British Banking Sector

Baroness Penn Excerpts

Tuesday 21st March 2023 Lords Chamber

[The Lord Bishop of St Albans]

To ask His Majesty’s Government what assessment they have made of the health of the British banking sector, following the challenges faced by overseas banks.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

The UK Government welcome the steps taken to support financial stability on Sunday by the Swiss authorities relating to Credit Suisse. This follows the sale on 13 March of Silicon Valley Bank UK to HSBC after the resolution of its US parent. No other UK banks have been materially affected by these actions. The Governor of the Bank of England has confirmed that, in his view:

“The wider UK banking system remains safe, sound, and well capitalised.”

[The Lord Bishop of St Albans]

I thank the Minister for her reply. Many people watching the events unfold at the moment are concerned that they may lose their jobs or that there will be another financial hit to people at a time of high inflation. It is 10 years since we had the publication of the Parliamentary Commission on Banking Standards report. One of its conclusions was that the implicit taxpayer guarantee gives banks

“access to cheaper credit than would otherwise be available and creates incentives for them to take excessive risks.”

Do His Majesty’s Government have any steps to remove the implicit taxpayer guarantee? If not, what other incentives will His Majesty’s Government give to ensure that bankers act prudently?

[Baroness Penn (Con)]

My Lords, I emphasise to people at home the words of the Governor of the Bank of England that the UK banking system

“remains safe, sound, and well capitalised.”

The situation is different from 2008. Over the last 15 years, the Government and the Bank of England have taken robust action to strengthen the regulatory system and the resilience of the UK banking system. Specifically to the right reverend Prelate’s question, we have put in place a resolution regime to ensure that the failure of a bank can be managed in a way that minimises the impact on depositors, the financial system and public finances. I note that the resolution solution found for Silicon Valley Bank last week involved no UK taxpayer money whatever.

[Lord Lamont of Lerwick (Con)]

My Lords, is the implication of the right reverend Prelate’s question not a policy that would make banks far riskier than they already are? It is an extraordinary policy for him to advocate. I understand from the press that the Government were involved in the actions taken to save Credit Suisse and merge it with UBS, but a certain amount of disquiet has been caused by the preferential treatment that appears to have been given to shareholders rather than bondholders. Can she explain why this situation has arisen? Is the implication of that not rather disturbing for bondholders in other banks?

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[Baroness Penn (Con)]

My Lords, the Swiss authorities were in the lead in the solution for Credit Suisse but my noble friend is right that, given the significant presence of Credit Suisse in the UK, the Treasury has remained in close contact with the Bank of England and the Swiss authorities in recent days. We welcome the comprehensive set of actions set out by the Swiss authorities to support financial stability. The UK authorities are going to take a number of actions to support that action, including PRA plans to approve a change in control application for the Credit Suisse subsidiaries in the UK. The resolution of the Credit Suisse situation was for the Swiss authorities, but the UK remains in close contact.

[Lord Tunnicliffe (Lab)]

My Lords, we welcome the Bank of England’s swift action on SVB UK and its recent statements about the safe nature of the UK’s banking system. Nevertheless, events elsewhere, including those relating to Credit Suisse, are creating uncertainty in the global financial system. With this in mind, will the Treasury and the Bank of England commit to undertake a systemic review of the impact of interest rate rises and wider events in the system on our own financial sector and banking system?

[Baroness Penn (Con)]

My Lords, as with any major event, the Treasury will reflect on the lessons to be learned and how improvements can be made. I assure noble Lords that, each year, the Bank of England carries out a stress test of the major UK banks that incorporates a severe but plausible adverse economic scenario. The 2022 stress test scenario includes a rapid rise in interest rates, with the UK bank rate assumed to rise to 6% in early 2023. The results of that test are taken forward by the PRA in its supervision of the banks. The results will also be published this summer.

[Baroness Bowles of Berkhamsted (LD)]

My Lords, an FT piece yesterday, headlined “How ‘competitive’ would you like your bank regulation now?”, says:

“The UK regulatory pendulum has been halted in mid-swing.”


Is that true? Credit Suisse had G-SIFI levels of capital and liquidity but was undone through bad culture. Are not the twin bastions of culture in the UK banks ring-fencing and the senior managers regime? Is it not also of massive cultural significance that it came from the Parliamentary Commission on Banking Standards? If the Government mess with those, where is the break on culture-based runs? What do they say when these practices come under lobbying pressures?

[Baroness Penn (Con)]

My Lords, I think the noble Baroness was asking about the Government’s proposed Edinburgh reforms package, which represents a move towards proportionate, simple regulation that works for the UK and will help to drive growth in the broader economy, supporting families and businesses across the country. In that approach, we recognise that the UK’s success as a financial services hub is built on agility, consistently high regulatory standards and openness. We will continue to take those principles forward in our reforms.

[Lord Eatwell (Lab)]

My Lords, I found the noble Baroness’s position on the current status of the banking system to exhibit extreme complacency. Is she aware that Credit Suisse was very highly capitalised and had in place all the financial anchors on which she relied in her Answer? Yet Credit Suisse has collapsed. Do the so-called Edinburgh reforms not actually come up to this: we are going to make the banking system more competitive, which equals taking greater risks?

[Baroness Penn (Con)]

My Lords, in the Financial Services and Markets Bill we are introducing a new objective for the regulators to look at competitiveness, but we are clear that that objective comes second in the hierarchy to the systems objectives around financial stability. We think that strikes the right balance. We are absolutely not complacent about the global banking system and the wider financial services sector, but it is important to recognise that we are in a different position from 2008 and that we are making further changes to ensure the resilience of our sector. For example, the Bank of England announced in December that, for the first time, it will run an exploratory stress-test exercise focused on non-bank financial institutions, recognising the increased risk posed there. We will continue to do what we need to do to ensure financial stability in this country.

[Lord Grabiner (CB)]

Are we entitled to assume that the London branch of Credit Suisse is being properly regulated by the FCA and the Bank of England?

[Baroness Penn (Con)]

The noble Lord is right that the Credit Suisse subsidiary in the UK was regulated by the Prudential Regulation Authority and met its obligations under those regulations.

[Baroness Bennett of Manor Castle (GP)]

My Lords—

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[Baroness Bennett of Manor Castle (GP)]

My Lords, we have had two questions addressing the dangers of the competitiveness agenda of the Edinburgh reforms, which the Green Party has consistently opposed. The other element is that the Government talk about boosting growth. The Minister suggested that was for the general economy, but it has been presented as a desire to grow the financial sector. Is there not, as demonstrated by recent events, a great risk of too much finance and too large a financial sector when what we need is a real-sized financial sector to serve the real economy?

[Baroness Penn (Con)]

I disagree with the noble Baroness. The UK’s financial services sector is one of our great strengths in and of itself and as an engine to power growth across the rest of our economy; that will remain the case under this Government.

[Lord Reay (Con)]

My Lords, is my noble friend the Minister confident that the risk controls at the UK fintechs are adequate, given the current challenging conditions in the global financial markets?

[Baroness Penn (Con)]

My Lords, one thing that UK regulators have sought to do is ensure that the fintech sector is well regulated while continuing to innovate. We have been able to use things such as regulatory sandboxes to allow safe spaces for that innovation to be tested out, and we will continue to take that approach.

