Inflation

Debate between Lord Young of Cookham and Lord Tunnicliffe

Monday 1st July 2019 Lords Chamber

[Lord Young of Cookham]

That goes to one recommendation directed at the UKSA. That issue will be addressed directly in the government response to the recommendations. I cannot give my noble friend an answer today; I hope that he understands why.

In introducing the debate, my noble friend wondered whether the Government discussing this issue with the UKSA somehow compromised the UKSA’s independence. It is perfectly legitimate for the Government to discuss matters with the UKSA without interfering with its independence in decision-making. We discuss a wide range of issues with it—as we should, given that the ONS is the producer of economic statistics. One can have that dialogue without encroaching in any way on the UKSA’s independence. The Government continue to discuss the relevant issues raised by the report; the Chancellor wrote to my noble friend last week, outlining that point. I stress to my noble friend, the noble Lord, Lord Sharkey, and other noble Lords that we are working hard to respond to the committee’s report as quickly as possible. We will communicate a date for this response in due course and will provide sufficient notice for the markets.

Let me move on to the central focus of the inquiry, namely the RPI. As the Government have stated before, we recognise that there are flaws in the way that RPI is measured and that, as a result, its rate of inflation is higher than that of other measures, such as the CPI and CPIH, which is the CPI including owner-occupiers’ housing costs.

The report from the committee is the latest in a series of reports on this intractable issue. I highlight this to stress how complex it is. In 2012, the then National Statistician launched a consultation on potential changes to the RPI following concerns about the increased wedge between RPI and CPI, which had been driven primarily by the 2010 change in the collection of clothing prices. There was then a considerable response, both on matters statistical and non-statistical, and in 2013 the then National Statistician responded, arguing that the RPI did not meet the highest standards expected for a national statistic. That answers the question of the noble Lord, Lord Lea, as to why it was regarded as discredited: the UKSA stripped the RPI of its national statistic status.

However, given its widespread use in the economy, the National Statistician argued that the RPI should remain unchanged. In 2015 a review into consumer price statistics, which had been led by Paul Johnson of the Institute for Fiscal Studies, was published. This also criticised the RPI and recommended that it should be classed as a legacy measure and that its use should be actively discouraged.

Let me explain the Government’s use of inflation statistics and highlight how they have not ignored the criticisms of RPI. Since 2010 the Government have reduced their use of RPI. They have moved the indexation of direct taxes, benefits, public sector pensions and the state pension from RPI to CPI. More recently—this addresses the accusation of index shopping made by a number of noble Lords—in April 2018 the Government brought forward switching the indexation of business rates from RPI to CPI.

[Lord Tunnicliffe]

Did the Minister say that the state pension was linked to CPI? I thought it was triple-locked—I hope it is because I draw it.

[Lord Young of Cookham]

One of the locks is CPI.

[Lord Tunnicliffe]

My understanding of this part of my income is that it is the greater of CPI, RPI or, I think, 2.5%.

[Lord Young of Cookham]

We have moved the indexation of direct taxes, benefits, public sector pensions and the state pension from RPI to CPI. If that is wrong, I am sure a signal will come from the far end of the Chamber to put it right before I sit down.

I was dealing with the issue of index shopping and said that in April last year we brought forward switching the indexation of business rates from RPI to CPI. This move is expected to save businesses almost £6 billion over the next five years—at, of course, a cost to the public purse.

At Budget 2018 we outlined our policy on inflation statistics. Specifically on RPI, the Government committed to not introducing new uses of RPI and to reduce its existing uses when and where practicable. I note that the report encourages the Government to move all uses to CPI. However, the matter of practicability is key and further moves away would be complex. It has not been clear in recent years which measure of inflation it would be appropriate to use, although that picture is now getting clearer.

One sizeable area where RPI is used is in the Government’s index-linked gilts—a number of noble Lords mentioned this, including my noble friend Lady Browning— which are indexed to RPI. The Government have no plans to stop issuing index-linked gilts indexed to RPI. As the demand for RPI-linked debt is vast in comparison to CPI, particularly from the pensions sector—the largest holder of gilts by sector—the taxpayer gets far better value for money issuing into this market. Until such time as we can be satisfied that there would be sufficient demand for a new debt instrument, and that it would deliver better value for money, we will continue to issue RPI-linked gilts.

As mentioned by the noble Lord, Lord Macpherson, demand for CPI-linked debt is growing. However, given that demand for RPI-linked debt is stronger, the Debt Management Office gets better value for money by continuing to meet this demand. However, in response to the noble Lord, Lord Macpherson, the issuance of new debt instruments is kept under review.

On the Government’s future use of inflation statistics, particularly in relation to CPIH, noble Lords have raised concerns over its suitability as a headline measure for the Government. Again, I pay tribute to the work of the ONS, led by John Pullinger. CPIH has undergone extensive development, choosing between different methodologies where necessary, and rigorous testing by the independent Office for National Statistics. This robust process has led to CPIH being approved as a national statistic, meaning that it is fully compliant with its code of practice for statistics. The Office for Statistics Regulation recommended to the board of the UKSA that CPIH be granted national statistic status, which is the highest kitemark of quality in our statistical system. Following this extensive development, at Budget 2018 the Government stated that their objective was for CPIH to become their headline measure over time.

The Government have not, however, set a date for CPIH to become their headline measure of inflation. This is because CPIH is a relatively new measure—a number of noble Lords touched on the issue of housing. CPIH has only recently been certified a national statistic, and it was only late last year that an updated historical back series was published, extending the series. With this back series in hand, work is now ongoing to understand its properties compared to CPI and RPI. The Government will regularly update Parliament on their progress towards using CPIH and, of course, on its broader strategy on inflation statistics.

Perhaps I may touch on some of the issues raised in the debate. The noble Lord, Lord Tunnicliffe, raised the benefits freeze. The decision to freeze most working-age benefits from 2016-17 was one of a number of difficult decisions that the coalition Government took to put the public finances back on track. We have no plans to repeat the freeze and we expect working-age benefits to rise with inflation from April next year.

The noble Lord, Lord Tunnicliffe, mentioned Sections 7 and 21 of the Statistics and Registration Service Act. Other noble Lords also mentioned the issue—the noble Lord, Lord Turnbull, in particular. We recognise the committee’s view on this and the Government will respond to the report in due course and on that specific recommendation. Changes to RPI are a matter for the independent UK Statistics Authority and the Office for National Statistics. That is a response to the suggestion that RPI could be incrementally corrected.

In conclusion, I recognise that I have not been able to go as far as noble Lords would have wished. The Government note that this report covers complex and wide-ranging issues, and makes a number of serious and sober recommendations to both the Government and the UKSA. Given the extensive use of RPI in the economy, the complex nature of some of those uses and their interactions, and, most importantly, the effect on people and the economy, the Government believe that it is necessary to take time to consider the committee’s report carefully before responding.

The Government recognise that RPI is a flawed statistic, and stress that they have not avoided acting on the issue. They recognise that further work must be done, but note that further moves away from RPI are complex. Further, the necessary work to prepare for CPIH is yet to be completed. I say to the noble Lord, Lord Sharkey, that the Government will respond as soon as practicable to noble Lords’ report and are working extremely hard so to do.

Finally, I will convey to the Chancellor the sense of frustration expressed by my noble friend Lord Forsyth and others about the time it has taken to respond to the report. I will personally relay that message.

Financial Services (Miscellaneous) (Amendment) (EU Exit) (No. 2) Regulations 2019

Debate between Lord Young of Cookham and Lord Tunnicliffe

Tuesday 7th May 2019 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I am so glad I did not have to write the content of this SI; it was hard enough trying to work one’s way through it when simply reading it. It is obviously the result of a combination of “Oops!” and communication with customers. I see absolutely no reason to oppose it. If anything, this underscores the complexity of trying to make arrangements for dealing with a no-deal scenario. I hope we never have to use it, because we would run into more “Oops!” if we ever found ourselves in that situation. I hope the Treasury is going ahead with a mapping exercise to try to link this all together, because how anybody who functions in the industry can ever work their way through all this is completely beyond me. Frankly, if you ever needed an argument for remaining, it seems that this alone provides it.

[Lord Tunnicliffe (Lab)]

My Lords, this is one of many no-deal SIs on which I have been forced to represent Her Majesty’s Opposition from the Front Bench—a pretty unattractive pastime. The principal reason for this is the fact that most of these SIs amend an SI that amends an SI that amends an Act that is many years old, which makes it fundamentally difficult to understand them. When one has put all the intellectual effort into understanding the so-called no-deal SI, one then discovers that the actual substance of the SI is frequently merely technical or consequential.

I found that this SI, and particularly its Explanatory Memorandum, really won the prize for being the most difficult to understand yet. In my frustration, I thought I would find out to what standard an Explanatory Memorandum should be created. I had the inspiration to go along to the Secondary Legislation Scrutiny Committee offices to seek guidance. I was once on that committee when it had a much grander title, the Merits Committee, and the staff there were always helpful and competent. I asked, “What is the guidance on the creation of SIs?” They said there were two pieces of guidance: that given by the committee itself and the Government’s guidance, which—for reasons I do not understand—is actually issued by the National Archives. The guidance from the committee itself is some 17 pages long. The latest version is from July 2016. Its objectives are caught in one particular paragraph:

“The purpose of the EM is to provide members of Parliament and the public with a plain English, free-standing, explanation of the effect of the instrument and why it is necessary. It is not meant for lawyers, but to help people who may know nothing about the subject quickly to gain an understanding of the SI’s intent and purpose. Legal explanations of the changes are already given in the Explanatory Note which form part of the actual instrument”.


The latest government guidance from the National Archives, the fifth edition on statutory instruments, dated 27 November, states at paragraph 2.9.2:

“The purpose of an EM is to provide the public with an easy-to-understand explanation of the legislation’s intent and purpose—why the legislation is necessary. Avoid repeating content you have included in the Explanatory Note. Your explanation should be concise but comprehensive, and should not generally exceed four to six pages. Use plain English and avoid … jargon”.


I put it to noble Lords that this document fails.

I then turned to the EM itself, which at paragraph 15.2 states:

“Katie Fisher, Deputy Director for Financial Services EU Exit Domestic Preparation at HM Treasury, can confirm that this Explanatory Memorandum meets the required standard”.


She is wrong. It does not.

However, in my frustration, I rang the number given at paragraph 15.1 to try to understand a little more and my conversation resulted in an email from Richard Lowe-Lauri. At long last, after much toil, I feel that I do largely understand the Explanatory Memorandum, as prompted and helped by that useful email. What did I find? I found at the end of this exciting process that the issues tackled in this SI are technical, consequential or merely corrective. Therefore, I have nothing to object to, except for one very minor question about paragraph 2.4, the last sentence, which happens to be about five lines long. It states:

“It also inserts provisions into other temporary regimes, allowing EEA financial services firms to continue to service existing contracts with their UK customers post-exit, and mitigating risks faced by UK firms using services provided by non-UK central counterparties and trade repositories”.


I could not find anywhere how and what the risks were that we were mitigating and how they were being mitigated. Otherwise, I have no objection to the SI.

[Lord Young of Cookham]

My Lords, I am grateful to both noble Lords who have taken part in this debate. I agree with the noble Baroness, Lady Kramer. I do not want a no-deal scenario any more than she does. The Explanatory Memorandum at paragraph 7.2 explains all that we are doing to move away from no deal by seeking a,

“deep and special future partnership with the EU … greater in scope and ambition than any such agreement before and”,

that encompasses “financial services”.

[Lord Tunnicliffe]

On that point, the Minister should realise that that paragraph has been repeated 65 times, so we all know it well.

[Lord Young of Cookham]

That is why I knew exactly where to find it. I am sure that the noble Lord had no difficulty with that particular paragraph as he has had an opportunity to reflect on it many times. But I am grateful to the noble Baroness, Lady Kramer, for her broad support for the SI before us.

I note from the noble Lord, Lord Tunnicliffe, that we have tested his patience. He made that abundantly clear and he has awarded the wooden spoon to this particular Explanatory Memorandum. If he ever wants a different job, perhaps he could be recruited to draft Explanatory Memorandums for the Government. He clearly has high standards, and he is capable of turning the documents in front of him into something which he understands, which is a valuable skill.

I shall deal with the specific point he raised about paragraph 2.4 of the Explanatory Memorandum. The Financial Service Contracts (Transitional and Saving Provision) (EU Exit) Regulations 2019 inserted provisions into the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 and the Trade Repositories (Amendment and Transitional Provision) (EU Exit) Regulations 2018; I hope the noble Lord is still with me. These amendments established a run-off regime for central counterparties, allowing UK firms time to wind down relevant contracts and business with non-UK CCPs in an orderly manner. They also established a run-off regime for trade repositories giving UK firms time to make alternative arrangements with another registered or recognised TR to satisfy the reporting obligations set out in the European Market Infrastructure Regulation—EMIR. In a nutshell, without these run-off provisions, UK firms would face cliff-edge risks, and that is the risk that we seek to mitigate, including disruption to services from non-UK CCPs and TRs introducing operational, legal and stability risks. I hope I have dealt with that point.

On the noble Lord’s valid final point—that an Explanatory Memorandum should be a stand-alone document which is readily understood—the Treasury has endeavoured to ensure that all its Explanatory Memoranda provide a full and clear explanation of how and why each exit instrument laid under the Act is intended to operate, so that we can scrutinise the legislation as effectively as possible. However, in the light of his comments, we will have another look at this Explanatory Memorandum and consider whether the document should be revised and relaid to ensure that its explanations are as clear as possible.

