Financial Services: Mansion House Speech

Baroness Kramer Excerpts

Thursday 21st November 2024 Lords Chamber

[Baroness Neville-Rolfe (Con)]

My Lords, the Chancellor’s speech at the Mansion House covered a wide range of very important topics which we will need to discuss over the coming months. I can touch on only a few of them today. However, perhaps first we should note that very recent developments include an unexpected reduction in the rate of economic growth and an increase in the rate of inflation; and, today, an increase in monthly borrowing to £17.4 billion—the highest level ever outside the pandemic.

The reduction in the growth rate in the fourth quarter was brought about in part by the unwise and inaccurate remarks on the state of the British economy that have been made frequently by both the Prime Minister and the Chancellor since taking office. Taken alongside the problems of the Budget, it has not been an auspicious beginning for the Government. Some of the effects on hard-working citizens, small businesses and farmers were brought to our attention outside this very building only this week. Furthermore, the UK gilt market has taken a hit, meaning that the cost of servicing our debt has risen. The last time yields on 10-year gilts were this high, Labour promised it would ensure that it never happened again; and, of course, higher bond yields mean higher debt-servicing costs. How do the Government intend to square this particular circle?

One major sector covered by the Chancellor’s very comprehensive speech was pensions, which are important for almost everyone. We share the Chancellor’s aims of securing greater returns for pension savers while at the same time enabling pension funds to contribute to funding increased infrastructure spending here in the UK. These objectives are not necessarily incompatible, but it will be difficult to bring about both. We on these Benches will take a keen interest in how this initiative is taken forward in the forthcoming pensions Bill and elsewhere. When can we expect more details?

We are also keen to know more about how, precisely, the proposed pension megafunds will work and, in particular, what rules they will need to follow as regards UK and foreign investments. We all know about the massive investment that Australian and Canadian funds have made in UK infrastructure. Will the proposed UK funds be able to invest in a similar fashion overseas? The Government have proposed consolidating 86 local authority pension funds into eight. When will this occur and on what criteria? How will the interests of those in well-run funds be protected from the ravages of the less successful ones?

Lastly, I return to the Government’s stated first aim of improving the rate of economic growth. We want them to succeed; really, we do. Per capita growth is the right measure of success. All economic policies should have growth as one of their aims, so I note with particular satisfaction that the Chancellor has recently impressed on several economic regulators that this should be their objective also. Otherwise, unfortunately, the Government have made a poor start on achieving growth and managing inflation. When we left government, we had the fastest-growing economy in the G7. Now that has greatly diminished. Let us hope, for the sake of our citizens, that the Government will do better in future.

[Baroness Kramer (LD)]

My Lords, my party is determined to see growth in the UK economy and to use tools such as reform of the financial services sector to drive that growth, though we would put much more emphasis on a revival of community banking and financing for SMEs. High risk, however, is not for all. For people with small pensions, safety—not a jackpot—is the goal. Will the Minister assure this House that, in all the various changes, small pensions will in some way be backstopped from losses generated through higher risk, including illiquid investments? In Canada, which seems to be a template for the Government, public sector pension funds are, in effect, wholly backstopped by the state.

Members on these Benches remember the financial crisis of 2007, which destroyed growth for a generation. It was enabled by gullibility and naivety in dealing with the financial sector, both by Conservative and Labour Governments and by the regulators. The Bank of England is re-looking at the regulation of CCPs to allow greater derivates risk; the PRA now allows insurance companies to hold illiquid assets without relevant reserves; the bank ring-fence is being undermined, and the FCA plans to gut the clawback on bankers’ bonuses and downgrade the certification of senior managers. We are back to jobs for the boys.

Much more—if I understand the Chancellor correctly in the Mansion House speech—is to come. I sat for two years on the Parliamentary Commission on Banking Standards, listening to the pernicious incompetence of masters of the universe who were turning a deliberate blind eye to market manipulation, mis-selling and money laundering, with no acceptance of responsibility. Will the Minster read the reports of the PCBS before he proceeds with any further weakening of regulation? If this is not done with extraordinary care, we risk seeing the reseeding the next financial crisis.

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, I am very grateful to the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, for their comments and questions. May I take this opportunity to welcome the noble Baroness, Lady Neville-Rolfe, to her place and say how much I look forward to working with her in the period ahead? I am very grateful to both noble Baronesses for the “cautious”—I think I should say—welcome that they gave to various aspects of these reforms.

The noble Baroness, Lady Neville-Rolfe, began by talking about growth and, of course, we all know that growth was one of the biggest failures of the previous Government. In her Budget last month, the Chancellor set out a number of important measures to fix the foundations of our economy, restore stability to our public finances and rebuild our public services. They included a new approach to public investment to help deliver high levels of economic growth.