European Structural and Investment Funds and the European Agricultural Guarantee Fund

Baroness Penn Excerpts

Tuesday 21st March 2023 Lords Chamber

[Lord Kirkhope of Harrogate]

To ask His Majesty’s Government whether they have matched the funding previously provided by the European Union to the United Kingdom for the European Structural and Investment Funds and the European Agricultural Guarantee Fund in 2014–20; and if not, what is the extent of the shortfall.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

The 2021 spending review announced the £2.6 billion UK shared prosperity fund, which improves on the European structural funds by empowering local places. The Government have also introduced farming and rural support worth a cumulative £3.7 billion annually over this Parliament and £33 million annually to support fisheries. This meets our 2019 manifesto commitments to maintain the levels of funding for farmers, fisheries and local economic growth in ways that are less bureaucratic and better targeted at local priorities.

[Lord Kirkhope of Harrogate (Con)]

I thank my noble friend for that partial reassurance, but I ask her to consider very carefully two elements. One is the farmers and members of agricultural communities, who are seeing an erosion of direct payments right now against a future sustainable farming incentive, and their deep concern to keep food production at a high level. The other is structural funding; many local authorities and regions in our country have had expectations for the new UK shared prosperity fund, but that is not coming in for some time. Can my noble friend give us further reassurances that these gaps will be filled?

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[Baroness Penn (Con)]

My noble friend is right that, in both schemes, as the EU funding falls away, the UK funding comes in to replace it. We are seeking to do that in as smooth a way as possible. When it comes to support for farmers, we will continue to set out next steps on our environmental land management schemes, including the sustainable farming initiative, Countryside Stewardship and landscape recovery. On the shared prosperity fund, I reassure my noble friend that that fund is ramping up as EU funding falls away; its profile is faster than the way in which previous EU funding had been distributed.

[Lord Wigley (PC)]

My Lords, is the Minister aware that, when Wales first received structural funds from the European Union in 2000, that money was accepted by the Treasury in the UK and was not initially passed over to the beneficiaries, on the basis that they were already getting adequate money from the Treasury? It needed the intervention of Michel Barnier, the regional commissioner at that time, to get the Treasury to pass that money over. Will she give a guarantee that all money that is supposed to be equivalent to structural funds will be additional to the base spending for the areas that need it?

[Baroness Penn (Con)]

My Lords, the commitment that the Government have made is that the replacement of EU funding in each nation will meet the levels that they previously received. That is the commitment that we are delivering through the shared prosperity fund.

[Baroness Randerson (LD)]

My Lords, Wales was a beneficiary of EU funding, as one of the poorest parts of the EU. The Welsh Government used a big slice of that funding to support university support partnerships across Wales and beyond. Because the new shared prosperity fund is administered by the UK Government and local authorities, there is no scope for universities to benefit in the same way, leaving a big hole in the amount available for university research, which is of course essential for levelling up. Will the Minister undertake that she will, with her colleagues, examine this problem and amend the UK’s funding mechanisms in order to solve the big hole that is appearing in university research funding? I declare an interest as chancellor of Cardiff University.

[Baroness Penn (Con)]

My Lords, the UK shared prosperity fund was designed to give local areas more discretion about how they spend that funding, aligned with local priorities. The UK Government provide significant support to our research sector, including through universities, but I am happy to take the noble Baroness’s feedback back to the Treasury.

[Baroness Ritchie of Downpatrick (Lab)]

My Lords, many social economy projects in Northern Ireland have relied on the European Social Fund for many years. Because that funding is due to end next week, they face a cliff edge, and they have not received any communication about funding allocations from the UK prosperity fund. To enable such social economy projects to continue with their good work, right across the communities, will the Minister ensure that this funding is made available to such projects that do such good work for the benefit of all?

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[Baroness Penn (Con)]

I am aware that there are elements of funding from the European Social Fund in Northern Ireland that are due to come to an end at the end of this month. The Department for Levelling Up, Housing and Communities is administering a competition to replace that funding, and it received strong and positive responses from organisations across Northern Ireland seeking to deliver the aims of that programme. It is working very hard to make the final selection decisions as quickly as possible.

[Baroness McIntosh of Pickering (Con)]

My Lords, does my noble friend accept that, for two categories of farmers—particularly hill farmers and tenant farmers—the level of income from the European funds is falling faster than initially expected? Will she work with Defra to ensure that their incomes are protected, and that they continue to produce the excellent food that they do for this country?

[Baroness Penn (Con)]

My Lords, I am sure that Defra will want to support the work of all farmers in our economy. My noble friend referred to two different categories of farmer: I know that my noble friend Lady Rock did an excellent review into tenant farmers, and a number of her recommendations have been taken forward. As Defra develops its programmes for the sustainable farming incentive and other replacements for EU funds, it will want to take into account the needs of different farmers across the UK.

[Baroness Hayman of Ullock (Lab)]

My Lords, the Government made a very simple promise to the nations and regions of the UK, as well as to farmers: European funding would be matched pound for pound, and the mechanisms used to allocate funds would be simpler and fairer. Several years on, we are still waiting for the shared prosperity fund, environmental land management schemes and the UK Infrastructure Bank to get fully up and running and to hit the targets they have been set. How have the Government managed to get this so badly wrong? Why is progress so slow? Does she acknowledge that this is a difficult time for farmers and that the Government really need to crack on with it?

[Baroness Penn (Con)]

My Lords, as I have explained to the House, as European funding tails away, UK funding ramps up. For example, the shared prosperity fund will reach £1.5 billion a year by the end of the spending review period. For each of the sectors that the noble Baroness mentioned, we have provided clarity around the funding available for the full three years of the spending review and the mechanisms by which it will be distributed. I know that my colleagues in Defra continue to work hard with farmers to ensure the successful rollout of the replacement schemes.

[Lord Jones (Lab)]

My Lords, will the Minister acknowledge that, in recent times, Wales has lost a great foundation industry, which was mining? It provided tens of thousands of jobs and created some prosperity. In recent times, the once mighty steel industry of Wales has also all but disappeared—it has shrunk. We are more and more in need of investment. It was from the privy counsellors’ Bench over there that former Prime Minister Harold Macmillan, Viscount Macmillan, paid tribute to the miners and steelworkers who, in two world wars, defeated first the Kaiser and then Adolf Hitler. Wales now needs more and more government funding. In the lovely heartland of Wales—cefn gwlad—there is great distress among the farming communities. We are in need of investment.

[Baroness Penn (Con)]

My Lords, we had a discussion last week about the needs of Wales when it came to government funding. I told noble Lords then that we took into account the greater needs of Wales as calculated by the Holtham commission. Indeed, the funding that goes to Wales is over and above the assessed needs of Wales at the present time.

[Lord Hannan of Kingsclere (Con)]

My Lords, will my noble friend the Minister confirm that we now have the advantage of being able to start with an identified need and then look for how to fund it rather than, as necessarily happened under the European funds, to start with a figure of money and then cast around for ways to spend it?

[Baroness Penn (Con)]

My noble friend is right that one of the opportunities that we have, having left the EU, is to look at programmes and make sure that they deliver against our policy priorities in the UK. That is exactly what we are seeking to do with our agricultural support schemes, for example, and we will continue to look for opportunities to do that.

Budget Statement

Baroness Penn Excerpts

Thursday 16th March 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, I thank all noble Lords for their contributions to this debate. Given the range of expertise that has been contributed today and the range of topics we have covered, I will spend my time directly answering as many of noble Lords’ comments as possible.

Many noble Lords reflected on the economic circumstances we find ourselves in. The current high levels of inflation we face, with increased costs for households and businesses, have a clear impact on growth. As my noble friend noted, the best tax cut we can give households and businesses is to get inflation back under control, and that is exactly what the OBR forecasts will happen.