Securitisation (Amendment) (EU Exit) Regulations 2019

Debate between Lord Young of Cookham and Lord Tunnicliffe

Monday 25th February 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I studied these two SIs with great care and could not object to their general direction. I even managed to think of three penetrating questions, which the Minister unfortunately answered in his opening statement, so I shall not repeat them. I thank the noble Lords, Lord Sharkey and Lord Deben, for their contribution. The noble Lord, Lord Deben, was concerned about the FCA costs. To some extent, that does not worry me nearly as much is whether there are competent resources. I worry whether there are enough people who want to work in a regulatory atmosphere who have enough competence to take this mess called falling out of the EU, fit it all altogether and discharge all their responsibilities. I can only just bring myself to ask this as a question, because I know that the Minister has a standard answer.

Building on the comments made earlier, the facts of life are that this is a dreadful deal. There is nothing wrong with the instrument, but if you are going to get into a dreadful situation, there are dreadful consequences. Although the Minister may say, as I am sure he will, that the issue of reciprocity is not nearly as bad as we all make out because the other side will want to do reciprocal deals, my experience of negotiation is that it is not that straightforward. They hold the cards, and if reciprocal agreements are made, good, but I fear that they will be somewhat one-sided.

[Lord Young of Cookham]

I am grateful to all noble Lords who have taken part in this debate and I shall try to deal with the issues that have been raised. A common theme is the issue of reciprocity, first raised by the noble Lord, Lord Sharkey, and touched on by the noble Lord, Lord Tunnicliffe, and my noble friend Lord Deben. As a matter of EU law, it is for the EU to decide who gets access to data held in the EU and we cannot in the SIs tell the EU what to do. However, we hope that it will take steps to protect financial stability—the consequences would be serious if it did not—and the Government are working to avoid a no-deal exit.

In the meantime, we are taking steps to minimise the disruption for the UK, and there have been some helpful indications on the issue of reciprocity. We welcome the announcements that the EU and some individual member states have made to date, which indicate that they would take steps to mitigate some of the risks. The Commission has taken a positive step in legislating to give the UK temporary equivalence for CCPs in a no-deal scenario, and the ESMA announced last week that all three UK CCPs will be recognised, mitigating a key no-deal risk to stability. Certain other member states, such as Germany and Sweden, have also announced various contingency measures. We stand ready to intensify our engagement, engage in bilateral discussion wherever possible and co-operate with EU institutions on preparedness for all scenarios, because it is in our mutual interest to lessen the risk of disruption to households and businesses in both the UK and the EU.

My noble friend Lord Deben asked a question which I think he has asked before about the resources of the FCA. Each time a Minister has said that these are very small incremental obligations, he has asked: what happens if you add them all up? It is a good question. Under the EU securitisation regulation which has applied from January this year, the PRA and the FCA already carry out most of the functions conferred on them by this SI. The main responsibilities transferring to the FCA relate to the authorisation and supervision of a small number of trade repositories and the publication of STS notifications on its website. We do not honestly think that this will create a significant burden for the FCA, which has specialist expertise in place and has made extensive preparations, including training supervisors, in anticipation of the implementation of the EU securitisation regulation and the onshoring of its requirements.

Uncertificated Securities (Amendment and EU Exit) Regulations 2019

Debate between Lord Young of Cookham and Lord Tunnicliffe

Monday 25th February 2019 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing these two SIs. I particularly thank the noble Baronesses, Lady Bowles and Lady Kramer, for their contributions. They were off the point but, nevertheless, they hit an important issue. Legislation, particularly financial services regulation, is impossible to understand because of its constant revision and the failure to have a process for regular consolidation. There are two problems: the sheer understanding of it and, because of its complexity, one cannot see whether there are interrelationships between the various activities that are being regulated, such that you end up with a systemic catastrophe.

Before the financial crisis many people—I assume genuinely—believed from the way in which the markets were structured that they were robust. In practice, they turned out to be far from robust. I particularly note the concern of the noble Baroness, Lady Kramer, about CCPs—we debated them several months ago, which probably means about a year ago—and, once again, although they seem to be institutions to reduce risk, there is a worrying possibility that they may concentrate risk.

Turning to the statutory instruments, the first seems to tidy up regulations to be compatible with the introduction of the CSDR and the subsuming of the uncertificated securities regulations role. It does that in the same way as most of these SIs by a series of regulations which touch on referencing, transfer, transition and information. I have two small points on these regulations. I have to concede that I rarely get beyond the Explanatory Memorandum but I study that with some care. On Page 4, paragraph 7.4 has unnumbered bullet points; the fourth states:

“Creating transitional provisions, to ensure that operators of systems that were approved as operators under the USR prior to 30 March 2017 can continue to operate under the current version of the USR, pending their authorisation as a CSD under the CSDR regime”.


Why was 30 March 2017 chosen? Most of these transitional things are on exit day and I can see no logic in 30 March. How long does this transitional waiver last before they must receive authorisation as a CSD under the CSDR regime?

At the bottom of the page is the eighth unnumbered bullet point. I think the Minister touched on this point. In the middle it says:

“This is necessary in connection with the Bank of England’s role after exit under the SCDR regime, which will include recognising and supervising CSDs in third countries”.


I have some difficulty grasping what,

“recognising and supervising CSDs in third countries”,

means. Does this mean that this law is extraterritorial? I am not sure I have got the word right, but I am sure the Minister has a sense of what I am concerned about. Or does it simply relate to their rules in so far as how they operate in this country?

The second statutory instrument seems to be picking up the usual format of references, transfers, information and so on. I was looking for transition. Most of these SIs provide for passive transition—that is people, institutions and entities doing certain things after exit day carry on for a period to allow them to register and adjust—but, unusually, this one does not. As the noble Lord pointed out, to operate in the UK one has to become a recognised overseas investment exchange. The FCA document on that published on 14 September and updated on 30 January 2019 states:

“The Treasury is not planning to put in place a temporary recognition procedure for EEA market operators in the event the UK leaves the EU without a deal and without entering an implementation period”.


Why did the Treasury exceptionally make that decision with this SI? Clearly it is important. Later under “How to make an application” the document states: “Market operators should contact”—then there is an email address,

“as soon as possible to make us aware of their plans in relation to any arrangements they intend to maintain in the UK”.

There is a sense that the FCA is worried about whether it has enough time to sort these things out.

[Lord Young of Cookham]

I am grateful to all noble Lords who have taken part in this debate and, again, I notice that there is no fundamental objection to the purpose of the two SIs. I shall try to deal with the issues that were raised.

On equivalence, the noble Lord, Lord Sharkey, asked about the Bank of England’s powers to recognise CSDs from overseas countries and, particularly, whether the waivers were intended primarily for EEA CSDs. These waiver provisions are in fact an existing feature of the FSMA, so they are not introduced primarily to assist the EEA CSDs, although of course they will welcome having them at their disposal. The waivers are subject to statutory conditions and are published. I hope that that answers the noble Lord’s point.

The noble Lord also raised a very good point about the distinction between engagement and consultation, expressing the hope that the results of engagement might be made public in the same way that the results of consultation are. As he recognised, we are reaching the end of the road on Treasury SIs, but it is a valid point that we could take on board if in future we decided not to go down the statutory consultation road but instead to go down the engagement road. It would be useful to bear in mind that we could do a little more to explain in what respect the engagement resulted in changes to the draft SI.

The noble Lord also asked whether we could clarify the nature of the consultation on the USRs. In December 2015, the Treasury published the consultation on implementing the EU CSDR. It closed in 2016 and it was then decided to implement it in stages: first, the Central Securities Depositories Regulations 2014; and, secondly, the Central Securities Depositories Regulations 2017. This is the third SI. We engaged with industry by sharing a draft of it on 24 October 2018 and we published a draft on 17 January this year.

The noble Baroness, Lady Kramer, raised a valid point about information sharing. Simply removing the legal obligation to share information does not necessarily mean that there will be any change in the quantity or quality of information that is subsequently shared. It would not be appropriate for the FCA to be obliged to follow the existing information-sharing arrangements with the EU authorities where there is no guarantee of reciprocity, or to be obliged to match suspensions—another feature that I mentioned. However, it will be able to co-operate with relevant EU authorities on a discretionary basis to share information, as it currently does with non-EEA countries. Therefore, the FCA will still be required to publish decisions—for example, when it suspends or removes a financial instrument from trading at a venue that falls under its jurisdiction—in a manner that it considers appropriate, and that information will then be available to the ESMA.

The noble Baroness also asked about requirements for the Bank of England to co-operate with other authorities when it does not have to do so now. The Bank of England will have a general duty, rather than a specific obligation, to co-operate with other authorities. That is introduced so that the Bank of England is subject to a duty under the FSMA to co-operate with other bodies that undertake similar functions in connection with the Bank’s functions.

The noble Baroness, Lady Bowles, asked whether the USR drafting had changed and whether the first draft was gold-plated. The Treasury has sought to take a proportionate approach to ensuring that issuers can exercise their rights under Article 49 of the CSDR. It was considered appropriate, first, to remove any provisions that were subject to both the USR and the CSDR, and, secondly, to remove those provisions in the USR that were incompatible with the Article 49 right. The current version is less extensive than the one published in 2015, while achieving those aims.

The noble Baroness, Lady Bowles, also asked about the accessibility of FSMA amendments. I know that this is a subject that she has raised before. If one looks at Schedule 5 to the EU withdrawal Act, it sets out that the Queen’s printer—as part of the National Archives—must make arrangements for the publication of “relevant instruments”, including regulations, decisions and tertiary legislation. These instruments will form the retained EU law from exit day and the National Archives is working to ensure that they are visible and accessible to ensure legal certainty and clarity post exit.

All pieces of EU legislation, as well as treaties, international agreements and case law, are currently being archived and will be made available to the public at the appropriate time. The noble Baroness may remember that on 19 April last year, during the passage of the EUWA, my noble friend Lady Goldie wrote to her setting out more detail about how the public would be able to access this EU law and the features that would be in place to ensure legal certainty and clarity post exit; a copy was deposited in the Libraries.

The noble Lord, Lord Tunnicliffe, asked about CSDs. I think it means CSDs from, rather than in, third countries, but I will write to him to confirm that. He asked also why there is no transitional passporting regime—such as the TPR that we have introduced in other parts of the post-Brexit scenario—for EEA market operators. The reason there is no temporary recognition for EEA market operators is that we have an already long-established and well-understood domestic regime for overseas exchanges. EEA market operators which currently make use of passport rights may wish to apply under this regime to become a recognised overseas investment exchange—ROIE. The FCA published a direction on 14 September clarifying how an EEA market operator can make an application to become an ROIE.

The noble Lord also asked about supervising third-country CSDs. Recognition is the process by which the Bank of England allows third-country CSDs to offer CSD services to the UK; supervising third-country CSDs refers to the Bank of England’s ongoing regulatory supervision to make sure the CSD continues to comply with its obligations.

The noble Baroness, Lady Kramer, raised a point about CCPs—an important point, which she has raised in earlier discussions. She is worried about the stability of CCPs and their possible vulnerability to total collapse. She will know that the current structure was put in place post the 2008 crash precisely to protect against the scenario that she outlined. CCPs are financial market infrastructures that take on counterparty credit risk between parties to a transaction. They do this by sitting between trades, as a seller to every buyer and a buyer to every seller. If the noble Baroness agrees, perhaps I could write to her in slightly more detail, setting out why we feel that the present position is robust and why we believe that the scenario she referred to may be unlikely to come about.

Finally, the noble Lord, Lord Tunnicliffe, asked about the transition provision for operators in uncertificated securities. Part of the SI is backward-looking to what has already happened and part is forward-looking. The 2017 reference is to operators approved under the USR 2001 prior to 30 March 2015, which will benefit from a transitional provision under this SI. These operators will retain such approval until they become recognised as a CSD for CSDR and FSMA purposes. I apologise for the acronyms; perhaps I could write to the noble Lord, Lord Tunnicliffe, explaining all this without using them.

[Lord Tunnicliffe]

That would be good. Perhaps the Minister could copy the letter to everybody who has taken part in the debate.

[Lord Young of Cookham]

Yes, I generously accept the suggestion made by the noble Lord, and I beg to move.

Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018

Debate between Lord Young of Cookham and Lord Tunnicliffe

Thursday 7th February 2019 Lords Chamber

[Lord Young of Cookham]

That the draft Regulations laid before the House on 29 November, 6 December and 13 December 2018 be approved.

Relevant document: 11th Report from the Secondary Legislation Scrutiny Committee (Sub-Committee A). Considered in Grand Committee on 23 January

[Lord Tunnicliffe (Lab)]

May I just refer back to our previous exchange on this matter? When we last discussed credit rating agencies, I asked what would happen if there was a deal and I got a somewhat amorphous answer. Can the Minister be clearer than he was in his original answer on this point? I have asked this question in every SI debate that I have attended and I have received a slightly different answer from each Minister concerned, so it would be good to know whether the Government have a unified position on this.

Looking at the Explanatory Memorandum, which was discussed in Grand Committee, there is the registration process and the three bullet points. The first two points were that there would be a conversion regime with automatic registration, and that the registration regime would be available to new legal entities. The third, however, which nobody seemed able to understand, was that the automatic certification process would enable certified CRAs established outside the EU to notify the FCA of their intention to extend the certifications to the UK. Like the conversion regime, these notifications must be made before exit day. The Minister’s answer, which I checked in Hansard, was again a little woolly.

