(2 years, 9 months ago)
Grand CommitteeMy Lords, as headlines scream “State spending and taxes at the highest since Clement Attlee”, I wonder whether the Budgets of 2021 and the health and social care levy could prove a turning point in our history. With the framework for debt and borrowing set out in the charter, which is not much changed from Gordon Brown’s, all that remains to be fixed are the levels of tax and spending. As others have noticed, the most interesting passage in the Budget speech was the Chancellor’s apology, regretting that taxes and spending were so high but assuring his supporters, “That is not the real me; I still believe in lower taxes and a smaller state”.
Yet there are a number of forces pushing state spending up over time as a proportion of GDP. The first is pure demography. Over the past 60 years, the proportion of the population of pensionable age has roughly doubled. Spending on healthcare and pensioner benefits combined has gone up from 6.8% of total spending to 14.2%. I do not think this will be reversed. The next is the relative price effect or, to the cognoscenti such as the noble Lord, Lord Eatwell, the Baumol effect, whereby the prices of services, especially public services, tend to rise faster than prices generally, as there is less scope for raising productivity to offset rising wage costs.
The third influence is that the basket of goods and services we may choose may change as society gets richer. The cognoscenti—again, the noble Lord, Lord Eatwell—call this the income elasticity of demand. I used to believe that, as we got richer, we would want to pay for more out of our own pockets. I now believe the opposite: as countries get richer, people want more of what the state provides—what used to be called a social wage—relative to what they finance out of their own pockets.
Why do I think this will happen in the UK? As we get richer, we may care less about getting a little bit richer, but more about protecting the standard of living we already have from the risks and vagaries of life. With its power to pool risks, the state is equipped to meet this preference by protecting us from adverse effects beyond our control. When we get ill, we want treatment. When we get frail, we want care. When a crime is committed, we want justice. When trust in the financial system collapses, we expect the state to intervene. We want to be safe on our streets. If we lose our job, we want a safety net and help back into work. We want our children educated. These are all components of our standard of living.
What strikes me about life in this country is how precarious it is and how weak is our resilience. Small events can have damaging effects. A small variation in weather patterns can trigger an energy crisis or flood our homes; even in good times, the NHS always operates on the limits, so that any shock quickly causes waiting times to grow; court cases are backing up; a small increase in traffic quickly leads to congestion. Public services need to be planned with more spare capacity.
The objection to providing a more generous social wage is said to be that it would impoverish us. But look at the standard of living in northern European countries which have much higher spending and taxes. Over the decade of Osborne/Hammond austerity, the fear narrative was that we had to pay down the deficit or we would impoverish our children. This ghastly phrase ignored the falling costs of government debt and the Government’s ability to borrow to invest. I believe this was a deliberately deceptive narrative, which used the debt argument to conceal a different policy: consciously reducing the size of the state, a policy which, if openly avowed, would have got little support.
While this greater realism about public spending is to be commended, important issues are unaddressed. Universal credit serves two different though overlapping groups: those who move in and out of work and those who rely on it for continuing support. The rate of benefit needed for the former does not need to be as high as that for the latter. People can get by for a few weeks or months if they can postpone some lumpy spending until they get back to work. However, those who depend on universal credit continuously cannot do that. Making the taper for those in work more generous is welcome, but cancelling the £20 addition for those on continued benefit is simply mean.
The second omission is council tax. The Government have accepted that business properties should be revalued regularly, but council tax values and bands have not changed for 30 years and have not reflected changes in relative property values across regions. The system has become massively regressive. Three things need to happen: first, a commitment to regular revaluations; secondly, several additional bands at the top going up to, say, £2 million; and, thirdly, changing the coefficient that limits the tax on the more valuable properties to no more than 2.5 times those at the bottom. Some argue that this is turning council tax, which was meant to be a charge for local services, into a wealth tax. So be it. Wealth embodied in housing is hugely undertaxed. There would be grumblings about taxing hard-earned savings, but that is nonsense. Half my wealth is embodied in the value of my house, which has increased tenfold in 30 years. I have not paid a penny in CGT nor have I moved into a higher tax band. Far from being hard-earned savings, this is a windfall worth about £1.5 million from living in a prosperous neighbourhood in London.
There is a gaping hole in the current social care plans. It is the estimate of what on average it costs per week to provide care. Let us call it £500, although it will vary by location. If that is not built into the financing of local authorities, they will not be able to pay care home providers enough to cover their costs. The result will be that either the number of care places contracts, something that is already happening, or care providers will go on charging those who are privately funded 50% or even 100% more than is being charged for people sponsored by local social services. That is an injustice. This figure for the reasonable cost of providing care rather than what the family actually pays is important for another reason, because it is the figure that will count towards reaching the £86,000 threshold at which the state chips in. If this figure is set too low, it will take families years to benefit from the cap.
How to sum up this Budget? When George Bush Senior was seeking the presidential nomination in 1988, his catchphrase was:
“Read my lips: no new taxes”.
The Chancellor’s catchphrase should be: “Don’t read my lips: taxes will stay high”.