My noble friend Lord Bridges asked about the difference between the Bank of England’s forecast and the OBR’s forecast, and the noble Lord, Lord Skidelsky, also spoke about the difficulties of producing forecasts in these times. Specifically on those differences, the Bank of England made its latest forecast in February and it was based on different market determinants from the time. In its economic and fiscal outlook, the OBR reports that the difference is driven by falling energy prices and interest rates since the Bank’s forecast and, as my noble friend Lord Willetts noted, a predicted greater recovery in labour force participation following the measures announced in the Budget.

Inflation will reach 2.9% by the end of the year, but we recognise that the next 12 months will put real pressure on people, particularly when it comes to their energy bills. The noble Baroness, Lady Brinton, said that this Budget did nothing to help with that and I really must correct her. Not only did it extend the energy price guarantee at £2,500 for the next three months, it removed the pre-payment meter premium, which is something that this House has called for many times. It is also important to remember that significant further help announced in the Autumn Statement is still to be delivered to households across the country.

The noble Lord, Lord Bird, asked for universal credit to keep pace with inflation and that is exactly what will happen. Those relying on universal credit, the state pension and other means-tested benefits will see them go up in April by more than 10%, and we have further cost of living support payments worth £900 to be paid over the next year to 8 million households on means-tested benefits. Support payments of £300 will go to more than 8 million pensioner households next winter and £150 will be paid to those on disability benefits. It is very important that people know that further support with the cost of living is on its way. In fact, support to households to help with higher bills is worth £94 billion, or an average of £3,300 per household across this year and next.

The noble Lord, Lord Bilimoria, said that there was no support for businesses with their energy bills. But the energy bills discount scheme will provide all eligible businesses and other non-domestic energy users with a discount on high energy bills until 31 March 2024, following the end of the current energy bill relief scheme. It will also provide businesses in sectors with particularly high levels of energy use and trade intensity with a higher level of support.

The noble Baroness, Lady Brinton, asked why no equality impact assessment had been produced with this Budget. I reassure noble Lords that His Majesty’s Treasury has rigorous processes in place to ensure that we comply with our legal requirements. We go beyond these by publishing a summary of equality impacts for tax measures within the tax information and impact notes alongside the Finance Bill.

When it comes to distributional analysis, that was published in the 2023 Spring Budget and it shows that the typical household at any income level will see a net benefit next year following government decisions made in the Autumn Statement 2022 and onwards. Low-income households will receive the largest benefit in cash terms and as a percentage of income from government decisions. Furthermore, looking across all tax, welfare and spending decisions made since the 2019 spending round, the impact of government action continues to be progressive, with the poorest households receiving the largest benefit both in cash terms and as a percentage of income in 2024.

The noble Lords, Lord Eatwell, Lord Bilimoria and Lord Tunnicliffe, and many others spoke about the impact of the freeze on tax thresholds, announced last spring and extended in the Autumn Statement. It is true that, after a colossal effort to fight Covid, with the Government spending over £370 billion on measures to support the NHS and our economy, we have had to take difficult decisions to get our public finances back on track.

We have frozen tax thresholds and, as we will come to, we have asked businesses to contribute more, through increased corporation tax rates. However, I say to my noble friend Lord Bellingham and others that 70% of businesses will see no change to their corporation tax headline rate, because small businesses are exempted, and only 10% of businesses will pay that top rate of 25%.

When it comes to the personal tax threshold freeze, noble Lords should note that, even after the freezes that we are putting in place, the changes we have put in place since 2010 mean that someone on an average salary will still pay £1,000 less in income tax and national insurance next year than if thresholds had gone up in line with inflation since 2010. Thresholds will be higher at the end of the period of the freeze than if they had been simply increased with inflation since 2010.

We had to take some difficult decisions on the public finances but that does mean—I hope this offers some reassurance to my noble friends Lord Bridges and Lady Lawlor—that we are bearing down on debt and have the deficit falling in every year of the OBR forecast. That means we are projected to meet the Prime Minister’s second pledge: to get debt falling. Indeed, total managed expenditure as a percentage of GDP is forecast to fall in each year of the forecast. We have also launched an efficiency and spending review; as part of the Autumn Statement 2022, departments have been asked to identify further efficiencies, building on the 5% efficiency challenge set at the 2021 spending review.

This brings me to the third pledge from the Prime Minister on our economy: to get it growing. My noble friend Lady Moyo spoke so eloquently about the importance of growth as a prerequisite of good public services, as a precursor to innovation and as a necessity for a healthy democratic society. That is why the Chancellor focused on making this a Budget for growth.

The noble Lord, Lord O’Neill, spoke of his frustration at what he saw as the artificial constraints that the design of fiscal rules has placed on investing in growth. I welcome that debate; although we may have different views on their design, I hope we can both agree on the importance of having a framework in place to maintain fiscal credibility, as was well expressed by my noble friend Lady Lea of Lymm.

I very much agree with noble Lords on the importance of investment. I welcome the point made by the noble Lord, Lord O’Neill, that, when it comes to areas such as corporation tax, we should not focus solely on the headline rate—although that remains the lowest in the G7—but look at how we build incentives into that tax. Full expensing will be a tax cut for businesses investing, worth around £9 billion a year, and I acknowledge that noble Lords would like that to be made permanent. The Chancellor has said he would like that too, when fiscal circumstances allow. However, it is worth noting that the increase in the annual allowance to £1 million is permanent and amounts to full expensing for 99% of businesses in this country.

I reassure the noble Lord, Lord O’Neill, that the Government do not see the solution to investment in this country as something for only the private sector to do. We are continuing to deliver the biggest programme of capital investment in 40 years, and public sector net investment will be 2.5% of GDP on average over the forecast period, delivering more than £600 billion of planned public sector gross investment over the next five years.

My noble friend Lady Moyo spoke of the most effective investment being multidecade in timeframe, and when public and private sources of investment come together. That is exactly what we are seeking to do through our commitment to £20 billion of support to the early deployment of carbon capture, usage and storage, allowing the Government to enter commercial negotiations with successful emitter projects and providing certainty over revenue streams to stimulate private investment.

The noble Lord, Lord Fox, spoke about our response to the US Inflation Reduction Act, and other noble Lords mentioned plans in Europe. Our approach to CCUS shows that we have a plan to stimulate investment in our green industries but in our own way, building on the success that we have had, for example, on contracts for difference with offshore wind, which has led us to be the second-largest producer of offshore wind in the world, behind only China. Further, the launch of Great British Nuclear and the competition for small modular reactors, along with our commitment to Sizewell C, show an ongoing commitment to the UK nuclear industry and to meeting our net-zero targets.

Many noble Lords, including the noble Lord, Lord Bilimoria, welcomed the announcement of investment zones, which will grow clusters in one of our five future growth sectors, partnering great research institutions with local areas. I say to the noble Lord, Lord Fox, that each investment zone will have access to up to £80 million of funding, but this is also about policy flexibility, to allow for greater collaboration and to address the needs of each individual area. He asked about environmental standards in investment zones. I reassure him that the Government are committed to ensuring that investment zones uphold the UK’s high environmental standards and meet our international commitments.

As well as our plans to support investment, many noble Lords focused on the workforce measures that we included in this Budget. The noble Baroness, Lady Brinton, asked about the Government’s planned changes to remove the work capability assessment and whether we will also reform the PIP assessment process. While many people claiming health and disability benefits have a positive experience, we want to improve the overall experience and trust in the benefits system for disabled people. We are doing this by making it easier to communicate and engage with us by improving the accessibility of our services and buildings. We are also testing new initiatives to make it easier to apply for and receive health and disability benefits.

The noble Baroness, Lady Brinton, also asked why there was no mention of social care. She will know that the Government are investing record levels of funding in response to the pressures facing both health and social care services. It was at the Autumn Statement 2022 that we made available up to £6.1 billion for the next year and £8 billion in 2024 in additional funding for the NHS and adult social care.

