Money Laundering Regulations: Politically Exposed Persons
Baroness Penn Excerpts(1 year, 12 months ago)
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Baroness Hayter of Kentish Town
To ask His Majesty’s Government what further consideration they have given to the impact of Anti Money Laundering Regulations on Politically Exposed Persons.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, the recent review of the money laundering regulations concluded that there is still work to do to better understand the risk profile of domestic politically exposed persons—PEPs. It is crucial that the Government fully explore and understand any potential consequences of changing requirements on domestic PEPs before making any amendments to the UK’s anti-money laundering regime. This work is ongoing and part of the Government’s wider economic crime strategy.
Baroness Hayter of Kentish Town (Lab)
I thank the Minister for that Answer, but I am afraid that I do not understand it. On 5 July, she said that the review had been concluded and that no change was needed, despite all the evidence that she has had from Members of your Lordships’ House. Unbeknown to us but very helpfully, after that, the Lord Speaker wrote to the FCA on 21 July. However, the FCA’s reply on 15 August simply repeated that firms should act proportionately in dealing with PEPs. Two hours ago, we all received a letter from the Minister which says: “It cannot be acceptable that Parliamentarians and their families are denied access to personal finance.” However, as we will hear from the noble Lords, Lord Vaizey and Lord Kirkhope, and others no doubt, banks are still refusing to handle accounts of their family members, and other colleagues of mine are finding that their accounts are being closed. The system is not working. Can the Minister agree to meet me and other concerned Members of your Lordships’ House, together with the FCA and HMT officials, so that we can make progress? Clearly, led by itself, HMT is unable to do so.
Baroness Penn (Con)
I would be very happy to meet with the noble Baroness and other interested Peers to see what more we can do. I will clarify one point. The review of the money laundering regulations concluded earlier this year. One of the outcomes was that there was more work to do to better understand the risk profile of domestic PEPs. That work is ongoing. When we have a better understanding of the risk profile and any potential consequences of changing the classification of domestic PEPs, we will take our work forward accordingly. In the meantime, it is important that people are treated fairly by the financial institutions that they work with. We have included a list of points of contact for some of the major banks so that people who are having problems can receive help where it is needed. If Members have issues, I encourage them to make use of the Financial Ombudsman Service, if they need to, as a route to address any problems.
Lord Kirkhope of Harrogate (Con)
My Lords, I thank my noble friend the Minister for her letter, which clarifies the current position to some extent. As one of those who was involved for a long time in drafting these regulations in Brussels, it was absolutely required that we should put “proportional” into them—unusually for regulations in Brussels. Can the Minister do more to force the FCA and the financial institutions to take some notice of that proportionality? Can we please make sure that this indiscriminate application to public servants—and their families, including my own—of draconian measures can be put aside, and that we can take a sensible and proper view towards anti-money laundering arrangements?
Baroness Penn (Con)
I absolutely agree with my noble friend on the importance of that word and of a proportionate approach being taken in the implementation of these regulations. I know that concerns have been raised in the past. We have convened previous meetings with the FCA and the banks to make this message known to them. Hopefully, the points of contact that we have provided will provide a further remedy to any noble Lords who are affected. We are also looking at the broader system to see whether we can change the designation of domestic PEPs. However, we need to look very carefully at this and take our time to make sure that we do that work properly.
Lord Sharkey (LD)
My Lords, the FCA guidelines, which are five years old, make clear that Members of this House should be treated as low risk unless there are other factors at play. There is no point to these guidelines if they are not being enforced. What assessment have the Government made of the FCA’s record on enforcement of the guidelines? Have any sanctions ever been imposed on those who break them?
Baroness Penn (Con)
My Lords, as I have said, we have had an ongoing dialogue with the FCA around the guidelines. In turn, they have had engagement with those that they regulate. I do not have any statistics for the noble Lord on enforcement action. However, one area where we have some statistics is that, since 2018, the Financial Ombudsman Service has received fewer than 10 complaints in this area. That is not to say that people have not experienced problems, but I would encourage them to use the points of contact and, where they are experiencing problems, to advance those complaints, so that we can have better data with which to assess the impact of the issue.
Lord Vaizey of Didcot (Con)
My Lords, I have used my noble friend the Minister’s point of contact. My son was refused an account with Starling Bank. I got through to a senior executive there, who stated to me very clearly that: “It is our policy not to give accounts to the relatives of Members of the House of Lords.” That is about as clear a breach of the regulations as you could have. Will the Minister use her convening power to collect in one room the banks, the FCA and Treasury officials? Let us sort this out and introduce some common sense.
Baroness Penn (Con)
I cannot comment on an individual case, but I can be absolutely clear with my noble friend that the FCA has been clear that designation as a PEP should not be a reason to end a business relationship. I said to the noble Baroness, Lady Hayter, that I am very happy to have a meeting, and I will use all the efforts of my convening power to bring to the table those I cannot directly commit to attending the meeting today.
Lord Hunt of Kings Heath (Lab)
My Lords, the Minister has said on two or three occasions that great care is needed in any review of the regulations, despite the fact that it is quite clear that the FCA guidance is not being followed by a number of banks. What is this huge amount of work that still needs to be done before we see a change in the regulations?
Baroness Penn (Con)
My Lords, there is a difference between looking at the FCA guidance and whether it is being properly adhered to and whether that could help solve the problem that noble Lords are talking about. We have made continuous efforts to look at that but, given the wider sentiment we have heard in this House, we also want to look at whether we can make a more substantive change to how domestic PEPs are regulated. That is a wider piece of work that could have unintended consequences, so we need to look at that carefully.
Lord Forsyth of Drumlean (Con)
My Lords, what was the point of us leaving the European Union to take back control if Ministers cannot direct the FCA to show a bit of common sense? I declare my interest as chairman of a bank.
Baroness Penn (Con)
My Lords, the standards for our anti-money laundering regulations come from the FATF, which defines an international approach. My noble friend is right that we have the opportunity, having left the EU, to adapt the anti-money laundering regulations to make them more proportionate and more effective. We have already done that in a number of areas, and the piece of work we are going to do, looking at the evidence around the risk of domestic PEPs, is a further area in which we can do some work.
Lord Macpherson of Earl’s Court (CB)
My Lords, I declare an interest as chairman of Hoare’s bank. To pick up on the point made by the noble Lord, Lord Forsyth, it is now several years since we left the European Union. The Treasury has regulatory powers to change the relevant legislation, and the Government are determined to prove the benefits of Brexit. Surely it is time to use those powers to make progress on this issue.
Baroness Penn (Con)
I agree with the noble Lord that we should make use of the new powers we have. As I said to the House previously, we have already made a series of amendments to the money laundering regulations to reduce unnecessary burdens—for example, scrapping the requirement for the creation of a bank account portal, which was seen as disproportionate. There is more work to do in this area, and that work is under way. We published the review of our anti-money laundering regulations in June, and we are committed to consulting on broader changes to our approach. The main focus of that is on the supervisory bodies for anti-money laundering regulations, but this issue is also being looked at as part of that work.
Bank of England: Libor System
Baroness Penn Excerpts(2 years ago)
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The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I thank my noble friend Lord James of Blackheath for securing this debate. I too wish him well with his recovery. I am grateful to other noble Lords for their contributions. I recognise the work my noble friend has done to raise the profile of issues relating to Libor. However, it would of course be inappropriate for me to comment on any specific cases.