Before I sit down, I congratulate the right reverend Prelate the Bishop of Newcastle on her service in church and state. I was present for her maiden speech in March 2016. It was a breath of fresh air—vigorous and positive—and it led me to conclude that the bishops’ policy of retirement and refreshment may be one that other parts of the House ought to look at.
(5 years, 1 month ago)
Lords ChamberMy Lords, earlier today, the House confirmed my P45 from membership of the Economic Affairs Committee. I greatly enjoyed working under the chairmanship first of the noble Lord, Lord Hollick, and latterly that of the noble Lord, Lord Forsyth. It was also an exquisite pleasure to note the conversion of the noble Lord, Lord Forsyth, to the cause of social housing and—as we will hear—ultimately to more generosity in the provision of long-term care.
I want to take this opportunity to pay tribute to the work of the late Lord Jenkin of Roding, who had an enduring interest in the quality and integrity of national statistics. He was instrumental in passing the Statistics and Registration Service Act 2007, which brought about important changes to the governance framework. We have already seen some important interventions from the statistics authority where it has identified abuses or distortions; for example, the notorious £350 million claim in the Brexit campaign and its decision to alter the presentation of student loans in the national accounts to give a more accurate picture of the incidence over time of write-offs of debt.
Nevertheless, some significant controversies remain unresolved, some of which, as the House has heard, are of the statistics authority’s own making. Three steps brought them to a head. First, the then Government decided to specify the MPC’s inflation target using the CPI to bring us into line with the rest of Europe. They also explained that the CPI was running about 0.5% a year slower than the RPI. The switch allowed the Chancellor of the Exchequer to claim that he was targeting lower inflation without the Bank having to do much tightening. It also allowed him to tell Tony Blair, who was like the impatient boy in the back of the car and was disappointed that the five tests did not support entry into the euro, that we were getting nearer.
At that stage, the change was confined to the realm of monetary policy. The next event was around 2010, when the ONS made the now notorious change to the way in which clothing prices were collected, which had the immediate impact of widening the gap by another 0.3%. The ONS reviewed that outcome but surprisingly decided to do nothing about it. However, the statistics authority—I emphasise that it was the statistics authority; the noble Lord, Lord Lea, tried to claim that it was the Treasury or the Bank—then declared that the RPI was a very poor measure of inflation that did not have the potential to be developed into a good one. It would therefore go on publishing the RPI but no longer designate it as a “National Statistic”.
My Lords, although I attributed possible motive to the Bank and the Treasury, I said that my main concern was the lack of authority to put this adjective in front of it to say that it was discredited. On what basis can officials brief the press that the RPI is discredited?
The basis on which that was done was that the statistics authority said it was flawed; that, I thought, was sufficient. Anyway, it said it would go on publishing the RPI and no longer designate it as a “national statistic” but rather, treat it as a legacy measure, with no further work to develop it. The chief statistician said there were many flaws with the RPI. For example, if it is used in the Carli index, which is a very simple test, if something goes up by 25% and then down by 25%, it does not end up where it started—the so-called time reversibility test. It said that it was not worth changing the treatment of clothing if it was not going to look at all the other issues.
This policy of spartan neglect proved controversial, provoking the inquiry by the EAC. Our conclusion was that RPI was deeply embedded in many aspects of economic life—on this we agreed with the noble Lord, Lord Lea—and it was wrong of the statistics authority and the ONS to just walk away from it. Indeed, it was argued that the statistics authority had a statutory duty—
Will the noble Lord explain something to me? I do not understand his contention that one of the main reasons why RPI is discredited is that if something goes up by 25% and then comes down by 25%, it does not end up where it started. If any figure goes up by 25% and is then reduced by 25%, it does not end up where it started.
I think the noble Lord should go away and write this down on a piece of paper—I think he will find that it does not end up where it started.
I said it does not. In other words, it fails the time reversibility test. If it goes up by 25% and then comes down by 25%, it ought to end up where it was before, but the price level is not the same. We believe that if the ONS is going to continue publishing the RPI, it should have a programme for addressing the flaws that have been identified.
The EAC then looked into the implications of having two rival price indices. It quickly became apparent that the Chancellor had spotted the opportunities for index shopping, as others have noted. The view of the committee was that it would be better to move towards a single index combining the best characteristics of both indices: neither on its own is superior in all aspects. There should be a rolling programme of improvements, starting with the clothing issue.
One area which will need to be addressed is the treatment of housing costs. Here, in my view, neither index has yet found an ideal treatment. The CPI takes no account of owner-occupier housing costs other than repairs. The RPI includes mortgage interest, but of the 27 million households there are only 10 million owner-occupier mortgages. The ONS seems to favour creating a housing element based on rental equivalence, but the rental market is very distorted. Clearly, there is some difficult technical work to be done to find the best solution, which can then be adopted by both indices, and as other differences are resolved a single general measure of inflation can emerge.
The final issue we addressed was the indexation of gilts. Holders of these gilts have benefited substantially from the changes, probably wrongly, which boosted the RPI. There is a clause in the prospectus of early issues that says that if a change is proposed which is materially detrimental, it can be made only with the agreement of the Chancellor. I began to wonder what fool came up with this “heads I win, tails you lose” arrangement, which allows gilt holders to keep any windfall gains but not suffer any correction when things went against them. Then I began to wonder whether it was me, many years ago when I worked on monetary policy in the Treasury.