That brings me on to the pension tax changes made in this Budget, which were remarked on by many noble Lords, including the noble Lord, Lord Davies of Brixton, the noble Baroness, Lady Jones of Moulsecoomb, and my noble friends Lord Bridges and Lord Willetts. I will try to address the different points raised. The aim of our pension tax changes is to incentivise highly skilled and experienced individuals to remain in the labour market, bringing the benefit of their knowledge and experience to the UK labour force. Some noble Lords said that this measure is too expensive. My noble friend Lord Willetts helped me on this in terms of the cost per additional worker in the workforce being similar for this measure compared with childcare measures.

Noble Lords then said that it was poorly targeted because, while the childcare measures have the benefit of helping potentially lower-income households, these measures will be targeted at those people who are relatively better off. Again, my noble friend Lord Willetts helped me by pointing to the benefits of the policy being not only about the recipient of the tax relief but about its wider effect. Here, we are focused on a big change in retaining senior clinicians in our NHS workforce. The noble Lord, Lord Davies of Brixton, was sceptical about the difference that this policy change would make to retaining those clinicians. I have two quotes: the shadow Health Secretary, Wes Streeting, said that the cap on doctors’ pensions was “crazy” and it would “inevitably save lives” to scrap it; and the BMA said that scrapping the lifetime allowance is

“an incredibly important step forward and … potentially transformative for the NHS as senior doctors will no longer be forced to retire early and can continue to work within the NHS, providing vital patient care.”

The BMA went on to say that

“the Chancellor has acted decisively to avert a major workforce crisis”.

The noble Lord, Lord Davies of Brixton, then asked why we did not focus the measure solely on doctors. He gave one of the answers himself, saying that we passed a law to change pension provision for senior judges. We can bring in this tax change by April for the start of the new tax year. Another reason why we have not limited it to one profession, as the noble Lord will also know as he has raised other cases with me in the past, is that these reforms will benefit experienced key workers, including head teachers, police chiefs, senior personnel in the Armed Forces, air traffic controllers and prison governors.

The noble Lord, Lord Eatwell, asked about the interaction with inheritance tax. I reassure him that the costings produced and published at Spring Budget with regard to the lifetime allowance included the inheritance tax impacts for the scorecard period. I further say to him that the primary purpose of a pension is to provide an income in retirement. If someone dies before they get to use it, we think it is right that beneficiaries can inherit those funds, and they are not usually part of someone’s estate for inheritance tax purposes. We are aware that some people may use their pensions to try to reduce their inheritance tax liabilities rather than to provide for their retirement. We do not think that pensions should be used as a vehicle primarily for inheritance tax planning and we will keep all aspects of the tax system under review.

I turn last, but by no means least, to the Government’s plans for childcare. In my enthusiasm for announcing our substantial reforms in this area, I made an error in my speech. I made reference to youth mobility schemes. I need to clarify that those schemes have not been agreed but are something that we would like to explore with international partners over coming months and years. I apologise for inadvertently misleading the House on that matter.

However, I was pleased to hear so many noble Lords welcome the policy on childcare; it will be truly transformative. The noble Baroness, Lady Brinton, asked whether the free hours would be adequately funded. I reassure noble Lords that the Government will provide £4.1 billion of funding by 2027-28 to provide 33 hours for nine months to three years, and we will provide £204 million from September next year to uplift the existing rates for providers. The noble Lord, Lord Tunnicliffe, asked about the changes to ratios. Noble Lords will know that this move is in line with many other comparator countries in Europe and indeed Scotland. The change is optional for providers, but DfE will continue to closely monitor the quality of care in early years settings, including through Ofsted.

The noble Lord, Lord Eatwell, quoted the Sutton Trust. He is right that the aim of the policy is to remove the costs of childcare as a barrier for parents who want to return to work, so the extension of free hours is for working parents. To make that transition even easier, for those who are on universal credit we have increased the amount that they can claim for childcare through universal credit and are paying that amount up front.

The noble Lord, Lord Tunnicliffe, asked what impact the policy would have on employment. The OBR expects that by 2027-28 around 60,000 more people will enter employment, and around 1.5 million mothers will increase the hours they work as a result of this policy. The OBR has further said that the policy has by far the largest impact on potential output in this Budget.

In my speech, I may have been the Tigger to my noble friend Lord Bridges’ Eeyore, but I reassure noble Lords that the Government are under no illusions about the challenges that we face both at home and with the increased threat picture abroad. To my noble friends Lord Howell of Guildford and Lord Tugendhat, I say that that is why in this Budget we have provided an additional £11 billion for defence and national security priorities over the next five years, with nearly £5 billion going in during the next two years to improve the resilience and readiness of our Armed Forces. This is on top of the spending review 2020 cash uplift of £24 billion over the spending review period for defence, which is the largest sustained increased since the end of the Cold War.

What of the Government’s final goal of growth? The Spring Budget made the biggest increase to supply reforms that the OBR has ever scored in its forecast, bringing 110,000 workers into the workforce and increasing GDP by 0.2%. My noble friend Lord Bridges is also correct that population change contributes a further 0.5% to potential output.

The noble Lord, Lord Tunnicliffe, asked about the recovery of our economy since the Covid pandemic. When you look at private sector output, you see that our economy has more than recovered since the pandemic. The picture is different on public sector output, but that makes the figure not very comparable with other international countries as we measure our statistics in a different way.

Overall, supported by policy and underlying conditions, the OBR has revised GDP upwards in every single year of this forecast. With inflation down, debt falling, growth going up, and transformative policies for investment in our growth and in childcare to get people back to work, this is a Budget that I can commend to the House.

Motion agreed.

Budget Statement

Baroness Penn Excerpts

Thursday 16th March 2023 Lords Chamber

Moved by

[Baroness Penn]

To move that this House takes note of the Chancellor of the Exchequer’s Spring Budget 2023.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, it is a privilege to open this debate on behalf of the Government and set out how we will move our economy on to a path of long-term sustainable growth. I start by welcoming my noble friend Lady Moyo to the House. I look forward to hearing her maiden speech. Given her distinguished career to date, I expect she will hold the Government’s feet firmly to the fire, especially when it comes to economic policy, and help us get our policies right.

In the autumn, we took difficult decisions to deliver stability and sound money. Since then, 10-year gilt rates have fallen, debt servicing costs are down, mortgage rates are lower and inflation has peaked. The Office for Budget Responsibility says that because of lower gas prices and the measures we are taking, together with our measures in the Autumn Statement, the UK will now not enter recession this year. The OBR forecasts that we will meet the Prime Minister's three economic priorities. Inflation is coming down and is on track to be more than halved by the end of the year: it is action that we are taking to help bring it down.

In this Budget, we confirmed that the energy price guarantee will remain at £2,500 for the next three months, saving the typical family a further £160 on top of the support we have already announced. We have ended the premium that 4 million households, often among the poorest, have to pay on their energy bills for having a prepayment meter. We have extended the alcohol duty freeze until August and will increase the generosity of draught relief, introducing a Brexit pubs guarantee. Because inflation remains high, we will maintain the 5p cut on fuel duty and keep it frozen for a further year, saving the average driver £100 next year and £200 since the policy was introduced. Finally, with communities strained by energy prices, we are providing £63 million to keep 275 local authority swimming pools afloat.

