Financial Services Bill

Baroness Fookes Excerpts

Committee stage & Committee: 2nd sitting (Hansard) & Committee: 2nd sitting (Hansard): House of Lords
Wednesday 24th February 2021 Grand Committee

I am aware that, once again, I have spoken at length, but I trust the Committee will agree that this is a crucial topic that should be considered in detail. I hope I have explained what the Treasury and the regulators are doing to tackle climate change and address green issues, and I hope it is apparent to the Committee that it is an ambitious programme of work. However, this is an area where we must continue to be ambitious, and I hope the noble Baroness, Lady Hayman, will forgive me if I do not allow myself to be drawn on the challenge that she issued at the conclusion of her remarks. I simply say that I have listened to the ideas that have been put forward, and I welcome noble Lords’ engagement on the issues that we have debated, which I am sure we will return to throughout our scrutiny of the Bill. On that basis, I ask noble Lords not to press their amendments.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I have received one request to speak after the Minister from the noble Baroness, Lady Bennett of Manor Castle, who I now call.

[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, I thank the Minister for his comprehensive answer, although I ask again, how can the Government justify having included climate change considerations in the then Pension Schemes Bill last year, but not in this far larger, more significant Bill in 2021?

I want to respond to what the Minister said: that there is no evidence that greener means prudentially safer. I hope I am quoting him accurately. I refer specifically to the fossil fuel companies that the noble Baroness, Lady Sheehan, mentioned earlier, as well as to mining companies with a substantial role in environmental destruction. As the UNEP report to which I referred earlier said, this is unlikely to continue to be tolerated on the international stage. Surely the Government are aware and are taking account of the Carbon Tracker Initiative, which is responsible for popularising the term carbon bubble, if not for inventing it. The excess of carbon beyond climate limits is termed unburnable carbon, some of which is owned by listed companies. This has the financial implication of potentially creating stranded assets and destroying significant shareholder value.

The Carbon Tracker Initiative says that valuations tend to be based on near-term cash flows, which are less likely to be affected by climate-related factors. However, exposure varies, and some companies will be in a far worse position than others, as the demand for fossil fuels and the ability to burn them reduces. Surely, this is a potential concern and a risk that the greening of companies can tackle.

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Amendments 22 and 23 not moved.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

We now come to the group beginning with Amendment 24.

Amendment 24

Moved by

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[Earl Howe (Con)]

My Lords, perhaps it will be helpful if I take as my starting point Clause 3, which enables the Treasury to revoke provisions in retained EU law to enable the PRA to implement the remaining Basel standards. As I discussed in an earlier debate, the UK Government are committed to the Basel prudential standards as a member of the G20. While a member of the EU, our adoption of the latest Basel standards was achieved through EU legislation. The capital requirements regulation implemented the previous set of Basel reforms in the EU and, therefore, in the UK. However, regulation is not static: it must continually evolve to mitigate emerging threats and respond to developments in the financial markets.

As I set out in earlier remarks, the most recent set of internationally agreed Basel standards now needs to be implemented in the UK. The capital requirements regulation, or CRR, forms part of retained EU law in the UK and therefore continues to form the basis of the UK’s prudential framework for credit institutions. In order to comply with the latest Basel standards, the CRR needs to be updated. The EU is updating its own standards through the second capital requirements regulation, CRR2. Rather than implementing the new provisions through detailed primary legislation to amend the retained CRR, Clause 3 gives the Treasury a power to revoke relevant provisions of the CRR that need to be updated in order to comply with the latest Basel standards. This then allows the PRA to make rules implementing the latest standards.

As I have already set out, the Government stand by the delegation of the responsibility for implementing those standards to the PRA but with an enhanced accountability framework. In that general context, and in response to the noble Lord, Lord Tunnicliffe, and for that matter the noble Baroness, Lady Bennett, I might usefully repeat something that I said in an earlier debate: the rules that will replace the EU legislation being deleted are already available in draft form. The regulators and the Treasury are working to make sure that the final rules are published ahead of the debate on the relevant statutory instruments, which have also been published in draft.

It is the PRA that has the technical expertise to implement these essential post-crisis reforms. This is a novel approach, so the Bill ensures that there are checks and balances in place. First, Clause 3 ensures that we transfer only some elements of the CRR to the PRA. The extent of the Treasury’s powers to delete will be confined to those areas of the CRR that are necessary to ensure that the UK upholds its international commitments. It is for the PRA to write the rules. The Treasury’s involvement is merely to enable the rules to be updated by deleting old rules that no longer meet international standards.

Secondly, the clause ensures that the deletions the Treasury makes take place only when it is clear that adequate provision has been made by the PRA to fill the space. Deletions will be subject to the draft affirmative procedure, providing the proper opportunity for scrutiny. The clause also allows the Treasury to make consequential, supplementary and incidental deletions to parts of the CRR. This is to ensure a coherent regime across the CRR and PRA rules, which are critical to industry.

Furthermore, Clause 3 gives the Treasury power to make transitional and savings provisions to prevent firms facing cliff edges from the deletion of a provision in the UK CRR. This will allow the Treasury to save, for example, permissions to modify capital requirements that have already been granted to firms under the CRR and avoids the need for firms to reapply for those permissions under the new PRA rules.

Amendment 24 would remove the requirement on the Treasury to ensure the PRA’s rules “adequately replace” revoked parts of the CRR. It would replace this requirement with ensuring that the rules “replicate or otherwise reflect” them. I understand that the intention of this amendment is to probe the degree of flexibility allowed by the current drafting. The intention is not for the new PRA rules to completely mirror the CRR provisions that they will replace. The PRA rules will update the CRR provisions they replace to achieve compliance with the revised Basel standards, and the language of “adequately replaced by” is intended to allow for this.