What to do next? Above all, we should not act precipitously but should give plenty of warning of our intentions. If, as recommended, a unified price index emerges, it should be applied to all indexed gilts issued. In the meantime, we recommended beginning the process of issuing CPI-indexed gilts. We were not convinced that issuing gilts with a different uprating formula would seriously fragment the market. For years, gilts have been issued with different coupons, maturities and tax treatments, and the market is big enough and flexible enough to find equivalent values for them. For existing gilts with maturities after 2030, the prospectus allows them to be linked to an index,
“which continues the function of being an officially recognised index measuring changes in the level of UK retail prices”.
In other words, if the change proposed represents the best professional advice, that index should be used and there should be no veto if it comes out better or worse than the previous index. I have never quite understood why the change in respect of clothing, which was regarded as technical when it happened, is now possibly being regarded as a fundamental change as it is reversed.
It would be nice to close on an upbeat note—that all these problems are being addressed under a new team—but I understand that the search for a successor to the retiring National Statistician has proved fruitless and that the deputy has been asked to act as an interim. That is not a good sign.
The new “Big Brother” Clock, which I regard as, basically, an electronic version of the noble Countess, Lady Mar, is probably telling me it is time to wind up.
(6 years, 10 months ago)
Lords ChamberMy Lords, I very much welcome this debate, which brings intergenerational fairness—a subject previously confined to the higher realms of philosophy and welfare economics—to the forefront of current government policies. It seems that a new division in society is not class, around which the two main parties have been organised for nearly a century, but around age. We may deplore that fact, but I do not think that we can ignore it.
It may seem difficult to believe that younger generations will not be better off than their predecessors when they will enjoy the enormous benefits of science and technology—the genome, the internet and mobile phones. But getting an Uber in three minutes may be scant consolation when you cannot find a home that you can afford to buy or rent. There are many benefits that the young will almost certainly not see: such as free university education, although it was only available to a small fraction of the cohort; defined benefit pension schemes; retirement at 60 or 65; a foot on the housing ladder by their mid-20s and mortgage paid off by 55; and wages more or less guaranteed to rise faster than prices. So it is right to examine the current state of policies through the lens of intergenerational fairness.
Much of the Government’s rhetoric has been spent on government borrowing and debt, but is that really the main problem? Fifteen years ago, the debt to GDP ratio was about 40%. Now it is close to 80%, although it is beginning to decline, and that has been described by successive Chancellors as impoverishing future generations. In my view, this argument is exaggerated. The debt to GDP ratio is a poor metric for fairness. It ignores the decline in the cost of servicing debt. While the ratio has doubled, debt servicing, which was 2.4% 20 years ago, is still 2.4%. Secondly and more importantly, the ratio ignores the asset side of the balance sheet. If government borrowing is reflected in productive investment—for example, housing—the net wealth of the nation may well be increased.
So I put higher up my list of issues a decade of quantitative easing. Its effect is to lower interest rates and boost asset prices, the benefit of which goes mostly to those who own assets, be it land, commercial property, houses or shares, and these are overwhelmingly older people. The other beneficiaries are company executives, who are paid—unlike most of us—partly in cash and partly in shares.
We also need to be precise about terms. Inequality of incomes has not widened in the past 25 years—post tax and benefits, it has stayed virtually the same. It is the widening inequality in wealth that I think is a greater worry, and it is that to which we should address remedies.
Next on my list is pensions. There are virtually no new entrants to DB schemes, some of which are being converted to direct contribution schemes, which then struggle to earn decent returns. Nevertheless, there is still a large number of DB liabilities to be met, and the lower returns are causing huge deficits in company pension schemes, which they have to plug by reducing investment, raising prices or increasing contributions, all to the detriment of younger generations. Meanwhile, free prescriptions are still available from age 60, and the triple lock on pensions has entrenched the position of the elderly.
I do not need to say much about housing, important as it is. We have had two good debates in this House, one only last week, so I have just two comments. The Government’s White Paper confessed that, for those on the housing ladder, the average house “earned” in capital appreciation more than the average earnings of those living in it. While earnings are heavily taxed, those capital gains are not, and inheritance tax is being eased. We need action on all fronts and for all tenures, with less emphasis placed on Help to Buy and more on building affordable homes for rent, which is the epicentre of the housing crisis.
The funding of higher education also raises issues of who should pay. The system that we now have has some important principles at its heart: those who earn more as a result of acquiring a degree should make a contribution and not rely on the taxes of people many of whom will be poorer than they are; contributions should be assessed on future earnings and not on what parents were earning at the time; the funding framework should enable the Government to draw back from detailed control of numbers and courses; and, importantly, students from poorer backgrounds should have better access to higher education. What we have at the moment is a mess. It is misrepresented as a loans scheme, which makes it look more frightening than it really is. The interest rate is indefensible—it is funny how HMG always choose which of RPI or CPI suits them best for any particular circumstance. The scheme has become almost incomprehensible after many changes, and the freezing of the income threshold with retrospective effect was a disgrace. In short, a scheme that has some sound and justifiable principles behind it has been undermined by Treasury greed and opportunism in exploiting the way in which the Government’s accounts are put together. There needs to be a review, but I hope that it will correct the injustices but not be panicked into throwing out what is sound.