I turn to the Prime Minister’s second priority: reducing debt. Again, we are on track. We are meeting our fiscal rules to have debt falling as a percentage of GDP by the fifth year of the forecast, and to have public sector borrowing below 3% of GDP over the same period. In fact, our deficit falls in every single year of the forecast. In the final two years of the forecast, our current budget is in surplus, meaning we borrow only for investment and not day-to-day spending. Day-to-day departmental spending will grow at 1% a year on average in real terms after 2024-25, until the end of the forecast period, and capital plans are maintained at the same level set at the Autumn Statement. At the same time, taken together, today’s measures lead to an overall lower tax burden for the rest of the Parliament, compared to the OBR’s autumn forecast.

I turn to the Prime Minister's third priority and the focus of yesterday’s Budget: growth. Thirteen years ago, we had an economy that had crashed. Since 2010, we have grown more than major countries such as France, Italy and Japan. We have halved unemployment, cut inequality and reduced the number of workless households by 1 million. The World Bank says that, out of all the big European countries, we are the best place to do business. When it comes to the industries of the future, we are world leaders. Over the last 13 years, we have become the third trillion-dollar tech economy, after the US and China. We have the largest life sciences sector in Europe and the creative industries has grown at twice the rate of the rest of the economy. We are a world leader in offshore wind and our advanced manufacturing industries produce around half of the world’s large civil aircraft wings. These strengths make me optimistic for our future growth.

We should note what the OBR forecasts say. The OBR says that, after this year, the UK economy will grow in every single year of the forecast period: by 1.8% in 2024; 2.5% in 2025; 2.1% in 2026; and 1.9% in 2027. The OBR also expects unemployment to rise by less than 1%, to 4.4%, meaning 130,000 fewer people will be out of work compared to their autumn forecast.

On employment, to achieve the dynamic economy we all want, we cannot afford to waste the potential of anyone. That is why we will remove the barriers that stop people who want to work from getting into work. To help those who are sick or disabled back into work, we have published a White Paper on disability benefits reform, the biggest change to our welfare system in a decade. It will abolish the work capability assessment in Great Britain and separate benefit entitlement from an individual’s ability to work. As a result, disabled benefit claimants will always be able to seek work without fear of losing financial support. In England and Wales, we will fund a new programme called universal support. This is a new voluntary employment scheme for disabled people, where the Government will spend up to £4,000 per person to help them find appropriate jobs and put in place the support they need, funding 50,000 places every year. That comes on top of a £400 million plan to increase the availability of mental health and musculoskeletal resources and expand the individual placement and support scheme.

To help children in care enter the workforce when they reach adulthood, we are doubling the qualifying care relief to £18,140, which will increase the take-home pay of a qualifying carer by £450 a year. We will also double the funding we provide to the Staying Close programme, to help more care leavers into employment and support young people with special educational needs and disabilities to transition from education into the workplace, with a £3 million pilot expansion of the Department for Education’s supported internship programme. To encourage the 2 million people on universal credit without a health condition who are looking for work or only working a small number of hours, we will apply sanctions more rigorously to those who fail to meet strict work search requirements or choose not to take up a reasonable job offer. For those working low hours, we will increase the administrative earnings threshold from the equivalent of 15 hours to 18 hours at the national living wage for an individual claimant, meaning anyone who works below this level will receive more work coach support alongside a more intensive conditionality regime.

For those aged 50 to 64, with a wealth of experience we need in our workplaces, we will increase the number of people who will get the best possible financial, health and career guidance, well ahead of retirement, by increasing access to mid-life MoTs. The Department for Work and Pensions will increase fivefold the number of 50-plus universal credit claimants who receive mid-life MoTs, from 8,000 to 40,000. For experienced workers, we will also introduce a new apprenticeship targeted at over-50s, called “returnships”. These will bring together our existing skills programmes to make them more appealing for older workers, focusing on flexibility and previous experience to reduce training length.

We are also fully alive to the fact that many senior NHS clinicians say they are being advised to leave the workforce, just when the NHS needs them most, because of unexpected tax charges on their pensions. The NHS is our biggest employer and we will shortly publish the long-term workforce plan, but to make sure that they and other professions are not deterred from working, we will increase the pensions annual allowance to £60,000. We are abolishing the lifetime allowance altogether, to incentivise our most experienced and productive workers to stay in work across our economy for longer.

These measures will help turn us into a high-skilled, high-wage economy, but we know that one thing that holds people back is the insurmountable obstacle of high childcare costs, especially when their children are young. In 2010 there was barely any free childcare for under-fives. The Government changed that with free childcare for three and four year-olds in England, but we need to complete the job. That is why, in households where all adults are working at least 16 hours, we will introduce 30 hours of free childcare, not just for three and four year-olds but for every single child over the age of nine months. It is a package worth, on average, £6,500 every year for a family with a two year-old using 35 hours of childcare every week.

Because it is such a large reform, we will introduce it in stages to ensure that there is enough supply in the market. Working parents of two year-olds will be able to access 15 hours of free care from April 2024, helping around half a million families. From September 2024, that 15 hours will be extended to all children from nine months up, meaning a total of nearly 1 million families will be eligible. From September 2025, every single working parent of under-fives will have access to 30 hours of free childcare per week where they are eligible.

Ahead of that, we will help the 700,000 parents on universal credit who, until the reforms announced yesterday, had limited requirements to look for work. Many remain out of work because they cannot afford the upfront payment necessary to access subsidised childcare. We will increase the maximum they can claim to £951 for one child and £1,630 for two children—an increase of almost 50%. For any parent who is moving into work and wants to increase their hours, we will also pay their childcare costs up front.

That is the demand side. On the supply side, we will increase the funding paid to nurseries providing free childcare under the 30 hours offer by £204 million from this September, rising to £288 million next year. This is in addition to the funding provided to extend the offer to parents with children from nine months to two years old. To increase flexibility, we will change minimum staff-to-child ratios from 1:4 to 1:5 for two year-olds in England, as happens in Scotland.

To further increase the potential supply of childminders, au pairs and nannies, we will reopen the youth visa scheme unilaterally to anyone under the age of 35 from the United States, France, Spain, Germany, Italy and Holland. This will allow an additional 27,500 young people to come to work in the UK annually for up to two years.

For parents of school-age children, we will fund schools and local authorities to increase supply of wraparound care so that all parents of school-age children can drop their children off between 8 am and 6 pm. Our ambition is that all schools will start to offer wraparound childcare, either on their own or in partnership with other schools, by September 2026.

My right honourable friend the Chancellor also set out the Government’s commitment to continue to level up growth everywhere across the United Kingdom. Yesterday’s Budget announced 12 potential new investment zones, eligible for £80 million of investment, bringing together our leading research institutions with local government to remove barriers to growth in areas that need levelling up.

There is also over £200 million to fund high-quality local regeneration projects and £420 million for new levelling-up partnerships. A second round of the city region sustainable transport settlements, allocating £8.8 billion over the next five-year funding period, has been announced, and a further £200 million next year—bringing the total to £700 million—will be allocated to fix potholes.

For Scotland, Wales and Northern Ireland, this Budget delivers not only a new investment zone in each nation but an additional £320 million for the Scottish Government, £180 million for the Welsh Government and £130 million for the Northern Ireland Executive as a result of Barnett consequentials.

The Government will also consult on transferring responsibilities to support local economic development, currently delivered by local enterprise partnerships, to local authorities from April 2024.

Mayors will be given more financial autonomy with multiyear single settlements for the West Midlands and the Greater Manchester Combined Authority at the next spending review—something we envisage being rolled out to all mayoral areas over time. So that local leaders can continue to grow their own revenues by growing their local economy we have made a long-term commitment, in the next Parliament, that they can retain 100% of their business rates—again something we hope to roll out to other areas over time.