Finally, there is the whole issue of how the law relates to the staff of credit rating agencies. We have improved the control of financial services and banks by having a senior management regime. I understand that that regime does not extend to credit rating agencies. The Minister went on to say that other regulations do, but I believe that those other regulations have the same sort of weak reservations that were there in 2008 and allowed the shambles in the money market. It seems somewhat deficient, because what happened in that period, as we know, and the reason nobody was prosecuted, is that everyone said, “It’s not me, guv”. There was not a clear single point of responsibility for the various exceptions to be made.

[Lord Young of Cookham (Con)]

I am grateful to the noble Lord, who has maintained his reputation for holding the Government to account on statutory instruments. I understand exactly why he sought to raise these issues. He referred to my comment that we would “switch off” the SIs in the event of a deal. It is a phrase that appears in some of the briefing for Ministers, so I hope it was not the wrong thing to say. To help the noble Lord, I will set out in more detail the process of switching off.

As we set out in the White Paper on the EU withdrawal agreement Bill, that Bill will amend the European Union (Withdrawal) Act 2018 so that the conversion of EU law into retained EU law takes place at the end of the implementation period instead of on exit day. While the UK remains subject to EU law, and before the conversion of EU law into UK retained law, there is no requirement for most instruments relating to our exit from the EU to be enforced. I come to the question the noble Lord asked: the intention, therefore, is that the EU withdrawal agreement Bill will contain provision to delay all relevant SIs—including these—that enter into force on exit day until the end of the implementation period. The Bill will also ensure that Ministers can revoke or amend the SIs as appropriate so that they deal effectively with any deficiencies arising from the end of the implementation period. Some provisions may remain in effect, such as powers that allow us to prepare for the end of the implementation period.

The noble Lord raised two other issues in the Moses Room on 23 January. One question was on the process of CRAs registering before exit day. The CRA SI includes an automatic conversion regime for UK-based CRAs with an existing ESMA registration, and a temporary registration regime, or TRR, for CRAs establishing a new legal entity in the UK. To enter the conversion regime, a CRA will simply need to notify the FCA 20 days prior to exit day. A CRA that meets the criteria will enter the TRR if it has submitted an advanced application that has not yet been determined to the FCA prior to exit day. Basically, these regimes will help to ensure there are no gaps between the UK leaving the EU and UK-based CRAs not being registered with the FCA. The FCA will be provided with powers to start the preparatory work for registering UK CRAs prior to exit day.

The third issue the noble Lord raised is another that he touched on in his intervention in the Moses Room. He asked about the senior management structure of credit rating agencies and whether individuals could be held responsible. As I said then, it is a good question. The senior managers and certification regime does not currently apply to credit rating agencies. One of the reasons is that they do not actually handle customers’ money, which banks and other agencies do. Regulation 22 of the SI applies Section 400 of the FSMA, which provides that if an offence committed was,

“with the consent or connivance of an officer”,

of the body corporate, or due to neglect on its part, the individual as well as the corporate is guilty of an offence.

[Lord Tunnicliffe]

Part of that answer jarred a little with me then and jars now on repetition—the part that says it is because they do not handle customers’ money. Looking back at the disaster of 2008, one has to recognise that the credit rating agencies were a substantial part of that disaster. The fact they were giving very high ratings to essentially junk stock was one of the issues that compounded the crisis. As a minimum, I would be grateful if the Minister would take this issue back to the Treasury and recognise that it might be an unfortunate hole in the legislation.

[Lord Young of Cookham]

I understand why the noble Lord is pressing me on this. As I said, the senior managers and certification regime does not currently apply to credit rating agencies. The noble Lord makes a good point; I hope he is now satisfied with some of the answers I have given. In answer to his last intervention, although the regime does not currently apply to CRAs, we will of course take his suggestion on board and see whether in future that might be amended. I beg to move.

[Lord Tunnicliffe]

I thank the noble Lord for his courteous replies and his help.

Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

Debate between Lord Young of Cookham and Lord Tunnicliffe

Monday 4th February 2019 Grand Committee

[Lord Tunnicliffe]

No, that is very good. It might turn my casual question into quite a substantial one.

I notice that all the Treasury SIs that the Committee has discussed say that there will be no consolidation and no guidance. I do not know how we can carry on like this. I have found it absolutely impossible to understand the overall scene that these SIs relate to. The scrutiny that one is able to give is therefore entirely dependent on the Explanatory Memorandums. As a generality, these assume quite significant previous knowledge and it is an uphill battle to get a feel for these SIs and to give them the appropriate scrutiny.

[Lord Young of Cookham]

My Lords, I am grateful to all noble Lords who have taken part. I detected no objection to the basic premises on which these SIs are based. I will sweep up some of the points raised in earlier debates that are also relevant to this one.

The noble Lord, Lord Tunnicliffe, asked about the FCA’s resources to cope with the new responsibilities being imposed on it. We are confident that the FCA is making adequate preparation and is effectively resourced ahead of March this year. In its 2018-19 business plan, a significant proportion of its resources are already focused on the forthcoming exit, including arrangements to implement any necessary changes. It has increased its staff numbers in response to increases in the scope of its regulatory activity, including EU withdrawal. It will publish its 2019-20 plan this spring, setting out its planned work for the coming year. As I said in response to an earlier SI, the chief executive of the FCA, Andrew Bailey, has said he expects to hold FCA fees steady for a year or two, assuming there is an implementation period. If there is not, it can increase its fees should it need to do so in the event of no deal.

The noble Lord, Lord Sharkey, asked about the impact assessment being published late. This issue was raised in another place and was dealt with by my ministerial colleague John Glen. We do recognise the importance of making impact assessments available for parliamentary scrutiny. We find ourselves in a unique situation. While we have tried to ensure that these impact assessments are published before debates, this has not always been possible. We acknowledge that some firms will incur costs as a result of these SIs but, as the noble Baroness, Lady Kramer, said in an earlier debate, the situation for these businesses would be much worse in the absence of this legislation. As a whole, these SIs will reduce costs to business in a no-deal scenario as without them the legislation would be defective. In response to the points raised by both noble Lords and the noble Baroness, we have agreed to undertake further analysis of these SIs in the event that we leave the EU without a deal and they come into effect.

The noble Lord, Lord Sharkey, asked whether we could have independent assessments for SIs. I understand that, but there are some complex interdependencies between some of the SIs. Also, the work that the regulators are undertaking cannot always be neatly pigeonholed between the SIs. Given that, it has not been possible to fully quantify the impact of the individual SIs at this stage. However, this is something that Miles Celic, the chief executive of TheCityUK, noted in a letter to the RPC in November. As I said a moment ago, we are committed to undertaking further analysis of the impact of these instruments at an appropriate point, should they come into effect, either in the event of leaving without a deal—

--- Later in debate ---

[Lord Tunnicliffe]

We hear that explanation and I have great sympathy for the civil servants involved with this task. However, will the Minister at least have the grace to admit that it was entirely in the Government’s hands to decide when to start this process? If they had started it earlier we would not be in this mess now. We have had impact assessment after impact assessment delivered after we have approved the instrument. That is not satisfactory and I doubt whether the Treasury will be able to catch up.

[Lord Young of Cookham]

I plead guilty as charged. As I said a moment ago, we recognise the importance of parliamentary scrutiny. We will try to do better and make sure that the relevant impact assessments are available in time.

--- Later in debate ---

[Lord Young of Cookham]

We need a post-mortem on this, which I will authorise.

In response to the question put by the noble Lord, Lord Sharkey, regarding the numbers on the impact assessment, and how they relate to trade repositories, I say that there are eight trade repositories operating in the EEA that are in scope of familiarisation costs. The impact assessment confirmed that we anticipate that the IT costs for those TRs will be approximately £10,000 to £15,000 per TR—although this cost is also dependent on the size of the TR—and, for firms that will need to update their systems, £5,000 per firm. Costs to the FCA associated with supervising the trade repositories, as well as new IT systems to connect to trade repositories, would be approximately £500,000 per trade repository, although this cost is also dependent on their size. The impact assessment also acknowledged that there may be other costs associated with trade repositories connecting to the Bank of England.

I think it was the noble Lord, Lord Tunnicliffe, and it may have also been the noble Lord, Lord Sharkey, who asked about the FCA’s power to suspend the need to report if there were no trade repositories. That is most unlikely. There are a number of trade repositories in the UK and there are arrangements in the legislation to passport them so they carry on. There are also arrangements for relatively speedily authorising any new TRs. It was slightly odd that a city such as the City of London did not have any TRs, so we think it most unlikely that the FCA will utilise its power to suspend reporting obligations against that background.

In the earlier debate, the noble Baroness, Lady Kramer, asked me whether the EU was considering reciprocity to UK funds in a no-deal scenario. The EU has not done the same for UK funds passporting into the EU, but many UK asset management firms operate EU fund ranges, and they have welcomed the creation of the temporary marketing permission regime, which enables them to market them into the UK.

I was asked what happens to an EEA system that does not notify the Bank of England of entering the TDR. Such a system will not enter the temporary designation regime and it will therefore not have recognition for UK insolvency law purposes. A notification is not an onerous requirement; the Bank of England provided details of this last autumn. The noble Lord, Lord Tunnicliffe, pointed out that under Section 8 we cannot create any new criminal offences, or, I think, create new taxes or new public authorities, and I am confident that nothing in the SIs goes against that restraint.

[Lord Tunnicliffe]

The appropriate paragraph does say that you are substituting one set of criminal offences with another. I can find it and read it if you like; it is a real question. I think the answer is in the word “relevant”.

[Lord Young of Cookham]

The noble Lord asked a good question: is the creation of a criminal offence consistent with the withdrawal Act? Section 8 outlaws the creation of a relevant criminal offence. This is defined in Section 20 of the Act as an offence with a possible prison term of more than two years. The criminal offence in this SI is not caught by that definition, so it is permitted.

Following an intervention from the noble Baroness, Lady Kramer, I was asked about unilaterally recognising EEA systems as central banks with no EU-wide reciprocal action. Extending settlement finality protections unilaterally reduces the risk that UK firms will be refused access to EEA financial market infrastructures, known as systems, and central banks once the UK leaves the EU. It also reduces the legal uncertainty and settlement risk these systems and central banks would face regarding UK law without such protections, so it ensures that the UK remains an attractive place to do business in a global context and supports broader financial stability.

I am conscious that I might not have answered all the penetrating questions from the noble Lord, Lord Sharkey, or some others that have been raised. If I have not, I will write to noble Lords, I hope with an authoritative reply.

Market Abuse (Amendment) (EU Exit) Regulations 2018

Debate between Lord Young of Cookham and Lord Tunnicliffe

Wednesday 23rd January 2019 Grand Committee

[Lord Young of Cookham]

My Lords, I am grateful to all noble Lords who have taken part in this debate and I notice that neither the noble Baroness, Lady Bowles, nor the noble Lord, Lord Tunnicliffe, have any fundamental objections to the detail of the SIs before us. I shall try to deal with the points they have made, along with those made by my noble friend. I was asked why the European Communities Act is mentioned. The answer is that the ECA powers are used to make consequential amendments to the Criminal Justice Act 1993 and the UK Market Abuse Regulation 2016. The European Communities Act is mentioned because it is the parent rather than the withdrawal Act.

My noble friend raised a number of points that go slightly wider of the mark. I would just say to him that it is a consequence of leaving the EU—like him, I campaigned to remain—that we can no longer influence what he described as “over there”. I used the word “equivalence” because what we are trying to do is make sure that if and when we do leave, the regime in this country is as equivalent as it can be to the regime when we were in the EU. Likewise, he talked about discretion. Indeed, we will not have the discretion that we have at the moment to influence what happens in the EU as a direct consequence of us having left.

Both my noble friend and the noble Baroness, Lady Bowles, raised the question of how we get information from the EU. In terms of ESMA and EU regulators co-operating and sharing information with the FCA, it will look to make use of the existing arrangements in the Financial Services and Markets Act 2000 to co-operate and share information which should be in the interests of both parties. We hope that that will continue. I was asked why we have bothered to keep paragraph 5 in the MAR SI, which is the list of EU institutions. We have omitted these exemptions from the UK MAR to achieve symmetry with the EU, but we recognise that after exit we may achieve or negotiate closer links, in which case it would be desirable to reinstate the current position if it was reciprocated or desired. I was also asked why we have exempted EU bodies under MAR. The UK and the EU markets are highly integrated, a point made by the noble Lord, Lord Tunnicliffe, and the relationship between them means that the exemptions may also be necessary for EU institutions interacting in the UK market.

My noble friend raised the issue of FCA fees. He will understand that those are not within the scope of the EU withdrawal Act powers or indeed within this statutory instrument. However, I hope that he was reassured by what I quoted from the chief executive, Andrew Bailey. He expects FCA fees to remain steady for a year or two, assuming that there is an implementation period.

The noble Lord, Lord Tunnicliffe, asked why the scope of this SI covers financial instruments in both UK and EU trading venues. I think the answer is that there is a very close relationship between the UK and EU markets and the scope provided by this SI ensures that the FCA will continue to have the ability to investigate and pursue cases of market abuse related to financial instruments which affect UK markets. UK companies may have instruments that are quoted not in London, but in Europe. If there were abuse there, it could affect the integrity of the UK market. This means that the FCA could take action where activity in a financial instrument, which was traded on an EU venue, impacted on UK markets. We want to maintain the current levels of integrity and confidence that UK markets currently hold. The impact assessment—

[Lord Tunnicliffe]

There seems to be an extraterritorial competence here, which is pretty unusual in English law.