The wording in the Bill— “adequately replaced”—is also phrased to ensure that the rules are written in a language appropriately tailored to the PRA’s rulebook, which is specifically for the UK sector, and that the regime remains coherent. The amendment replaces this with the word “replicated”, which suggests that the language of the EU CRR is copied over exactly into the rulebook. This may not be the most suitable language for the UK’s rulebook and may prevent the PRA making the necessary changes to ensure compliance with the latest Basel standards.

In response to the noble Baroness, Lady Bowles, the EU—as I am sure she will recognise with her immense experience—is an outlier in the extent to which it specifies these matters in the equivalent of primary legislation. The approach taken in the Bill will bring us more into line with other major financial centres. This means that the EU is used to assessing rules set in the equivalent of regulator rules.

Amendment 25 would bind the Treasury into setting out why it thinks it is appropriate for the rules not to be replaced before laying the relevant regulations before Parliament. Clause 5 already provides for the PRA to prepare a document setting out whether its rules correspond to the revoked provision and, if so, how. The Government’s view is that that should be the primary document to explain why a CRR provision is not being replaced to provide a coherent explanation. If that document does not reflect a revocation where the CRR rule is not being replaced, this can be explained by the Treasury in the Explanatory Notes accompanying the statutory instrument revoking the rules. The amendment is therefore unnecessary, and I hope noble Lords will feel able not to press it.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I have received no requests to speak after the Minister, so I call the noble Lord, Lord Tunnicliffe.

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[Baroness Penn (Con)]

My Lords, I suggest that this is a convenient moment to conclude our debate in Grand Committee today.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

That concludes the work of the Committee this afternoon. The Committee stands adjourned, and I remind Members to sanitise their desks and chairs before leaving the Room.

Committee adjourned at 7.13 pm.

Financial Services Bill

Baroness Fookes Excerpts

Committee stage
Monday 1st March 2021 Grand Committee

[Lord Sikka (Lab) [V]]

My Lords, I congratulate the noble Baronesses, Lady Bowles of Berkhamsted and Lady Kramer. I am delighted to support their suggestion for reform.

Last week, a number of proposals for arresting regulatory failures were put forward, each offering to help the regulator—what I call “acting as a guide dog for the watchdog”. This is another proposal which has considerable merit. It builds on the notion of an independent skilled person review, a practice that is already well established to some extent. However, in the details of the amendment, it differs from the conventional notion of a skilled person review in focusing on systemic factors rather than individual cases. These include matters relating to internal controls and operations, regulatory parameters, effectiveness, treatment of whistleblowers, public policy objectives and, more importantly, matters of public concern.

Although the amendment does not explicitly say so, I am sure that the noble Baronesses, Lady Bowles and Lady Kramer, would not be opposed to the independent skilled person review being conducted by a panel of retired judges; that could be feasible. The review in any case should be in the open, take evidence on oath and require the production of key documents from producers, consumers, intermediaries and other key parties in the finance industry. The panel could travel to different parts of the UK to take evidence and report within a specified period, like the Australian royal commission that we heard about earlier.

The main aim of the inquiry would be to focus on systemic problems, get to the bottom of the recurring and unresolved scandals in the industry, enable consumers to share their experiences with the industry and its regulators, and facilitate the legislative changes needed to secure confidence in the industry. The proposed review would be a necessary step to bring about a much-needed change in organisational culture and a sense of personal responsibility and accountability in the regulatory bodies, as well as the industry.

The proposed review and its specified headings of “regulatory perimeters”, “public concerns” and “effectiveness of relevant legislation” can also focus on neglected and emerging issues. A good example of issues totally neglected in the Bill, and by the FCA and PRA, are those about the impact of shadow banking. The shadow banking sector is intertwined with retail and investment banks, insurance companies, pension funds and others, and any crisis there is bound to have a huge impact on the rest of the economy. The sector could be worth nearly $117 trillion, far bigger than the world’s GDP; it is lightly regulated, and normal prudential rules do not apply to it. I remind the Committee that the 2007-08 financial crash was triggered not by mass withdrawals of bank deposits by savers but by the inability of Lehman Brothers and Bear Stearns, key players in the shadow banking system, to meet their contractual obligations arising out of speculative gambles. So there is an urgent need for an independent review; that is what we should be aiming for.

I want to reply to a couple of comments made earlier. The noble Viscount, Lord Trenchard, and the noble Baroness, Lady Noakes, referred to the issue of costs. As the noble Lord, Lord Desai, pointed out, the biggest cost is associated with the status quo, which has never been cost free. Over the months and years I have spoken to many victims of bank frauds who have lost their homes, businesses, savings, investments and pensions. All that any review panel or committee has to do is talk to them, and they will soon understand that there is a cost associated with the status quo.

The second point was the question of where on earth we would find these skilled persons. It is a sobering thought that it is not the skilled persons who told the world about any of the frauds or scandals. Journalists and ordinary people have been far more aware of what is wrong, and I am quite happy to trust their judgment to tell us what is wrong with the system, rather than having a very legalistic explanation.

I hope that in his response the Minister will now tell us how the Government have weighed up the evidence of systemic failures of the FCA and what assessment they have made of the impact of such failures on people’s lives. So far, Ministers have not supported any proposals for assisting the regulators or put forward any suggestions. Maybe the Government plan to appoint a royal commission or an independent public inquiry under the Inquiries Act 2005, or something else. It would be very helpful to know whether the Government are content or not content with the current state of affairs in the finance industry.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I understand that the noble Baroness, Lady Neville-Rolfe, has withdrawn, so I now call the noble Lord, Lord Naseby.

[Lord Naseby (Con) [V]]

My Lords, I would like to thank the noble Baroness, Lady Bowles, for the second time this afternoon for an interesting new clause. I have in the back of my mind the concluding words of the Minister of State, my noble friend Lord Agnew, when he introduced this Bill. Colleagues will remember that he said the Bill

“will support economic prosperity across the country, ensure financial stability, market integrity and consumer protection. It will ensure that the UK remains a world-class financial centre.”—[Official Report, 28/1/21; col. 1814.]