Then there is the issue of long-term care. We were edging towards a sensible definition of care and a fair balance between what is paid by the family and what is paid by taxpayers generally. We were also looking at what level of assets should be protected and what assets should be taken into account. In my view, it is right that the family house should be included in wealth, particularly when there is a scheme to provide deferral of payment. The Conservative Party manifesto blew this consensus wide open by knocking out a crucial element; that is, the protection given to the small number of families who incur massive bills for care. This is an issue not of intergenerational fairness but of intragenerational fairness, but it nevertheless needs to be addressed. We need to go back to the drawing board and to take the courage to get past the taunts of “dementia tax”.
Finally, there is an issue right here in this House. Many people would welcome the opportunity to serve here, so my final question is: is it fair that, once appointed, some people can serve 20 years, 30 years or 40 years, thereby reducing the opportunity to generations behind them?
(7 years, 5 months ago)
Lords ChamberMy Lords, let us start by giving credit where credit is due. First, the White Paper is candid in acknowledging the multiple failures in the housing market. Secondly, it recognises that the current target of 1 million homes over five years is too low. Although we are told that it remains in force, it has been completely airbrushed from the documents, presumably because it is clear that housing starts have already fallen behind the asking rate.
Thirdly, it adopts much of the thinking of the Economic Affairs Committee—for example, that the problems will be solved only by action by all players and on all types of tenure. It makes a major move away from the almost exclusive focus of recent Governments on promoting home ownership and recognises that there are severe pressures in the rental market. Indeed, in my view, it is the rental market that is the epicentre of the crisis, where hardship is greatest. I agree that much of the credit for this fresh thinking should go to the new Minister for Housing, Gavin Barwell, and I wonder whether he will eventually enter the pantheon of those who have held this portfolio with distinction—notably the then Sir George Young and Nick Raynsford, who between them held it for about 15 years.
Fourthly, it acknowledges that the so-called volume builders will never want or be able to build enough. Thereafter, things go downhill. A new range is suggested, although whether it is a target or just the consensus is unclear—I hope that its status can be clarified. The bottom end of the range, 225,000 homes per annum, may not even be enough to match emerging demand. The top end of the range, 275,000, may not do enough to catch up the underprovision of the past decade. For that reason, our report recommended 300,000 per annum.
The main failing of the White Paper is that, despite an extensive range of measures, there is no assurance that the Government will deliver the numbers required—indeed, no attempt is made to reconcile the two. Finally, there is a serious omission: the tax issues which distort the housing market are simply not addressed. That is the gist, but let me develop some of these points.
I do not need to go over the main failings. Most of the things that the Government want are not happening or, worse, are going in the wrong direction. A major factor in these failings comes from the excessive focus on home ownership to the neglect of the rental sector. Simple economics tells you that if, as the Government claim, they have helped 200,000 people into home ownership but the supply has not increased, house prices will rise to price out a different 200,000.
The recognition that renting needs to be promoted is a huge advance. The share of the private rented sector has doubled from 10% to 20% in the past 15 years, but much of the sector is in poor condition, badly managed and, as has been said, tenancies are insecure, so families cannot even be sure where their children will go to school.
The Prime Minister’s foreword itself acknowledges that 2.2 million working households on below-average income spend a third or more of their disposable income on housing. As has been said, that figure is greater in London. Today, it would take a low or middle-income family saving 5% of their wages 24 years to reach an average-sized deposit. This is all massively unfair, as the White Paper reveals that housing costs relative to income are substantially lower for owners than for renters.
As the main housebuilders build almost exclusively for sale, it follows that if rental provision is to increase, new players have to be mobilised. Historically, local authorities and housing associations played that role, and they need to be brought back into play. My estimate is that we need to find an additional 100,000 homes above those provided for sale.
There is a lot in the White Paper about local authorities, but most of it is about their role as planning authorities. The requirement to produce plans which meet local need is very much to be welcomed, as is the fact that they are to be given extra resources to speed the planning process. However, while paragraph 3.27 states:
“They also have an important role in delivering homes themselves”,
there is no sign of the relaxation of the housing revenue accounts that we have called for.
This is followed by a masterly euphemism in paragraph 3.32:
“We will work with local authorities to understand all the options for increasing the supply of affordable housing”.
This ranks alongside Hirohito’s:
“The war … has developed not necessarily to Japan’s advantage”.
The picture is not much better with housing associations. Paragraph 3.26 raises hopes, stating that the Government will,
“set out, in due course, a rent policy for social housing landlords … for the period beyond 2020 to help them to borrow against future income”.
Hopes rise further with:
“Our aim is to ensure that they have the confidence they need about their future income in order to plan ahead”,
but then reality comes crashing in:
“The Government also confirms that the 1% rent reduction will remain in place in the period up to 2020”,
together with the damaging restrictions imposed by the Housing and Planning Act.