[Lord Young of Cookham]

We would expect the EU regulators to intervene and investigate market abuse in an EU trading venue of a UK-related instrument. We would expect it to take the lead. The provision in the SI is for what I hope is the unlikely event that they decide for whatever reason not to intervene, but that we feel there is a need to investigate market abuse because it is having an impact on UK markets. That is why that particular power is as I have said.

To return to the lack of an impact assessment, we did ship a bit of water yesterday. We recognise the importance of having impact assessments available to inform these debates. Treasury Ministers are doing everything they can to make these available as soon as possible. They are in discussions with the Regulatory Policy Committee to improve the impact assessments and enable them to complete their review of them. We hope to publish the relevant impact assessment next week.

[Lord Tunnicliffe]

I omitted to congratulate the noble Lord on getting out an impact assessment on the final SI—the credit rating business. Because it came out, I was foolish enough to read it; it is interesting that the numbers showed a cost to the industry of £11.4 million. I did not really understand what that meant—whether the figure was big or little. It is obviously £11.4 million, but do these people make hundreds and thousands of millions of pounds such that it is nothing or will it be a significant cost to them?

[Lord Young of Cookham]

It is a very good question, and the answer is that we do not have the exact information as to the exact turnover or number of people employed in the CRAs. I will make further inquiries and see if I can shed some light on that. I might get some in-flight refuelling.

Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018

Debate between Lord Young of Cookham and Lord Tunnicliffe

Wednesday 23rd January 2019 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, perhaps I should say a couple of words about where we find ourselves with these SIs. As Her Majesty’s loyal Opposition, I do not want our participation in this process to be misinterpreted in any way as an endorsement of a no-deal exit from the EU; I cannot think of a worse outcome than no deal to the chaos that we find ourselves in. However, we have to accept that, given this chaos, which has to be laid at the Government’s door, there is a real possibility that we will stumble out of the EU without a deal. While the Government seek to make contingency plans for this, by bringing in front of us what one might call no-deal instruments, we will do our duty of scrutinising them as best we can.

So far, the Government seem to have played by the rules. In my view, the rules are set out first in the European Union (Withdrawal) Act 2018, but also in paragraphs 7.1 through to 7.9—which are identical in all Explanatory Memoranda that come from the Treasury. I believe they say that there will be no new policy introduced except where necessary to achieve the transition.

I diligently read through the Explanatory Memoranda. I fear that I did not read the instruments with as much care, because, frankly, I would not know how to start. A lot of them relate to other documents and getting up-to-date, amended copies of them is difficult, so I have to judge an instrument on the basis of the Explanatory Memorandum. All it basically does is say that EEA countries become third countries. It then goes on to make the consequential changes, which involve transferring various responsibilities. In relation to this instrument in particular, it also defines high-risk countries, which I can see is important.

I have only two questions. The problem with these memoranda is that the authors know what they are talking about, whereas the reader does not know what they are reading about. Having staggered through the document, when I got to paragraph 2.12, I became exhausted. I shall read what I think is the offending passage:

“The standards are to specify what additional measures are required to be taken by credit institutions and financial institutions with branches or subsidiaries abroad, when national law outside the UK does not permit group-wide policies and procedures to be implemented that are at least as strong as those that are required by the MLRs”.


I hope that the noble Lord can make some sense of that.

My only other comment is on the tone of the memorandum—this is true of other memoranda, but I shall centre on this one for the moment. The obligation to report to EU institutions is removed, and one can see why that is perfectly logical. However, money laundering is an international crime with an enormous impact on ordinary citizens, relating particularly to terrorism and to their wealth, because of the crimes committed and their impact on the economy. It is crucial that, even if we are daft enough to leave the EU without a deal, international co-operation continues. It is not just about taking the law where it is now; it is about the law needing to develop as criminals become cleverer and do different things, and we understand more about what they are doing and what action and international co-operation are necessary.

These regulations are brought before us as no-deal SIs and will be commenced on exit day. It is clear what role they will have if it is a no-deal exit, but if a deal is done and we enter a transition period and then come to the end of it, what will happen to this statutory instrument? Will it be repealed or will it be paused? The answer to that makes a big difference to its impact. If the instrument is merely paused, we are making law for the future. If it is repealed and we essentially start from scratch as part of the negotiation in the transition period, and if sanity then reigns and we complete a deal, this SI will not matter; we will be looking at longer-term ways of managing the problems to which it relates.

[Lord Young of Cookham]

My Lords, I am grateful to all noble Lords who have taken part in this debate, particularly my noble friend, with his background as a Member of the European Parliament.

I agree with the noble Lord, Lord Tunnicliffe; in so far as the Government do not want no deal, we do not expect no deal, and we accept entirely that it will be much better to make progress. He also asked what would happen to this SI if, as I hope, there is a deal. The answer is that the withdrawal Act would switch it off, and it could subsequently be either reintroduced or possibly amended in the light of whatever agreement we came to during the transitional period.

[Lord Tunnicliffe]

Could the noble Lord define “switching off” slightly better? Is the law taken out or repealed? The term I have used is “paused”, which is rather different from “deleted”.

[Lord Young of Cookham]

I will read out the exact words in my brief: “Are these SIs for a no-deal scenario only? This legislation would not come into effect in March 2019 in the event of an implementation period, which will be delivered through a separate piece of legislation”—as I think I said—“through the EU (Withdrawal) Bill. It could be amended to reflect an eventual deal on the future relationship or to deal with a no-deal scenario at the end of the implementation period”. I hope that that is not too far from what I initially said. Alternatively, it could be delayed until the end of the implementation period with the possibility of repeal or amendment, depending what happens. The answer to the noble Lord’s direct question is that if there was a deal, it would be, in my words, switched off, or, in the words that I have just read out, it would not come into effect, and the withdrawal Act would be the vehicle through which that happened.

My noble friend Lord Kirkhope mentioned the burdens on banks. It is important to focus on the fact that we are talking about relationships with correspondent banks with regard to the standards he referred to. As I understand it, at the moment there are two standards: one for inter-EEA banks and the higher one for outside. In future, there will be one standard, so to some extent it will be slightly easier for the banks. As I said at the outset, in many cases, the banks already provide the higher standards—the enhanced due diligence—even where they do not have to.

In response to the points my noble friend made, which were also made by the noble Baroness, Lady Bowles, we plan to have some transitional arrangements. I hope that they will help both my noble friend and the noble Baroness. We have announced plans to grant the regulators a temporary power to phase in these new requirements that would apply to firms in a no-deal exit. This power must be exercised by the regulators in accordance with their statutory objectives, as set by FiSMA. This is a sensible measure to ensure that the firms have the time they need to adjust in an orderly way to the changes brought about by Brexit. The regulators will be seeking industry views on where it would be appropriate to phase in new requirements. However, the short answer to my noble friend is that it is no longer appropriate to treat the EEA differently, so we must either reduce all the standards or enhance them. We have chosen to enhance the standards, which, as I said, meets the higher standards that I think we would expect in any case.

So far as politically exposed persons are concerned, this statutory instrument will not affect the regime for them following exit. My noble friend was rightly concerned about the effect on business and the financial services sector. We believe that the SI will have a minimal effect on businesses across the sector. As I said when I spoke at the beginning of the debate, we consider that the net impact on businesses will be less than £5 million a year. Picking up again on the point made by my noble friend, we understand from the FCA and industry that in practice this already takes place because of the risk that firms associate with correspondent banking relationships. As such, this will lead to minimal increased costs to businesses beyond the status quo.

I turn now to payment services providers which again were mentioned by my noble friend. They will also be legally required to provide a greater volume of information to their EEA counterparts in connection with the cross-border transfer of funds than is currently the case, thus equalising the requirement across third countries. We understand from the industry that this takes place already and any changes will require firms to expand their existing IT systems to firms with which they transact.

On the information requirements concerning the electronic transfer of funds, which was a point I made earlier, HM Treasury has communicated that it will bring forward measures to give the FCA some flexibility to phase in changes to the regulatory requirements on firms under the EU withdrawal Act. They will use the powers to waive or modify some requirements to allow for a smooth transition to the post-exit regulatory regime.

--- Later in debate ---

[Lord Young of Cookham]

My noble friend will know that when we leave the EU, the obligation that we already have will be transferred. Thereafter, looking to the future, we will no longer be bound by EU regulation, so the opportunity for gold-plating them will not exist; we will be in control of our destiny. I am sure that my noble friend would not want in any way to water down the robust regime we have in this country to deal with money laundering, terrorist financing and the rest. We must get the balance right, which is what I think my noble friend was saying.

[Lord Tunnicliffe]

I intervene on that point because there is surely a contradiction. Surely when we leave the EU, the opportunity for the state to gold-plate—take present regulations and make them progressively more difficult—will be unfettered. The Minister has to convince us that, given that freedom, it will not be misused.

[Lord Young of Cookham]

The noble Lord has repeated what I meant to say: at the point of transfer, the existing EU regime is on our statute book. We will no longer be bound by future directives so there will not be the opportunity to gold-plate: we will be master of our own house. Having said that, I am sure that the noble Lord and my noble friend would not want in any way to water down the tough regime we have against money laundering and terrorist finance, but we will be in control of our destiny rather than having to implement directives.

Reverting to the point that the noble Baroness made, the FCA does not expect firms or regulated entities providing services within the UK’s regulatory remit and other stakeholders to prepare now to implement the changes from exit day. The FCA is engaging with the industry extensively to ensure smooth and effective implementation of the changes.

The noble Lord, Lord Tunnicliffe, asked me about paragraph 2.12 of the Explanatory Memorandum. The SI confers power on the FCA to make certain technical standards in an area in which it has technical expertise. The transfer of power is necessary because the relevant standards are currently made by the European Commission. The technical standards specify what additional anti-money laundering measures are required to be taken by banks with branches or subsidiaries abroad. These measures include policies and procedures to counter money laundering and terrorist financing, and must be at least as strong as those required by the UK money-laundering regulations.

For example, if a UK bank has a branch abroad in a country that does not have anti-money laundering and terrorist financial requirements as strict as ours, the parent bank must ensure that the branch applies measures equivalent to the UK regulations. If the law of the country in question does not permit such measures, the UK parent bank must take additional measures to handle the risk of money laundering and terrorist financing effectively. The FCA will be able to make technical standards specifying what additional measures such a parent bank may take and the minimum action needed to handle those risks.

The noble Lord also asked about high-risk third countries and how the list will be updated. On exit day, the EU high-risk country list will be onshored and form part of retained EU law. Subsequently, references to the list will be static rather than dynamic, meaning that updates that the EU makes to the list will not flow through into UK law. The list will evolve only as amended by UK law. The Sanctions and Anti-Money Laundering Act 2018 gives the UK power to maintain a list of high-risk jurisdictions in connection with which enhanced due diligence needs to be performed. Updates to the list will be made through the affirmative procedure. Therefore, they can come into force before parliamentary approval but will then cease to have effect if both Houses do not approve them within 28 days of their being made. Parliament will have scrutiny on updates, while allowing updates to be made quickly to reflect changing circumstances in third countries. There will be a significant increase on current levels of scrutiny as Parliament has no direct influence over updates to the list at the moment.

Finally, the noble Lord asked how we would co-operate with the EU on anti-money laundering efforts once the UK leaves. National anti-money laundering authorities will continue to make use of international co-operation to detect, prevent and investigate money laundering. There is a legal gateway in the regulations that provides that UK supervisory authorities must take such steps as they consider appropriate to co-operate with overseas AML authorities. Moreover, the political declaration agreed with the European Union contains a statement of mutual intent that the future relationship should cover money laundering and terrorist financing. This includes commitments to put in place arrangements for effective and swift data sharing, allowances to support law enforcement, measures for practical co-operation between law enforcement authorities and agreements to support international efforts to prevent, and fight against, money laundering and terrorist financing.

I hope that I have answered the points that noble Lords have made.

Wheeled Goods Vehicles

Debate between Lord Young of Cookham and Lord Tunnicliffe

Thursday 13th December 2018 Lords Chamber

[Lord Young of Cookham]

I am sorry if the noble Baroness did not understand my reply. What I hope I said was that cement mixers are not exempt; in other words, they have to comply with the sideguard regulations. Since 2012, all new tippers have be fitted with sideguards and we are taking other measures. On 22 November, we published proposals to increase road safety for cyclists, pedestrians and horse riders. The Government are taking a wide range of initiatives to promote road safety. Our roads are among the safest in the world but one casualty is one too many.

[Lord Tunnicliffe (Lab)]

My Lords, the death of cyclists in this scenario is a tragedy. The problem, which I think the Minister has alluded to, is that the vehicles are very heavy and the cyclists are very light. Sideguards are relatively ineffective when turning left over a prone cyclist. The modern technology available that powers alerts with radar or sensing systems and so on, including on modestly priced cars, is here and available today. It is actually on the car that I own. Is the department taking direct action to accelerate the trialling of this sort of equipment on lorries and contemplating regulations to require it to be fitted?

[Lord Young of Cookham]

We are playing our role, in this case along with the European Commission. In May 2018, direct vision for trucks was one of the safety measures included in the European Commission’s review of general safety regulations. We are also supporting measures under the European Commission’s third mobility package further to improve the protection of pedestrians and cyclists. The European Commission is also doing work, which we support, to reduce what it calls the “aggressiveness” of HGV fronts in the context of vulnerable road users. The noble Lord is quite right that there is a lot of work going on supported by the UK which we hope will improve safety for pedestrians and cyclists.

