responsibilities that it now has. Secondly, we think that under the governor’s stewardship, as the noble Lord said, the quality of staff of the bank is very high.

The noble Lord pointed to the level of turnover. I think that that is a general concern in the public sector more generally, and has been in the Treasury as well as the Bank. It is fair to say that as far as the Treasury is concerned—I do not know about the Bank—the level of turnover has reduced somewhat over recent years, but it is still pretty high. In reality, that is in the nature of these institutions: there will be quite a lot of churn among people who are coming into and going out of the public and private sectors in the banking world. However, we think that we have a very high quality of staff.

Of course, one of the challenges which the noble Lord referred to is that although there is a special resolution unit, fewer people work in this area outside a crisis than when there is a crisis, otherwise you would have a huge number of people sitting around doing nothing for a very long time. Therefore the way the Bank and Treasury seek to deal with that problem is, of course, that other people in the institution would be brought in—just as they were at the time of the RBS and Lloyds crisis—to help on resolution.

There is a recent example of where it was not in the end necessary to have the full resolution procedure because the PRA and the Treasury—and in particular the Bank—had worked so closely with the relevant institution. That was the case with the Co-op, which last autumn faced quite severe problems. In the end, it was possible for those problems to be resolved by the Co-op without recourse to the provisions in the Banking Act or the Financial Services Act. However, that was possible in part because it was working with the Bank very closely over a period, and as a result of that it came up with an effective solution.

The noble Lord quite rightly referred to the fact that when you get to a crisis, sometimes you have to act very quickly, which is what happened with RBS. I hope that in future most cases such as that would be more analogous to the Co-op case than to RBS. In the Co-op case, it was clear for a while that there was a difficulty, and over a period of months—not a huge number, but over a period of weeks and a small number of months—options were identified and implemented. If the PRA is doing its work, it will not be taken completely by surprise in the way we were with the banking crisis. Of course, that does not mean that nothing will happen as a surprise. As the noble Lord pointed out, while we hope that the degree of information the PRA gets from the banks is always perfect, it will sometimes be less than perfect. One thinks of crises in the past that have occurred because the bank’s senior management and the compliance people did not know what a rogue member of staff was doing. As we know, that brought the bank down, for example, in the case of Barings. Therefore there will always be a risk.

The noble Lord asked specifically about training and practice exercises, and about how we work with our EU and American partners. There have been a number of training exercises to look at such situations. Scenario planning is obviously part of the role of the special resolution unit, and it does that. We work very closely with our American and European partners to see what lessons we can learn, and to have in place good working relationships and mechanisms to activate if we find that a bank is in real difficulty and that we might need to use the resolution procedures.

If I can say anything about that more formally, I will write to the noble Lord. However, both the Treasury and the Bank are acutely aware of the need to be able to use the powers they now have in an effective and timely way, and they are working very hard to make sure that they are up to snuff as regards doing that. As I said, the Government have considerable confidence that we have put a legislative process and structure in place that give the Treasury and the Bank the powers that they need and the people and structures internally to ensure that they are properly exercised. This is some way from the extremely important but rather technical amendments that we have been discussing today. I hope that all noble Lords in the Committee will feel that the statutory instruments are necessary and proportionate, and I commend them to the Committee.

Convergence Programme

Debate between Lord Tunnicliffe and Lord Newby

Wednesday 9th April 2014 Lords Chamber

[Lord Newby]

My Lords, I am grateful to both noble Lords who have spoken in today’s debate. In a short speech, the noble Lord, Lord Pearson, succeeded in asking very fundamental questions about Britain’s position in the EU. Without spending too much time on his final, semi-rhetorical question, I should like to respond to his earlier questions about the convergence programme and the European Semester.

The convergence programme stems from the Lisbon treaty, which requires the UK Government to report regularly to the European Commission on the economic situation and forecasts in the UK. The report is drawn from previously published material, as I said. It is part of a Europe-wide programme. Under the stability and growth pact, all member states are required to submit either stability programmes, for euro-area member states, or convergence programmes, for non-eurozone member states. The European Semester is a common timetable for the submission and consideration of fiscal policies via the stability or convergence programmes and macroeconomic policies via national reform programmes.

The noble Lord asked: what is the point of all this? As the crisis in much of Europe has shown, it is in everybody’s interests that member states do not run up excessive deficits, because if they do the consequences of putting those deficits right are not confined to those member states. The UK economy suffered very significantly because of the eurozone crisis. To pick up one of the points made by the noble Lord, Lord Tunnicliffe, this is one of the reasons that the forecasts we made in 2010 were blown off-course. Given the very high proportion of trade we have with the eurozone countries, we are very much dependent on those countries prospering and therefore it is very much in our interests that they keep their public sector finances under control.

[Lord Tunnicliffe]

It is a detail, but the Minister said that the requirement comes from the Lisbon treaty. I thought that it had come from the Maastricht treaty, which we put into law in 1993. Am I mistaken?

[Lord Newby]

The difference, I believe, is that the Lisbon treaty requires the convergence programme to be submitted to the Commission in the form that we are describing today, whereas the underpinning requirements about budget deficit and levels of growth were in the Maastricht treaty. What came out of Lisbon were the very specific mechanics of trying to co-ordinate via the submission of national plans every year which the Commission can then scrutinise and comment on.

[Lord Tunnicliffe]

I hope the Minister will forgive me, but I put a little bit of study into this. Article 103 of the Maastricht treaty—which may have been elaborated at Lisbon—states pretty bluntly:

“In order to ensure closer co-ordination of economic policies and sustained convergence of the economic performances of the Member States, the Council shall, on the basis of reports submitted by the Commission, monitor economic developments in each of the Member States and in the Community as well as the consistency of economic policies with the broad guidelines referred to in paragraph 2, and regularly carry out an overall assessment. For the purpose of this multilateral surveillance, Member States shall forward information to the Commission about important measures taken by them in the field of their economic policy and such other information as they deem necessary”.

I thought today that we were responding to that part of that treaty. I want to draw out the point that our being here this afternoon at this late hour is the fault of all Governments, not perhaps just one.

Tax Credits (Late Appeals) Order 2014

Debate between Lord Tunnicliffe and Lord Newby

Monday 17th March 2014 Grand Committee

[Lord Newby (LD)]

My Lords, I am pleased to introduce the Tax Credits (Late Appeals) Order 2014. It makes a small but important change to Section 38 of the Tax Credits Act 2002 to reinstate HMRC’s ability to accept late tax credit appeals. It inserts provisions to allow HMRC to treat a late appeal as made in time—that is, an appeal made outside the statutory 30-day time limit but within a further 12 months may be accepted in exceptional circumstances.

If a claimant disagrees with a decision made by HMRC—say, on a tax credit award—they can lodge an appeal within 30 days of the date of the decision. Since tax credits were introduced in 2003, it has been the policy intent that claimants can also lodge a late appeal in exceptional circumstances—for example, where a dependant died or they suffered a serious illness—within a period of 12 months after the normal 30-day time limit. Allowing late tax credit appeals where there is good reason to do so is consistent with the policy relating to the treatment of other appeals received by HMRC.

If there are no exceptional circumstances for lateness, HMRC will not accept the appeal. Instead, it will be passed to the tribunal, which will then make a decision as to whether to treat the appeal as made in time. This will be based on the tribunal’s wider view on whether it is fair and just to accept the appeal.