Great hopes have been expressed about the entry of institutional investors, who allegedly have billions of pounds ready to go, but I have heard all that before. Those investors now find themselves constrained by the ill-thought-out Solvency II directive.
So it continues to the end of the document: encouraging aspirations not backed by the resources or the freedoms to develop them. There are lots of bits and pieces of schemes, many of them worthwhile, including one to deal with great crested newts, but nowhere is there a table which draws all the contributions together to demonstrate that the plans for more housebuilding can be achieved.
Then we come to the serious omission: the way that the tax system distorts the housing market. This is dramatically illustrated in the White Paper, which states:
“In 21st century Britain it’s no longer unusual for houses to “earn” more than the people living in them”.
This is a shameful admission, but nothing is offered to remedy it. While pay is subject to income tax and national insurance contributions, there is no tax whatever on the increase in the value of the house: no income tax, no CGT, no extra council tax, only, eventually, inheritance tax, where the allowances are currently being increased. It is not surprising, with returns on financial assets low and taxed, that investment in bricks and mortar, whether a second home, a buy to let or simply a loft extension, is proving so popular, thereby taking home ownership further out of the reach of many.
In our report, we criticise the working of council tax. We have a situation where the grandest mansions, some no doubt owned by Members of this House, could never pay more than three times the tax of the humblest dwelling. This is a much shallower gradient than the old rates system. The property values are still those of 1991, so those living in the areas where values have risen most have not been asked to contribute more.
In practice, the Government recognise the argument that high-value properties are not paying enough, but their response is to impose very high rates of stamp duty at the top, so those who move pay astronomical sums, while those who stay put, like me, pay nothing. Evidence is beginning to emerge that this is proving counterproductive, causing such a slowdown in turnover that revenues have declined. Far better to return stamp duty to more reasonable levels and then recoup the money by raising council tax, so that all property owners pay a little more every year.
To conclude, the White Paper starts promisingly by introducing some fresh thinking, but it fails to convince that it is capable of making the step change that is required.
(8 years, 8 months ago)
Lords ChamberMy Lords, this amendment seeks to provide the Treasury Select Committee of another place with the ability to stimulate the oversight function of the Court of the Bank of England. It may be helpful to provide some context for this proposal. The measures in the Bill, in so far as they refer to the Bank of England, return the regulatory scope and powers of the Bank to roughly the same position that they were in in 1997. From 1997 onwards there was, first, the transfer of many, though not all, of the Bank’s regulatory powers to the FSA, then the abolition of the FSA and the transfer of prudential regulation to the PRA, and now the subsidiary status of the PRA is to be abolished and its activities fully reincorporated within the Bank, so we have come full circle. After major institutional reforms, we are back where we started, with all the powers of prudential regulation being exercised by the Bank. Conduct of business regulation, amalgamated in the FSA from various sources, now resides with the FCA, but it should be noted that few of these powers were originally exercised by the Bank of England.
It is worth recalling that the Bank of England that we began with, prior to the creation of the FSA, was not a successful regulator. The Bank failed in the case of the Johnson Matthey bank and over BCCI, and so glaring was its failure with respect to Barings that the then Board of Banking Supervision commented acerbically that the Bank of England should try to understand the institutions that it purports to regulate. Regulation was taken away from the Bank because it had failed as a regulator. Then, of course, the new tripartite regulatory structuring of the FSA, the Bank and the Treasury failed dramatically in the financial crisis of 2007-08, so the FSA was abolished. At least the PRA can hold its head up and declare that its position as an independent subsidiary is being abolished in this merry-go-round not because it has failed but because of a desire to restore the unitary power of the Bank of England. It is neater that way.
What this tale of circular institutional reform should teach us is that there is no specific institutional structure that can guarantee to deliver regulatory competence. The all-powerful Bank that we are now recreating has proved in the past to be a regulatory failure, while the tripartite structure of the FSA, the Bank and the Treasury failed even more spectacularly. Given that institutional reform will not be a panacea, there is a powerful case for thorough parliamentary scrutiny to at least attempt to identify the failings when they occur, as we can be sure that they will. Moreover, I remind noble Lords of the words of the Treasury Select Committee of another place with regard to the original proposal that a supervisory board be established at the Bank. The committee said:
“The Bank is a democratically accountable institution, and it is inevitable that Parliament will wish to express views and, on occasion, concerns about its decisions. Our recommendation that the new Supervisory Board have the authority to conduct retrospective reviews of the … prudential performance of the Bank, should, if operated successfully, provide the tools for proper scrutiny”.
In Committee I asked the Minister if he agreed with the proposition that the Bank should be a democratically accountable institution. He failed to reply. I will happily give way now if he wishes to comment. Apparently he does not.
Therefore, the Treasury Select Committee argued, correctly, that proper parliamentary scrutiny depends on internal reviews of the Bank, not just on the external inquiries of parliamentary committees. Internal review provides Parliament with the “tools for proper scrutiny”. The reason is obvious. The court that as a consequence of the Bill will be invested with the oversight function has full information about the operations and policies of the Bank—a level of information that even the most assiduous Treasury Select Committee could never have. Indeed, the court has information which is not, and sometimes should not be, in the public domain.