Automated and Electric Vehicles Bill

Debate between Lord Young of Cookham and Lord Tunnicliffe

Report stage (Hansard): House of Lords
Tuesday 5th June 2018 Lords Chamber

[Lord Tunnicliffe]

My Lords, Clause 10 involves the classic dilemma of taking rights over private property for the greater good. I commend the fact that the clause is there, but whenever such rights are debated, you debate both breadth and reasonableness. I will listen to the response of the noble Baroness, Lady Worthington, on that breadth with interest, because I think there is a case for an incremental improvement in the breadth and power of this clause.

My three amendments are about the other side of the coin: that the regulations should be reasonable. Amendment 27 seeks assurances on the whole matter of how the regulations shall be reasonably applied. Amendment 42 is about notice. We need to be assured that private owners will not be immediately required to do things and that there is appropriate and adequate notice. Amendment 43 relates to the consultation process being appropriate.

[Lord Young of Cookham (Con)]

My Lords, the co-pilot is in charge of this group of amendments. I am grateful to all noble Lords who have spoken to this group and made the case for seeking to expand the scope of Clause 10 beyond the destinations that are so far defined in it.

The amendments of the noble Baroness, Lady Worthington—Amendments 21, 23 and 28—seek to expand the scope of Clause 10, so that privately owned large car park operators would also be required to ensure provision of charge points at their premises. A number of noble Lords and Baronesses have spoken in support of that group of amendments. It is important that we carefully consider which location should be captured in Clause 10. As my noble friend highlighted in Committee, we believe that the Government should regulate only where there is a specific need and not where we are confident that market forces will deliver the necessary infrastructure to meet the needs of EV drivers. I seek to reassure noble Lords by giving examples of what is now happening in the private sector.

First, perhaps I can deal with my noble friend’s comment about the London Borough of Kensington and Chelsea. I think it is providing a number of spaces and that the Government are taking the initiative in encouraging it to do better. Indeed, through the Government’s on-street residential scheme, we have just provided funding for 50 additional lamp post charge points to be installed. I hope that is of some reassurance to my noble friend. But we are already seeing the private sector taking the lead, with charge points going in at destinations including car parks and supermarkets, as these locations begin to appreciate the advantages that offering charging facilities will ultimately have in attracting the growing number of EV drivers to their shops or to use their services. For example, NCP, one of the largest car park operators in the UK, already offers charge points at some of its car parks and is investing to grow the number of sites offering this facility.

Electrical vehicle charging points have been installed in car parks at Heathrow Airport and around 500 charge point connectors have been installed in the UK in the last 30 days. The Office for Low Emission Vehicles has also worked closely with the British Parking Association to develop guidance for its members on investing in and installing charging infrastructure.

Automated and Electric Vehicles Bill

Debate between Lord Young of Cookham and Lord Tunnicliffe

Committee: 2nd sitting (Hansard - continued): House of Lords
Thursday 17th May 2018 Lords Chamber

[Lord Young of Cookham]

My noble friend is absolutely right. Some fuel retailers may be in remote locations where the necessary electricity supply is not immediately available. Therefore, it would not make sense to oblige them to have charge points if they could not get the power. We have taken that on board. When we consult, we will look specifically at the availability of power supply before deciding whether to make progress.

Clause 16(4) would require the Secretary of State to lay the draft regulations in Parliament and their approval by each House before they are made. I understand the intent of the amendment: to ensure there is enough time for stakeholders to consider and comment, and make their views known to parliamentarians, before the regulations are discussed in the House. However we believe that, given the commitment to full consultation and the use of the affirmative procedure, it is not necessary or proportionate to publish the regulations six months before they are made. There will be many opportunities to comment on what should be included in the regulations throughout the consultation, and a delay of six months from the final draft to a vote in Parliament could adversely affect the delivery of the policy. Regarding Amendment 68, I hope this also reassures the noble Baroness, Lady Randerson, of our commitment to consult fuel retailers about the appropriateness of regulations before they are introduced.

I turn to Amendment 87 and the important issue of data. The collection and use of data from charge points is increasingly important to those who help manage the electricity system. We will need carefully to consider how that data is used and how to ensure data privacy. We are already statutorily obliged to consult on the regulations through Clause 16(3). The consultation will cover the issues referred to in the amendments: who is responsible for collecting the data, how the data is shared, and any limitations on the use of such data. Therefore, we do not believe that a specific amendment on data is necessary. Data security and privacy are essential. Data would be anonymised and aggregated and it could be handled in a similar way to how smart meter data is treated. The noble Lord, Lord Campbell-Savours, suggested that one of the prescribed persons might be the Treasury, so that it could get this information in order to charge motorists. I do not think that is the intention, but I will take advice before I commit myself on it. It is an ingenious thought, which the Treasury may follow up now that the noble Lord has mentioned it.

Amendment 95 is proposed by the noble Baroness, Lady Randerson. She must have a very small carbon footprint if she generates through solar panels the power for her car. The amendment would require night-shift workers and households with solar panels to be taken into account for regulations under Clause 13, about smart charge points. I would hope that night-shift workers might be able to charge at work and therefore benefit from the lower rates, but off-peak is not only at night; lowest demand can now be in the afternoon because of solar power, so it could be the new off-peak—I understand that this happened for the first time in the UK in 2017. We will of course look to ensure that the introduction of smart charge points does not have adverse effects on any groups of consumers. However, we do not believe it is appropriate to specify, and implicitly prioritise, a small selection of people, however important, as the noble Baroness’s amendment seeks. I understand that it is important to take into account different groups of consumers, but as the clause is about the requirements for smart charge points rather than the pricing structures, I am not sure that it is the right place.

On smart charging pricing structures, I hope noble Lords will be reassured that the regulator for the electricity system, Ofgem, has an explicit responsibility to make the system fair for all energy consumers. Amendment 102 in the name of the noble Lord, Lord Tunnicliffe, would extend the consulting requirement for this part of the Bill to ensure that the Secretary of State included the National Grid, large fuel retailers and service area operators. I agree that it is important to consult widely and of course that includes such stakeholders, but we do not think it appropriate to specify in the Bill a small proportion of the organisations that should be consulted.

Amendment 103 in the name of the noble Baroness, Lady Randerson, is about requiring draft regulations in this part to be approved in both Houses of Parliament every time they provide or amend a definition in this Act. Clause 16(4) already requires the Secretary of State to do this for the first time regulations are laid, with exceptions for technical regulations under Clause 9(3) and Clause 13. This is a rapidly evolving market and may require the Government to act quickly. The initial regulations will be subject, quite rightly, to the affirmative procedure, but it may not be appropriate to extend this to every provision or amendment of a definition.

I am grateful to noble Lords for raising important issues. I hope they are reassured that we intend to fulfil existing duties in respect of secondary legislation, that we will consult widely and thoroughly before any regulations are brought forward, and that the statutory obligation to consultation in Clause 16(3) will ensure that we do so. I recognise the importance of proper parliamentary scrutiny when defining terms used in the Bill, as the Delegated Powers and Regulatory Reform Committee noted in its report. My noble friend is considering its recommendations and will respond to the committee before Report and copy this response to all noble Lords who have taken part in today’s debate. On that basis, I hope that the noble Lord might withdraw his amendment at this stage.

[Lord Tunnicliffe]

My Lords, I shall not delay the Committee unnecessarily. I will study the response with some care. I suspect that we will bring forward an amendment on Report unless the Minister does so for us, because there is something rather special about the timescales. The standard consultation is 12 weeks. The six months that we propose recognises the considerable work that will be required if a fuel retailer or service operator is caught unawares. Either such a provision is needed or the regulations have to be sensitive about time. I hope for a perhaps more in-depth response—I do not want to be rude—which recognises these timescales. Perhaps we can put that on record on Report, even if the Minister is unable to suggest some useful words to add to the Bill.

Before I withdraw the amendment, can I assume that when Amendment 53 is called, we will commence discussion on the original group without Amendment 51? I see nodding from the Whips; therefore, we are all on the same page. I beg leave to withdraw the amendment.

Automated and Electric Vehicles Bill

Debate between Lord Young of Cookham and Lord Tunnicliffe

Committee: 1st sitting (Hansard): House of Lords
Wednesday 9th May 2018 Lords Chamber

[Lord Young of Cookham (Con)]

My Lords, as we deal with a set of amendments dealing with handover, it is perhaps appropriate to give my noble friend a break, and I move over from the passenger seat. However, I assure the Committee that my noble friend remains in control.

The transferring of control of an automated vehicle between a human driver and the automated vehicle’s system will be an important factor in ascertaining how a vehicle safely and appropriately operates on UK roads. Straightaway I reassure the noble Lord, Lord Tunnicliffe, who spoke to his Amendment 21, that of course we recognise the need to put in place a proper regulatory framework to ensure both the safe deployment and safe use of automated vehicles—I will say a bit more about that in a moment.

It is likely that the first automated vehicles to reach the market will be able to be used in automated mode only in specific circumstances or situations, with vehicles capable of full automation arriving further into the future. My noble friend Lady Sugg said a little more about that when we debated Amendment 4. For example, she said that these circumstances could refer to vehicles that have been geo-fenced—able to operate only in a very specific, defined area—or to systems that would operate only on motorways and other high-speed roads. It is likely that these vehicles will be designed to allow handover only in these very specific circumstances: for example, from the driver to the vehicle when the vehicle enters that geo-fenced area, and from the vehicle to the driver when it leaves, in a safe manner and when appropriate to do so.

It is anticipated that the relevant international regulations at UNECE level will reflect these limited use cases and handover process. It is possible that these regulations will contain requirements for the vehicle to be able to detect where it is so that the system cannot be used in other situations. These standards and regulations will be likely to form the basis of the type approval process which automated vehicles, like conventional vehicles today, must pass to be sold for safe use on UK roads or in other public places. They would then be covered by Clause 1.

At the moment, the powers we have are sufficient. We can use existing powers in the Road Traffic Act 1988 to revise existing, or create new, road vehicle construction and use regulations to transpose or reinforce new iterations of the global regulations as they appear. However—I repeat what we have said before during this debate—global regulations for automated vehicles have not yet been decided, and so it is not clear what changes in our domestic framework would be needed at the present time. It would be premature to ask for primary powers in a Bill that is just about automated vehicle insurance without more detailed knowledge of the ultimate design standards to which these vehicles will be held, or without knowing the outcome of the Law Commission review of the existing legal framework —which, again, my noble friend mentioned.

As regards handover of the driving to an automated vehicle, my noble friend Lord Borwick has proposed a different test from that in the Bill: that the handover must not be “avoidable and unreasonable”. These two words would be applied conjunctively by the courts, and the result would be that a person could be found to be negligent only provided “avoidability” and “unreasonableness” were both shown to be present. The Bill’s test makes for a lower threshold on the insurer by placing a stricter burden on the driver not to hand over in situations when it would be inappropriate to do so. While the technological and wider regulatory framework here is still very new and developing, it would be prudent to set a strict standard and relax it if appropriate once more is known. Therefore, in the Government’s view, the original text of the Bill should stand.

To insert “or continue” into Clause 3, as proposed in Amendment 19, would in effect legislate for the possibility of the user having some residual role in the driving task after the handover to self-driving mode is completed. When a vehicle leaves a geo-fenced area or comes off the motorway, it is anticipated that there will be a safe handover back to the driver, and the details of this will be covered by international safety standards. However, my noble friend’s amendment does not fit with the Bill’s definition of an automated vehicle, because this requires no monitoring while the vehicle is driving itself. I hope this explanation reassures him that his amendment is not necessary.

While, as I have already said, I am sympathetic to the intent of the noble Lord, Lord Tunnicliffe, in Amendment 21, we think that we do not need these powers, as the definition of when it is appropriate for the vehicle to drive itself will be covered elsewhere in regulations. I hope that, given that assurance, the noble Lord will feel able not to press his amendment.

[Lord Tunnicliffe]

Can the Minister expand on where else in regulations these powers will be available?

[Lord Young of Cookham]

I think I said when I was speaking to the amendments that at the moment the powers we have are sufficient. We can use existing powers in the Road Traffic Act 1988 to revise existing, or create new, road vehicle construction and use regulations to transpose or reinforce new iterations of the global regulations as they appear. However, as has been the case with other regulations we have debated, on safety and other issues the Government will bring forward the appropriate legislative framework in due course if we do not already have powers under existing primary legislation.

Revised Draft Airports National Policy Statement

Debate between Lord Young of Cookham and Lord Tunnicliffe

Thursday 15th March 2018 Lords Chamber

[Lord Young of Cookham (Con)]

My Lords, it falls to me as co-pilot to land this debate, which had a smooth take-off with my noble friend Lady Chisholm at the controls. I hope to land on schedule. During the flight, we had in the cockpit two qualified pilots, two former Transport Ministers and a number of aviation experts. All said that they had been on this flight before several times and were used to being stacked for long periods. The journey was smooth, but with some turbulence as we flew over Richmond and Moulsecoomb, and there was a request to divert to Luton.