So we all know that the Bill is absolutely key. This particular amendment is about the enhanced role of the FCA and the PRA and, in particular, those who lead them. It means, frankly, that they are ever more powerful and important.

The amendment calls for a review after five years, although the noble Baroness, Lady Bowles, made it clear that, according to her contacts in Australia, a shorter period would have been better. I am quite clear in my own mind that five years is far too long. A great many changes are happening all the time, and I am quite sure that the market will remain dynamic and there will be many opportunities; personally, I would suggest a period of three years. You could argue for two, and I understand why you might, but I think that three years is about right, because it is quite a challenge for those who are running these two organisations to be reviewed after two years, which in effect means 18 months.

Should it be just one person? No, it is far too big a challenge for just one person. I believe there should be a team of three, and it should be the responsibility of one of them to be the chairman of the review, with a casting vote if necessary. In my experience of 12 years on the Public Accounts Committee, quite often a small working group would be set up of just three of us to look at the spread and success or otherwise of our work, and it seems to me that that was a good test market. Secondly, I had the privilege of being chairman of a quoted investment trust for some 10 years on a fixed-term basis. We had a limited number of non-executives and we decided that there should be a review every two to three years of the strategy that the operational company was following.

I say to the noble Baroness: well done for putting this forward. In principle, it ought to find favour from Her Majesty’s Government, although I am sure that the review period should be shorter than five years.

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[Baroness Bowles of Berkhamsted (LD) [V]]

My Lords, I am pleased to support the amendment from the noble Baroness, Lady Noakes, which, as she explained, was tabled before the benchmarks consultation was launched. I share her thoughts that something nevertheless has to be done quite quickly if there is to be an opportunity to ensure that one can look forward to stability of contracts, knowing that something will be done before the end of the year. Maybe we are again in the territory of Parliament giving a consultation response through the debate.

Switching from Libor reminds me just a little—it is complicated—of the problem that we had with gilts being indexed to RPI rather than CPI, when RPI was both wrong and not being maintained by the ONS. The Economic Affairs Committee covered this in a report; indeed, we were tempted by Mark Carney to try to get it sorted out. Though I paraphrase, I think the report’s message was to grasp the nettle. That is certainly where I stood. That is really what the noble Baroness, Lady Noakes, is saying with the amendments: there needs to be continuity of contract. We do not want lots of litigation, so there needs to be a safe harbour. It makes one reflect on how wise some of the fallback positions possibly were, but we are where we are; in many instances, nobody really expected them to be activated. They are sometimes maybe not fair between the parties.

The explanations given already are very good. It would be useful to have something in the Bill. It might even be crafted in such a way that it could apply as the general precedent if one came across such circumstances again, heaven forbid. Benchmarks do change from time to time: one discovers that something is flawed, therefore one has to correct it. That should not disturb what could be made into something that can operate with continuity, certainty and without disadvantaging either side. I would therefore like the Government to take something up, if that is possible in the timeframe they have given themselves now that they have launched a consultation.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

The next speaker is the noble Viscount, Lord Trenchard.

I believe the noble Viscount is muted. Would he be kind enough to unmute?

[Viscount Trenchard (Con) [V]]

[Inaudible]—Amendment 45 in the names of my noble friends Lady Noakes and Lord Holmes of Richmond, and of the noble Baroness, Lady Bowles of Berkhamsted. We are midway through the process of transitioning from the familiar Libor benchmarks, the replacements for which have become more necessary since banks’ funding patterns have changed following the financial crisis. My noble friend Lord Holmes already asked the Minister what he thinks about synthetic Libor. I would also be most interested to hear his reply on that.

The Investment Association welcomes the additional powers for the FCA in the Bill as it will be better able to manage the transition, which should help to mitigate the uncertainty for holders of derivative contracts. There is the additional uncertainty caused by the existence of only temporary equivalence between UK and EU benchmark regulations. It is to be hoped that the EU will soon adopt the European Council’s recommendation to extend the transitioning period for third-country benchmark administrators to the end of 2025.

My noble friend’s Amendments 44 and 45 would be helpful improvements to the Bill, by making it clear that changes to benchmarks made by the FCA will apply to contracts made under benchmarks being revised. Rightly, they offer a safe harbour protecting parties to such contracts from legal actions resulting from benchmark changes. It is encouraging, as I mentioned, that the Investment Association supports this part of the Bill and I welcome these powers being handed to the FCA. My noble friend’s amendments would improve and reduce the risks inherent in exercising these powers and I support them.

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[Baroness Bennett of Manor Castle (GP) [V]]

My Lords, it is a pleasure to follow the noble Lord, Lord Rooker. What we might label in shorthand “the Delaware danger” is very real. It was my pleasure to attach my name, as has the noble Lord, Lord Sikka, to Amendment 46 in the name of the right reverend Prelate the Bishop of St Albans. I also welcome Amendment 47 in the names of the noble Lords, Lord Tunnicliffe and Lord Eatwell. We heard from the noble Lord, Lord Eatwell, a clear and welcome outline of the peculiarities of the Gibraltar authorisation regime and the reason why we need to hear a lot more from the Minister about the justification for it and an explanation for some of the peculiarities that the noble Lord, Lord Rooker, just outlined.

I do not regard Amendment 46 as a probing amendment; I suggest that it is a modest amendment for improvement. It builds on an amendment from the noble Baroness, Lady Bowles of Berkhamsted, debated last week, which made broader country-by-country reporting proposals. Given that we have just seen the Government’s welcome incorporation into the Domestic Abuse Bill of a significant number of amendments proposed by noble Lords in that debate, we might hopefully see the same thing here before we get to the next stage of this Bill.