As we have heard, Libor is a benchmark which seeks to reflect the rate at which banks lend to each other in wholesale markets. It has been important historically not just for how our financial services industry operates but for mortgage holders, borrowers and lenders in households and businesses across the country and internationally. At its height, approximately $400 trillion of financial contracts referenced Libor. It was published in all major currencies, including the dollar, sterling, yen, the euro and the Swiss franc, and for various time periods. As noble Lords have described, in 2012, it emerged that Libor was being manipulated for financial gain, in what became known as the Libor scandal.
To digress slightly, I want to reiterate the point that this Government’s position on financial market abuse is clear: it undermines the integrity of public markets, reduces public confidence in them and impairs the effectiveness of financial markets. Therefore, those found guilty of such an offence should be held to account.
The noble Baroness, Lady Kramer, asked whether we had a figure for the overall impact of Libor manipulation. I do not believe that we do, but the seriousness with which we took this issue and the response by the regulators and law enforcement show that, even without such a figure, we appreciate the scale of what was implied by the scandal.
I am sure we will have much more detailed debates on these issues in the forthcoming Financial Services and Markets Bill but I reassure the noble Baroness that it is a question not of deregulating the markets but of improving the regulation and having regulation that is better tailored to the UK. We have the opportunity to look at what works in this country rather than across 27 different jurisdictions. That is the spirit in which the Government are taking forward that Bill. I hope that provides some reassurance.
Following the subsequent government-commissioned Wheatley review and the establishment of the Parliamentary Commission on Banking Standards, Libor came under the regulatory jurisdiction of the FCA in 2013. This led to significant improvements to the regulation and governance of Libor. However, following the 2008 financial crisis, the ways in which banks raised short-term capital changed fundamentally. In particular, banks increasingly moved away from borrowing from other banks to fulfil funding needs. As a result, the unsecured interbank lending market, which Libor seeks to measure, became increasingly shallow.
Furthermore, in light of fundamental changes to bank capital-raising, in 2014 the G20’s Financial Stability Board declared that the continued use of Libor represented a
“serious source of … systemic risk”
and encouraged national authorities and financial institutions to move to alternative rates. In line with this transition plan, in 2017 the FCA announced that Libor would be published only until the end of 2021. Since then, the Government, the FCA and the Bank of England have worked together to support a market-led transition away from Libor.
As noble Lords in this Room will know, because the two noble Lords opposite me were here for the passage of the Financial Services Act 2021 and, unlike me, for the Critical Benchmarks (References and Administrators’ Liability) Act 2021, these gave the FCA the power to compel the production of synthetic Libor rates. I note that on the basis of the framework the wind-down of Libor is progressing well. Synthetic Libor provides for continuity of a Libor setting for up to 10 years. This is for the benefit of the contracts which have proved very difficult to transition—the tough legacy contracts; in other words, it is a safety net for tough legacy contracts.
The noble Baroness, Lady Kramer, said that synthetic Libor is no longer available. That is not quite correct. Since the end of 2021, we have seen a greater than anticipated reduction in the overall stock of Libor-referencing contracts, but synthetic Libor remains available where it is needed. The noble Lord, Lord Tunnicliffe, asked about additional steps the Treasury and regulators have taken to assist those who are unable to transition in time. The synthetic Libor rates for certain sterling and yen settings are there for the benefit of those who were unable to transition. The FCA will consider the data on remaining exposures when taking decisions on how long to continue its rates.
The noble Lord asked specifically about when a final decision on the winding-up of the synthetic three-month sterling Libor rate will be taken and how much notice will be provided. Over the summer the FCA published consultations on the future of the remaining Libor rates. In line with its requirement to consult on its decisions relating to synthetic Libor, the FCA will respond to the consultations in due course, but it understands and factors in the need to ensure that adequate notice is provided.
The synthetic rates for sterling and yen Libor seek to replicate as far as possible the economic outcomes that would have been achieved under Libor’s panel bank methodology. The FCA selected a methodology in line with the global consensus of firms and regulators, including extensive domestic consultation.
As many noble Lords will know, the synthetic sterling rate is calculated using the Bank of England’s sterling overnight index average—SONIA—which is administered by the Bank of England and, importantly, is based on approximately £60 billion worth of actual transactions of the interest rates that banks pay tomorrow, sterling overnight from other financial institutions and institutional investors each day. This means that SONIA is far more robust and resilient to any risks of manipulation, such as those seen before 2012. By imposing a synthetic methodology based on SONIA, the FCA can provide more time for certain legacy contracts to move to alternative benchmarks, thus reducing the risk of disruption.
The Libor benchmark has been globally important for many years, not just for those who work in financial services but for people across the country and around the globe. But, given the fundamental changes in global finance in the past 20 years, it has been appropriate to transition away from Libor safely and predictably. The UK is the home of Libor and has taken action to support the global, market-led transition away from it, reaffirming our commitment to being a trusted custodian of a global financial services sector.
The work of the UK authorities to encourage the transition away from Libor has been highly successful so far. For instance, of the estimated £30 trillion of sterling Libor exposures outstanding at the beginning of 2021, estimates show that less than 1% now remain on synthetic sterling Libor. I hope that that goes some way to answering the noble Lord’s question about the estimated number of unresolved cases. If we had not played the role that we did, the disorderly cessation of Libor could have presented a significant global financial stability risk because of the vast number and variety of contracts that reference it.
My noble friend Lord James asked what steps the Government are taking to ensure that the Libor system remains available. I hope that I have been clear about why the Government have taken the action they have to ensure a smooth and orderly wind-down of Libor. The Government continue to encourage transition away from Libor to more robust risk-free rates, such as the Bank of England’s SONIA. The Question also referred to the risk of the collapse of interbank lending. The interbank lending market that Libor seeks to measure is of course just one way that banks can fund themselves. Banks have a range of possible sources of funding available to them, including savers’ retail deposits and investors’ wholesale funding, as well as the banks’ capital base. As I said, the way in which banks fund themselves has fundamentally changed since 2008.
Of course, the other thing that has changed since 2008 is that the banking sector is substantially more resilient than before the financial crisis, with higher levels of capital and liquidity. This is because of reforms introduced after the financial crisis that require banks to hold more capital and reduce their reliance on short-term funding, such as interbank lending. For example, banks are now required to hold enough liquid assets to meet their projected outflows for at least the next 30 days, and to have enough funding with a maturity of greater than a year to fund their assets.
In addition, I reassure noble Lords that the Bank of England has a range of tools and facilities that can be called upon to support bank liquidity in the event of market stress, including liquidity insurance facilities, which are used to ensure that it achieves its financial stability objectives. These facilities can be called upon if banks stop lending to each other in the event of market stress.
To conclude, overall, the reforms introduced since 2008 have increased the financial stability of the system and will prevent the costs of banks failing from falling upon taxpayers. The sensible management of the wind-down of Libor is vital not only to the integrity of the UK’s markets but to the UK’s credibility internationally. We have worked closely with international partners in the approach that we have taken, and we received praise from them for that. The Government will continue to engage with regulators to ensure a smooth ultimate end to this transition and, in doing so, underline the UK’s reputation as a well-regulated and effective global financial centre.