This has been an excellent debate, and I welcome the informed scrutiny that this House has, as usual, provided. I will try to answer the many questions raised; if I cannot, I will write. As I said, the speakers have been well qualified. For my part, I was Secretary of State for Transport for two years, with responsibility for airport policy, but my recollection is that I was constrained from articulating it for fear of prejudicing the inquiry into Terminal 5, which was under way at the time. At the time, I was Member of Parliament for Ealing Acton, so the future of Heathrow has always been an interest that has generated concern: concern about noise from some constituents but, I must say, counterbalanced by the employment generated for others, either those directly working at Heathrow or those working for businesses whose success depended on proximity to Heathrow. I suspect that there is that same tension in many other parts of west and south-west London.

There is a wide range of views on this subject. That is why we have undertaken one of the largest consultations ever and were keen to ensure that all the consultations were full and fair, giving everyone an opportunity to have their say. In response to the final point made by the noble Lord, Lord Tunnicliffe, I hope that that engagement with the community will continue as we move to the next stage in the planning process.

I was asked about consultation by the noble Lord, Lord McKenzie. I should like to write to him about the timings, but we are carefully considering the responses to the consultations—both the one under way and the separate one undertaken by Heathrow. We do not expect any further contributions to the Government’s consultation, but that is dependent on our analysis of consultation responses. We anticipate a debate in both Houses ahead of the Summer Recess, and the Government are committed to a vote in the other place.

The noble Lord, Lord McKenzie, asked me about the EU safety agencies, which is an important issue. We want to explore with the EU the terms on which the UK could remain part of the EU agencies that he mentions, such as the European Aviation Safety Agency.

The process of parliamentary review that we are participating in is a vast improvement on the years of public inquiry into the need for schemes that bogged down infrastructure before the Planning Act was introduced, and I shall say a word about that in a moment. My noble friends Lord Spicer and Lord Naseby made it clear at the outset that we have delayed far too long in resolving the calls for additional runway capacity in the south-east. The Government are anxious to bring this decades-long debate to a satisfactory conclusion. The revised aviation passenger demand forecasts show the need for additional capacity in the south-east is even greater than previously thought.

The opportunities and challenges that Brexit brings only strengthen the need for investment to improve links with the rest of the world. Across the economy our national infrastructure needs modernisation. That is why we are pressing ahead with the delivery of HS2, rail investment, broadband, road schemes, energy infrastructure and this proposal for a 3.5 kilometre additional runway. The noble Lord, Lord Tunnicliffe, asked me whether anything less than that would invalidate the NPS, and the answer is, yes, it would.

The noble Lord also asked under what powers the Secretary of State could acquire the properties he referred to. The answer is that the Planning Act 2008 enables compulsory purchase, but the draft NPS rightly holds Heathrow to its public commitment to provide 125% of unblighted market value for the homes of those subject to compulsory purchase.

The Government are clear that they expect the number of domestic airports with connections to Heathrow to increase. Heathrow Airport Limited has set out a number of pledges to help strengthen existing routes and deliver new routes to the regions and nations of the UK. These include discounted charges for domestic passengers. Air routes in the first instance are a commercial decision for airlines and are not in the gift of an airport operator. The aviation strategy—I will say a word about that in a moment—will consider the level of connectivity our nations and regions require to support economic growth, whether the market is able to provide this and what the role is for Government support.

There was a lot of interest in surface access and who pays for what. Heathrow is already well connected, with links to the M4 and M25, access to the Tube via the Piccadilly Line, and rail services from Paddington. In addition, later in 2018 Crossrail services will start to the airport, replacing the existing two-train-per-hour Heathrow Connect service. From December 2019, six Crossrail trains per hour will run from the airport directly to central London. TfL plans to upgrade the Piccadilly Line with new trains, more capacity and a faster, more frequent service. From 2026, HS2 will connect to the airport via an interchange at Old Oak Common, providing an express route to the Midlands and the north. A western rail link is planned to allow passengers to travel directly to the airport from Reading and Slough. The scheme is currently being designed in detail before seeking its own planning powers. Building is underway to upgrade the M4 to a smart motorway between junctions 3 and 12 to provide additional capacity.

As my right honourable friend the Secretary of State for Transport has said, we can see great potential in a southern rail connection to the airport, which would enable journeys via Woking, Waterloo and Clapham Junction. That would be of great benefit to those coming up from the south-west. We have already had initial approaches from a number of would-be private sector promoters that are interested in developing this.

On the question of Transport for London, we do not agree that airport expansion would require £15 billion to £20 billion of new infrastructure improvements on top of the billions we are already investing in improved transport. TfL’s number includes a range of other projects in London, which may or may not be needed in the future to deal with general population growth unrelated to airport expansion. The revised draft airports NPS sets out targets for the public transport modal share of journeys made to and from the airport by both passengers and staff.

HAL has pledged to meet the costs of any surface access proposals that are essential to deliver airport expansion. This would include works on the M25, A4 and A3044, as well as a contribution to the cost of the rail schemes. The plans for the runway to cross the M25 would be subject to the proper planning process and would be designed to minimise disruption to other users during construction.

On the question of the Government’s contribution, which was raised by a number of noble Lords, the Government would only consider contributing to surface access costs where they were not needed purely for airport expansion and they benefited non-airport users, as may be the case for the proposed western and southern rail access schemes, for example. The CAA will decide how the costs of any capacity-related surface access schemes will be treated as part of the regulatory settlement, including which of these costs would be recoverable from airport users.

Moving on to some of the other issues, the noble Baroness, Lady Jones, asked about car parking. Heathrow is currently consulting on its proposed plans. Any application for development consent must include details of how the applicant will increase the proportion of journeys made to the airport by public transport, walking and cycling to achieve a public transport modal share of at least 50% by 2030 and at least 55% by 2040.

The noble Baroness also raised an issue regarding the Environmental Audit Committee. By ending the sale of conventional new diesel and petrol cars and vans from 2040, the UK is going further than almost every other European nation. Air pollution has improved significantly since 2010, but we recognise that there is more to do, which is why we have a £3.5 billion plan to reduce harmful emissions. We will carefully consider the Joint Committee’s report and respond in due course.

Environmental and health impacts were again mentioned by a number of noble Lords. The Government take account of the WHO guidelines in developing policy. It is important to note that they refer to noise from all sources, not just aviation. The draft airports NPS makes clear that the Government would expect noise mitigation measures to limit, and where possible reduce, the impact of aircraft noise compared to the 2013 baseline assessed by the Airports Commission. The details around the operation of any scheduled night flight ban, including the exact timings, would be determined at a later stage in consultation with local communities and relevant stakeholders, in line with the requirements of the International Civil Aviation Organization’s balanced approach to noise management. I will ensure that they take on board the point made by the noble Baroness, Lady Kramer, on behalf of those who live in and around Richmond.

It is the Government’s view, based on expert analysis, that the Heathrow north-west runway scheme can be delivered in compliance with legal air quality obligations, with a suitable package of policy and mitigation measures. To answer the question of the noble Lord, Lord Tunnicliffe, and to be absolutely clear, expansion will be allowed to go ahead at Heathrow only if it can be delivered within air quality obligations.

I turn to the impact of noise for those living underneath the flight paths. Airspace modernisation will give the opportunity to make the most of quieter modern aircraft, referred to by my noble friend Lord Naseby, and will also provide more predictable periods of relief from noise, as well as reducing the need for stacking. The CAA has introduced a new and more rigorous process from 2 January this year. Looking ahead, the design of new flight paths is technical and can take some time. Again, I will ensure that the comments made in this debate are taken on board.

On the question of benefits and economics raised by the noble Baroness, Lady Kramer, the Heathrow north-west runway is expected to deliver the greatest benefits to the UK economy, because it will deliver the largest increase in connectivity, particularly long-haul flights. This gives UK firms the opportunity to access markets around the world. International transfer passengers make this connectivity increase possible by supplementing local demand to make more flights viable. More flights means more capacity to carry goods to markets around the world. Details around the operation of the night flights ban will, as I said a moment ago, be determined at a later stage in close consultation with local communities. Once a ban is in place, compliance with the rules will be mandatory and not discretionary.

On the question of costs raised by the noble Baroness, Lady Kramer, and the noble Lord, Lord Berkeley, the revised draft airports NPS requires the promoter to demonstrate that the scheme is cost efficient and sustainable, and seeks to minimise costs to airlines, passengers and freight owners over its lifetime. The Government have set out a clear expectation for HAL to work with airlines and the CAA to drive down the costs for the benefit of passengers, with the aim of keeping landing charges as close as possible to current levels. Beyond landing charges, the increased competition between airlines operating at the airport is expected to result in lower ticket prices for passengers.

HAL has already identified options for expansion, which it says have the potential to reduce the overall cost of expansion by £2.5 billion. On deliverability—or whether or not this can be done—Heathrow Airport is privately owned and any expansion will be privately financed and must be delivered without hitting passengers in the pocket. The Airports Commission concluded that the north-west runway scheme at Heathrow was commercially viable and financeable without government support, including where an additional 10% capital expenditure was required. The Government have considered this analysis and are content that the scheme is viable.

On the other points made by the noble Lord, Lord Berkeley, we are aware of the alternative proposals for expansion at Heathrow which he mentioned. We would encourage any third parties to engage with the economic regulator, the CAA and HAL with a view to reaching a possible commercial agreement. He also touched on the broader issue of the aviation strategy, looking beyond Heathrow. Our new aviation strategy will indeed look beyond the current debate on a new runway at Heathrow. It will set out an ambitious long-term vision for the sector which will support economic growth across the whole of the UK. It will consider how we can make best use of existing capacity at all airports around the country, including Luton, looking at any future need for new capacity away from Heathrow while tackling environmental impacts.

Going through the hundreds of pages of briefing that I was generously given, I was struck by one reply from Caroline Low, who gave evidence to the Transport Select Committee on 4 December last year. It concisely explains the reasons for the Government’s preference: “In terms of maintaining a global hub, regional connectivity, the number of flights and destinations, and passenger benefits, where Heathrow sits in the country it comes out every time on top”.

The Government are still considering the responses they have received and parliamentary scrutiny is ongoing. We will take on board all the comments made during this debate, and I will write to any noble Lord whose queries I have not answered.

[Lord Tunnicliffe]

Will the noble Lord be kind enough to send me a letter telling me which section of that very long Act relates to the compulsory purchase?

[Lord Young of Cookham]

It is an Act that his Government generously put on the statute book, but I will of course write to him with details of the section that gives the Secretary of State those powers.

Social Security (Contributions) (Rates, Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2018

Debate between Lord Young of Cookham and Lord Tunnicliffe

Tuesday 6th March 2018 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I am not having a good afternoon. The Minister stole my speech on the previous set of regulations and my noble friend on the Back Benches has stolen most of my speech on these regulations, so I will not repeat her remarks.

I largely agree with the general point made by the noble Lord, Lord Kirkwood, that these regulations, together with the measures we discussed last week, are part of a very big debate. We should have that debate. I shall certainly press through my channels for a day’s debate in government time on the whole issue of the charges, the uprating and the overall problems. As the Minister well knows, there is not the slightest chance of this Front Bench opposing these regulations because, if we did so, we could win a vote. That would produce a constitutional crisis for which I would be drummed out of the House of Lords so, of course, we will not object. However, I have a technical question: to what extent are any of these regulations, and the parts thereof, anything more than a formality, because as far as I can see they simply approve measures that have already been announced and do not include any discretionary decisions that would alter previous government statements.

These regulations are, of course, a small part of the total picture and a small part of a massive and highly successful programme, to which I think the Minister referred as fiscal discipline and I refer to as a programme to take from the poor and give to the rich. As the noble Lord, Lord Kirkwood, said, the four-year freeze has not been debated: that is, the four-year freeze on child benefit, jobseeker’s allowance, employment and support allowance, income support, housing benefit, women’s state pension age, local housing allowance rates, child tax credit, working tax credit and universal credit. These regulations contain only one substantive element—namely, that CPI inflation is 3%, which is a great deal higher than the 1.7% figure which I believe was envisaged when the freeze was first introduced. Indeed, for the people concerned, for whom food is a very high proportion of their expenditure, food inflation was 4.1% over the period when CPI inflation was 3%. Therefore, the people in the freeze zone are getting substantially poorer. Indeed, the Resolution Foundation takes the view that the freeze will save the Government some £4.7 billion by 2020, and this saving will fund tax cuts for middle and higher-income earners. Austerity has not worked. The Government—be it the coalition Government or the present Conservative Government—have missed every fiscal target they have set. In fact, I am not quite sure where we are now; it is possible that the Government have given up setting targets, which at least aligns with reality. Our failure to oppose these regulations does not mean that we in any way support the evil policy of which they are part.

[Lord Young of Cookham]

My Lords, I am genuinely grateful to all noble Lords who have taken part. We have had a thoughtful debate, with no specific objections —on the contrary, with welcome for the measures in the regulations before us. However, noble Lords have pegged on to that some broader issues which deserve a response, and I will do my best to address them.

The noble Baroness, Lady Primarolo, and I have been debating these matters for over 20 years. Sometimes she has been the Minister and I have been in opposition, and sometimes the roles have been reversed. However, it is good to see that dialogue being maintained in this House, in the same cordial way that it was in the other place.

It may be helpful if I first put in the broader context the reasons for the freeze on certain benefits, because that is the backdrop, then address specifically the points that fall within that of the impact on child poverty, and then address some of the issues that have been raised during the debate.