The defect that we are remedying today also carries across to the tribunal rules, meaning that tribunals cannot hear appeals made after the 30-day time limit either. The Tribunal Procedure Committee will similarly be remedying its rules to ensure that the legislation works as intended.

The defective legislation arose from changes made in 2009 to legislation applying to appeals in Great Britain in the light of the establishment of new courts and enforcement tribunals. HMRC and the MoJ introduced changes to their appeals legislation as a consequence of the transfer of the functions of the former special and general tax appeal commissioners to the First-tier Tribunal and Upper Tribunal tax chambers. An unintended consequence of the interaction of these legislative changes led to the legislation allowing HMRC to accept late appeals to lapse.

I should like to reassure the Committee about what has been happening since the lapse was discovered. We did not want claimants to be adversely affected by this lack of legal power, so HMRC has been accepting late appeals through its care and management powers, and judges are still deciding on a case-by-case basis. However, neither can do so indefinitely without this legislative remedy.

I should also explain that there is to be a change to the appeals process from 6 April this year. HMRC is introducing a new stage called mandatory reconsideration. When claimants dispute decisions, they will have to ask HMRC to conduct a mandatory reconsideration of the decisions before they can appeal, which they will then have to do directly to the tribunal. This is called direct lodgement. HMRC is introducing mandatory reconsideration to align the tax credits process to that already introduced by the DWP. As tax credits are to be replaced by universal credit over a period of time, it will help to provide consistency between the two departments around appeals. However, appeals to HMRC against decisions made prior to 6 April 2014 will be dealt with under the current flawed system.

This order remedies the flaw in the current legislation and legally reinstates HMRC’s power to accept late tax credit appeals. I commend the order to the Committee.

[Lord Tunnicliffe (Lab)]

My Lords, nobody could object to such a wholly rational and reasonable order. I shall just ask a couple of questions. When was the error discovered? I was going to go on and ask the Minister to set out the consequences of it, but I think that he said that there have been no consequences to individuals because the process rolled on and, in fact, the order merely legitimises the administrative process that is taking place. If so, that has obviously been handled in an intelligent way and my question as to when it was discovered is somewhat academic.

[Lord Newby]

Yes, my Lords, HMRC has been operating, as I said, under its care and management powers to accept late appeals as though there was no problem, as it were. The error was first discovered last May. There has been some discussion as to whether the change in the legislation was necessary, given that the whole system is changing from this April, but it was decided that it was, not least because late appeals in exceptional circumstances can be considered up to a year after the initial decision. So I can absolutely reassure the noble Lord that in the interim, since the problem was discovered, nobody has lost out. HMRC has been accepting late appeals through its care and management powers, and judges have still been deciding cases on that basis.

Guardian’s Allowance Up-rating Order 2014

Debate between Lord Tunnicliffe and Lord Newby

Monday 17th March 2014 Grand Committee

[Lord Newby (LD)]

My Lords, as I begin, it is a requirement that I confirm that the provision contained in the three orders and regulations before the Committee today is compatible with the European Convention on Human Rights, and I so confirm.

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

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

Alongside the broader steps that this Government are taking to support hard-working families with the costs of living, these regulations and orders make sure that support for the most vulnerable in the tax credit system is protected, even in the context of tough decisions elsewhere. The Government’s approach is helping to secure the recovery now and for the longer term. I commend these regulations and orders to the Committee.

[Lord Tunnicliffe (Lab)]

My Lords, I commend the Minister for not making the classic mini-Budget speech before introducing these orders, as has been done on previous anniversaries. I shall also put my mini-Budget speech to one side and save us all a great deal of time. The two orders reveal the difference between us on CPI and RPI and I will not rehearse that. The explanatory memorandum to the final instrument, the Tax Credits Up-rating Regulations 2014, says that they will go up 2.7%. I casually spoke to my computer about this and in Regulation 2, the amendment of the Child Tax Credit Regulations 2002, the figure of £5,735 goes up to £5,850. My computer says that this is 2%. The next figure, of £6,955, goes up to £7,105. Sheer curiosity demands that I ask why this is more like 2% than 2.7%. I am sure that there is a cunning answer.

[Lord Newby]

My Lords, I am sure that there is a cunning answer. I am equally sure that I do not know what it is, so I am afraid that I will have to write to the noble Lord with my cunning answer.

Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2014

Debate between Lord Tunnicliffe and Lord Newby

Monday 3rd March 2014 Grand Committee

[Lord Newby (LD)]

My Lords, I am pleased to introduce to the Committee the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations 2014 and the Social Security (Contributions) (Re-rating and National Insurance Funds Payments) Order 2014. As both the regulations and the order deal with national insurance contributions, it seems sensible that they should be debated together. As a matter of course, I can confirm that the provisions in the regulations and the order are compatible with the European Convention on Human Rights.

The changes to the NICs rates and thresholds covered by these two instruments were announced as part of the Chancellor’s Autumn Statement on 5 December last year. It is worth confirming from the start that the basis of indexation that has been used to calculate the changes covered by these two instruments is the same as that used since the 2012-13 tax year.

In the Budget 2011, we announced that from the 2012-13 tax year the basis for indexation of most NICs rates limits and thresholds would be the consumer prices index, the CPI, instead of the retail prices index, RPI, rate of inflation. This is because the Government believe that the CPI is the most appropriate measure of the general level of prices. The exceptions to this are the secondary threshold and the upper earnings and upper profits limits.

I will start with the Social Security (Contributions) (Limits and Thresholds) (Amendment) Regulations. These regulations are necessary to set the class 1 national insurance contributions lower earnings limit, primary and secondary thresholds and the upper earnings limit for the 2014-15 tax year. The class 1 lower earnings limit will be increased from £109 to £111 per week from 6 April 2014. The lower earnings limit is the level of earnings at which contributory benefit entitlement is secured. However, NICs do not need to be paid by the employee until earnings reach the primary threshold. The class 1 primary threshold will be increased from £149 per week to £153 per week from 6 April 2014. The secondary threshold is the point at which employers start to pay class 1 NICs. In line with the commitment in Budget 2011, this is being increased by RPI from £148 to £153 per week.

From this April, the income tax personal allowance for people born after 5 April 1948 will be increased above indexation by £560 from £9,440 to £10,000. The point at which higher rate tax is payable will be increased to £41,865 in the 2014-15 tax year. As I mentioned, the upper earnings limit is not subject to CPI indexation. This is to maintain the existing alignment of the upper earnings limit with the point at which higher rate tax is paid. The upper earnings limit will be increased from £797 to £805 per week from 6 April 2014. The regulations also set the prescribed equivalents of the primary and secondary thresholds for employees paid monthly or annually. There will be no changes to NIC rates in 2014-15. Employees will continue to pay 12% on earnings between the primary threshold and the upper earnings limit, and 2% on earnings above that. Employers will continue to pay contributions at 13.8% on all earnings above the secondary threshold.

I move on to the social security order. This order sets out the NICs rates and thresholds for the self-employed and those paying voluntary contributions as well as providing for a Treasury grant. The order raises the small earnings exception below which the self-employed may claim exemption from paying class 2 contributions. The exception will rise in April, from £5,725 to £5,885 a year. Many self-employed people choose to pay these contributions in order to protect their benefit entitlement even though they may claim exemption from paying class 2 contributions. The rate of class 2 contributions for the 2014-15 tax year will rise from £2.70 to £2.75 a week. The rate of voluntary class 3 contributions will also increase from £13.55 to £13.90 a week for the 2014-15 tax year.