My amendment would allow the Treasury Select Committee of another place to request that the court exercise its oversight function. Note, as the Minister said, that the court is not compelled to comply. The wording of the noble Lord’s amendment, to which my amendment refers, states that the non-executive members of the court “may”—not must—“arrange for a review”.
Let us suppose that the Treasury Select Committee’s request stimulates a review. What happens then? First, as the noble Lord’s amendment requires, a report or reports will be made to the court. To discover what happens next we turn to Sections 3C, 3D and 3E of the Bank of England Act 1998, as amended. There we find that the Bank must give the Treasury a copy of the report and that the report must be published, unless the court of directors decides that publication is not in the public interest. Finally, in exercising its oversight function the court must monitor the response of the Bank—including the court itself—to any recommendations made in a report.
I have detailed the path that any report stimulated by a Treasury Select Committee request might take in order to reassure the House that safeguards are already built into the structure of the legislation before us that will ensure that information which it is not in the public interest to publish at a particular time will indeed not be published. Yet even without publication, a request by the Treasury Select Committee may well stimulate an important investigation that results in valuable internal reform at the Bank.
The government amendment makes a valuable addition to the powers of the non-executive members of the court in the exercise of their oversight function. However, the procedure envisaged by the government amendment is such that investigations can be stimulated only by insiders—not what might be considered proper democratic accountability. My amendment will at least provide a pathway along which proper democratic accountability may be exercised: not will be, but may be. The Treasury Select Committee will be able to request that the court institute a review. That is just a small increase in democratic accountability but one that may well avert future regulatory failings. I beg to move.
My Lords, I am somewhat puzzled by the amendment, because it seems to be a power which the Treasury Select Committee already has and already exercises. I will give noble Lords three examples. It called for a report from the Bank into Northern Rock, another one into RBS, and then—with some delay, appearing only three days ago—finally into HBOS. Therefore the Treasury Select Committee, led by the people who lead it now, does not need this power. It is perfectly capable of forcing the Bank to undertake a review and to reveal the contents to that committee.
My Lords, I have no wish to detain the House. The Government have listened to the concerns that we raised at previous stages of the Bill and in the discussions that the Minister generously agreed to. The amendment that the Government have brought forward does not go as far as we would like but we feel that it addresses the most essential issue, which is the independence of the non-executive directors of the court, and that it provides a mechanism so that they can resist capture by officials of the court. For that reason, we are satisfied.
My Lords, I have a short checklist of points that I would like to make. I start by thanking the noble Lords, Lord Bridges and Lord Ashton, and their team for the very high levels of engagement on the Bill. That applies too to their officials and the officials of the Bank, especially Anthony Habgood and Andrew Bailey. It has all been extremely helpful and it has resolved some, but not all, of the questions that were raised in Committee. Clause 22 is one of the unresolved questions.
As other noble Lords have said, Clause 22 alters the SM and CR that Parliament agreed to in the Financial Services Act (Banking Reform) 2013. This Act put into law the unanimous recommendation of the Parliamentary Commission on Banking Standards. The commission’s report recommended that the PRA and the FCA should be able to impose,
“the full range of civil sanctions, including a ban, on an individual unless that person can demonstrate that he or she took all reasonable steps to prevent or mitigate the effects of a specified failing”.
The reason given for proposing this measure was that it would,
“make sure that those who should have prevented serious prudential and conduct failures would no longer be able to walk away simply because of the difficulty of proving individual culpability in the context of complex organisations”.
This is an issue that was settled by Parliament in 2013.
Mark Taylor, Dean of Warwick University Business School, former FX trader and an adviser to the Bank of England’s Fair and Effective Markets Review, commented on the situation in May. Mr Taylor said that bonuses are too high, there is little threat of jail for wrongdoers and bosses are not held responsible. He said:
“The problem is the incentives for cheating markets is massive. If you can shift a rate fractionally you can make millions and millions of dollars for your bank and then for bonuses”.
He went on to say that:
“Once senior executives feel they are personally at risk if the culture doesn’t change, and individual traders feel they are at risk of being put in prison, then you’ll get a culture change”.
The Parliamentary Commission on Banking Standards recognised all that, which is why it recommended the new regime. Parliament recognised all that, which is why it passed the new regime into law. This new regime was due to come into force at the end of March next year, but Clause 22 stops that. It replaces the new regime with a lighter version.
Over the course of the stages of this Bill and in discussion, the Government have offered a variety of justifications for reverting to a lighter-touch regime. There have been four main arguments to date. The first was that, since the Bill extends the supervising regime to all financial services, the tougher regime would bear down disproportionately on the smaller firms being brought under supervision. This is not a convincing or even coherent argument for relaxing the regime for systemically important players. It is an argument for a sensible two-tier regulation system—nothing more.
The second argument was that the prospect of the new, tougher regime was leading to individuals spending more time and resources mitigating the risk of being held personally liable for breaches on their watch. This was the whole purpose of the new, tougher regime.