First, I quite understand the points noble Lords made about the impact of the freeze of in-work benefits on families now that inflation is higher than it was, although I note that it is predicted to fall back to 2% next year, having peaked at 3% in the final quarter of last year. However, just to put that decision in context, spending on welfare had trebled in real terms between 1980 and 2014, and had contributed to a record level of debt: 83.7% of GDP in 2015-16. This was unsustainable. Also, in 2013, the UK had the highest spending on the family out of all OECD countries as a percentage of GDP. That is the backdrop.

Secondly, between 2008 and 2015, average earnings went up by 12%, whereas most working-age benefits, such as JSA, increased by 21%, and child tax credit rose by 33%. A four-year freeze helped to reverse that trend and reinforce the incentives to work.

Thirdly—this has not been mentioned during the debate—the Government have taken steps elsewhere to help the incomes of those in work by raising the national living wage to £7.83 per hour and by making progress on the manifesto commitment to raise the personal allowance to £12,500. Put in that overall context, and with the exemptions we are debating today, the policy is defensible.

I will address some of the issues raised during our debate. Real household disposable income grew at its fastest rate in 2015 to reach its highest-ever level. On the specific issues around child poverty, the noble Baroness quoted the Resolution Foundation; other reports by the Institute for Fiscal Studies and the Child Poverty Action Group focused on the issues raised by the noble Baroness. Since 2010, there are 200,000 fewer children in absolute poverty, before housing costs, and 608,000 fewer children living in workless households, which is a record low. We are committed to taking action to help the most disadvantaged, with a focus on tackling the root causes of poverty in workless households. As the noble Baroness anticipated, it is indeed our view that work remains the best route out of poverty. In 2015-16, 9% of children were in households where all adults were working with relative low income before household costs, compared with 48% in workless households. Since 2010, there are over 3 million more people in work and 954,000 fewer workless households. Therefore we are taking action to ensure that work always pays.

The noble Baroness asked whether we could publish an assessment of the benefits freeze. I understand that it is quite difficult to isolate its impact but, when the freeze was announced, an impact assessment was published, and the Treasury publishes a wider distribution analysis at the Budget.

It seemed to me that some of the strategic issues that the noble Lord, Lord Kirkwood, raised could be dealt with by the Select Committee in the other place that he chaired so ably. In another place one could have Opposition day debates on the more strategic issues, but I take his point, which was raised by others in the debate, that there might be value in a broader debate about social security. I am more than happy to raise that issue with the business managers to see whether that might take place.

We do not consult on the specific measures. They are routine and everybody expects them. I am not sure that it would be a tremendously valuable exercise to consult on the rather narrow annual uprating each year.

The noble Lord, Lord Kirkwood, said that the whole range of benefits is subject to the freeze. However, I am sure that he knows that pensioner benefits and benefits for the additional costs of disability and care are exempt from the freeze and continue to be uprated as part of our commitment to protect the most vulnerable.

He mentioned the quinquennial GAD report, which estimates that the NIF will run out of money in the 2030s. Looking to the foreseeable future—to 2024-25—we expect the fund to have a surplus. However, in the long run he is right: life expectancy and other demographic trends will continue to pose a challenge for the public finances. He mentioned my noble friend Lord Willetts, who came up with his own solutions to how those challenges might be responded to. Again, that is the sort of issue that might be raised in the broader debate that he would like to get under way.

We are committed to the triple lock for the duration of this Parliament. It has been an invaluable element in addressing the issue of pensioners living in low-income households. That peaked in the late 1980s at over 40% but the proportion of pensioners living in low-income households is now down to 16%.

Finally, the noble Lord, Lord Tunnicliffe, complained that he had been robbed by the first-class speeches from those on the Opposition Benches. He asked whether there was an element of discretion in the measures before us. The Explanatory Memorandum says that Section 41 of the Tax Credits Act 2002 requires a review of certain monetary amounts in each tax year to determine whether they have retained their value in relation to prices. Therefore, we have to do that. We discovered that they have not retained their value, so the Government have taken the action that they have. In one year, we did not uprate because inflation at the time was negative. It is government policy to uprate in line with the regulations before us, and I suspect that if we did not, we would be before the courts.

I have tried to answer all the points raised and commend the regulations to the House.

Andrey Lugovoy and Dmitri Kovtun Freezing Order 2018

Debate between Lord Young of Cookham and Lord Tunnicliffe

Tuesday 20th February 2018 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, we on these Benches accept and believe that the order is an appropriate, commensurate and proportionate response in relation to the specified persons. In coming to that conclusion, we have of course looked at the order with care. I also looked up the time when the first order was initiated—two years ago—only to discover that I was in fact the Opposition spokesman then. Time has not changed much.

The noble Lord, Lord Ashton of Hyde, answered all my questions at that time, except one. I quote him:

“As the noble Lord may know, Mrs Litvinenko’s lawyers provided a list of people who she felt should have further action taken against them. Some are members of the Russian authorities who are already under sanctions relating to Crimea and activities in Ukraine. The rest of the list is being considered by the Home Secretary, but so far no action has been decided upon”.—[Official Report, 10/2/16; col. GC 228.]


Has any further action been decided upon for individuals on that list?

[Lord Young of Cookham]

My Lords, I am grateful to all noble Lords who have taken part in this debate for their broad support for the order. I will try to deal with the points that have been raised, but I may have to write in respect of some of them.

To the noble Viscount, Lord Waverley, I say that the Russian authorities should be in no doubt about the position the Government have taken in relation to Litvinenko. We have reinforced our message several times: we have made very clear our profound concerns to the Russian Government in Moscow, we have summoned the Russian ambassador to the Foreign Office in London and we continue to demand that the Russian Government do more to co-operate with the investigation into Mr Litvinenko’s death, including extraditing the main suspects, providing satisfactory answers and accounting for the role of their security service. The noble Viscount raised the issue of the ICJ. I think that is probably a matter for the ICJ but I will make further inquiries.

Government Resources and Accounts Act 2000 (Audit of Public Bodies) Order 2017

Debate between Lord Young of Cookham and Lord Tunnicliffe

Wednesday 29th November 2017 Grand Committee

[Lord Tunnicliffe (Lab)]

My Lords, I am sorry to be a bit picky, but I hope that the Minister has not moved the order; I hope that what he has in fact moved is that the Grand Committee do consider the order. The order itself, whatever his Treasury-produced paper says, will be taken on the Floor of the House after consideration by the Committee. I note the Minister nodding in agreement. I hope that his authors will get that little bit right in future.

I thank the Minister for introducing the order to the Committee this afternoon. The order provides for certain public bodies to be audited by the Comptroller and Auditor-General. In addition, the scope of audit is removed from the Comptroller and Auditor-General for a number of public bodies and companies that are no longer in operation, no longer exist or no longer meet the criteria for public sector audit. It is on the whole concept of criteria that I wish to ask one or two questions.

First, does the primary legislation that established these bodies have Henry VIII clauses that allow the changes to be made by delegated legislation? Secondly, with reference to those bodies being omitted from the scope of National Audit Office audit, why are they being omitted and against what criteria? Will the Minister outline the criteria to the Committee? Thirdly, why are the specific eight bodies being added, under what criteria are they being added and why are the Government adding them at this specific moment? Lastly, what other bodies are either waiting to or likely to be added to the list of bodies to be audited by the National Audit Office? Is there a question about the quality of the bodies waiting to be added?

Although I understand that the order is largely procedural, I would welcome a response from the Minister on those questions to give greater clarity to those who are affected by the order about why they are affected. In very simple terms, the Minister gave us an overall view that it was to add consistency, but I should have thought that that consistency must be against a general view of what should or should not be audited by the National Audit Office.

[Lord Young of Cookham]

My Lords, I am grateful to both noble Lords who have spoken in the debate and will try to respond as best I can.

In answer to the last point made by the noble Lord, Lord Tunnicliffe—he asked: what is the big picture?—the big picture goes back to the year 2000 and Lord Sharman’s report, which recommended that all public bodies should have as a statutory auditor the C&AG. Since then, most new bodies that have been set up have had the C&AG as their auditor, and most existing bodies have been swept up and are now caught by the C&AG. One or two have slipped through the net, which is why we need the order to capture them. That is the basic principle—that the C&AG should be the statutory auditor of all public bodies in the interests of transparency and other broad goals.

The noble Lord, Lord Jones, asked about the Ebbsfleet Development Corporation and, in particular, I think, who reads its report and what the whole development corporation costs. I would like to write to him as I do not have those figures at my fingertips. The responsibility for the development corporations rests with the Department for Communities and Local Government, and I will contact it to pass on the noble Lord’s concerns and make sure that he gets the information that he has rightly asked for. The Ebbsfleet Development Corporation is delivering 15,000 homes and creating a 21st-century garden city in north Kent, taking advantage of HS1.

Turning to the questions asked by the noble Lord, Lord Tunnicliffe, I think I have explained the broad context of audit and accountability and where central government believes responsibilities should rest. The first statutory instruments under Section 25(6) of the Government Resources and Accounts Act 2000 made the C&AG the auditor of certain non-departmental public bodies. The C&AG was also given greater powers of access to documents held by persons in receipt of grants from, or in relation to contracts with, bodies audited by the C&AG. Under the Companies Act 2006, the C&AG was given power to audit companies and specific provision was made for the auditing of non-profit-making companies. This order continues the long-standing approach of implementing Lord Sharman’s recommendations, which I mentioned at the beginning, and which have been adopted by different Governments.

I shall address the specific points raised by the noble Lord, Lord Tunnicliffe. On whether the primary legislation that established these bodies has Henry VIII clauses that allow these changes to be made by delegated legislation, for the bodies included in the scope of C&AG audit by this order, I can advise that no such provisions are available. For the bodies that are removed from that scope, the order amends provisions previously made by earlier GRAA orders and there are no other legislative provisions which would enable all the necessary changes to be made.

Regarding the bodies that are being omitted from the scope of the NAO audit, as I said in my opening remarks, these 61 bodies have ceased operation and there is therefore nothing left to audit and they are being removed. They are listed in one of the schedules to the order. Regarding the addition of the eight bodies, again, in my opening remarks I tried to outline the criteria. To address the noble Lord’s question on why this is presented now, the Treasury originally laid the order in March 2017. However, debates were not possible as a result of the election and so the order was re-laid in September, in slightly amended form, with the Commons debate scheduled for 12 December, and was presented to the Lords today. Lastly, the noble Lord raised a question on future GRAA orders. The Treasury has informed me that no further affirmative orders are planned, which I think is good news for both of us. The last affirmative GRAA order was in 2012.

We support the policy that all public bodies should be subject to C&AG audit to increase parliamentary accountability. We are now implementing that policy, bringing full accountability to Parliament for public bodies and other central government bodies that are consolidated within a department’s accounts. The draft order before us today is an important step to realising that ambition.

[Lord Tunnicliffe]

Will the Minister forgive my unreasonable curiosity and tell me what GRAA stands for?

[Lord Young of Cookham]

Government Resources and Accounts—Act. I got three out of four off the cuff. That was a very fast ball the noble Lord bowled me right at the end, and I got three out of four.

Motion agreed.

Risk Transformation Regulations 2017

Debate between Lord Young of Cookham and Lord Tunnicliffe

Tuesday 7th November 2017 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing the order so thoroughly. As he outlined, the Risk Transformation (Tax) Regulations 2017 create the regulatory and supervisory framework for insurance-linked securities. ILSs allow companies to obtain reinsurance protection from a new pool of capital separate from traditional reinsurance, meaning the direct transfer of reinsurance risk to the capital market. The proposed framework is composed of three elements: the corporate structure for insurance special purpose vehicles or ISPVs, called protected cell companies or PCCs; an authorisation procedure for the PRA and the FCA; and the specific tax arrangements for ILSs.

Before I turn to some specific questions which arose from my reading of the regulations, impact assessment and consultations, I will say something about ILSs in general. The assumption—I use that word deliberately—is that they ought to have little or no correlation with the wider financial markets as their value is linked to non-financial risks such as natural disasters, and therein lies my concern. The Government have made no attempt to conceal the fact that the UK will be venturing into the unknown. Indeed, on the first page of the impact assessment the Treasury states:

“London would be the first major financial centre to offer ILS solutions and we think that a major and well trusted financial centre can help grow the global ILS market”.


This is not a statement of certainty. Given the admission that the UK is breaking new ground, I would have expected the Government to have been keen to assess the impact that the introduction of more risk to the market could have on the financial sector as a whole. An IMF working paper puts it well, stating:

“The growth in recent years of Insurance-Linked Securities has widened the exposure of investors (mostly hedge funds and specialist investment vehicles) to insurance risks originated and managed by insurance companies ... But the effect is that catastrophic insurance losses can now be transmitted directly to investors without the cushion of the insurance company's balance sheet”.


There seems to be an untested assumption, throughout the Government’s proceedings, that there is no correlation between ILSs and economic stability. Am I wrong? Have the Government carried out such risk assessments? If they have, I would be grateful if the Minister could publish them. If not, will he go back to his department and urge it to produce them? It is this lack of inquiry which makes me doubly concerned about the lack of a requirement for a formal review to take place.

The Government have stated that there are a number of issues they intend to review periodically, including whether protected cell companies could be used for other purposes and the untested authorisation and supervision of ISPVs and MISPVs. How did they arrive at the view that a formal review, perhaps within a year of these regulations coming into force, was not necessary? I suggest that there are plenty of measures which would merit review: the extent to which ILS shares are traded on a secondary market, the usage and impact of PCC gateways and the tax treatment. The noble Lord knows that conventions dictate that we do not test the opinion of the House on such matters, but let that not undermine the importance that I place on these questions.