Today’s order also sets the profit limits for class 4 contributions. The annual lower profits limit on which these contributions are due will increase from £7,755 to £7,956 in line with the increase to the class 1 primary threshold. At the other end of the scale, the annual upper profits limit will increase from £41,450 to £41,865 for the 2014-15 tax year. This is to maintain the alignment of the upper profits limit with the upper earnings limit for employees. The changes to the class 4 limits will ensure that the self-employed pay contributions at the main rate of 9% on a similar range of earnings as employees paying class 1 contributions at the main rate of 12%. Profits above the upper profits limit are subject to the additional rate of 2% in line with the 2% paid by employees on earnings above the upper earnings limit.

Finally, I need to ensure that the National Insurance Fund can maintain a prudent working balance throughout the coming year, which the Government Actuary recommends should be one-sixth or two months of benefit expenditure. The rerating order provides for a Treasury grant of 5% of benefit expenditure to be made available to the fund in the 2014-15 tax year. Similar provision will be made in respect of the Northern Ireland National Insurance Fund. I commend the regulations and order to the Committee.

[Lord Tunnicliffe (Lab)]

My Lords, I have studied the Explanatory Memorandum and these regulations with great care, and I have to confess that I am finding it very difficult to find any questions whatever to ask on them. The report of the general committee in the other place was equally bereft of any serious exchange. There were some technical questions asked but I will not repeat them, on the basis that I am sure that the Treasury machine would give precisely the same answers. There was an exchange on some thinking that we are developing about a different rate of benefit for people who have paid contributions over a number of years but that has to be developed further, to make sure that it is cost-neutral. The 5% that the Minister mentioned is, as I understand it, essentially a piece of book-keeping and does not represent any increase in overall public expenditure. I am not sure whether the Minister said that explicitly and I would value it if he were to confirm that but otherwise we have no comments to make on these regulations.

[Lord Newby]

My Lords, I can confirm that the provision of a 5% Treasury grant is indeed a piece of book-keeping and does not involve any additional expenditure.

Motion agreed.

Co-operative and Community Benefit Societies and Credit Unions (Investigations) Regulations 2014

Debate between Lord Tunnicliffe and Lord Newby

Monday 3rd March 2014 Grand Committee

[Lord Newby (LD)]

My Lords, I am pleased to introduce the Co-operative and Community Benefit Societies and Credit Unions (Investigations) Regulations 2014. With your permission, I will refer to them as the investigations regulations.

The current regulatory regime for co-operatives, community benefit societies and credit unions is in need of modernisation in order to deliver better outcomes for consumers and the sector in Great Britain, now and for the years to come. The Government are therefore taking forward a package of measures, following a public consultation last year. The investigations regulations are part of this package.

The other three measures in the package will increase the amount of withdrawable share capital an individual can invest in a society from £20,000 to £100,000; make insolvency rescue procedures available to industrial and provident societies; and simplify electronic registration for new societies.

These changes, alongside progressing the co-operative and community benefit societies consolidation Bill, demonstrate the Government’s commitment to promote mutual bodies and to foster diversity in the UK economy while preserving the unique features of the sector. There are around 7,600 societies and 380 credit unions registered in Great Britain. The sector continues to provide a popular and successful structure for mutually run businesses, with a growing membership of more than 15 million members in the UK.

Looking specifically at the investigations regulations, this statutory instrument gives the Financial Conduct Authority additional powers to investigate co-operatives, community benefit societies and credit unions where circumstances suggest their behaviour may be improper or unlawful. The FCA initially requested these changes to legislation to enhance its powers to investigate societies. The proposal was included in the Government’s July 2013 public consultation, Industrial and Provident Societies: Growth through Co-operation, and was well received by respondents from industrial trade bodies, individual societies, credit unions and consumer groups.

The investigations regulations aim to increase confidence in co-operatives, community benefit societies and credit unions by creating a level playing field with the requirements that companies face. Therefore, the additional powers for the FCA are in line with the current powers in the Companies Act 1985, appropriately modified for societies. The investigations regulations include a number of new powers, including the requirement for the FCA to appoint an inspector if a court instructs it to do so. They also give the FCA power to appoint an inspector to investigate the affairs of a society. The power is available in the same circumstances as for companies, for example where it appears to the FCA that the society’s business may have been conducted with an intention to defraud creditors or for unlawful purposes.

Other powers concern the expenses of an investigation and state that these would be payable in the first instance by the FCA, which would then have the power to recover them from the society investigated. The total cost of an investigation is expected to be no more than £100,000, since co-operatives, community benefit societies and credit unions are relatively simple business models compared with large companies, where much higher costs may be involved.

In practice, the FCA’s first intention would be to recover the costs of an investigation from the periodic fees paid by all societies; as a last resort the FCA may consider using its central budget before passing on any costs to a society. It is also worth noting that the FCA estimates, based on past experience, that it would only need to use the powers to investigate up to one society a year.

The measure also gives the FCA, or an authorised investigator, power to give directions to a society to produce documents and provide information. This is similar to the FCA’s existing powers but, in addition, the investigations regulations give the FCA or an authorised person the power to apply to a magistrate for a warrant of entry to premises of a society on the same grounds as those relating to companies.

These regulations will help to improve the legislation for co-operatives, community benefit societies and credit unions by bringing it more into line with that for companies and giving members of these societies confidence that the regulator has adequate powers to act to investigate those societies suspected of wrongdoing. This will benefit the co-operatives sector as a whole by giving more confidence in the legal form, and it has been welcomed by the main trade body, Co-operatives UK. I commend the regulations to the Committee.

[Lord Tunnicliffe (Lab)]

My Lords, these regulations seem to be universally welcomed and they are certainly welcomed from these Benches. I studied the Explanatory Memorandum with some care and looked at the general Committee debate in another place. The only point that my eyes alighted upon was the powers mentioned in paragraph 7.4 of the Explanatory Memorandum. The other powers concern the expenses of the investigation. These will be payable in the first instance by the FCA but will be recovered from the society being investigated, which rather implies that they go through the FCA as a transaction. I note the response that the Financial Secretary to the Treasury made in another place, using more or less the same words that the Minister has used—that it would be unusual for such a charge to be passed through to the society being investigated. However, I would welcome an assurance that where the investigation reveals no malpractice, there will certainly be no passing through of the charge to the society concerned. With that, I am entirely content with the regulations and fully support them.

[Lord Newby]

My Lords, in respect of the noble Lord’s question, the FCA has the option of either recouping its costs directly from the society in question or funding the costs from within its own overall budget. In the case of a society being felt to have committed no wrongdoing, the FCA may well decide that it is more appropriate to adopt the latter option. However, the decision will be for the FCA. I hope that that answers the noble Lord’s question.