The third argument, put forward by Andrew Bailey, was that noise around the tougher regime has been distracting future senior managers from complying with the spirit of other important aspects of the regime. Mandy Rice-Davies would have known how to respond to that.
The fourth argument I have heard made, entirely understandably—I heard it again this afternoon—was that the reverse burden of proof runs counter to our legal traditions. The Government have not pressed this argument strongly, but other noble Lords have at previous stages. I simply point out that there is ample precedent for this in English law and a helpful Law Lords ruling on where such measures are appropriate. The reverse burden of proof has been used in the Road Traffic Act 1988, the Health and Safety at Work etc Act 1974, the Bribery Act, the Terrorism Act, the Misuse of Drugs Act 1971, the Trade Marks Act 1994, the Criminal Justice Act 1988 and the Official Secrets Act, and there are other examples as well.
But in the past few days, the arguments have focused on a different aspect of the proposed change: that the rigorous specification of responsibility will make it easier to identify senior managers who are guilty of misconduct or unreasonably allow misconduct to take place. This argument was advanced forcefully by the noble Lord, Lord Bridges, in response to my Oral Question of 2 December, and by Andrew Bailey at a private meeting last week.
There is a very serious flaw in this argument. It assumes that it was previously impossible to identify senior managers with responsibility for misconduct. That is not the case. At the very least, board members and departmental heads carry, and have always carried, responsibility. That was not the problem. The problem was the evidence trail. This was, in all cases, so defective that all senior managers could say and did say, “I didn’t know”, and that was enough to get them off the hook.
As Tracey McDermott, the then director of enforcement and now acting CEO of the FCA, said in 2013 to the Parliamentary Commission on Banking Standards, the inability to impose sanctions on senior executives was first and foremost due to the evidential standard required to prove their liability. That is why the old regime produced no penalties against senior managers, and that is precisely why the regime proposed in Clause 22 will not do that either. It is absolutely no use having a detailed organisation and responsibility chain if there is no evidence trail. Barclays knew this when it sent some of its people out to buy a safe to keep incriminating documents out of sight and prevent an electronic trail.
Then there is the question of equality of arms. Banks are rich. They employ many very bright people on astonishing amounts of money; they can afford very expensive and extended legal defences; they have absolutely enormous resources. By contrast, the FCA is underresourced, underpaid, overstretched and outgunned. The G30 report of this year, Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform, also noted this inequality of arms. The contest between the FCA and the banks is unequal, made more unequal by Clause 22. It is notable that the Government have fielded no one from the FCA to defend their proposed change. They have relied instead on Andrew Bailey, a Bank of England official.
The senior manager regime proposed by the Parliamentary Commission on Banking Standards and enacted by Parliament is there because both the commission and Parliament recognised the extraordinary failure to hold any senior manager to account. What this regime says is simply this: senior managers must show that they have behaved reasonably in doing the right thing. Senior managers must show the FCA the electronic and paper trails that demonstrate that they took reasonable action to do their jobs properly. The Government proposal scraps that. It says that the FCA must extract, if it can, this paper and electronic trail from the banks. Well, it will not be able to do that, for the same reasons that Tracy McDermott gave the Parliamentary Commission on Banking Standards in 2013.
If Clause 22 remains part of the Bill there will be no holding to account, no changes in banking culture for fear of being held to account, and no reason to expect a change in behaviour. We will be back where we started. We should remove Clause 22, and we on these Benches support this amendment.
My Lords, looking back over the discussions on this issue, inside and outside this House, I cannot help feeling that an element of caricature has crept in. We are told that the Government have lost their nerve, caved in to bank lobbying and gone back to the failed status quo ante. At the same time, the debate has been excessively polarised, disguising the fact that there is substantial agreement on what I believe is the primary issue—tackling the problem of personal liability. The difference between us is what I think is a secondary issue: what does the reverse burden of proof add or detract from this proposal? Is this the only way in which the regime can be made to work?
The proposal in the Bill is not retracing these steps but moving forwards by introducing the SM and CR and the new concept of the duty of responsibility, which will fall on the senior managers. It tackles directly the difficulty with establishing personal liability and the Pontius Pilate defence: “It wasn’t me guv, I wasn’t there; I only read about it in the FT a couple of days ago”. That is actually true—that is what someone told the Parliamentary Commission on Banking Standards.
In future, senior managers will have to take responsibility for what goes on in the teams for which they are responsible and for the actions of the people whom they have appointed and thereby given accreditation. The code rule for senior managers says:
“You must take reasonable steps to ensure that any delegation of your responsibilities is to an appropriate person and that you oversee the discharge of the delegated responsibility effectively”.
That is absolutely clear and I still fail to see why the reverse burden of proof is the only way to get people to understand that.
Perhaps I may ask a question of the noble Lord, Lord Turnbull. The FCA stated just over a week ago:
“The FCA may take disciplinary action against an individual where there is evidence of personal culpability on the part of that individual”.
Where does that differ from the regime before any of this is introduced?