As the Chancellor made clear at the time, however, the Budget was not the limit of our ambition. Increasing private investment and reforming our economy are also central to realising the UK’s growth potential. That is why, last Thursday at the Mansion House, the Chancellor placed the financial sector at the heart of the Government’s growth mission and set out a plan for investment and reform. The financial sector employs 1.2 million people and makes up 9% of GVA, and it is one of the largest and most successful in the world, but we cannot take the UK’s status as a global financial centre for granted. The Chancellor therefore set out a commitment to developing a comprehensive plan to grow that financial services sector.

In the spring, the Government will publish a financial services, growth and competitiveness strategy to give the financial services sector the confidence it needs to invest for the long term. It will be published alongside our modern industrial strategy and be clear-eyed about our strengths, proposing five priority growth opportunities: fintech, sustainable finance, asset management and wholesale services, insurance and reinsurance markets, and capital markets.

In her Mansion House speech, the Chancellor also announced plans in the key area of pension funds, which the noble Baroness, Lady Neville-Rolfe, focused on. I am grateful for her supportive words about the objectives behind those reforms. As she knows, the UK has one of the largest funded pension markets in the world, but pension capital is often not used enough to drive investment and growth in our economy. Our system remains highly fragmented and pension funds cannot bring their full financial weight to bear due to limited investment in more productive assets. This holds back investment in infrastructure and for our most innovative companies.

For this reason, the Chancellor announced the publication of the interim report for the pensions investment review. The plan in the report will deliver a significant consolidation of the defined contribution market and the Local Government Pension Scheme in England and Wales, harnessing the collective size of our pension funds and creating larger funds and pools of capital. The noble Baroness asked about the timescale. A consultation on our pension reform changes opened last week and will run until 16 January. To give the market the necessary time to prepare, these changes will not apply in full until at least 2030. Local Government Pension Scheme changes are expected to be completed sooner, by March 2026, given the arrangements already in place.

The Chancellor also set out plans for reform. We will upgrade our regulatory regime across our economy, including reviewing the guidance we give to the Competition and Markets Authority and other major regulators, to underline the importance of growth. The noble Baroness, Lady Kramer, talked about the global financial crisis; I am very happy to read the reports she recommends. While it was right that successive Governments made regulatory changes after the global financial crisis to ensure that regulation kept pace with the global economy, these changes resulted in a system which often sought to eliminate risk-taking and, in some cases, had unintended consequences that we must address. Regulation has costs as well as benefits; when spending large sums on compliance, firms are not using that money to innovate and grow. It can also have costs to consumers, such as by restricting access to financial advice that could help them plan for the future.

While maintaining important consumer protections and upholding international standards of regulation, we must rebalance our approach. I think this was cautiously welcomed by the noble Baroness, Lady Neville-Rolfe. Alongside her Mansion House speech, the Chancellor issued new growth-focused remit letters to the financial services regulators to make it clear that the Government expect them fully to support our ambitions on economic growth.

The noble Baroness, Lady Kramer, asked about risk-taking. Enabling more responsible and informed risk-taking will support innovation and investment to help drive growth. Our aim is to maintain a sound and stable financial system with appropriate consumer protections while allowing businesses and consumers to make informed choices about the level of risk they take on. Protecting consumers is central to these reforms; the remit letters are clear that the regulators must maintain high regulatory standards, including to adequately protect consumers, in the process of embedding their secondary growth and international competitiveness objectives.

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[Lord Livermore (Lab)]

The noble Baroness raises a very important question and I am grateful for her support around the reforms of the Financial Ombudsman Service; she brings a great deal of expertise to it. Her point about the role of consumers is a good one, and I will write to her on that specific matter.

[Baroness Kramer (LD)]

My Lords, I pick up the issue of consumer protection that the Minister mentioned, as well as a number of other speakers. Does he recognise that the consumer duty, as it is currently fashioned by the FCA, definitely has cost for businesses—it is very box-ticking? But what it does, which very much pleases businesses, is to deny individuals who have been injured a right of private action. It is that right which allowed the sub-postmasters to challenge the abuse that they suffered. That is not available to people within the financial services sector, and quite deliberately so. Without it, essential consumer protection is, to my mind, very much undermined. Will the Minister take a look at that issue?

[Lord Livermore (Lab)]

I thank the noble Baroness for her question. She brings out quite eloquently the trade-offs that the regulator has to make across these different protections. I am happy to look at what she says, of course, but I do not believe there are any plans in that respect.