Financial Services and Markets Act 2000 (Consumer Credit) (Designated Activities) Order 2014

Debate between Lord Tunnicliffe and Lord Newby

Monday 10th February 2014 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I welcome these two orders. It is the duty of Her Majesty’s Opposition to study secondary legislation and then to oppose it where we find errors and faults, but I have to say that I have not been as successful as the noble Lord, Lord Sharkey, in finding questions to pose to the Minister, so at least my words will give him a little time to collect together his notes on those technical areas. While we welcome the orders, my honourable friend in another place did ask one or two questions which seemed to be answered satisfactorily. As far as I can tell, the orders do their job. With the permission of the Committee, I should like in a sense to celebrate these orders because they represent the last hurdles of effecting the transfer of responsibilities for consumer credit from the OFT to the FCA. Over the past many months, we have all been concerned about the consumer credit market, in particular its grey areas and payday lending.

I, too, have studied all 49 pages of the impact assessment, although I did not find the same inconsistencies as the noble Lord. I did pick up an implication that the resources to be devoted to the area seem to be tripling from around £10 million per annum to £30 million, and I would be grateful if the Minister could confirm the extent to which new resources are being made available for this new activity. What does this represent in terms of resources and people at the FCA devoted to the consumer credit market? Will it involve the transfer of people from the OFT? Will it involve new and perhaps more capable people working in this market? Will there be a change in attitude and culture on the part of those working in this area?

As has been pointed out, there are some detailed areas, but the really serious evil here is the loan sharks, the rogue lenders and the payday loans market. That market is pretty worrying at every level, from the one-person operator through to major organisations. It involves probably some of the most vulnerable consumers in the land, who are people making decisions in very difficult and stressful circumstances. If ever a market needed intelligent, proactive government regulation, it is this one, and I hope that what the Government have designed will do it.

I would be grateful if the Minister could say a few words about how the regulators will be more proactive. The documentation makes the point that the FCA can be forward-looking and create regulations quickly. I would be grateful if the Minister could expand on that and give me some reassurance—in response to a point made by a colleague—that the new unit will be able to strangle products at birth; in other words, will be sufficiently proactive to sweep the market for the emergence of new products and move quickly to kill them before they do the social harm that we know they can do.

One of the aspirations of these changes is to bring rogue firms under control, which I think we all welcome. The problem is that it might increase opportunities for illegal operations. I feel as though I am in a pantomime now and saying, “Look behind you”, because notes are at the Minister’s right hand. To what extent will the unit work with the police where it sees the early emergence of illegal operations and stamp them out before they can create the evil which we know happens in communities under stress?

[Lord Newby]

I am grateful to both noble Lords who have spoken. Even by the standards of statutory instruments, these are extremely opaque, but the powers they contain are important and, as the noble Lord, Lord Tunnicliffe, said, tidy up and, one hopes, finalise the secondary legislation that is needed to effect their transfer.

The noble Lord, Lord Sharkey, asked a number of questions about the extent to which SMEs could be adversely affected by the regulations. While there may be some impact on lending to SMEs by some non-bank lenders, we would expect it to be extremely small. The stock of lending to business that is consumer credit is estimated to be, at most, 5% of total lending to SMEs. If we are talking about a small proportion of that 5% disappearing, it is a very small impact. We believe that the Government’s wider initiatives, such as the Funding for Lending scheme, will over time far outweigh the negative impact of the transfer. It is worth bearing in mind that SMEs, like any other consumers, can enter into credit agreements that may drive them into unsustainable levels of debt. The enhanced consumer protection that we hope and expect will flow from this transfer will benefit SME debtors.

Co-operative and Community Benefit Societies Bill [HL]

Debate between Lord Tunnicliffe and Lord Newby

Monday 13th January 2014 Lords Chamber

[Lord Newby (LD)]

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

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

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

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

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

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

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

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

and that this is,

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

This is a useful and overdue Bill.

[Lord Tunnicliffe (Lab)]

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

[Lord Newby]

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

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

--- Later in debate ---

[Lord Tunnicliffe]

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

[Lord Newby]

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

[Lord Tunnicliffe]

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

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

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

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

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

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

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

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

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

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

Pensions

Debate between Lord Tunnicliffe and Lord Newby

Thursday 12th December 2013 Lords Chamber

[Lord Newby]

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

[Lord Tunnicliffe (Lab)]

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

“The chances of mass consumer detriment”—

I emphasise, mass consumer detriment—

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

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

[Lord Newby]

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

Financial Services (Banking Reform) Bill

Debate between Lord Tunnicliffe and Lord Newby

Wednesday 24th July 2013 Lords Chamber

[Lord Newby]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[Lord Tunnicliffe]

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

[Lord Newby]

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

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

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

Banking: Regulation

Debate between Lord Tunnicliffe and Lord Newby

Thursday 11th July 2013 Lords Chamber

[Lord Newby]

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

[Lord Tunnicliffe]

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

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

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

[Lord Newby]

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

Taxation: Tax Collection

Debate between Lord Tunnicliffe and Lord Newby

Thursday 4th July 2013 Lords Chamber

[Lord Newby]

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

[Lord Tunnicliffe]

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

[Lord Newby]

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

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

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

Cash Ratio Deposits (Value Bands and Ratios) Order 2013

Debate between Lord Tunnicliffe and Lord Newby

Monday 20th May 2013 Grand Committee

[Lord Tunnicliffe]

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

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

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

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

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

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

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

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

[Lord Newby]

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

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

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

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

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

Collective Investment in Transferable Securities (Contractual Scheme) Regulations 2013

Debate between Lord Tunnicliffe and Lord Newby

Monday 20th May 2013 Grand Committee

[Lord Newby]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[Lord Tunnicliffe]

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

[Lord Newby]

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

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

Financial Restrictions (Iran) Order 2012

Debate between Lord Tunnicliffe and Lord Newby

Tuesday 11th December 2012 Grand Committee

[Lord Newby]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[Lord Tunnicliffe]

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

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

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

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

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

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

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

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[Lord Newby]

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

[Lord Tunnicliffe]

It is on the internet.

Banking: Offshore Accounts

Debate between Lord Tunnicliffe and Lord Newby

Tuesday 20th November 2012 Lords Chamber

[Lord Newby]

This is why we need increased international co-operation and why the G20 initiative is so important. Obviously if people can just shift off all their revenues to a low tax jurisdiction, some companies are going to do so. We are working very hard with our international partners on this because we have a common interest in making sure that these companies pay a fair share of tax.

[Lord Tunnicliffe]

My Lords, the Minister mentioned £19 billion that is tied up in Jersey related to UK citizens—a very precise figure. Does this mean that there is sufficient transparency, and that we have a sufficient viewing, of what is happening in Jersey? Do we have sufficient HMRC resources addressing that? And if the answer to both of those is yes, does he have a feel for the amount of money that the UK Exchequer could expect out of these people if we were better able to get hold of that money through agreement?

[Lord Newby]

My Lords, in terms of resources, the Government have committed an extra £917 million over the current period to combat tax avoidance and evasion. That money is now being redirected with HMRC. It has led already to several convictions involving overseas tax evasion. The fact that £19 billion of funds is held by UK citizens in Jersey does not mean that £19 billion is improperly held in Jersey. A very large proportion of that money is there perfectly properly. We have to understand that simply because you have a bank account in Jersey does not of itself mean that you are a crook.