Stock Markets
Baroness Penn Excerpts(2 years ago)
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The Lord Bishop of St Albans
To ask His Majesty’s Government what assessment they have made of the impact of Paris overtaking London as Europe’s most valuable stock market.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, according to the Global Financial Centres Index, London is the second highest-ranked financial centre in the world after New York, while Paris is 10th. The UK continues to be the pre-eminent financial centre for derivatives and foreign exchange trading. In all equities instruments, the UK almost doubles France’s total market capitalisation at $6.2 trillion. To support the UK’s competitiveness, the Government are undertaking ambitious reforms to keep pace with innovation.
The Lord Bishop of St Albans
My Lords, I totally accept that there are various people trying to analyse the levels of trading—although it was a wake-up call last year when on some grounds Amsterdam was seen to overtake London as the premier financial trading centre, and last week some of those organisations claimed that Paris had overtaken London as the premier stock exchange. In the light of us trying to build an economy which properly rewards our workers and protects our environment, what are His Majesty’s Government doing to increase confidence in London’s reputation in financial trading and as the premier stock market?
Baroness Penn (Con)
I am so glad that the right reverend Prelate has given me a chance to set out what the Government are doing. The Financial Services and Markets Bill has just completed its work in Commons Committee, setting forward a whole range of reforms to inherited EU law to make us more competitive. He also mentioned the environment. The Government’s ambition is to make London the premier place for green finance, to ensure that our financial markets take into account the challenge of climate change, so that we then can ensure that we are pursuing green growth across the whole of our economy.
Lord Lilley (Con)
My Lords, having lived and worshipped for nearly 40 years in the diocese of the right reverend Prelate the Bishop of St Albans, I have benefited greatly over the years from the spiritual advice that I have received from his predecessors and my local clergy. But is my noble friend aware that this is the first time I have ever heard a bishop of the Church of England complain that the stock market is not high enough? Is that because the bishops have ceased to worry about spreading Christianity and now propose the worship of Mammon, or is it simply a delayed anti-Brexit point, which is not the role of the bishops?
Baroness Penn (Con)
I cannot speak for the right reverend Prelate but he mentioned two things. One was ensuring green growth, which I have addressed, and the other was workers and jobs. Maybe he knows that there are 2.3 million jobs supported by the financial services sector, with two-thirds of these outside London in finance hubs including Birmingham.
Lord Anderson of Swansea (Lab)
My Lords, what is the Government’s considered view on which provides the greatest pressure on the standing of London as a financial centre: Brexit, or the chaos and instability caused by the last Conservative Government?
Baroness Penn (Con)
My Lords, I do not accept the premise of the noble Lord’s question, which he may be unsurprised to hear. In fact, in 2021, over 120 companies chose to list in London, the highest number since 2014 and ahead of its European competitors. These listings raised a total of £17 billion, the most raised in 15 years.
Lord Razzall (LD)
My Lords, I am sure that the noble Baroness must accept that in 2015 the value of the London Stock Exchange was twice that of the French stock exchange, and today it is lower. Will she also accept that there could be a number of reasons for this? First, it could be, as the Governor of the Bank of England said this week, that the markets have lost confidence across the board in the UK economy. Secondly, could it be because of the damage to the economy that the previous Prime Minister did in her 44 days? Thirdly, could this be—whatever the noble Lord, Lord Lilley, might think—a result of Brexit, as the Times said today? Or does she agree that it is all three?
Baroness Penn (Con)
I think the noble Lord forgot to mention a global pandemic and Putin’s war in Ukraine. He also forgot to acknowledge the point that I have made throughout this Question that London continues to be either the highest or second highest-ranking financial centre in the world.
Lord Bellingham (Con)
My Lords, obviously we cannot be complacent, but can the Minister remind the House that Paris has 795 listed companies on its exchange, whereas London has 2,484 companies. We should look not just at the most valuable companies, such as LVMH, which is quoted in Paris and has a market capital of over €300 billion, but at all those small companies that are raising capital on the London market.
Baroness Penn (Con)
I think my noble friend has reminded the House on my behalf of those figures. I take the opportunity to say that we are not complacent about London’s position, and we are doing a lot of work beyond the Financial Services and Markets Bill to ensure that it remains competitive—the listings review from the noble Lord, Lord Hill, the second capital raising review and the wholesale markets review, among other pieces of work. The FCA has already delivered a number of rule changes based on the listings review to ensure that we remain competitive.
Lord Rooker (Lab)
Is not London the money laundering capital of the world?
Baroness Penn (Con)
The noble Lord will know that risks come alongside being a premier financial centre. The important thing is that we take action to address those risks. That is what the Government have been doing and will continue to do. We had part one of the economic crime Bill in the previous Session and part two will be forthcoming.
Lord Watts (Lab)
My Lords, the rest of Europe faces the same problem as the UK. Why are we are being hit harder than many other European countries?
Baroness Penn (Con)
The noble Lord is right in one respect: both the rest of Europe and the UK face heightened energy prices as a result of the war in Ukraine, and jurisdictions such as the US do not face equal pressures. But the UK also faces a tightness in its labour market that we see in the US, for example, that is not seen in other European countries. Factors have come together to make things harder for the UK in the current circumstances.
Lord Houghton of Richmond (CB)
Is it possible to produce a definitive ranking order of the causes of our economic woes, specifying war in Ukraine, Brexit, Covid and a defined period of government mismanagement? It seems to me that everybody hides behind a mix of them. Is it possible to have an independent and defined ranking order of them to cut away some of the dispute?
Baroness Penn (Con)
Our biggest economic challenge right now is the high levels of inflation that we are facing as a country, and the biggest driver of that inflation is heightened energy prices caused by the war in Ukraine. Yes, there are other factors at play, but I think those two things are undisputed.
Lord Stoneham of Droxford (LD)
The fact of the matter is that the Government have weakened the City by their policies towards the single market and Europe. I wonder what the Government are doing about the fact that people who work in the City selling financial services—I declare my interest, as a member of my family works in the City—cannot sell or are restricted in selling in Europe unless they are accompanied by somebody from the country in Europe where they are trying to sell, because of the deal we have with Europe. This is weakening the City.
Baroness Penn (Con)
I disagree with the noble Lord. I think that our leaving the EU presents opportunities for the City, which is exactly what the Government plan to capitalise on through the Financial Services and Markets Bill and other things that I have already mentioned. We do not just trade with Europe, and we continue to be one of the pre-eminent global financial centres in the world.
Lord Kamall (Con)
My Lords, my noble friend is absolutely right to say that there are a number of ways of measuring the rankings of different financial centres. In the ranking to which the Question refers, one reason why Paris has overtaken London is because of the value of LVMH—one company, which has doubled its share price. It shows the challenge of making sure that we are attracting growth companies. What are the City and Government doing to make sure that we continue to attract growth companies to list in London?