The noble Baroness, Lady Neville-Rolfe, suggested that this might be extraordinary, or be targeting Gibraltar in some way. As the noble Lord, Lord Eatwell, outlined, we are incorporating it in a truly extraordinary way within our system, so it is surely important that we have full transparency about what is happening. The noble Baroness, Lady Neville-Rolfe, said that we should not make it more difficult for Gibraltarian businesses. Whether it is motor insurance or the gambling industry, we are not talking here about the issue for Gibraltarian businesses; we are talking about businesses operating and making their profits in the UK, which should be paying their tax in the UK. On the Tax Justice Network corporate tax haven index—what might be called the ranking of infamy—I note that Gibraltar is ranked 28 on a scale where number 1 is the worst. While it is not the worst, given that there are scores of tax havens around the world, it is pretty well right up there.

It is estimated by the Tax Justice Network that the tax loss that Gibraltarian arrangements inflict on other nations is about US$4 billion. I do not have a breakdown of figures of where those losses are inflicted but, given what we have heard about both the motor insurance and the gambling industries, it is clear that a very significant portion of them will be in the UK. We also have to think about the nature of those industries; the gambling industry, in particular, inflicts significant major damage on individuals and communities in the UK and I believe that even the Government are looking to tighten controls on it.

Certainly, Amendment 46 offers a modest measure towards transparency, honesty and openness. If that should mean that certain industries pay tax on their profits in the UK, I do not see how that could be opposed. I ask the Government to comment on that.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

My Lords, I understand that the noble Baroness, Lady McIntosh of Pickering, has withdrawn, so I now call the noble Lord, Lord Sikka.

[Lord Sikka (Lab) [V]]

My Lords, I draw attention to my interests as set out in the register: I am an unpaid adviser to the Tax Justice Network. I strongly support Amendment 46 and congratulate the right reverend Prelate the Bishop of St Albans for providing the moral lead in securing tax justice and transparency.

As the noble Baroness, Lady Bennett, just pointed out, Gibraltar is one of the most secretive jurisdictions on this planet; indeed, it is among the top 30 most secretive, and inflicts tax losses on many nations including the UK. We all know that secrecy is an essential ingredient for tax avoidance and illicit financial flows. Over the years, Transparency International has reported that Gibraltar-based companies have been used to purchase properties in the UK, possibly with dirty money. Gibraltar has a population of around 33,000 but it has over 60,000 registered companies: that is, nearly two for every person living on the Rock. Many of these are just shell companies and little is really known about their authentic beneficial owners.

Gibraltar-based companies pop up in smuggling and bribery scandals all over the world. Unsurprisingly, a headline in the Guardian on 9 April 2017 said:

“Defend Gibraltar? Better Condemn it as a Dodgy Tax Haven”.


Little has changed. In February 2020, a report by the Council of Europe’s anti-money laundering body, MONEYVAL, called on Gibraltar to improve its efforts to combat, money-laundering and financing for terrorism.

The right reverend Prelate the Bishop of St Albans has already drawn attention to the tax haven aspects of Gibraltar. Unsurprisingly, many UK insurance and gambling companies are headquartered there because it is considerably more profitable to run UK operations from there by dodging UK taxes and increasing profit-related executive pay.

Research by TaxWatch shows that Gibraltar is indeed a hub for tax-avoidance: some 55% of the remote gambling services provided to UK-based customers are provided by companies based in Gibraltar. Most of the big companies, including William Hill, Ladbrokes and Bet365, have links to the Rock. Unibet’s website states that its servers are based in Malta, Alderney and Gibraltar and that it is registered and licensed in Gibraltar. The company is also listed on the New York Stock Exchange. This organisational maze provides opacity and tax avoidance and obfuscates accountability and the regulators’ ability to investigate.

William Hill has six subsidiaries in Gibraltar and is expected to pay around 12% in corporation tax for 2020, compared with the headline rate of just 19%. One of Ladbrokes Coral’s two licences to operate in the UK is registered in Gibraltar. On 9 August 2019, the Daily Mail reported that 32Red, which is based in Gibraltar,

“paid just £812,000 in corporation tax over ten years—an effective tax rate of just three per cent.”

The company is obviously not in Gibraltar just for the sunshine and the good climate. On 7 August 2020, the Daily Mail reported:

“Over the past two years, Bet 365 paid an effective tax rate of 12.7 percent on profits of £1.4 billion.”


Bet365’s accounts for the period 2015-19 show that the company’s corporation tax bill was £176 million lower because it has various operations in tax havens, including Gibraltar. Adjusting for inflation, Bet365 avoided around £182 million of UK corporation tax for the period 2015-19.

Ministers continue to tell us that companies should be taxed where sales and profits are made, but then we have this Bill, which will enable companies to book their profits in Gibraltar, even though they will have their sales and profits in the UK. The Government’s briefings on the Bill have not stated how much of the profits made in the UK are booked in Gibraltar and what the effect the Financial Services Bill will have on that.

The Government have a legal and moral duty for the good governance of Gibraltar and other jurisdictions to ensure that they do not continue to be what I call the world’s fiddle factories. Through this Bill, the Government are showering more gifts upon Gibraltar but without any quid pro quo; what exactly is it that we are getting in return? Can the Minister explain how these gifts aid tax justice in the UK? I strongly support Amendment 46 because it provides the basis for tax justice and transparency.

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[The Minister of State, Cabinet Office (Lord True) (Con)]

My Lords, this has been a very interesting brief debate. I will not follow the noble Lord, Lord Rooker, into speculating about Delaware because I am acutely conscious that the new President of the United States represented Delaware in the US Senate for 36 years. However, I appreciate what my noble friend Lady Neville-Rolfe and indeed the noble Baroness, Lady Kramer, said: I think that the people of Gibraltar merit sympathy and understanding.

Before I turn to the specific amendments tabled, it might be beneficial in the light of a number of the questions and comments to set out some of the intentions behind the introduction of the Gibraltar authorisation regime. As the right reverend Prelate said, the financial services industry plays an important role in Gibraltar’s economy, and Gibraltar-based firms have made extensive use of the existing market access arrangements between the UK and Gibraltar. It is true, as has been pointed out in this debate, that currently firms based in Gibraltar service a large retail consumer base in the United Kingdom, particularly in the insurance sector, where, as has been said, more than 20% of motor policies in the UK are written by Gibraltar-based insurers. The reasons for the concentration of motor insurance in Gibraltar are complex and obviously of a commercial nature, but it is natural that growth in a sector can lead to an agglomeration effect. Business attracts business, and that attracts people and talent.