Financial Services Bill

Debate between Lord Tunnicliffe and Lord Newby

Monday 12th November 2012 Lords Chamber

[Lord Tunnicliffe]

It is not often that I rise to offer sympathy to the Minister. He was quite right to say that the generality of this amendment, which in my recollection came from all sides of the House, particularly from these Benches, was stressed by us in another place. Every now and then, one has to look at a massive Bill such as this and recognise that the final test of all legislation is that it contributes to the general good. I think that the two lines of this growth amendment produce the right reminder to the regulators that they have to contribute to the general good—I share the emphasis placed by the noble Baroness, Lady Kramer, on the medium and long term—and I warmly welcome it.

[Lord Newby]

I am grateful for the contributions from all noble Lords who have spoken. I do not want to go into a lengthy response at this time of the evening, but not because I do not feel that we know the answers to the questions. I shall deal with a couple of specific points that were made. My noble friend Lord Hodgson asked in particular about crowd sourcing. To a certain extent, my noble friend Lady Kramer dealt with that. Government Amendment 26, which we debated earlier this evening, goes some way to recognise the validity of crowd sourcing. As my noble friend Lord Hodgson will know, there is already one fully authorised, equity-based crowd-funding platform operating here and growing. We will continue to consider how we can help this and other platforms grow. It is all part of increasing diversity of funding, which we strongly support.

My noble friend Lady Noakes asked whether this amendment relates to the financial services sector as it relates to the rest of the economy and whether the Government accept that sustainable growth in the financial services sector is desirable. We agree that it is crucial. The financial services sector plays a major part in the UK economy, not just in helping the rest of the UK economy to grow, but in its own right. It is a very significant source of export earnings. The whole of the Bill is designed to provide regulatory underpinning that will mean that the financial services sector is safe and secure and can grow in the medium and long term. I hope that with those comments the House will feel able to support the amendment.

--- Later in debate ---

[Lord Newby]

The government amendments in this group make a change to the way that with-profits policies will be regulated under the new framework. We had a very useful debate on this subject in Committee. As my noble friend Lord Sassoon stated at the time, with-profits policies give rise to a particular risk of unfairness because the benefits that policyholders receive are largely at the discretion of the firm. The tensions between the firm treating current and future policyholders fairly, and maintaining safety and soundness, are especially acute. It is therefore difficult to separate the prudential and conduct issues in the regulation of “with-profits”, much more so than in any other type of financial services business. The Government’s main objective, therefore, is to ensure that there is clarity in decision-making in this area. The approach that was originally envisaged in the Bill was that this clarity would be delivered by giving the PRA sole responsibility for ensuring an appropriate degree of protection for policyholders in relation to the making of discretionary payments.

The noble Baroness, Lady Drake, raised a number of concerns including the possibility that excluding the FCA from decision-making would lead to consumer detriment, as the prudentially focused culture of the PRA may lead it to pay insufficient attention to the fairness element of policyholder protection. The Government have now given further consideration to this, and on balance we agree that this is an area where the Bill could be improved. We have therefore brought forward amendments that will ensure that both the FCA and the PRA have a responsibility in relation to the regulation of with-profits, rather than giving sole responsibility to the PRA. This will mean that the FCA has a full role in consumer protection, as it does in other firms. The PRA and FCA will have to put in place an MoU setting out their respective responsibilities in this area.

However, to preserve the sense that there should be a final decision-maker, the PRA will be given the power to require the FCA to refrain from actions that conflict with its general or insurance objectives, for example if it considers the FCA action could harm the safety and soundness of a particular with-profits insurer or with-profits insurers generally. To ensure scrutiny and accountability, any such veto must be published unless the PRA considers it is against the public interest to do so. The Government’s view is that this approach strikes the right balance between giving the FCA a much stronger mandate, and preserving clarity of decision-making and responsibility in this exceptionally complicated area. I hope that the amendment meets the noble Baroness’s concerns, and I beg to move.

[Lord Tunnicliffe]

My Lords, I thank the Government for bringing forward this group of amendments, which meets the concerns raised by the noble Baroness, Lady Drake. I particularly thank the Minister for mentioning her in his speech. She regrets that she cannot be here, but I am sure she will feel her efforts were worthwhile by resulting in this group of amendments.

Financial Services Bill

Debate between Lord Tunnicliffe and Lord Newby

Wednesday 17th October 2012 Lords Chamber

[Lord Newby]

My Lords, amendments to probe the role of the FPC in triggering a public funds notification under Clause 54 were also laid in Committee in the other place. They were inaccurate then and they remain inaccurate now, primarily because these amendments would have no legal effect. The FPC does not have any powers under Parts 1 to 3 of the Banking Act 2009. So in referring to the powers of the FPC under those provisions, the amendment refers to powers that simply do not exist.

The thrust of the noble Lord’s amendment is that the FPC should be able to give notification of risks to public funds separately from the Bank itself. As we have explained previously, the new system that the Government are putting in place is based on making the Bank a single point of accountability for financial stability. Consistent with this, we are making the Bank, and the Bank alone, responsible for notifying the Chancellor of risks to public funds. This is because, as we have seen so strikingly with the tripartite system, the risk of splitting responsibilities over various institutions is that each one thinks that one of the others is responsible, or blames another, when things go wrong, thereby allowing serious risks to fall through the gaps. This will require the Bank and its senior management team to identify and evaluate risks emanating from all parts of the financial sector, working closely with the PRA, the FCA and the FPC.

However, the statutory responsibility for formally notifying the Chancellor must be clear and unequivocal. It is not that the FPC is going to be separate somehow from the Bank and, given that the governor in his new enhanced role is going to chair the FPC, if the governor, representing the Bank, goes to speak to the Chancellor under the terms of Clause 54 he, of necessity, will also be representing the views of the FPC.

We therefore think that the amendment is unnecessary and inappropriate, and ask the noble Lord to withdraw it.

[Lord Tunnicliffe]

My Lords, the essence of this situation was caught in the last part of the noble Lord’s response. If the governor goes to see the Chancellor and, say, does not represent the FPC’s view, that would to some extent be unthinkable. However, our concern is if he does not go to see the Chancellor—that he listens to the debate at the FPC and may find himself in a minority, but still concludes that he has no responsibility to share FPC’s doubt with the Chancellor. We are not talking about competing roles where it is not clear who is responsible. We are not in any way challenging the split of responsibilities set out in the Bill. We accept that the Bank has the executive responsibility to take action in a crisis. We accept that there need to be rules about where the Chancellor comes in and has executive responsibility.

This is not about who is responsible, other than the points raised by the noble Baroness, Lady Noakes, earlier in the debate, where we may think the line has to be moved about a bit on direction. We are not, broadly speaking, challenging the thrust of the Bill and the division; we are challenging the idea that only the Governor of the Bank of England can advise the Chancellor that there is a gathering crisis that may involve the use of public funds. We believe that it is safer to have more bodies involved in that situation and we particularly believe the best qualified body in the land should have a duty to consider whether there is a crisis situation developing and should have a right, if it considers that to be true, to advise the Chancellor.

I can see that I am not persuading the noble Lord but nevertheless the point is important and valid. We may come back to it on Report but in the mean time I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Newby]

My Lords, we have stated many times during this debate that the Government place great importance on effective co-ordination between the relevant authorities. We accept that this will be particularly important with regard to crisis management. That is why the Bill places a legal duty on the Treasury, the Bank and the PRA to co-ordinate their functions, and requires that they prepare a memorandum of understanding setting out how they intend to co-ordinate in a crisis management situation.