I have a few specific points. The first relates to the tax measures. This third component is in separate regulations —the Risk Transformation (Tax) Regulations 2017 — which are not being debated today. Surely it would have made more sense for the two instruments to be debated alongside each other? Can the framework come into force without the tax elements in place? When does the Minister expect this House to debate the tax treatment for ILSs?

Moving to the insurance mechanisms, a PCC will comprise a core— which is the legal entity—and a number of cells. Will there be a limit to the number of cells each ISPV will be authorised to have? Has the department carried out any analysis on the estimated number of cells each company will run? I ask with particular concerns that an unlimited number of cells would increase the risk of instability in the market, especially if cells are grouped. I understand that this grouping of cells will be allowed in limited circumstances. The Government consulted on how the PRA may impose limitations on how PCCs use these gateways, so as to ensure that cells are used with care and are consistent with the EU Solvency II directive. Will the Minister outline the circumstances in which the PRA would enforce such restrictions?

My final point is about the Government’s decision, as a result of listening to consultation feedback, to change from a pre to a post-transaction notification period to the PRA for new multi-arrangement insurance special purpose vehicle cells, or any assumption of new risk. Why the change? What objections were raised to what sounds like a perfectly reasonable suggestion? As a result of this shift in approach, the Government have stated that the necessary safeguards are in place. Will the Minister outline what these are? The consultation response goes on to say that,

“it will be proportionate for the PRA to give permission to mISPVs to enter into specified kinds of risk transfer deals in the future without the need for further authorisation, provided that those future deals are in accordance with the limitations as set out in the mISPVs permission”.

Is it the PRA’s responsibility to monitor whether deals are in line with expectations or is the onus on the company to report it?

As I have made clear, although we will not vote against this order, I am deeply concerned that the Government are inviting further risk into an already unstable and uncertain market without fully considering the consequences. I hope that the noble Lord can relieve some of my worries in his response.

[Lord Young of Cookham]

My Lords, I am very grateful to the noble Earl, Lord Kinnoull, and the noble Lord, Tunnicliffe, for their comments on these regulations, the light they have shed on them and the perceptive questions they have raised. I am grateful to the noble Earl for identifying that his company—clearly in the forefront of developing this market—has been dealing with these securities for some time. He made the point that the infrastructure needs improving if we are to capitalise on our strengths, and that developing these vehicles in London means that they can then utilise some of the other strengths of the London capital market, such as fund management. He raised issues about the costs. I understand that the PRA and FCA have both set out the costs of authorising ILS vehicles. The proposed costs are already known to the market and so far the industry has not expressed any concern about them. Indeed, the fact that we are developing a fit-for-purpose regulatory structure has been welcomed.

The PRA is aware of the concerns about timing and has said that it aims to improve straightforward ILSs within a six to eight-week timeframe. Given that this is a new activity for it, I expect there will be a learning curve. As time progresses, this may be less steep and it may be able to turn applications round more quickly. However, once the initial authorisation of a vehicle has taken place—this is the protected cell company—each ILS deal can then be added, without having to be approved by the PRA, so long as it complies, as the noble Lord, Lord Tunnicliffe, has just said, with the vehicle’s overall business plan. This will allow ILS deals to be conducted at speed within an authorised vehicle.

On the question of these instruments being listed on the stock exchange, the regulations do not prevent the trading of these instruments on a secondary market. However, as I said when I introduced the regulations, if trading of these instruments is to occur, the secondary marketplace should be accessible only to sophisticated or institutional investors, and this will be regulated by the FCA. We do not want retail investors to be able to purchase these securities as they are clearly unsuitable for retail investment.

On the important issue raised by the noble Lord, Lord Tunnicliffe, the Government’s view is not that we are entering into the unknown by seeking to attract this business to the UK because, as we heard from the noble Earl, ILS is now a well-established and well-understood industry that has been part of the global reinsurance market for some 25 years. Therefore, the ILS business model and the contribution it makes to increasing capacity is well understood and it is clear that ILS has made a positive contribution to global reinsurance capacity. The ability to conduct ILS business in the UK, or indeed across the EU, is not new. Indeed, under the EU’s Solvency II Directive, the UK is obligated to permit and regulate this business. What is new is the regulatory fit-for-purpose framework we are introducing through these regulations, which will ensure not only that we remain a competitive market but that ILS business is conducted to high prudential standards.

The noble Lord referred to impact assessments. As he will know, government departments are required to produce impact assessments for any new regulations they seek to introduce. One such assessment was submitted for the Risk Transformation Regulations and cleared by the Regulatory Policy Committee. As ILS is already possible in the UK, the purpose of that impact assessment was to determine whether the new framework would increase costs for business or the regulators. The conclusion, consistent with the objective to make the UK a competitive environment, is that it would not. What is difficult to estimate is how much ILS might be attracted to the UK.

The noble Lord also raised the important issue of the impact that developing this market might have on overall financial stability. This will not be the case. Unlike conventional reinsurers, ILS transactions do not pool risk, as I explained. Deals must be fully collateralised—the transformer vehicle must raise and hold collateral which is sufficient to meet its reinsurance obligations. These deals are not a way for insurance companies to leverage or hedge their risk or avoid the proper capitalisation of risk that is required under the Solvency II directive, so each risk is in a sense insulated within its own cell. Indeed, I would argue that if these transactions are arranged prudently, they can contribute to financial stability because of the way they are composed. The noble Lord may be interested to know that Hiscox carried out an insurance sector stress test in January of this year which underlined the importance of ILS in providing an alternative source of capital for insurers to draw on in times of crisis.

The noble Lord addressed the point that I made that this market was not correlated with general financial markets. A range of publicly available studies has looked at this issue, so again, we are not dealing with the unknown. For example, one report published in 2016 by the Chartered Financial Analysts Institute concluded that:

“ILS products allocate capital efficiently while providing positive returns for investors—returns that offer true diversification because they are not correlated with returns of the traditional asset classes”.


The clearest evidence of this view being reliable is the performance of ILS investments during the financial crisis. While financial markets in general were hit by the crisis, ILS instruments continued to perform well.

The noble Lord asked about the tax regulations. The Risk Transformation (Tax) Regulations, which set out the tax treatment for these vehicles, are made under the Finance Act 2016 and will be considered in another place. I will write to the noble Lord on the question he raised about the timing and why they are not being introduced simultaneously.

The noble Lord asked about the number of cells that a protected cell company will be able to use. This is not limited by legislation but will be a matter of interest to the PRA, the regulatory body. The PRA will judge what scale of business, including the number of deals, is prudent if individual transformer vehicle applications go down this route. Protected cell companies are designed so that the number of deals should have no impact on the stability of the market as a whole because each cell, as I said, is self-financed.

The noble Lord may have raised other issues and I apologise if I have not addressed them. He asked if we would keep the regulations under review: I think he put that in a slightly more direct way. The Government will, of course, keep these regulations under review to ensure that they are working for both the consumer and the industry.

In conclusion, I am grateful to the noble Earl and the noble Lord for their contributions. I will write to pick up the points that I have not dealt with. I commend these regulations to the House.

Banking Act 2009 (Service Providers to Payment Systems) Order 2017

Debate between Lord Young of Cookham and Lord Tunnicliffe

Tuesday 7th November 2017 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister for introducing the orders and regulations this afternoon. Both instruments amend the Banking Act 2009. The first, the Banking Act 2009 (Service Providers to Payment Systems) Order 2017, extends the Bank of England’s formal powers of oversight to service providers to recognised payment systems. The 2009 Act enabled the Bank to supervise interbank payment systems. However, Part 5 was extended to all payment systems by the Digital Economy Act 2017. The second instrument, the Scottish Banknote (Designation of Authorised Bank) Regulations 2017, will ensure that once the Royal Bank of Scotland has separated its core retail banking from its investment banking, the “new” ring-fenced RBS can continue to issue Scottish banknotes. We support both measures but I have a number of questions for the Minister.

First, on the extension of Bank of England supervision to all service providers, the Explanatory Memorandum states that in this context a service provider,

“may be an organisation that designs, builds or operates a payment system’s infrastructure”.

It goes on to say that,

“only service providers that are considered systematically important”,

to the UK,

“would be considered for supervision”.

In these circumstances it seems entirely appropriate that the Bank of England has oversight and regulatory powers as it relates to financial stability. But who in the Bank of England will have specific responsibility for this? Many of our discussions during the passage of the Bank of England and Financial Services Act 2016 came back to this exact point: what constituted “the Bank” and where did power, responsibility and, ultimately, accountability lie? I will be interested to hear what the Minister has to say on this point.

As the Minister stated in his opening remarks, this is just an enabling piece of secondary legislation. As the Explanatory Memorandum outlines:

“This instrument does not automatically bring any service providers into scope of supervision by the Bank”.


The Treasury needs to specify the service provider by including it in the “recognition order”. How many service providers does the Treasury intend to recommend to the Bank of England for supervision, and will these recommendations be subject to parliamentary scrutiny?

The order is surprisingly vague about what the process of being included in the recognition order would entail. What criteria are used to determine whether the Treasury recommends that the Bank of England supervises a service provider? What does this oversight entail in practical terms? Given that it will be for the Treasury to initiate the proceedings, I would have expected it to produce guidance regarding this instrument. However, the Explanatory Note suggests that it will be for the Bank itself to provide information to service providers.

When the Bank of England supervises banks, it has considerable powers of insight into those banks and has rights to alter structures and to constrain their behaviours. Will the Bank have the same powers when it comes to these service providers? I recognise that the Government say that they have consulted with industry. However, this was not a formal process, therefore I would be grateful for some more details. The Explanatory Memorandum states that the industry was “broadly supportive” of the measures that were bought forward. What elements were there disagreements about, and were amendments made to the draft regulations accordingly?

Finally, on this order, what has spurred the Government to act now? Was it the industry, the Bank of England or the Treasury that requested an extension in scope of the regulations? Closing a gap in supervision is an important step, which we support. However, I remain unclear as to why this change was deemed necessary, how many service providers will be affected and what the supervisory and regulatory framework will look like in practice. I look forward to the Minister’s response.

On the second instrument, which relates to the issuance of Scottish banknotes, page 2 of the regulations states that,

“the Treasury must determine the designation date for the purposes of these Regulations”.

Can the Noble Lord give the House an idea of when this date could be? How much notice do the Government believe is required before the ring-fencing deadline of 1 January 2019?

[Lord Young of Cookham]

My Lords, I am grateful to the noble Lord, Lord Tunnicliffe, for his broad support for the regulations in front of us, his courteous response and for the questions he has asked, most of which I hope to be able to address; if I am not, I will write to him.

The noble Lord started by asking who in the Bank of England had the responsibilities set out in the regulations. The answer is that the Bank’s Financial Market Infrastructure Directorate is responsible for carrying out the supervision of FMIs, which includes the systemic payment systems that we are dealing with in these regulations. That directorate reports to the Bank’s FMI board, which is an executive committee constituted by the governor and chaired by the Bank’s deputy governor for financial stability. It exercises the Bank’s powers and, in turn, escalates issues to the Bank’s governors when appropriate. The Bank publishes an annual report on supervision of market infrastructure, which is laid before Parliament, and of course the governor and other officials of the Bank of England are regularly summoned to give evidence before the Treasury Select Committee.

The noble Lord asked how many service providers might be recommended to the Bank of England for supervision and whether these recommendations would be subjected to parliamentary scrutiny. To specify a service provider, the Treasury has to go through the process which I outlined of consulting the PRA and the FCA, and notifying the service provider and the payments system to which it provides services, after which it considers any representations made. The Treasury then specifies a service provider for recognition by an order, which is published on its website. The order is not subject to further parliamentary scrutiny or published as legislation because the process and criteria for making the orders specifying the service providers are already set out in the Act.

The noble Lord asked what sort of issues might trigger the Treasury into notifying a service provider. The answer is that it will look at: the size and systemic importance of the payment system to which the service provider provides the service; how critical that service is to the payments system; the substitutability of both the service provider and the payment system; and the changing payments market. It will consider the representations made by the Bank and others before finally making the appropriate designation.

Under the Act, the Bank has a power to publish the principles and code of practice to be followed. It can require rule changes, give directions to require or prohibit particular actions, set standards to be met and impose penalties for failures to comply. The Bank will publish its approach to the supervision of critical service providers shortly, to ensure that the approach is as transparent as possible.

[Lord Tunnicliffe]

I am not looking for an answer now but can the Minister check whether the powers will be similar to those that the Bank has with other banks, to intervene and require changes in their management and boards? Will those powers be paralleled under this order? I do not expect an answer now but would be grateful if he would write to me.

[Lord Young of Cookham]

I am grateful for the noble Lord’s recognition that that information may not immediately be at my fingertips. It would be much safer to get an authoritative reply, rather than an off-the-cuff one. He asked what had spurred the Government to action now. Basically, the Treasury has identified the increasing importance of electronic payment systems and therefore of service providers to payment systems. We have done this as part of making sure that our payment system has robustness and can cope with risks and changes.

We did consult industry but it was not a formal process. As the noble Lord said, the industry was broadly supportive of the measures brought forward. In late 2016, the Treasury notified supervised payment systems and major service providers of its intention to lay this order and concluded that these stakeholders were broadly supportive, as no objections were raised.

I am conscious that I have not answered the noble Lord’s specific question about timing, relating to the second of these SIs. If he would agree, I would like to write to him when I have an authoritative answer to that question. In the meantime, I ask that the Motion be agreed.