I note the remarks that have been made in the debate on a range of companies. However, I remind noble Lords that the Bill is limited to financial services firms only. It will establish a new legal and institutional framework that provides for mutual market access and aligned standards in financial services between both jurisdictions. The United Kingdom and Gibraltar have a historic and unique relationship in financial services, and the UK has not had the same level of market access arrangements with any other jurisdiction. This regime will enable Gibraltar-based firms operating in the UK to continue to do so provided they meet certain standards. That way, the regime respects Gibraltar’s regulatory autonomy while ensuring high standards of supervision and consumer protection for UK customers.

On the amendments themselves, Amendment 46 would require any Gibraltar-based person carrying on authorised financial services activity in the UK to provide an annual statement to the Treasury of the profits it has made from those activities, and for the Treasury to report on this. This proposal cannot be supported by the Government because it does not reflect Gibraltar’s autonomy. As an overseas territory, Gibraltar is fiscally autonomous, and it has the right to set its own policy to support its economy within international standards and to determine its own tax rates. The scope of the GAR is focused on ensuring continued market access for Gibraltarian firms to the UK market based on the alignment of relevant law and practice. The GAR does not extend to taxation.

As my noble friend Lady Neville-Rolfe said, Gibraltar is already committed to meeting international standards on illicit finance, tax transparency and anti-money laundering, including those set by the OECD and the Financial Action Task Force. Gibraltar shares confidential information on company beneficial ownership and tax information with UK law enforcement bodies in real time and has agreed to introduce publicly accessible registers of company beneficial ownership. The Government were satisfied that the Gibraltar authorisation regime is rigorous and includes the right safeguards to ensure consistent standards of law and supervisory practice. I therefore ask that the amendment is withdrawn.

Amendment 47, in the names of the noble Lords, Lord Tunnicliffe and Lord Eatwell, would require the Treasury to report on the regime, the current position regarding financial services market access enjoyed by the Crown dependencies and the case for extending the regime to the Crown dependencies. I suggest to noble Lords that the first part of this amendment would replicate provisions that already exist in the Bill. Clause 22(3) of the Bill, which inserts a new Section 32A into the Financial Services and Markets Act 2000, already imposes a duty on HM Treasury to lay a report to Parliament on the operation of the regime. This report will be presented to both Houses within two years of the regime coming into force, and every two years from then on. It will specifically include an assessment of whether the alignment condition between the UK and Gibraltar is satisfied before market access is granted for an approved activity.

Noble Lords have alluded to the frequency of reporting. It has been chosen considering a range of relevant factors, including the length of time required to undertake a meaningful assessment. In this context, the amendment would simply duplicate this requirement within 12 months of the Bill receiving Royal Assent, potentially demanding a statement before this is appropriate and before any assessment has been completed.

Turning to the second point raised in this amendment, it is important to note—and the noble Lord, Lord Eatwell, acknowledged this—that no other overseas territory or Crown dependency has the same market access arrangements with the UK as Gibraltar has today. The Gibraltar authorisation regime has been designed to deliver the Government’s commitment to Gibraltar in 2018 to maintain long-term market access for financial services between our jurisdictions, based on shared high standards of regulation and modern arrangements for information-sharing, transparency and co-operation. This commitment and the framework reflect the unique historic position of Gibraltar and the UK, specifically the passporting arrangements that were in place when we were both members of the EU single market, as has been said.

In our judgment, it would not be appropriate to extend the operation of the regime to other jurisdictions that do not have the same starting point of close alignment between our rules and supervisory practice. The Treasury remains committed to working with the Crown dependencies, and there are existing tools, including equivalence, that enable different degrees of access to the UK market and are more appropriate for the circumstances of the Crown dependencies. Having considered those points, I therefore ask noble Lords not to press this amendment.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I have not received a request from anyone wishing to speak after the Minister, so I call the right reverend Prelate the Bishop of St Albans.

[The Lord Bishop of St Albans]

My Lords, I am most grateful to the Minister for the points that he has made. I too want to underline my support for Gibraltar. In this new post-Brexit world, I want us as a nation and our neighbouring countries, as well as Gibraltar, to flourish. However, we are also in a time of huge financial stringency, and there are very important issues here about tax justice. As so often when I sit in a debate in your Lordships’ House, I find myself realising that I am in a seminar and learning far more than I am giving. I am grateful to my noble colleagues and friends here for some of their explanations.

I am still unclear how the GAR will be reciprocated in terms of why we are giving these extraordinary benefits. I need time to go away and think about what the Minister has said. I certainly still look at the situation with puzzlement. I was struck by the comment by the noble Lord, Lord Sikka, that there are two registered companies for every citizen on the Rock. It sounds as if there are some extraordinary benefits which to some of us do not look to be reciprocated justly.

I will probably return to this on Report, but in the light of the comments and some of the limitations of the amendment as it is currently drawn up, I beg leave to withdraw it.

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[Baroness Scott of Bybrook (Con)]

My Lords, this may be a convenient moment for the Committee to adjourn.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

The Committee stands adjourned, but in so doing I remind everyone to sanitise desks and everything else within sight.

Committee adjourned at 7.28 pm.

Financial Services Bill

Baroness Fookes Excerpts

Committee stage
Monday 8th March 2021 Grand Committee

[Lord Sharkey (LD) [V]]

I thank everybody who has spoken in the debate on this group. I confess that I should have said clearly at the beginning that my amendments and their text were not the issue; the amendments were simply the fossilised remains of my scope negotiations with the Public Bill Office and a means of introducing the subject of sharia-complaint student finance.