Obviously in such a situation the Treasury, Bank and PRA will need to be in regular contact. These events are often by their nature fast-moving or take place outside office hours. The protocols in place for ensuring co-ordination need to be flexible to accommodate this uncertainty. A committee is not necessarily the most appropriate way to deal with every crisis. For example, setting up a formal committee for a crisis event that lasts the duration of a weekend would be overly bureaucratic and cumbersome if the event required a particularly swift and flexible response.

These crises require that. They require frequent and immediate contact between Ministers and senior officials at the Treasury and senior executives at the Bank of England. Each financial crisis situation is different, and sometimes the circumstances will mean that a formal committee process would not be appropriate. If you look at three events which have either been, or had the potential to trigger, a financial crisis, without going into the details you can see how greatly they differ. There was for example BCCI, which was referred to earlier. There were the concerns in the immediate aftermath of the 7/7 bombings. There was the RBS crisis. These happened at different times of the day and at different points in the week. Some were put to one side relatively quickly while others have had long-term consequences. In those circumstances, it is difficult to imagine how you could set out in a memorandum of understanding either how a committee might be formed—we do not think that you always need one—or, if one is formed, how it will be convened and would function.

The memorandum of understanding is currently 39 paragraphs long. I do not know whether, when the noble Lord, Lord Tunnicliffe, was doing his training on the plane or when he was at London Underground, they had instruction manuals and crisis manuals. From working in humble PR, I recall that crisis management plans there ran to page after page. An MoU would not be the right place for these plans. This is not to say that the authorities do not plan. I can reassure the noble Lord that the authorities now have regular war games to prepare for a range of financial crises and participate in a range of cross-governmental operational crisis war games. This is to try to make sure that when a crisis explodes its participants have some preparedness for how they can respond.

That is different from saying that you need a committee in every case, even though we have said in the memorandum that in some cases you might. Certainly it is different from saying that in a memorandum of this scope and length you could set out how a committee could be convened and function. I hope that the noble Lord will be reassured that officials are spending quite a lot of time in crisis management planning and that that is the appropriate way of making sure that we are ready to deal with a crisis, rather than having the formal structure that his amendment would require.

[Lord Tunnicliffe]

My Lords, I thank the noble Lord for his response. I am reassured to a degree about the issues. We are not likely to press this further. The Committee might be reassured if he could flesh out some stronger sense of the preparedness and if he could write us a note that sets out the levels at which people are involved. I am not asking him to make a commitment now. He does not have to do anything as dangerous as that.

The thoughtfulness that has gone into the pre-crisis preparation is crucial. So many organisations fail to do it properly. British Petroleum successfully wrote off something like a quarter of its value through not having an adequate level of preparedness. In the defence sphere, for instance, the committee systems within government for national security and so on are documented as part of the strategic defence plan. Anything the Minister can do to add to our understanding of the depth and height of this preparedness and who is involved would be reassuring. With that request, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Tunnicliffe]

My Lords, the MoU is an important document. We believe that it is incomplete. Earlier, we suggested that it should have some additions relating to what I will call, more generally, emergency preparedness, if only to acknowledge that there should be an acknowledgement that there is a duty to do that. There is a real question mark over whether the commitment to explain material extent is fulfilled in Clause 61(2)(a). I have read the memorandum with care and I do not see in which paragraph that commitment is discharged. I should be grateful if the noble Lord could bring that out in his response. I see curiosity spreading across the faces of the Government.

[Lord Newby]

For clarification, will the noble Lord repeat which duty he is referring to?

[Lord Tunnicliffe]

Clause 61 is entitled “Memorandum of understanding: crisis management”. Clause 61(2) states:

“The memorandum must, in particular, make provision about—

(a) what the Treasury and the Bank regard as a material risk for the purposes of section 54(1)”.

We have had quite a debate about material risk but I cannot see which paragraphs of the memorandum address that duty. I should be grateful if the Government would flesh that out. I do not want to cause the Government undue problems. We would be very happy to see a letter setting that out, although a response now would be delightful. The memorandum is important. It will change because, in my view, it already has question marks over it as it stands, but also because the world will change and, as the world changes, the Government, the Bank and the Treasury will want to change the memorandum. It is crucial that Parliament is involved in such an important document.

This MoU deserves to be a formal document and it deserves to be approved by both Houses. The amendment is a standard amendment such as we find in these situations. It requires an affirmative resolution, first, to register the document and, secondly, to allow for when it might change. I cannot see why it is being resisted. The concept of an MoU is entirely sound but the document, frankly, should be more formal than it is at the moment. Its alteration in the future should be by affirmative resolution of both Houses. I beg to move.

[Lord Newby]

My Lords, I shall start by answering the noble Lord’s question as to where in the memorandum of understanding the question of material risk appears and where it is defined. The principal paragraphs dealing with this matter are paragraphs 8 to 18, but paragraphs 13 to 16 set out the matters that the Bank should take into account in determining the material risk.

The Bill does not actually say that the memorandum of understanding has to define material risk. It says that it must,

“make provision about … what the Treasury and the Bank regard as a material risk”,

which is a slightly different requirement. The paragraphs in the memorandum of understanding to which I have just referred do exactly what the Bill requires the Treasury to do.

[Lord Tunnicliffe]

Forgive me—the noble Lord was going faster than my brain. Will he repeat the paragraph numbers that cover the point?

[Lord Newby]

The whole section is headed “Notification by the Bank of a risk to public funds” and it runs from paragraph 8 to 18. It explains the background and sets out, particularly in paragraphs 13 to 16, the matters that the Bank needs to take into account in determining whether the material risk test is met.

The amendment would transform the MoU into a statutory instrument. In our view, that would severely limit the usefulness of the MoU as secondary legislation is, like primary legislation, extremely prescriptive. It sets out what must and must not be done and confers powers that have legal effect. Although we agree that clear responsibilities are important for effective crisis management, we believe that the Bill sets out the framework for this extremely clearly and the MoU then fleshes that out. That is the role of an MoU. It goes beyond what must, in all cases, be done or not done. It allows the authorities to set out what is likely to happen in given situations and why that is the case and provides an insight into the aims of the authorities involved. We do not believe that it would be possible for the MoU to fulfil this purpose effectively if it were required to be in the form of secondary legislation. That is because it is difficult to impose clear legal constraints on how a crisis is managed because of the wide variety of situations that could be considered as a crisis, each requiring bespoke handling that suits the characteristics of that particular event. Earlier I talked about the different kinds of financial crises we have had in recent years which I think exemplify that point.

It is our view that the MoU should be a living, responsive document, able to change as is needed. Requiring that it should be a piece of secondary legislation would severely curtail the authorities’ ability to change the MoU as circumstances change. As things stand, the MoU can be changed within a matter of days. That requires no huge amount of legal input because it is a working document about how to handle a crisis. That is very different from dealing with a statutory instrument which goes through a different formal process. It would be difficult to deal with a statutory instrument when the House is not sitting and that would be inappropriate.

The Bill already provides for the MoU to be laid before Parliament. It will then be open to scrutiny. The Treasury Select Committee will be able to scrutinise it, as will the Economic Affairs Committee in this House if it decides to do so. In my view, that is the best way to get parliamentary input rather than through an overprescriptive and inappropriate statutory instrument. In view of those arguments, I hope that the noble Lord will withdraw his amendment.