Baroness Penn (Con)
My noble friend is absolutely right that one factor in play here is that different sectors are represented more strongly in the different stock markets, which have been affected differently by the global uncertainty and inflationary pressures that we have faced. On his point about what we are doing to attract investment into the UK, I say that two elements of the growth plan that were retained were around the annual investment and small enterprise investment—I will get the acronym wrong, but I refer to the other investment allowances. We consider that to be incredibly important. I have mentioned before a number of the changes to listing rules including, for example, dual class share structures, which have been taken forward by the FCA.
Financial Services (Miscellaneous Amendments) Regulations 2022
Baroness Penn Excerpts(2 years ago)
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Baroness Penn
That the draft Regulations laid before the House on 17 October be approved.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, this statutory instrument comprises two sets of provisions relating to Gibraltarian firms operating in the UK market and to securitisation. The proposed legislation will remedy technical deficiencies identified in financial services legislation that was put in place to help manage our withdrawal from the EU.
In relation to Gibraltar, this instrument will fix temporary market access arrangements put in place to ensure that Gibraltarian firms did not face a cliff-edge loss of market access into the UK when we left the EU. In particular, these amendments will complete the intended transfer of powers to the Treasury and the Financial Conduct Authority in three specific areas. This transfer will give the UK authorities powers in relation to Gibraltarian firms where operating in the UK market, consistent with their powers over domestic firms.
It is worth remembering that financial services legislation was amended on withdrawal from the EU to adjust the treatment of EEA firms; in particular, to remove passporting rights, which were a function of the EU’s single market. At this time, because Gibraltarian firms had benefited from equivalent rights, separate provisions were necessary to preserve the existing arrangements supporting market access for financial services between the UK and Gibraltar. These arrangements were always intended to be temporary. Through the Financial Services Act 2021, we are working to replace them with a new permanent regime designed specifically for Gibraltar that reflects our unique history and relationship.
The temporary regime that the Government put in place for Gibraltarian firms unintentionally prevented the transfer of powers to the Treasury and the Financial Conduct Authority being completed in certain areas, leaving gaps in UK law. This SI will exclude provisions from this temporary regime to remove these gaps in the powers available to the Treasury and the FCA. This is equitable and proportionate, as it will enable the treatment of Gibraltarian firms to be brought in line with that of UK firms. Closing these gaps will provide for a more consistent legal and regulatory environment, as intended.
This SI will have an impact on three regulations that affect Gibraltarian firms operating in our market. Under the Short Selling Regulation, the Treasury’s power to modify the reporting threshold relating to net short positions will extend to Gibraltarian firms trading shares on a UK trading venue. Under the Markets in Financial Instruments Regulation, the FCA will be able to apply technical standards relating to post-trade disclosure obligations to Gibraltarian investment firms in the UK. Similarly, under the Packaged Retail and Insurance-based Investment Products Regulation, the FCA will be able to apply technical standards to Gibraltar firms selling, advising on or manufacturing PRIIPs to retail investors in the UK.
I turn now to the second area the SI covers, securitisation provisions. Securitisation is the packaging up of assets or loans and selling them on to investors. This allows lenders such as banks to transfer the risks of assets to other banks and investors to free up their balance sheets and allow for further lending to the real economy. The UK supports the implementation of international standards to promote simple, transparent and standardised—or STS—securitisations. STS securitisations are easier for investors to understand and assess the risks of. As a result, some STS investors will benefit from lower capital requirements.
Generally, only firms established in the UK can designate their securitisations as STS. However, transitional arrangements were put in place to allow for certain EU STS securitisations issued prior to the end of 2022 to be recognised in the UK. These arrangements were extended to the end of 2024 by another set of EU exit regulations earlier this year. The instrument being debated today will simply extend the end date of two requirements for EU STS securitisations to the end of 2024, rather than 2022. This will ensure that UK investors do the appropriate due diligence checks when investing in EU STS securitisations, and that these securitisations remain exempt from clearing requirements, to prevent unnecessary administrative burden. The amendments thus maintain the current requirements as long as the transitional arrangements last. I beg to move.
Lord Jones (Lab)
My Lords, I thank the Minister for her lucid introduction. I refer to paragraph 7.26 of the Explanatory Memorandum. Will she tell us just how busy Gibraltar firms are? How many of them are there—that is, those that are
“acting as sellers, advisers or manufacturers of PRIIPs to retail investors in the UK”?
Gibraltar is a very small place. We might ask, with regard to the Explanatory Memorandum, what is going on in Gibraltar? There is a plethora of technical terms, a multitude of abbreviations in capital letters and specialist vocabulary, and it is all a blizzard of necessitous complexity, the House might agree. Of course, the Minister is a master of it all and, again, I thank her for her lucid introduction.
Baroness Penn (Con)
My Lords, I thank all noble Lords for their contributions to this debate. With this SI, the Government aim to remedy technical deficiencies identified in financial services legislation arising from the UK’s withdrawal from the EU. Nevertheless, a number of pertinent questions were asked.
To give the noble Lord, Lord Jones, a better picture of Gibraltarian firms operating in the UK and their involvement in our financial services sector, data from the Government of Gibraltar highlights that approximately 95% of Gibraltar’s financial services business is with the UK. From the other end of the telescope, around 29% of motor insurance policies in the UK—some 8.5 million—are provided by Gibraltar-based insurers. According to 2022 data from the FCA, over 100 Gibraltarian firms are operating in the UK, including insurance firms, banks, asset managers and e-money firms. The number of firms that might be affected by this SI is roughly 18, but in practice we think it will be fewer. Although there is large-scale involvement of Gibraltarian firms in UK financial services, the impact of this SI would be more limited.
The noble Lord, Lord Tunnicliffe, asked whether this SI will assist Gibraltar in getting off the high-risk list from the FATF. This statutory instrument will not have a direct bearing on Gibraltar’s status in that respect. The UK is a supportive and strong member of the FATF and the Government are committed to making the UK a hostile place for illicit finance and economic crime. We are also committed to supporting Gibraltar to achieve full implementation of the FATF standards by addressing the weaknesses in its regime to tackle illicit finance.
The noble Lord also asked how different the regulation of financial services firms in Gibraltar will be compared to the regulation of financial firms in the UK—for example, in Birmingham. As members of the EU, Gibraltar and the UK implemented the same EU rules on financial services, so we start from the same place. The current temporary regime maintains market access on that basis while we implement the new regime provided for in the Financial Services Act 2021. That will require alignment with UK law and practice. In effect, firms in Gibraltar and the UK will be subject to the same rules under the new system.
Baroness Penn (Con)
I will double-check that for the noble Lord. I believe so, but I would prefer to write and confirm it.
In the noble Lord’s precis, he asked whether this simply extends the status quo for two years. Yes, that is the correct interpretation of this SI. The noble Baroness, Lady Bowles, asked whether we are in a process of extending it in another two years, and then another two years after that. The Financial Services and Markets Bill, which has just finished Committee in the other place, has introduced a permanent equivalence regime to allow the Treasury to recognise STS-equivalent securitisations issued by firms in other countries. The temporary recognition of EU STS will help bridge the gap until we can undertake assessments under this new regime in the Bill currently going through. We have a plan and the legislation is passing; we fully expect that the extension to 2024 would be the last such extension and that we would have a new regime up and running by that point.