I must say that I am, as usual, extremely disappointed by the Minister’s evasive and unconvincing response. It is a great pity. I still do not understand why there has been such a long delay in addressing this serious problem. The Minister has not offered a reason for the delay except to point at various complications. Perhaps I should remind him that the takaful version of the Help to Buy mortgage system was introduced from a standing start in six months. This has taken nearly seven years, and we have not got there yet. I simply do not understand why this is going to be prolonged and why the Minister cannot give us any assurance about a firm date for the introduction of a sharia-compliant student product.

I also do not understand—I never did—why the Augar review is at all relevant; perhaps the Minister can explain why at some other point. However, I understand that the Muslim community continues to suffer a direct disadvantage without any good reason or plausible excuse. The Government are acting in a completely mean-spirited and heartless way. They are failing in their moral duty, failing to fulfil their explicit promises and failing to provide any real comfort that they might eventually do what they should have done long ago. They are behaving neglectfully and really rather disgracefully. We will return to this issue later.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

Does the Minister wish to speak further? No? Does the noble Lord, Lord Sharkey, wish to withdraw his amendment?

[Lord Sharkey (LD) [V]]

I beg leave to withdraw the amendment.

Amendments 81 to 85 not moved.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

We now come to the group consisting of Amendment 86.

Amendment 86

Moved by

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[Baroness Noakes (Con)]

My Lords, it is a pleasure to follow my noble friend Lord Trenchard who, as usual, speaks good sense on this matter. While these are clearly probing amendments designed to get the Government to say how they see the future of various aspects of financial services, it seems to me that, as regards equivalence with the EU, they are rooted in the language of the past. It has been clear for a long time that the EU sees equivalence either as a route to dictate how the UK’s financial services sector is regulated or as a weapon to be used against the UK as a competitor. The Governor of the Bank of England has spoken strongly against the EU’s apparent positioning on equivalence. He said that either it was trying to say that our rules should never change, which he described as dangerous, or that our rules should change whenever the EU changed its rules, which was “not acceptable”.

There is no doubt that the EU sees the UK as a threat to its way of doing things. It no longer has a leading financial centre within the EU and will struggle to create one, especially if its only weapon is protectionism. We have long been one of the leading financial markets in the world and I hope that we get our number one slot back now that we are unshackled from the EU. That may well take us into new areas of financial services; it should certainly lead to the dismantling of some elements of the EU’s rules that we never liked. The alternative investment funds directive is one clear example; Solvency II and MiFID are others. They never reflected what we regarded as important, and introduced rules which we regarded as unnecessary and cumbersome.

It would have been very easy for the EU to have granted us equivalence at the end of the transition period; we were completely aligned. However, there is a misguided belief in the EU that they can create a rival to the UK and that the best way of doing that is to make it difficult for UK firms to operate in the EU. My own view is that we should abandon any interest in equivalence. Even if we were to get a favourable decision, the EU has retained the right to remove any such decision at short notice. We know that decisions on granting or removing equivalence will not be made on technical merit. They will be political decisions designed to advance the EU’s financial services industry at the expense of the UK. I do not believe that a UK-based financial services operator could ever build a viable business model on the shifting sands of equivalence as determined by a body—the EU—which does not wish us well.

In addition, I do not think that it matters very much. We may find that some areas of our financial services as currently operated will become less profitable—for example, if the EU cuts off its nose to spite its face and denies Euro-denominated derivatives the advantages of London’s liquidity via UK clearing exchanges. Many UK banks and other financial institutions have already set up EU-based subsidiaries to carry out the business that was previously carried out under passporting. That is now water under the bridge—those subsidiary structures will carry on while the business is profitable and cease if it is not.

For these reasons, I believe that the amendments in this group are looking in the rear-view mirror. Of much greater importance is what plans the Government have to support and promote the future—

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

My Lords, there is a Division in the Chamber. The Committee stands adjourned for five minutes.

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[Earl Howe (Con)]

My Lords, the noble Baroness, Lady Bowles, has taken us into an interesting topic area: regulatory equivalence.

The UK has long been a global leader in financial services. As we adapt to our new position outside the EU, it is essential that we continue to support a stable, innovative and world-leading sector. We have already considered the UK’s international standing in another debate. With these amendments, we are considering equivalence and the UK’s relationship with the EU in relation to financial services. I know that there is a lot of interest in this issue, so I will take this opportunity to provide an update on where we are, to the extent that I am able to do so at this point in time. Perhaps, though, I could begin by saying something about our approach to making these decisions.

Amendment 90 seeks to impose an obligation on the Government to make an equivalence determination only where they have determined that the relevant overseas jurisdiction has legal and supervisory standards equivalent to those of the UK. It also seeks to prohibit the Government granting an equivalence determination based only on an agreement to make determinations on a reciprocal basis.

I am happy to confirm that the Government are already committed to conducting their equivalence assessments of overseas jurisdictions on the basis that the relevant legal and supervisory framework of that jurisdiction provides equivalent outcomes to the UK’s. This is outlined in the guidance document on the UK’s equivalence framework which was published in November 2020.

In addition, an example of the legislative requirement for granting equivalence can be seen on page 35 of the Bill. It amends the money market funds regulation to allow the Treasury to make equivalence determinations and states:

“The Treasury may not make regulations under paragraph 1 unless satisfied that the law and practice of the country or territory imposes requirements on MMFs which have equivalent effect to the requirements imposed by this Regulation.”


There is a key point for me to make here. This is not a so-called “line-by-line approach”, where we require a country to have identical rules. We believe that compliance with internationally agreed standards and equivalent regulatory outcomes in different countries can be achieved in different ways and through different legal frameworks.

In that context, there is a further important point that I invite noble Lords to note: granting equivalence is a decision we make independently with no reciprocity requirement. The UK would not grant equivalence just on the basis of reciprocity but would always carry out an assessment to ensure that the other jurisdiction is equivalent. The Government must lay a statutory instrument in Parliament to make an equivalence decision. This will give all noble Lords the opportunity to consider and scrutinise Her Majesty’s Treasury’s decisions as part of the normal legislative process.