[Lord Tunnicliffe]

My Lords, my experience is that statutory instruments do not have to be that inflexible. Statutory instruments that have to have early effect can be laid and come into effect immediately, if that is appropriate. However, they do require formal scrutiny by Parliament. I have not won many points today and I am not going to win this one. I beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Tunnicliffe and Lord Newby

Monday 15th October 2012 Lords Chamber

[Lord Tunnicliffe]

As a great admirer of the US, I would never underestimate its ingenuity but I did not realise that that had been a principal objective. I thank the noble Lord for my improved education. Returning to my speech, the failure in RBS in particular was once again an internal management problem. The refreshingly honest report of the FSA brings that out but it goes on to criticise its own performance as a regulator. It criticises various ways in which it behaved and its allocation of resources but it also criticises the information that it was able to get during the crisis. That was because firms were unable to provide information that was sufficiently accurate, comprehensible and timely.

The Joint Committee on this Bill took a considerable interest in the whole matter of information and pointed out that in the US the,

“Dodd-Frank Act created the Office for Financial Research which was given responsibility for monitoring of systemic financial risks and, in order to undertake this task, has been given powers for the setting of data standards for the industry. In order to allow effective monitoring of systemic financial risk, the Dodd-Frank Act also requires that OTC derivative contracts are recorded in trade repositories, a step that requires standardisation of reporting across the industry”.

The recommendation from the Joint Committee, which the Government effectively rejected, was:

“The Bill should be amended to place a duty on the Bank of England (or its subsidiary the PRA) to develop information standards for the UK financial services industry and to report regularly on progress in improving these information standards in order to support financial stability”.

This amendment does its best to give effect to that recommendation.

In researching the background to this amendment, I looked over a number of areas but perhaps the most inspirational thing I came across was a speech by Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Securities Industry and Financial Markets Association, “Building a Global Legal Entity Identifier Framework” symposium in New York on 14 March. That is a long introduction but it was called simply “Towards a common financial language”. He contended that a common financial language would improve risk management in firms because of better flows and understanding of information; improve risk management across firms; map the network of financial transactions; and, shock-horror, lower barriers to entry. He pointed out that the information standards and information systems within the industry are probably 10 or 20 years behind those in other industries, and particularly the major distribution industries.

We put forward this amendment and it will no doubt be countered by the noble Lord saying, “Well, they can do this anyway”. We are trying to say something different. We are trying to say that this is not just an enabler but a doer. It is a requirement not just that the PRA has the ability to take a positive role in the matter of information and information standards, but requires it to take a role. It is quite long so I will not go through it in any detail but it requires the PRA to require firms to report; it requires them to set standards in the manner in which they report; it requires that they should have sufficient resources to be able to use that information; and it requires them to publish reports.

The Bill has a purpose. It is about institutions, it is about governance and it is about enabling. The amendment is designed to give it some teeth. It is designed to make a requirement in the Bill. This is a “must” amendment, not a “may” amendment. I beg to move.

[Lord Newby]

My Lords, as the noble Lord has explained, Amendment 187TE would require the PRA to collect and publish financial transaction data, and require it to maintain the necessary resources to collect and review data from firms. In doing so, it mirrors exactly the provisions of the Dodd-Frank Act and in particular the provision in that Act for the powers within the Office of Financial Research.

We do not think that such a power is necessary because the regulators here have their own powers to gather information, including all the information referred to in the amendment. Indeed in some cases the FSA already requires firms to hold information in particular ways; for example, through rules requiring firms to be able to present a single customer view. The fact that there is now the concept and the practice of a single customer view shows how the system has been able to develop in the light of the stresses and strains that it has found itself under in recent years. Firms already report transaction data and will continue to do so. Specifically mandating the regulator to develop data standards and to publish collected data, as the noble Lord suggests, is not in our view the answer. The legislation will set the regulators clear and deliverable objectives and the regulators already have powers that could be used to require them to hold their data in specific formats if they judge that to be an appropriate and proportionate way of meeting their objectives.

If the FPC requires particular information in a particular format, whether about counterparty exposures or about anything else, this will be provided by the PRA. If for some reason the PRA is not providing the necessary information, the bank has a backstop power to direct the PRA to gather it and provide it. There is a belt-and-braces provision in the Bill.

The regulators will require a whole range of information from firms. It would not be possible or desirable to specify them all in legislation. The legislation gives clear and deliverable objectives and it is up to the regulators to maintain sufficient resources and to gather sufficient information to meet those objectives. They will be held to account for doing so. With that explanation, I hope that the noble Lord will feel able to withdraw his amendment.

[Lord Tunnicliffe]

My Lords, I have received an unsurprising response. The essence of it is that those powers exist anyway. Perhaps the noble Lord can help me—I am not asking him to do so now—by writing to me setting out where these powers are in the new Bill. I have followed up the invitation of the Treasury and downloaded its very helpful Bill as amended. When you download it, you are told that it is 624 pages long and, therefore, it is not entirely easy to find things. I would be very grateful if I could be told where in FiSMA, as revised, these powers are and which of those powers is new because of the Bill. If there are not new powers because of the Bill, we have had regulators with these powers for a considerable time and as far as I can see we do not have the level of standardisation of data, the matching priority or the counterparty exposure. We do not have anything like the ability to see into the systems that the new American provisions envisage. It is incumbent on us in this country, with our dependence on this important industry and the fact that the real economy depends on it as well, to have provisions which are not only wide in theoretical terms but provide actual knowledge of what is being done to make this industry safer, particularly as regards what this Bill does about making the industry safer. If the noble Lord leaps up now and reads his piece of paper I would not mind.

[Lord Newby]

Section 165 of FiSMA enables the regulators to require information or documents which may reasonably be required in connection with the discharge of their functions. Section 165A enables the regulators to gather information from certain categories of unregulated firms for financial stability purposes. Section 166 enables the regulators to appoint a skilled person to provide a report into any relevant matter that the authority may specify. The regulators can also make rules requiring firms to hold their data in specific formats, if the regulators judge that to be an appropriate and proportionate way of meeting their objectives. As I have already said, the FSA did so when it introduced the single customer view requirements.

In terms of the system as a whole and what is new about the Bill as regards ensuring that the regulators get the information that they require in order to prevent some of the problems that we have seen in recent years, the whole purpose of the Bill is to put in place an architecture that enables a clearer focus by splitting the regulators into two halves so that they will concentrate on those parts of the industry for which they have now been given specific responsibility. I am sure that having those powers in the legislation, coupled with a new, more laser-like focus on ensuring that the system is safe and secure, will ensure that the concerns of the noble Lord about the information that is collected are not realised.

[Lord Tunnicliffe]

My Lords, I do not want this to go on, but there is a world of difference between having powers and knowing what people are doing with them. It is absolutely clear where the Americans are coming from; they want something done and they want something changed. I can now try to find these quotes in FiSMA and see how they impact but really I want to know what the regulators are doing. We are not opposing the Bill in general, certainly not in this House, and we wish the Government luck in its implementation, but at the end of the day it only moves people about and has a lot of interconnecting clauses. It does not specifically mandate a requirement to improve the quality of information. Any reasonable observer of the recent crisis has to say that one of the key issues in that crisis was the quality of information moving around within firms, between firms, and between firms and the regulator. The Government have to make a persuasive case that they are doing something about this deficit. Having said all that, I beg leave to withdraw the amendment.