That is not exclusive. Elsewhere, there is still a duty of responsibility. There is still personal culpability where it can be proved, but there are many people to whom it does not apply—senior people—and, there, you will need to have recourse to the duty of responsibility to secure a “conviction”—that is, proof of regulatory breach.
After the speeches that we have heard, particularly that of the noble Lord, Lord Turnbull, I had hoped that the noble Lord, Lord Tunnicliffe, might rise to the Dispatch Box and say, “In the circumstances, I will no longer press this amendment”. But, sadly, he has not. In declaring my interest, I say to the noble and learned Lord, Lord Brown of Eaton-under-Heywood, and the noble Lord, Lord Grabiner, that not only did I completely agree with every word they said but I thought that they made outstanding speeches.
I strongly support the extension of the senior managers and certification regime to all sectors of the financial services industry. It will create a fairer, more consistent and rigorous regime for all sectors of the financial services, enhancing personal responsibility for senior managers as well as providing a more effective and proportionate means of raising standards of conduct of key staff more broadly, supported by what we have heard during this Bill will be more robust enforcement power for the regulators.
As I have not persuaded the noble Lord, Lord Tunnicliffe, so far, perhaps I may now proceed to declare my interest as chair of the Credit Union Expansion Project and Cornerstone Mutual Services. The noble Lord did not mention credit unions, but credit unions as deposit takers are subject to the senior managers regime. I am delighted that, due to the advocacy of the Association of British Credit Unions and the support of the All-Party Parliamentary Group on Credit Unions, both the Prudential Regulation Authority and the Financial Conduct Authority have made special allowances for smaller deposit takers to apply a simplified regime in recognition of the need for proportionality. But not a word of that lies in this amendment. There are no associated amendments helping to deal with the position of credit unions.
If this amendment were to be carried, we would have the reverse burden of proof applying to managers in credit unions. Credit unions in the vast majority of cases have fully non-executive volunteer boards which are democratically elected by and drawn from a credit union’s membership. They already face significant challenges in attracting and retaining skilled and experienced individuals willing to sit on their boards on a voluntary basis. The imposition of the heightened personal responsibility which the noble Lord, Lord Tunnicliffe, would impose by removing this clause would compound and exacerbate these difficulties for many credit unions. Some larger credit unions have already begun to move away from the voluntary board model in order to attract the right people in the light of SMR and, in particular, the prospect that the noble Lord, Lord Tunnicliffe, might succeed in this amendment. There are many other reasons but, please, do not impose this level of responsibility on institutions—admittedly deposit takers—like credit unions.
We have heard all the arguments about presumption of innocence. We have the opportunity of a regime which will be tougher and fairer. Please do not let us complicate it any further by introducing a disparate, varied scheme. Let us impose this new regime, which I believe will be very successful indeed.
(10 years, 7 months ago)
Lords ChamberMy Lords, is the criticism of the Civil Service coming from Ministers, Parliament and think tanks justified? Of course, the Civil Service can, and should, raise its performance, but the big picture is that since 1997 it has contracted by 13% and expects to be 20% smaller by 2015. It is handling a rising caseload with less money so its productivity has been significantly increased and many services have been improved by digital delivery. Other countries see the UK as a source of good practice.
Contrast that with the incontinence of the political payroll, with Ministers up by 8% since 1997, despite the savings which devolution should have produced. Spad numbers are up from 38 in 1997 to 98 now, most of whom are political interns and not deep experts. Unlike politicians whose reputation has been damaged by expenses fiddling and influence peddling, the Civil Service has maintained its reputation for integrity, according to the annual MORI survey on trust.
Do civil servants obstruct Ministers, as some have claimed? That is the cry-baby response of the weak Minister. Strong Ministers get what they want. As others have pointed out, the Civil Service has failed more often in the opposite direction—that is, in agreeing with Ministers’ proposals when it should have questioned them: for example, on the poll tax, the new style rail franchises and the overambitious timetable for universal credit.
On accountability, the Institute for Government got it right when it said that,
“secretaries of state and permanent secretaries have shared accountabilities and responsibilities … Trying to separate them is an illusion”.
It also said that the relationship is,
“impossible to express in contractual terms”.
As Tam Dalyell said of the West Lothian question, the only answer is not to ask it. The argument on accountability is more with Parliament, which wants greater scope to criticise individual officials without giving them any greater right of reply. We should concentrate on those things that bring Ministers and officials closer together and not on things like contracts, extended ministerial offices or more ministerial appointments which drive them apart.
Should Ministers choose their Permanent Secretaries? The answer is definitely not. That should be exclusively for the Prime Minister, who, after consulting the Minister, appoints someone from a list of those deemed genuinely appointable. Is a parliamentary commission likely to help? Despite being a member of a successful commission on banking, I am probably in a minority in being rather doubtful about whether that would add much to performance. More importantly, should a review be carried out by Parliament? In my view, the answer is no, as Parliament is an insider in this argument with a vested interest. A review should be independent.
What are the real priorities for improvement? My answer is professional skills throughout the service, not just for those who work closely with Ministers, in four areas: project management; contract management so that the Government are not fleeced by contractors; digital delivery; and financial management. All four areas have been identified and are being addressed.