These steps will help us not just to grow but to share the benefits of growth across our country, but we must never forget that it is the private sector that helps drive this growth, so we are lowering business taxes to incentivise investment and tackle the productivity gap. Building on the increase of the annual investment allowance to £1 million, which covers the entire investment made by 99% of businesses, and following the end of the super-deduction, we will introduce a new policy of “full expensing” for the next three years. We will make this permanent as soon as we can responsibly do so. It will mean that, over that period, every single pound a company invests in new buildings, new IT or new machinery can be deducted from their taxable profits. It will mean a corporation tax cut worth £9 billion for every year that it is in place.

To encourage research and development, we are introducing an enhanced credit for small and medium-sized businesses that spend 40% or more of their total expenditure on research and development.

One of the reasons why we have succeeded in the past is our inclination toward innovation—our propensity not just to adapt but to drive change. Having left the EU, there is an opportunity to do so again.

With financial services reforms under way, we are now looking at regulations around life sciences, and we are lucky to have one of the most respected drugs regulators in the world in the MHRA. It will now move to a different model that will allow rapid and often nearly automatic sign-off for medicines already approved by trusted regulators in other countries such as the United States, Europe or Japan. At the same time, from next year it will set up a swift new approval process for the most cutting-edge medicines and devices to ensure the UK becomes a global centre for their development. An extra £10 million of funding over the next two years will put in place a plan to provide the quickest and simplest regulatory approval in the world for companies seeking rapid market access.

To strengthen our position in digital technology, we have accepted all nine of the digital tech recommendations made by Sir Patrick Vallance.

We are also making good on our pledge to direct our innovation toward a green economy by allocating up to £20 billion of support for the early development of carbon capture and storage projects across the UK as we work towards our goals in 2050. This will attract private investment, support up to 50,000 jobs and help capture 20 million to 30 million tonnes of CO₂ per year by 2030.

Alongside more public investment in nuclear, we are going to class it as “environmentally sustainable” in our green taxonomy, giving it access to the same investment incentives as renewable energy. This will not only deliver against our climate change goals but afford us energy security too. To support our wider security in a more dangerous world, having announced £5 billion of funding for the Ministry of Defence, the Budget confirmed an additional £11 billion over the next five years. By 2025, we will spend 2.25% of GDP on defence and endeavour to raise it to 2.5% as soon as the fiscal and economic conditions allow.

It has not been possible to condense the entirety of the Budget and its ambition into my opening remarks, but what should be clear is that we are bringing inflation down, debt down, and growth up. We have a plan that says to people: work will pay and pay well. We have a plan that is revolutionising childcare, reforming pensions and supporting disabled people. We have a plan to tear down barriers to growth, unlocking investment, incentivising innovation. It is a credible plan that will deliver economic success, growth and prosperity. I beg to move.

Defence Spending

Baroness Penn Excerpts

Thursday 16th March 2023 Lords Chamber

[Lord West of Spithead]

To ask His Majesty’s Government, further to their Integrated Review Refresh 2023, published on 13 March, whether they have any plans to increase spending on defence to three per cent of GDP.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

As the Prime Minister said on Monday, we will move away from our baseline commitment of spending at least 2% of GDP on defence to a new aspiration of 2.5% when the fiscal situation allows. There are no plans to change this aspiration to 3%. To ensure that we continue to meet the threats we face, the Chancellor is providing an extra £11 billion over five years to improve the country’s resilience and readiness.

[Lord West of Spithead (Lab)]

My Lords, everybody knows that our defence forces have been underfunded for some considerable time and are not in the position they should be. One could argue, I think quite reasonably, that that is part of the reason we are in the mess we are with the war in Ukraine. Autocrats such as Putin watch what we do and think, “These people are not taking life seriously”. We also know that the percentage of GDP figure is totemic. It was useful because we were able to put pressure on European allies to increase their spending, but it depends totally on what one’s GDP is. Bearing in mind that we have insufficient money for defence, does the Minister not believe that the Government should now make a clear commitment of going for 3%—let us call it of GDP—but actually attach a figure to it and start that spending now so that murderous people such as Putin see that we mean business?

[Baroness Penn (Con)]

My Lords, I agree with the noble Lord about the need to increase our spending on defence and start that now. That is why defence received its settlement a year earlier than other departments in the spending review 2020. It is why, alongside the integrated review refresh, we have included an uplift beyond that, including £4.95 billion for defence over the next two years to improve readiness and resilience of the Armed Forces, including bolstering our conventional stockpiles, enabling an early investment for the AUKUS submarine alliance and modernising our nuclear enterprise.

[Lord Stirrup (CB)]

My Lords, does the Minister recall that as recently as 2010, we were spending 2.6% of GDP on defence? Given the accounting changes that have occurred since then, that probably equates to something more like 2.8% in today’s terms. So the recent announcements putting us on a trajectory to 2.5% really cannot be seen as scaling some new peak, but rather as clawing us a little further out of the hole into which we have sunk. Does she accept that not only is there more to be done but that it needs to be done with urgency, and that saying we aspire to 2.5% when fiscal conditions permit is about the same as Government Front-Bench spokesmen saying they will bring something to this House “in due course”? It is pretty much meaningless.

[Baroness Penn (Con)]

I would like to reassure noble Lords that there is more money now going into defence. It is the largest sustained increase in defence spending since the end of the Cold War and, in recognition of the changing picture globally, we announced at the Budget money on top of that investment: £4.95 billion over the next two years and an extra £11 billion over the next five years to improve the country’s resilience and readiness.

[Lord Robathan (Con)]

My Lords, while the money announced yesterday is of course very welcome and we thank the Chancellor for that, it is £11 billion over five years. This is jam tomorrow—we need the money spent today. Has nobody noticed what is happening in Ukraine, and that our bunkers are empty of ammunition? We need to spend the money today. Will my noble friend confirm that, as she speaks, we are still cutting the number of troops, ships and aircraft in the United Kingdom defence budget?

[Baroness Penn (Con)]

An additional £24 billion is going in now as a result of the spending review 2020. The £11 billion announced at the Spring Budget includes £4.95 billion over the next two years. That does not include the spending on our commitments to Ukraine, which was £2.3 billion last year and will be £2.3 billion in the coming year.

[Lord Tunnicliffe (Lab)]

My Lords, we have got figures, figures and figures. There is only one crucial question. The Defence Secretary said in February that the Government

“have hollowed out and underfunded our armed forces”.—[Official Report, Commons, 20/2/23; col.65.]

Yesterday, some new funding was announced. Do the Government believe that yesterday really represents a reversal of the Secretary of State’s analysis and, crucially, is sufficient to secure Britain’s national defence for the future?

[Baroness Penn (Con)]

I think the Secretary of State for Defence has been very positive about the money announced at the Budget and previously, and this Government have overseen the largest investment in defence since the Cold War. The British Armed Forces remain among the best in the world; that is why we are a leading NATO partner. Over the last 10 years, the UK has been NATO’s second largest defence spender, after the US, and we spent almost as much on defence as 20 other NATO members combined. Future Soldier, the Army’s response to the integrated review, will deliver the largest transformation of the British Army in more than 20 years. As the threat changes, we need to change with it, and we have set out a plan to do so.

[Lord Swire (Con)]

I very much welcome the Prime Minister’s recent announcement about the replacement and refurbishment of the nuclear submarine fleet. Can my noble friend say from which budget that money is coming and, critically, can she confirm that the other political parties have signed up to this, given the long-term impact and programme that it will require?

[Baroness Penn (Con)]

I will let the other parties speak for themselves, but this is a long-term commitment to investment in our own security. The money we are investing in the defence nuclear enterprise is additional funding; it is not coming from any existing contingency, and I am happy to confirm that to the House.