The noble Baroness asked about the regulation of these firms in the intervening period. I will write to her on that point to ensure that I do not get anything wrong, and I will also write to the noble Lord, Lord Teverson, on his question. To reassure the noble Baroness, looking at the data in terms of the specific regulations in this area, about five Gibraltar firms could fall within the scope of the 0.1% reporting threshold in the short selling regulation, the SSR. We are giving the regulators here the power to change that threshold to align with the EU. It is a small number. No Gibraltar PRIIPs manufacturers operate in the UK, so the power we have to change the provisions there currently would not bite. Five Gibraltar firms in the UK are using branch passports under MiFIR. I know that does not directly answer the noble Baroness’s question, so I will write to her. However, to give a sense of the scale of the gap—if there was any such gap—we believe it to have been small.
Lord Tunnicliffe (Lab)
Will the Minister ensure that all letters are copied to all participants?
Baroness Penn (Con)
I will ensure that all letters are copied to all participants in the debate and placed in the Library of the House.
Financial Markets: Stability
Baroness Penn Excerpts(2 years ago)
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The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
My Lords, I join all noble Lords in thanking the noble Lord, Lord Sharkey, for the opportunity to debate this important topic.
The central responsibility of any Government is to protect national security, and an essential pillar of that security is economic stability. That economic security and stability has real and profound impacts on people’s lives, as we have heard in today’s debate, from pensions and savings to mortgage costs and the broader cost of living.
The Motion that we are debating today speaks of the importance of stability in financial markets, and I agree with all noble Lords on the desirability of this. However, it is also important to recognise that many of those factors influencing stability can be beyond our control. There are global forces that can create volatility in the financial markets, as we saw in the past with the global financial crisis and more recently with the shocks of the global pandemic and the energy shock in the aftermath of Russia’s invasion of Ukraine. The role of government and the regulators is to ensure that we have a system that is resilient to those shocks. Since the financial crisis in 2008, that is what we have sought to build.
We created a new Financial Policy Committee to look at risks across our financial system, backed by the powers to tackle them. On the question the noble Lord, Lord Tunnicliffe, asked about whether the Treasury will take a view on financial stability risks in addition to the Financial Policy Committee, the Government remain committed to the Bank of England’s independence, so it is right that the FPC can independently assess the level of resilience required to promote UK financial stability.
We have also developed the UK resolution regime, which provides the financial authorities with powers to manage the failure of financial institutions in a way that protects depositors and maintains financial stability, while limiting the risks to public funds. We have implemented regulations to strengthen the resilience of the banking system, with the major UK banks now reporting core capital ratios three times higher than before the global financial crisis. There has also been a concerted international effort to strengthen the financial system and ensure that the authorities have the necessary tools in place to protect financial stability.
Recognising in particular the significance of the non-bank sector, over the last decade the Government and UK regulators have worked closely with our international partners through the Financial Stability Board to identify vulnerabilities and enhance the sector’s resilience. It is important to pursue this work through international fora due to the global nature of the financial system, and the Government, the Bank of England and UK regulators play an active role in this work. As a result, the system is much more resilient today than it was in 2008.
However, alongside the UK’s independent financial regulators, we continue to closely monitor any developments that could be relevant to UK financial stability. The Treasury, the Bank of England and the Financial Conduct Authority have well-established and mature systems for monitoring the health of our financial services firms and responding when incidents occur. We are also committed to maintaining and enhancing the UK’s position as a global financial services hub.
The noble Baroness, Lady Bennett, questioned what the financial sector delivers for the United Kingdom. She will probably be familiar with the statistics that financial and related professional services employ more than 2.3 million people across the UK, creating £1 in every £10 of the UK’s economic output and contributing nearly £100 billion in taxes to help fund vital public services. We plan to continue to strengthen that sector through the Financial Services and Markets Bill, which is currently in Committee in the House of Commons. We are all—
Lord Liddle (Lab)
The Minister has stressed, rightly, the importance to the prosperity of the City of London of financial regulation, and of a stable financial regulatory regime, which I certainly support. However, the Government are talking about taking powers to overrule regulators. Can the Minister confirm whether or not these powers will be included in the Bill when it gets to this House? Can she tell us how she thinks that will contribute to the independence and stability of the regime, which is so fundamental, as she admits?
Baroness Penn (Con)
I cannot confirm that, but I am sure that when that Bill comes to this House, we will spend sufficient time scrutinising its provisions and ensuring that they deliver the outcome that we all want—a stronger financial services sector—which is important not just for the City of London but for people’s everyday lives in the country.
Baroness Bennett of Manor Castle (GP)
The Minister referred to the amount of employment from the financial sector, which, by my figures, is about 7% of total paid employment, meaning that 93% of people are not working in the financial sector. If the Government are focusing their efforts on increasing the financial sector while failing to meet the needs of the sectors of the economy that provide 93% of jobs, are we not all losing out?
Baroness Penn (Con)
I do not believe that that characterisation is right. Ensuring that we have a strong financial services sector also benefits many other parts of our economy in terms of access to capital, and many other things. It does not need to be at the expense of the rest of our economy. It strengthens the rest of our economy.
Lord Sikka (Lab)
The Minister referred to £100 billion of tax from the finance industry. That is misleading, because it includes things such as the VAT collected by the finance industry, which is borne by customers; PAYE, which is borne by employees; and national insurance, part of which is also borne by employees. Surely that £100 billion number needs to be corrected.
Baroness Penn (Con)
No, it is correct. The noble Lord seems to know how it is composed, so we are transparent in how that number is reached. I would like to make a little progress.
Baroness Bowles of Berkhamsted (LD)
I am sorry, I know that the Minister keeps being interrupted, but maybe it should all come at once. She mentioned that the Bank of England had powers to intervene. I would be very interested to know what preventive powers she thinks the Bank of England could have used to intervene on LDI and leverage. It put it in its Financial Stability Report, but genuinely, I do not know what powers it has to intervene over something that is not covered by FiSMA. It is DWP and there is another regulator, yet it is causing a systemic glitch that could happen again.
Baroness Penn (Con)
The noble Baroness is right that there is more than one regulator at play in this space. That point was also made by the noble Lord, Lord Davies of Brixton. If the noble Baroness will forgive me, I will come on to some actions taken after the 2018 stress test shortly.
The noble Lord, Lord Tunnicliffe, asked what the forthcoming Bill will do to promote financial stability. Allowing us to tailor our financial services regulation to the UK’s situation and needs will mean that we can create the best regulation for our circumstances. In a world where financial services are evolving all the time, with new developments and technologies requiring regular changes, the measures in the Bill will mean that UK regulations can remain up to date and effective.
It is also the role of the Government to ensure that their own decisions lead to trust and confidence in our national finances. Our responsible approach to managing the economy meant that we went into Covid and the current economic crisis with strong public finances, allowing us to intervene to support people’s lives and livelihoods. In that context it is important to acknowledge that, while well intended, the recent growth plan had unintended consequences for economic volatility.
Mistakes were made, and we have taken steps to fix them. Most of the tax measures in the growth plan have been reversed and the associated volatility dissipated. However, we are still faced with a profound economic crisis, with global inflationary pressures driven by increased demand post Covid, elevated energy prices after Putin’s invasion, widespread labour shortages and, in response, central banks across many major economies raising interest rates.