I turn to consider our relationship with the EU. I say to the noble Baroness, Lady Kramer, that there is no question of us dismissing this relationship with a wave of the hand or otherwise. Amendments 100 and 105 seek to impose obligations on the Government to report on the status of the EU’s considerations about UK equivalence and on the status of negotiations on the regulatory co-operation memorandum of understanding between the UK and EU. I have already said that the granting of equivalence is an autonomous matter for the UK, and this is equally true for the EU, so the Government are not in a position to report on what the EU may or may not be thinking at a given point in time, even if we wanted to.

The noble Baroness, Lady Bowles, characterised the UK regulatory system as a squidgy balloon and hence difficult for the EU to grapple with but, as I have previously set out, the EU is well used to assessing regulator rules and practice as part of its equivalence assessments, and we see no reason why it would not be able to assess the UK in the same way if the will is there.

However, I can provide an update on our own actions. In November, the Chancellor announced a package of equivalence decisions for the EU and EEA member states. We did this to provide clarity and stability for industry. My noble friend Lord Hodgson asked me a number of factual questions about the existing equivalence decisions between the UK and the EU. If he will allow, to ensure a full and accurate response, I am happy to write to him on those questions.

We are not ruling out further equivalence decisions for the EU in the future, and we continue to believe that comprehensive mutual findings of equivalence between the UK and EU are in the best interests of both parties. The Government remain ready and willing to work with the EU to achieve this. For their part, the EU has granted only minimal decisions for the UK. As per our joint declaration with the EU on financial services, which was agreed alongside the trade and co-operation agreement, we have agreed to establish structured regulatory co-operation on financial services by the end of this month. My noble friend Lord Trenchard will be glad to note that we believe we are on track to do that.

This co-operation will support engagement on issues of mutual interest, including facilitating transparency and dialogue around the process of adopting, suspending and withdrawing equivalence decisions, but I should be clear that it is not envisaged, in the joint statement or elsewhere, that the agreement of the MoU on regulatory co-operation will directly entail any new equivalence decisions. This MoU will be publicly available to Parliament after the conclusion of negotiations. I reiterate that the Government are committed to operating an open and transparent approach to equivalence with the EU, but I am afraid that the Government cannot provide updates on this discussion in real time.

My noble friend Lady Neville-Rolfe expressed concerns that we may have given EU firms some kind of advantage over UK firms. In the absence of clarity from the EU, the UK has acted to provide clarity and stability to industry, supporting the openness of the sector, and to deliver our goal of open, well-regulated markets, but these decisions should not be seen simply as altruistic. They will allow firms to pool and manage their risks effectively and to support clients on both sides of the channel in accessing our world-leading financial services and highly liquid markets, so there are benefits for the UK as well as for the EU.

Finally, Amendment 100 also seeks to impose a legal obligation on the Government to publish a strategy to provide security to UK retail investors in the event of equivalence being withdrawn. I reassure noble Lords that, as set out in the guidance document on the UK’s equivalence framework, the Treasury will seek to ensure that withdrawal of equivalence is undertaken in line with the principle of transparency. That means that the Treasury will endeavour to engage with interested parties as part of the process and will seek to provide Parliament with appropriate scrutiny. I say to the noble Lord, Lord Eatwell, that I recognise the importance of clarity and stability regarding the potential withdrawal of equivalence. When withdrawing an equivalence determination, it will be undertaken in an orderly and controlled manner to ensure that investors are protected.

The noble Lord, Lord Eatwell, made clear a similar concern in relation to the overseas funds regime, given that the provisions of the Bill also create a new equivalence regime there. I assure him that we do not envisage that in the event of equivalence being withdrawn investors would be forced to divest their investments in the fund, but instead that the fund should continue to service them. The Bill also includes a power so that the Treasury may take steps to smooth the transition for funds if equivalence has been withdrawn.

I realise that noble Lords might have wished for a slightly fuller account of our discussions with the EU on the MoU and equivalence issues, but I trust that the reasons for me being constrained on those matters are clear. I hope nevertheless that I have provided the Committee with a sufficient update on this topic and ask that the amendment be withdrawn.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

I have received a request to speak after the Minister from the noble Lord, Lord Northbrook.

[Lord Northbrook (Con) [V]]

My Lords, since we are already diverging from the EU—for instance, with regard to lightening new share-listing rules—does the Minister believe that equivalence does not really matter because Her Majesty’s Government believe that the UK will make up the lost revenue from the passporting system in this and other financial areas?

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[Baroness Penn (Con)]

My Lords, this may be a convenient moment for the Committee to adjourn.

[The Deputy Chairman of Committees (Baroness Fookes) (Con)]

That concludes the work of the Committee this afternoon. As always, I remind Members to sanitise desks and chairs.

Committee adjourned at 7.34 pm.

Financial Services Bill

Baroness Fookes Excerpts

Report stage
Wednesday 14th April 2021 Lords Chamber

Amendment 14 agreed.

[The Deputy Speaker (Baroness Fookes) (Con)]

We now come to the group consisting of Amendment 14A. Anyone wishing to press this amendment to a Division must make that clear in debate.

Amendment 14A

Moved by

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[The Deputy Speaker (Baroness Fookes) (Con)]

I understand that the noble Lord, Lord Stevenson of Balmacara, has withdrawn, so I call the noble Baroness, Lady Kramer.

[Baroness Kramer (LD)]

My Lords, we do not oppose this amendment, particularly as we have the safeguard of the GDPR in place. However, I want to make one comment. One of our major frustrations with the regulator is how slow it has been to pick up on issues—how much information seems to have come its way that there is wrongdoing, yet all its actions seem to be delayed. We went through example after example of that in Grand Committee, Blackmore and London Capital being just two of the latest examples, and I think I have even missed two more scandals that have occurred in the last couple of weeks. I hope there are some other ways in which we can put pressure on the regulator to act and to do so in a more timely manner, and that it will not see this extension as an opportunity to relax and allow more time to pass before it begins to take action when it is needed.