[Lord Campbell of Pittenweem (LD)]

My Lords, since the additional money is over five years, and since we are supporting Ukraine to the tune of £2 billion a year, that additional money will all be used up in the support of Ukraine, which invites and encourages me to ask two questions. First, when will the money be made available to replace the ageing armoured vehicle, the Warrior, with a new battlefield vehicle, having regard to the shambles of the Ajax programme? Secondly, when will the Royal Air Force be provided with sufficient F35s to train its pilots to fly that aircraft, never mind taking it into combat?

[Baroness Penn (Con)]

I am afraid that I will have to write to the noble Lord on those two specific questions, but I should make a very important clarification of the additional funding going into our Armed Forces. Our support for Ukraine is over and above the additional investment I have mentioned, so it will not be drawn on in future years when we continue that support for as long as the conflict lasts.

[Lord Anderson of Swansea (Lab)]

Does the noble Baroness agree that Poland has been a model in respect of additional expenditure, and does she share the concern about the delay in Germany fulfilling its commitment? She talked about long-term commitments. Does this mean that the new expenditure will be backloaded and there will be some for several years in the future?

[Baroness Penn (Con)]

We welcome the contribution from all our allies and partners. I think I have been clear that nearly £5 billion of the £11 billion of additional funding is over the next two years. We have provided clarity beyond the existing scorecard period to help facilitate long-term investment in our future defence.

[Lord Cormack (Con)]

Can my noble friend clarify a statement she made in answering the noble Lord, Lord Campbell of Pittenweem? Did she really say that none of this money is going to be needed to replenish the armaments we have sent to Ukraine? A simple yes or no will do.

[Baroness Penn (Con)]

I believe I said earlier that one of the things we will be able to do with our funding is bolster our conventional stockpiles. But I want to be clear with noble Lords that the £2.3 billion commitment we made to Ukraine in 2022-23, which we are also matching going into next year, is over and above the money I have set out today.

[Lord Reid of Cardowan (Lab)]

My Lords, I know the Treasury likes to speak in percentages and aggregate sums, but can we cut to the chase? Will the Minister confirm that, as far as the Treasury knows, over the next few years our Armed Forces will reduce the number of soldiers, ships and planes? She may consult her colleague from the Ministry of Defence if she wishes.

[Baroness Penn (Con)]

I am very happy to have my noble friend sitting next to me. We constantly review our capabilities, but the vision for the future of our defence as set out in the original integrated review remains the vision for defence in this country. However, additional resource has come in as a result of the integrated review refresh, in order to reflect the new circumstances in which we find ourselves.

Public Spending: Barnett Formula

Baroness Penn Excerpts

Wednesday 15th March 2023 Lords Chamber

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I add my thanks to the noble Lord, Lord Shipley, for the timeliness of this debate and add words of welcome to the noble Lord, Lord Hendy. As we have heard, he brings a plethora of experience to this House, not least through his efforts to increase union connectivity, which, as the noble Lord noted, the Government are considering carefully. I look forward to working with him in the future.

As was reflected in my right honourable friend the Chancellor’s Budget today, the Government are committed to delivering growth and prosperity across all four nations of our United Kingdom and all regions within it. The Budget will rightly be debated in its own right by this House tomorrow, but I want to highlight that it is a Budget that delivers for the union, both through UK government support for all parts of the UK and through providing further additional funding to the devolved Administrations. The Spring Budget ensures that the benefits of economic growth are felt everywhere; promotes the conditions for enterprise to succeed; encourages the inactive back into employment; and continues to provide support with the cost of living to people across the United Kingdom.

As we heard earlier today, the spending review 2021 set the largest annual block grants, in real terms, of any spending review settlement since the devolution Acts. On top of this, the devolved Administrations received £3.4 billion of extra funding at the Autumn Statement and, as a result of decisions at the Spring Budget, are now receiving an extra £630 million in additional funding over the next two years through the Barnett formula, which we are here to discuss today.

The Government’s commitment to investing in our union should be in no doubt. However, it is helpful on Budget Day to reflect on the fiscal settlement that we have across all four nations and on how decisions such as those taken today flow through to the finances of the devolved Governments, including through the use of the Barnett formula.

As many noble Lords noted, the Barnett formula is long-standing, having been introduced in 1978—which is, as the noble Baroness, Lady Chapman, noted, before my time. It is transparent and open to scrutiny. It is consistent with the principles set out in the Statement of Funding Policy document, playing a key role in pooling and sharing resources so all parts of the United Kingdom receive a secure and stable level of funding for public services.

As noble Lords noted, the formula determines changes to devolved Administration funding in relation to changes in UK government funding and works by multiplying the change in UK government funding by two figures: a population share and a comparability factor, which measures the extent to which a UK government service is devolved.

The formula serves to ensure that any changes to funding are, per person, broadly the same across the United Kingdom. These changes are then added to devolved Administrations’ existing funding, which is much higher per person than equivalent UK Government spending, broadly reflecting that needs are higher in Scotland, Wales and Northern Ireland. The outcome is that the devolved Administrations receive more than 20% more per person than equivalent spending in the rest of the United Kingdom.

I understand that there are, on many occasions, calls to replace the Barnett formula. To answer those calls honestly, it is important to acknowledge that the formula is not perfect, but all allocation systems have strengths and weaknesses, and we do not need to replace the Barnett formula to make meaningful improvements in the way in which devolved Administrations are funded. Indeed, that picture has not remained static since the formula was introduced in the 1970s: significant changes have been made since then.

The devolved Administrations have agreed tax powers so they can increase their funding. They have control of local taxation, such as business rates and council tax. They also have agreed borrowing powers, as well as flexibility to move funding between years. The noble Lord, Lord Shipley, raised the question of needs-based funding—not just looking across the nations of the United Kingdom but across our regions as well and how funding is allocated within England. I am sure the noble Lord will know that many different formulas contribute to the distribution of funding within England. Many of them take needs factors into account. To answer him, as he gave me the option to do this, I think it would be best if I wrote out to those who have attended the debate today on the approach to needs-based funding in England.

As for needs-based funding and the Barnett formula, I recognise that it is not directly needs based in Scotland and Northern Ireland. However, the higher levels of funding they get reflect the greater needs in those areas. In Wales, raised specifically by the noble Lord, Lord Wigley, although we did not take forward all the recommendations of the Holtham commission, very importantly, we have introduced a needs-based floor into the Barnett formula to ensure that that is taken into account.

The latest fiscal framework agreed between the UK and the Welsh Government in 2016 added a needs-based factor into the Barnett formula to ensure that Wales receives fair funding. The Welsh Government receive at least 15% more funding per person than the equivalent United Kingdom spending in the rest of the UK, as recommended by the commission. A review of that fiscal framework is triggered when the Welsh Government premium falls below 15%. It is not below 15% at the moment; noble Lords will know that is it at 20%. This is about £1 billion more each year than the Holtham commission indicated, and the Welsh Government agreed, was fair to Wales.

There may be a question of how effectively the Welsh Government have spent their needs-based funding, and the noble Lord, Lord Wigley, raised that question about EU funding that the Welsh Government have received. The United Kingdom Government share the desire to ensure that money is spent effectively across all parts of the UK and that devolved Governments are held to account by their electorate for how effectively they spend their money. When it comes to introducing a needs-based element into the Barnett formula, the reforms we have undertaken since the Holtham commission’s report show that you do not need to abolish the Barnett formula to improve on its work.