My right honourable friend the Chancellor of the Exchequer has been clear that we will take the measures needed to restore confidence and trust in the UK’s public finances and to deal effectively with the economic shocks that are being felt across the globe. In doing so there will be difficult decisions to take, but I hope that I can reassure the noble Lord, Lord Tunnicliffe, and others, that in taking them, this Government will protect the needs of the most vulnerable.
Specifically on recent events, the FPC noted in its July Financial Stability Report that the worsening global economic outlook had caused markets to be volatile in recent months. Since July, global inflationary pressures have intensified further. Specifically on the intervention by the Bank of England, all noble Lords will be aware that in late September there was elevated uncertainty in the UK bond market that resulted in gilt yields rising rapidly and significantly. LDI funds, many of which held leveraged positions in the gilt market, faced significant margin calls as a result. In some cases, these calls exceeded the cash buffers that they held, forcing them to raise cash by selling gilts into a falling market. Large sales of gilts into an already illiquid market led to yields increasing even further, in turn triggering further margin calls and forcing further gilt sales to try to maintain solvency.
This would have led to a spiral of falling prices but increasing pressure to sell gilts, so, within its remit, on Wednesday 28 September, the Bank of England started temporary purchases of long-dated UK government bonds, with the aim of restoring orderly market conditions. In line with the Bank’s statutory financial stability objective, the purpose of these operations was to act as a backstop to restore orderly market conditions and reduce any risks from contagion to credit conditions for UK households and businesses while the appropriate adjustment takes place. This operation was fully indemnified by the Treasury.
It is worth remembering that the Bank’s intervention served to keep the gilt market stable so that funds had time to adjust their positions in line with the changed market conditions. The speed and scale of repricing far exceeded historical moves, and therefore fell outside the expectations of risk management plans or regulatory stress tests. Throughout the intervention, the Bank worked with LDI funds and pension schemes as they built their financial resilience ahead of it coming to an end. Market conditions have since improved. The Bank’s usage of the scheme, at under £20 billion, was significantly below the maximum size permitted under its maximum daily auction size and below the increase in the indemnity provided by the Treasury. This stress in the LDI sector highlights the necessity of ensuring that the appropriate risk oversight and mitigation systems are in place for market-based finance.
I shall try to address the question asked by the noble Baroness, Lady Bowles, and the noble Lord, Lord Tunnicliffe, about what has happened since the 2018 exercise that looked at this. Since then, the Bank of England has worked with other domestic regulators, including the Pensions Regulator and the FCA, on enhancing monitoring of the risks. That included working with the Pensions Regulator on a survey of DB pension schemes in 2019 and prompting work to improve pension liquidity risk management. As the FCA noted in its letter to the noble Lord, Lord Hollick, and my noble friend Lord Bridges in March this year, the FCA contacted the largest LDI fund managers to ask them what plans they had in place to deal with increased volatility. It also probed large managers on the speed with which they could call money from underlying pension funds in the event of stress.
In response to many noble Lords, including the noble Lords, Lord Sharkey, Lord Sikka and Lord Davies of Brixton, and the right reverend Prelate, the Government recognise that there will be lessons that need to be learned from the market volatility seen in recent weeks. The regulators are working with the industry to improve their resilience to market shocks, and it remains a focus of the Government and regulators to ensure that we have a robust regulatory system.
In addition to the ongoing monitoring of systemic risks by the FPC, His Majesty’s Treasury and UK financial regulators have been working internationally as part of the Financial Stability Board, as I previously noted, to develop global approaches to identify and address vulnerabilities in market-based finance. The noble Lord, Lord Sikka, asked why we take a different approach to the regulation of banks versus non-banks in the financial system. Part of that is the international nature of the non-banking part of our financial system.
The Bank of England has also committed to working with the Pensions Regulator and the Financial Conduct Authority to ensure that appropriate levels of resilience are in place to mitigate risks to UK financial stability. As the Pensions Regulator chief executive emphasised earlier this month, DB pension schemes were not and are not at risk of collapse due to rapid movements in the price of gilts, and savers should not make any hasty decisions about their pension pots.
I turn to pensions. As I have just stressed, defined-benefit pensions remain strong, and members of those schemes that were invested in LDI funds are not at risk of losing out as a result of either the aforementioned volatility or interventions made by the Bank. Indeed, the independent Pensions Regulator issued a statement on 12 October for trustees of defined-benefit and defined-contribution schemes and their advisers, which communicated its expectations on matters for trustees to consider in relation to managing schemes and supporting savers.
The noble Lords, Lord Sharkey, Lord Best and Lord Campbell-Savours, and my noble friend Lord Young of Cookham, rightly mentioned the housing market, and I want to respond directly. The fact is that interest and mortgage rates have been rising since last autumn in response to global trends. This is not a UK phenomenon, with the US Federal Reserve having raised its base rate since March 2022 and the ECB taking similar steps. In the UK, around 75% of residential mortgages are on a fixed rate and therefore, in the short term, shielded from rate rises. However, I know that, for those on variable rights and those who are seeing their own fixed-rate deals coming to an end in forthcoming months, there will be significant concern. Where mortgage holders fall into financial difficulty, FCA guidance requires firms to offer tailored forbearance options. While it is important to note that the pricing of mortgages is a commercial decision for lenders in which the Government do not intervene, the Government do offer support through Support for Mortgage Interest loans for those in receipt of income-related benefits and protection in court through the pre-action protocol.
Similarly, the setting of rates is a commercial decision for private landlords in which the Government do not intervene. However, we understand that many people will be worried about the impact of rising prices. My noble friend Lord Young of Cookham spoke more broadly about the reform needed in the private rented sector in order to provide more security to tenants in that sector. I agreed with much of what he had to say. Indeed, the Government’s programme of work to reform the private rented sector continues through, for example, our commitment to ban Section 21 no-fault evictions. We heard ideas from my noble friend Lord Young and the noble Lords, Lord Best and Lord Campbell-Savours, for other changes that we could potentially make in housing. I will take those back to the department and ensure that they are looked at carefully.
The noble Lord, Lord Sharkey, asked whether the local housing allowance would be uprated. He will know that, as part of our response to Covid, the rates of local housing allowance were increased significantly to the 30th percentile of the market, with 1.5 million households gaining just over £600 a year. We have maintained those rates at an elevated level last year and this year in order to ensure that claimants can continue to benefit from this. This is reviewed annually, and I will not comment further on the uprating of benefits.
More specifically, many noble Lords spoke about the difficulties that vulnerable people are facing this year with the rising cost of living. The Government absolutely recognise that and are focusing our support most heavily on those households. People are facing a difficult time. We have put in place an energy price guarantee and further support for those on income-related benefits, pensioners and those with disabilities. There is also discretionary support for local authorities to provide help in their local areas.
I am conscious of the time so I will begin to wrap up. Many noble Lords used this debate as an opportunity to look ahead to the Chancellor’s Autumn Statement. I welcomed the constructive efforts by the noble Lord, Lord Liddle, to make suggestions not just about areas of spending that should be prioritised but about ideas for tax reform to help to fund them, which always needs to come alongside. I will only say to him, on his suggestion for equalised pension tax reform, that we have heard in this Chamber in recent weeks about the challenges of keeping GPs and others in their roles because of the tax treatment of their public sector pensions, and the idea might perhaps be a bit more complicated than it may look at first sight.