Financial Services Bill

Debate between Lord Tunnicliffe and Lord Newby

Monday 8th October 2012 Lords Chamber

[Lord Tunnicliffe]

My Lords, we are very happy, in a sense, to accept the blanket assurance that these amendments are minor and technical and we will not probe them in any detail. However, we are going to have a host of government amendments to the Bill, as was discussed earlier. We did, on this first day back, request a written explanation of this group of amendments so that we could study them at our leisure before the Committee met. Unfortunately, there has been no response to that request. It is important that the Government get into the habit of extremely comprehensive supporting documentation for their amendments. Therefore, I will study with care what the noble Lord has said and make sure that I can be comfortable that they are minor and technical, but it would have been much better if we had had a response to our request. I would value an assurance from the noble Lord that, as these amendments come along over the rest of the Bill—we will all try to work together to ensure the success of debates about new government amendments—the Government will facilitate those debates by providing proper documentary support.

[Lord Newby]

I hope I can give the noble Lord two assurances. First, I can assure him that the amendments are indeed technical and have no policy substance attached to them. I also assure him that, wherever possible, we will make available adequate written information about government amendments in good time so that people can look at them and ensure they are what they say on the tin.

Open-Ended Investment Companies (Amendment) Regulations 2011

Debate between Lord Tunnicliffe and Lord Newby

Monday 12th December 2011 Grand Committee

[Lord Newby]

My Lords, this is a fascinating example of the industry asking for regulation that the FSA seems to have been slow to introduce. This is an almost unique experience for the sector, which is normally grumbling that there is too much regulation.

I am intrigued that it is being introduced here purely under domestic legislation rather than within the ambit of any EU cover, and I wonder whether there is any prospect of OEICs, in this regard, being the subject of any of the many EU directives that are currently on their way down the track or being discussed. I note that, at the moment, the jurisdictions that already have this additional regulation are a mixed bag and include Jersey, Ireland and Luxembourg. I find it slightly surprising that it has taken some time for both the UK industry and the Government to get round to implementing this legislation, given that its benefit is that it will improve the competitive position of OEICs in the UK. It seems extremely sensible. I want to confirm what I think the Minister said: that there is no suggestion that this is being introduced because there has been any difficulty with any existing OEICs. Is it purely as a pro-competitive rather than as an anti-competitive measure?

[Lord Tunnicliffe]

My Lords, I make it clear from the outset that we support this order. I am looking forward to the Minister’s answer to the noble Lord’s questions about how the regulations fit in with the EU—questions which are particularly apposite at this moment. I will content myself with a few comments on the impact assessment and two or three questions.

The impact assessment is absolutely fascinating. From my reading of it—and I am happy to be corrected here—the net benefit of the regulations will be between £18 million and £360 million, which is a pretty wide range that will involve lots of sums to prove that. The only point that I feel I can take from the impact assessment is that, in all credible scenarios, the introduction of a protected cell regime will be favourable, and I think that we can all be satisfied with that.

I have just a few questions. First, new Regulation 11A(4) provides for an exception, which is referred to in the Explanatory Note. However, for myself I cannot quite see what sorts of transactions or assets the exception refers to. Like all exceptions, one is always slightly worried that the exception ends up negating the intent of the order. I am sure that it does not, but I pose that question for assurance.

Secondly, as I understand it—once again, I could be wrong—there will be a period in which PCR products and non-PCR products will be on sale at the same time. I may have misunderstood that, but if I am right in that assumption, what actions are the Government taking to ensure that there is no confusion in the marketplace during that period of overlap? I will be happy if there is no period of overlap, but if there is one then it is important that we do not introduce confusion through these very sensible regulations.

Finally, I like reading impact assessments, which is a little burden that I have to carry. The wonderful thing about impact assessments is that I always sense that they are written by rather more junior people— I was going to say with rather less care, but care is perhaps the wrong term—as you get that little hint from things. On page 10, the impact assessment states:

“The UK fund regime has been viewed as less favourable by managers and investors for a number of reasons, with the lack of a PCR being one of them”.

Perhaps the Minister could enlighten us as to what other reasons exist and what, if anything, he is doing about them.

Financial Restrictions (Iran) Order 2011

Debate between Lord Tunnicliffe and Lord Newby

Monday 12th December 2011 Grand Committee

[Lord Newby]

My Lords, I thank the Minister for the clear introduction that he has given to this measure which seems, broadly speaking, to be proportionate. I have just one question. To what extent will Iranian banks be able to continue doing business here direct with companies as opposed to with UK financial sector bodies? I think that the Minister said that they will be able do that. If so, have the Government given any consideration to freezing the operations of Iranian banks so that they simply cannot do any business out of the UK?

[Lord Tunnicliffe]

My Lords, the Minister will be delighted to know that we support this order. I would like to thank him for his introduction and to say that he has certainly satisfied any questions that I might have had on the technical side of the banking—not that I am particularly qualified to be able to ask him any questions on that. This is, essentially, a foreign policy issue and I will say a word or two on what has led to this very strong action, which we support.

We are contemplating a nuclear-capable Iran, the consequence of which would be dire. It would destabilise the region; it would cause other states to react; it would probably put the non-proliferation treaty under pressure—perhaps terminal pressure—and, of course, it would lead to an increased possibility of the use of nuclear weapons. The military solution that has been talked about in some international circles is no less dire. The idea of a simple, surgical strike is almost certainly unreal and we may well see ourselves in military conflicts whose breadth and depth are quite appalling to think about, stretching from Hezbollah as one actor through to Saudi Arabia, the Emirates, Israel, US facilities in the area and, as ever, the Strait of Hormuz.

Fortunately, actions taken to date that are short of military actions are being successful. Most commentators seem to view them as successfully holding Iran some two years away from capability. This order is part of that widespread non-military action that international states are taking to keep Iran away from that capability. Nevertheless, the seriousness of this order and the reaction to it in Iran is illustrated by the probability that the attack on the British embassy in Tehran was stimulated by it. I pay tribute to the bravery of our staff in Tehran during the violence that they were subjected to in that difficult situation.

Having looked at the FCO’s statement, it seems to me that the order has a twin-track set of reasons. The first is the International Atomic Energy Agency's latest report on Iran, highlighting fresh concerns. In situations such as this, I always like to try and turn to the source information. The document that it refers to has 25 pages and is quite chilling reading, if one knows anything about nuclear weapons. The general view is that nuclear weapons are about getting enough nuclear material but they are much more difficult than that. They are about clever explosives, hydrodynamics and all that sort of thing. Just flicking through the report, the chilling thing is to see the amount of energy that Iran is apparently putting into that technical side of making a bomb work.

Sadly, one of the problems with the IAEA is that while it is a very capable body, at the end of the day it does not have the ability to instruct people to do things. If you actually read its resolution, it uses words such as press, stress, urge, express and commend. The only thing that it decides to do is to remain seized of the matter, so I would be grateful if the Minister could express to me just how widely this concern, which I think was expressed on 18 November this year, has been followed up by other countries. Can he flesh out any more detail of the actions on it that other countries have taken?