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[Lord Sharkey (LD) [V]]

My Lords, Amendment 15 is in my name and those of my noble friends Lady Sheehan and Lady Kramer, and I am grateful for their support.

The amendment addresses the issue of the provision of sharia-compliant student finance, of which there is none. Because Islam forbids interest-bearing loans, that prohibition is a barrier to our Muslim students going on to attend our universities. We debated this extensively in Grand Committee so I will not rehearse the arguments in detail, but I will remind the House of the timescale involved.

The problem became clear in 2012 when tuition fees were significantly increased, and it became worse when maintenance grants were replaced by maintenance loans. In 2014, the Government published their report on the consultation that they had undertaken. That consultation had attracted 20,000 respondents, a record at the time. The Government acknowledged that the lack of an alternative financial product to conventional student loans was a matter of major concern to many Muslims. The report also identified a solution: a takaful, a well-known and frequently used non-interest-bearing Muslim financial product. The Government explicitly supported the introduction of such a product.

That was seven years ago. There is still no sharia-compliant student finance available, nor have the Government ever offered a detailed reason for this long delay or indicated when it might come to an end. As I mentioned in Grand Committee, I have repeatedly asked the Government the reasons for this lack of action. I have never had a substantive response. There was no substantive response from the Minister in Grand Committee a month ago and no explanation for the delay nor any indication of a date by which the takaful would be available. There was absolutely no sense of urgency. It was as though the plight of these Muslim students was not really important or worth taking seriously.

I made the point that I had written to the Minister on 4 January this year asking for a report on progress and making some suggestions. There had been no response by then, and there was no response until 5.15 pm yesterday evening, 14 weeks after my email. The Minister of State for Universities apologised for the three-month delay without offering an excuse or an explanation and her reply was completely formulaic, containing no substantive answers. It contained no indication of when sharia-compliant student finance would be available. I was struck by the casual contempt for our Muslim community that this response so clearly signalled—an absurdly unfriendly and unfeeling response with no attempt to reassure or comfort the Muslim community. In fact, if you look at the Government’s record on all this, it is very hard to see it as anything other than discrimination against our Muslim community—not just discrimination but a failure to engage and to explain.

Our amendment would oblige the Government at last to fulfil the promise they made to the Muslim community in 2013. It would oblige the Secretary of State to facilitate the availability of Sharia-compliant financial services for students who are eligible for conventional student finance on equitable terms with students accessing these conventional products, and to do so within six months of the passing of this Act so that the next Muslim student cohort did not have to face a conflict between faith and education.

I very much hope that when the Minister responds he will be able to do better than Minister Donelan. I hope he will be able to tell the House when the Government will introduce the sharia-compliant student financial product. I hope he will set a date that will allow the next cohort of devout young Muslims to go on to university. If the Minister cannot do that—if he cannot say when he will fulfil his Government’s 8 year-old promise to our Muslim community—I will seek to test the opinion of the House. I beg to move.

[The Deputy Speaker (Baroness Fookes) (Con)]

My Lords, the noble Lord, Lord Stevenson of Balmacara, has withdrawn so I call the noble Baroness, Lady Sheehan.

[Baroness Sheehan (LD)]

My Lords, I rise to speak in support of Amendment 15 in my name and those of my noble friends Lord Sharkey and Lady Kramer. I felt it only right and the very least that I could do, as the only Muslim speaking in debates on this Bill, to thank my noble friend Lord Sharkey for his determined resolve to ensure that all students, including devout Muslims, can access finance in order to go to university.

Parents who think that it is haram—forbidden—to take out an interest-bearing loan will try to save money to pay for their children to go to university. This has become inordinately expensive and, in many cases, unachievable now, in these financially straitened times. An important point to raise here is that boys will be favoured over girls when money is tight. Access to sharia-compliant student finance will make it easier for all bright boys, and girls, to access higher education.

I note the 2014 BIS consultation—which, as my noble friend Lord Sharkey said, had a remarkable 20,000 responses—and the subsequent report, which identified takaful as a suitable, frequently used non-interest-bearing sharia-compliant financial product. In its response to the report, the Government accepted its findings and put forward an alternative finance product based on the takaful model, which would, in the interests of equity, be available to everyone. It was designed so that repayment after graduation and debt levels must be identical to those of a traditional loan, with all repayments to be made directly through the UK tax system. In addition, the alternative finance product must be applied for in the same way as a traditional loan, through the Student Loans Company.

That was six and a half years ago. The enabling legislation has been implemented in the Higher Education and Research Act 2017, but, since then, there has been no further action. In the meantime, a sharia-compliant version of Help to Buy took only five or six months to launch, from start to finish—so the delay in offering a similar scheme to students is quite inexplicable. I hope that the Minister will be able to give categoric assurance that there will be no further delay. In the absence of such assurance, I would be pleased to support my noble friend Lord Sharkey, should he seek a Division.

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[The Deputy Speaker (Baroness Fookes) (Con)]

My Lords, we now come to the group beginning with Amendment 24. Anyone wishing to press this or anything else in this group to a Division must make that clear in the debate.

Amendment 24

Moved by

Financial Services Bill

Baroness Fookes Excerpts

3rd reading & Report stage
Monday 19th April 2021 Lords Chamber

Amendment 33 withdrawn.

[The Deputy Speaker (Baroness Fookes) (Con)]

We now come to the group consisting of Amendment 34. Anyone wishing to press this amendment to a Division must make that clear in debate.

Amendment 34

Moved by

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Amendment 35 not moved.

[The Deputy Speaker (Baroness Fookes) (Con)]

We now come to the group consisting of Amendment 36. Anyone wishing to press this amendment to a Division must make that clear in debate. I call the noble Baroness, Lady Bennett of Manor Castle.

Amendment 36

Moved by