Baroness Penn (Con)
I am afraid I am really short on time, so I will make some progress and finish.
As the Chancellor has said, and as I think the noble Lord, Lord Desai, and the noble Baroness, Lady Kramer, agree, stability is a pre-requisite for growth. It is vital for families across the country—from the jobs they depend on to mortgages they have to pay, and to savings for pensioners and businesses investing in the future—and vital for the Government’s ability to borrow and invest in our economy.
The Chancellor will deliver his Autumn Statement on 17 November. Many noble Lords have asked me to speculate on its contents. They will know that I cannot, but I can say at this stage that the Prime Minister and the Chancellor are clear that the priority will be to ensure economic stability by setting out a concrete plan to get debt falling in the medium term. However, they are also clear about their priorities when taking the difficult decisions that this will necessarily entail: to support the most vulnerable and to drive growth to ensure that we have a strong economy by building jobs for the future—and our resilience to future shocks, too.
UK Green Taxonomy
Baroness Penn Excerpts(2 years ago)
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Baroness Parminter
To ask His Majesty’s Government, further to their commitment in Greening finance: A roadmap to sustainable investing, published on 1 October 2021, to consult on the “UK Green Taxonomy” in the first quarter of 2022, what plans they have to publish the draft taxonomy.
The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)
The UK green taxonomy is an important part of the Government’s ambitious programme of work on sustainable finance. However, it is critical that we learn from approaches being developed in other jurisdictions and take the time to get this right. The Government will continue to engage with scientific experts and market participants this year on how best to take forward work in this area.
Baroness Parminter (LD)
I thank the Minister for her reply. As she will know, many firms really support the transition to net zero, but this will not be achieved without clear direction from government. The Government’s independent green taxonomy advisory group told them last month that they had to send a “rapid market signal”, or we risked falling further behind Europe, which launched its taxonomy in 2020. So when will the Government publish their consultation on the green taxonomy? Will we get it by Christmas, or will the market just have to accept that we will fall further behind in the world and never become the financial leader on green issues that we should be?
Baroness Penn (Con)
My Lords, I agree with the noble Baroness on the importance of progressing this work at pace but it is also important that we get it right. For the green taxonomy to have real value for the market, we need to make sure that it is user-friendly and operable, and that is what we are focused on. We continue to progress our work in this area and remain committed to producing the green taxonomy.
Baroness McIntosh of Pickering (Con)
My Lords, I welcome my noble friend back to her place on the Front Bench. Could she outline the work in this area to reduce greenwashing, and could she highlight the work on carbon offsetting? Does she share my concern that, although it is right and helpful, in environmental terms, to plant trees, they must be planted in appropriate areas, so as not to cause more flooding rather than reducing it?
Baroness Penn (Con)
The Government are taking a number of steps. The FCA, for example, has consulted on a sustainable investment-labelling scheme so that, when consumers and investors are told that they are investing sustainably, they have better information to show that that is based on an objective assessment of those investments.
Baroness Hayman (CB)
My Lords, a year ago, the Prime Minister, then the Chancellor, made the commitment at COP 26 that the UK will be
“the world’s first net zero aligned financial centre”.
Does the Minister—whom I welcome back to the Front Bench—agree that, to achieve that, we need a robust and respected taxonomy for green investment? Does she also agree that this is an increasingly competitive area, with other countries having exactly the same objective? Does she accept the need for urgency in this area?
Baroness Penn (Con)
I agree that the green taxonomy is an essential part of being a leader in green finance. The UK has led the way: we were the first country to lay regulations to make reporting mandatory under the TCFD framework and firms listed on the London Stock Exchange have the highest sustainability disclosure rate of any global financial centre. But, if we want to continue that leadership, we need to continue to make progress. We have laid out a number of future steps under our road map. I accept that some have been delayed, and it is for us to continue to work to make better progress, to ensure that we continue to lead in this area.
Baroness Kramer (LD)
Last night in this House, the Lord Mayor of London underscored that retaining our leadership position on green finance is essential to retaining a leading role in financial services far more broadly. Understanding the pressures generated by that, could the Minister please tell us when we will get the green finance strategy? Given all the government changes, could she publicly recommit to the earlier commitments to become the first net zero-aligned financial centre, as described by the noble Baroness, Lady Hayman?
Baroness Penn (Con)
My Lords, that commitment has not changed. On the importance of retaining our leadership position on green finance for London as a financial centre, I completely agree with the noble Baroness: that is why we have been so ambitious in this area. We have taken a number of steps to ensure that we lead the way, and we work with our international partners to bring them along with us. When we chaired the G7 last year, we got commitments on sustainability disclosure requirements, for example, from all the G7 Finance Ministers. So we are not just leading the way; we are also trying to bring other countries with us.
Lord Tunnicliffe (Lab)
My Lords, for the avoidance of doubt, I have already welcomed the noble Baroness back to the Front Bench. The concept of a green taxonomy is of value to investors assessing how green a company is—that is almost self-evident. It is also of value to companies because it protects them from litigation accusing them of greenwashing. A number of actions are occurring around the world in which companies are being sued for overpromising on greenwashing. To be really valuable, however, the taxonomy needs to be international. What progress is being made on gaining international consensus?
Baroness Penn (Con)
The noble Lord is absolutely right that, to be most useful, having international agreement on a taxonomy is essential. The Government have supported the development of international standards in this area: for example, we have worked with the International Sustainability Standards Board to ensure that there is international alignment on the work in these areas.
Baroness Altmann (Con)
My Lords, I also welcome my noble friend back to the Front Bench. I echo the calls for us to urgently release the information on the green taxonomy. Could my noble friend please confirm that the Government remain committed to a green taxonomy that is science-led? Could she also confirm the position regarding natural gas as a transition fuel, given concerns about the security of the energy supply in the short term?
Baroness Penn (Con)
I assure my noble friend that we will be led by science in this area. Earlier in this Question, noble Lords referred to the work of the Green Technical Advisory Group, which was set up to advise the Government on the UK green taxonomy and is informing our work in this area. There is a question about the inclusion of both gas and nuclear in the green taxonomy. The Government have not made any decisions on their inclusion, but they will engage with experts and the market before making any final decision in this area.
Lord Kamall (Con)
I also welcome my noble friend back to the Front Bench, even though the Prime Minister has fired me but not rehired me—
Lord Kamall (Con)
I apologise; I was not after the violins. When I dealt with developing the green taxonomy in the European Parliament, we did not look only at companies that can certify themselves as green and ensure investors; we also looked at how to incentivise companies that are not yet green to become greener. How will the Government tackle that in developing their green taxonomy?
Baroness Penn (Con)
I take this opportunity to pay tribute to my noble friend’s work. I saw at first hand the energy and commitment that he brought to his roles. He is absolutely right that information is the first step on this path, and it then needs to be used to ensure that firms working in all sectors make plans for transition and action to ensure that their activities are aligned with net zero by 2050. Our green finance road map sets out the path that the Government think firms can take towards that aim.
Defined Benefit Pension Funds
Baroness Penn Excerpts(2 years ago)
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Lord Moylan
To ask His Majesty’s Government what assessment they have made of (1) the extent of Liability Driven Investment strategies in the management of Defined Benefit pension funds, and (2) the consequences that may arise for (a) His Majesty’s Government’s ability to issue new gilts, and (b) the management of inflation.
The Parliamentary Secretary, Treasury (Baroness Penn) (Con)
Defined benefit pensions use liability-driven investment strategies to protect themselves from adverse interest rate and inflation movements. The Pensions Regulator estimates that 60% of defined benefit pension funds have LDIs. The Debt Management Office’s gilt operations are running smoothly, with good levels of demand; its 2022-23 financing remit will be revised alongside the Autumn Statement on 17 November.
Lord Moylan (Con)
My Lords, I welcome my noble friend back to the Front Bench. If the pension funds were entering into those risky strategies with a view to eliminating their exposure to interest rate changes, it did not quite work, did it? The Government need to sell gilts to borrow money for their activities. The Bank of England needs to sell gilts to start to reverse quantitative easing and to bear down on inflation. Both those activities were threatened by the sudden discovery of what can only be described as risky and dodgy investment strategies at private pension schemes a few weeks ago. So what I and other noble Lords would like to hear from my noble friend is that those financial positions have now been reversed out of by the pension funds—that they are not pursuing those strategies—so that this does not happen again, and the Government and the Bank can continue with their vital activities.
Baroness Penn (Con)
My Lords, LDI strategies can be used as a risk-management strategy for pension funds, and I would expect them to continue to do so. There were specific circumstances which the Bank stepped in to address. But my noble friend is right that it is important that we reflect on what happened to those particular funds in that period and make sure that the Bank of England and the Financial Policy Committee have the right oversight to ensure ongoing stability in these markets.
Baroness Bowles of Berkhamsted (LD)
My Lords, a key focus of the IORP directive, which was transposed into the Pensions Act 2004, was to prohibit borrowing so that assets are retained for the payment of pensions and not put at risk of being drained away to third parties. With that prohibition on borrowing, how has that been circumvented, permitting repos and investing in funds that break both the principle and detail of that provision? Is it not dishonest to describe LDI as de-risking when it introduced leverage and derivative exposures of some £1.4 trillion, which is nearly the same as the total pension fund assets?
Baroness Penn (Con)
My Lords, the Government do not agree with the noble Baroness’s assessment of the situation. Along with the Bank of England and the Financial Policy Committee, we keep a close eye on identifying and addressing systemic risks to improve UK financial stability. In 2018, the committee specifically looked at UK pension schemes’ resilience to an instantaneous 100 basis point rise in yields across maturities. The movements that we saw a few weeks ago were greater than that. As the FPC has also noted, it may not be reasonable to expect market participants to insure against all extreme market outcomes, because there can be negative effects to that as well.
Lord Davies of Brixton (Lab)
My Lords, I declare an interest as a fellow of the Institute of Actuaries. I am afraid that there will be an alliance of regulators and providers who will say, “Nothing to see here, we can move on”. There are questions to be answered about what damage has been done and about what we can do to ensure that it does not happen again. There is so much hidden in the investment policies of pension funds. Can the Government give an assurance that there will be a proper investigation of what happened, with an independent element?
Baroness Penn (Con)
My Lords, the Pensions Regulator and other regulators have said that they will want to look at what has happened and learn lessons. I also understand that the Work and Pensions Committee in the Commons is looking at this issue, including any changes to the Pensions Regulator, for example, that may need to be made. The Government look forward to reading the results of its findings.
Lord Lamont of Lerwick (Con)
My Lords, is the potential booby-trap in LDIs not the liquidity mismatch between the time it takes to sell the assets of pension funds and the demands of the hedge, which requires the margins to be met on the same day in cash? Is that not a strong argument for the liquidity buffer to be increased? Does it not also pose the question: to what extent did QE force people more and more into these assets?
Baroness Penn (Con)
My noble friend is absolutely right about the liquidity mismatch. My understanding is that there was a certain amount of flexibility shown in that; none the less, the Bank of England’s intervention was directed to address that specific problem. As for the QE policy, my noble friend will not be surprised to hear me say that that is for the Bank of England and I will not comment further on it.
Lord Bellingham (Con)
My Lords, obviously the shadow banking system, which includes insurers and pension funds, is not subject to the same rules as traditional banks, especially when it comes to holding cash reserves against market shocks. Does the Minister agree with Sir Jon Cunliffe, Deputy Governor of the Bank of England, when he wrote to the Treasury Select Committee in the other place recently to say that it is incredibly important that there should be more international checks and balances on non-banks?
Baroness Penn (Con)
My noble friend is absolutely right that there can be risks to financial stability from non-banking actors in the financial system and that they are not subject to the same regulations. He is also right that addressing some of these risks cannot be just through domestic action but must also be international action, and that is something the UK is advocating for.
Lord Tunnicliffe (Lab)
My Lords, I welcome the noble Baroness, the Minister now, back to her seat and look forward to many one-to-ones. Financial regulators in a number of European countries have taken steps to increase surveillance of derivative-linked funds used by UK pension schemes. That is an attempt to promote international financial stability following the post mini-Budget market turmoil. Having witnessed recent events, does it remain the Government’s intention to water down UK regulators focused on stability by introducing a statutory requirement to prioritise competitiveness?
Baroness Penn (Con)
I thank the noble Lord, and all noble Lords for their welcome back, but I have to disagree with the noble Lord’s interpretation of the provisions in the forthcoming financial services Bill. Financial stability will remain at the core of our system, but I do not think it is wrong to also recognise the importance of competitiveness in that system.
Baroness Kramer (LD)
My Lords, the Minister, whom I welcome, said that the Government had handed off to a committee of the House of Commons the responsibility for looking at whether reform of the Pensions Regulator was required. Surely, the Government should be looking at whether reform is required because, very clearly, we have a regulator that neither recognised the embedded risk of strategies that it was allowing pension funds to pursue, nor understood the broader implications. This suggests that change is urgent.
Baroness Penn (Con)
If that was the impression the noble Baroness had of my Answer, it was not the one I meant to leave with noble Lords. The regulators, including the Financial Policy Committee, the Pensions Regulator and others, will want to look at and reflect on the lessons that can be learned from the events of recent weeks. In pointing to the Commons committee’s work, I merely sought to address the noble Lord’s point about a different or more independent set of eyes also looking at this.
Lord Forsyth of Drumlean (Con)
My Lords, can it be true that the Bank of England’s own pension fund had more than 80% of its assets invested in these highly risky derivative products, which depended on keeping interest rates down? Given that the Bank of England intervened to buy bonds to keep interest rates down, was there not a conflict of interest there? Also, was it not apparent to everyone, if these are the facts, that the system of regulation has failed—failed absolutely —and needs to be looked at again?
Baroness Penn (Con)
My Lords, I do not know how the Bank of England’s own pension scheme is invested. As my noble friend pointed out, the particular issue around these schemes was liquidity; the Bank of England stepped in to address that issue, which I believe has now been resolved. None the less, we will look at the lessons that can be learned. I pointed to an exercise undertaken in 2018 to stress-test UK pension schemes’ resilience, but the movements we saw in the past few weeks went beyond the bounds of those scenarios. We should reflect on that and see whether anything needs to change as a result.