My noble friend Lord Greenhalgh provided a different perspective on whether we should look at needs-based funding or opportunity-based funding. He raised an interesting point and I hope he has taken heart from some of the announcements in today’s Budget. Whether it is devolution or decentralisation, there were important announcements in today’s Budget that will give more power to those who are close to their communities and have a better idea of how money should be spent in those areas.

We have agreed, subject to ratification, trail-blazer devolution deals with the Greater Manchester Combined Authority and West Midlands Combined Authority. They will equip those authorities with deeper, additional policy levers to deliver on their priorities, including across local transport, skills, housing, innovation, net zero and employment. They are a big step towards what my noble friend spoke so passionately about: empowering the leaders of local areas and others to take forward the policies that will deliver for those local areas.

The Budget also provided hundreds of millions of pounds more for levelling up, including over £400 million of funding for the rollout of new levelling-up partnerships, bringing the collective power of government to provide bespoke place-based regeneration in 20 of England’s areas most in need of levelling up over 2023-24; and over £200 million for 16 local regeneration projects in places in need across England—from a skills and education campus in Blackburn, to the transformation of Ashington town centre. There have been significant moves in this Budget both to devolve power to local areas and to ensure that areas that need support from levelling-up funds get it.

It would be remiss of me to conclude this debate without addressing the point on High Speed 2. I do not think that what I will say to noble Lords is new information, but the reason why Wales does not receive a Barnett consequential on High Speed 2 spending, unlike Scotland and Northern Ireland, is that rail infrastructure in Wales is a reserved matter. It is based on the devolution settlement we have and the difference in the settlements between Wales, Scotland and Northern Ireland. That is consistent with the funding arrangements for all other policy areas that are reserved in Wales but devolved in Scotland and Northern Ireland, such as policing.

This has been an interesting debate. As we move to further devolution, it is interesting to think about what basis that, and the funding, should be on. I am sorry that I could not more fully answer the question from the noble Lord, Lord Shipley, about funding in England. I hope to write to him with a very full response after this debate.

[Lord Shipley (LD)]

Can the Minister clarify that her letter will explain—in great detail, I hope—why, for example, the East Midlands has a lower per capita public funding settlement than the rest of the United Kingdom? We need such examples to dig out the reasons for the differences in per capita public funding by nation and region. I hope, secondly, that the letter will also confirm my view that the levelling-up metrics which are part of the Levelling-up and Regeneration Bill could be used as a basis for a needs analysis to allocate public spending in a new system that does not depend on the outdated Barnett formula.

[Baroness Penn (Con)]

My Lords, I will endeavour to provide as much detail as I can in my written response. I note the noble Lord’s desire that it address the specific points concerning the East Midlands.

When it comes to the levelling-up metrics, we will of course look at the idea put forward by the noble Lord. As someone experienced in looking at reforming funding formulas across a whole range of different public service areas, I can say that this can be extremely complicated. I know the noble Lord said that that was almost no excuse, but it is important to recognise that fact. Any such changes need to be carefully taken forward and thought through, but we will look carefully at his proposition.

Devolved Budget for Wales: Inflation

Baroness Penn Excerpts

Wednesday 15th March 2023 Lords Chamber

[Baroness Wilcox of Newport]

To ask His Majesty’s Government what assessment they have made of the potential impact of inflation on the devolved budget for Wales.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

The Welsh Government are well funded to meet their responsibilities. The 2021 spending review set the largest annual settlement in real terms since the devolution Act. The settlement is still growing in real terms over the spending review period. The Welsh Government also have their own tax and borrowing powers. In addition, the UK Government are supporting households UK-wide with the cost of living, supporting businesses, charities and the public sector with their energy bills.

[Baroness Wilcox of Newport (Lab)]

I thank the Minister for that Answer, but I need to make her and the House aware that Wales is facing a perfect storm of pressures, with austerity, the pandemic, the cost of living and high inflation. Our economy and public services in Wales are very fragile. Simply put, it seems that the UK Government have abandoned Wales to meet these pressures alone. With the funding from last autumn’s Budget Statement, inflation means that our settlement is still worth up to £3 billion less in real terms and £1 billion less next year. What can the people of Wales hope for from the UK Government’s latest Budget today—more of less?

[Baroness Penn (Con)]

My Lords, I reiterate to the noble Baroness—and to the Welsh Government—that the Welsh Government, in the 2021 spending review, received the largest annual settlement in real terms since the devolution Act. I also say to the noble Baroness that, with the inflation that we are facing across the country, the budget is still growing in real terms across the spending review period. The Autumn Statement included additional funding for Wales, and today’s Budget means that the Welsh Government will receive an additional £180 million through the Barnett formula across the next two years. Measures that we are taking across the UK in today’s Budget will benefit Wales: the extension of the energy price guarantee; the freezing of fuel duty; and the doubling of draught relief, which will support more than 2,000 pubs and bars in Wales. There is much to be welcomed in today’s Budget for Wales.

[Lord Morgan (Lab)]

My Lords, is it not the case that Wales has been inadequately funded under both Labour and Conservative Governments? Many reports have been debated in your Lordships’ House. I recall the noble Lord, Lord Forsyth, saying how inadequate it is. The Barnett formula is a fraud; it seriously underfunds Wales. Furthermore, Wales in any case suffers from long-term problems in matters such as housing and education, which relate to the fact that Wales is bracketed with England—a bad idea in the first place. We need something much more substantial than what were—I agree with the noble Baroness—some beneficial points today. Otherwise, Wales will continue to lag behind.

[Baroness Penn (Con)]

I believe the noble Lord was referring to the Lords Committee on the Barnett Formula in 2009, which called for a review of that, including implementing a needs-based factor. That is exactly what we have done through implementing the recommendations of the Holtham commission, which found that the Welsh Government should have at least 15% more per person than equivalent UK government spending to reflect the Welsh Government’s additional needs. In fact, that figure is 20% more per person in the 2021 spending review, which is about £1 million more each year than the Holtham commission indicated and which the Welsh Government agreed was fair for Wales relative to England.

[Lord Wigley (PC)]

My Lords, did not the Holtham commission have as one of its three points the need to do away with the Barnett formula as it exists and to replace it with a needs-based formula? That has not been accepted by the Government. Will they please think again?

[Baroness Penn (Con)]

Instead of removing the Barnett formula, we have amended it to include that needs-based factor. The Barnett formula is simple and efficient and provides a clear and certain outcome. With the addition of the needs-based factor, the people of Wales have the guarantee that funding based on their own needs will not fall below the assessment of where those needs are.

[Lord Hannan of Kingsclere (Con)]

My Lords, inflation did not come as some act of God; it was caused by paying people for two years to stay home and printing money to cover the difference. Is it not odd that those who called for the longest and strictest lockdown, including not least Labour’s Administration in Wales, now complain about it and demand more of the medicine that sickened the patient? Will my noble friend the Minister confirm that no one ever tamed inflation by spending more money?

[Baroness Penn (Con)]

My noble friend is absolutely right about the importance of reducing inflation. That is why it is so important that the measures we have taken in the Autumn Statement and today’s Budget mean that, when we get to the end of this year, inflation is more than halved, meeting one of the Prime Minister’s five pledges to the United Kingdom.

[Baroness Humphreys (LD)]

My Lords, last month the British Dental Association warned that NHS dentistry in Wales could disappear. In Cardiff and the Vale of Glamorgan alone, around 15,000 people are on two-year waiting lists, more than 8,000 of whom are children. Given the financial constraints already referred to and the imposition by the UK Government of a 3.5% cap on the dentists’ remuneration body—leading to 13% saying that they would hand back their contracts this year—how can the Welsh Government run an efficient and viable service?

[Baroness Penn (Con)]

My Lords, I believe that is a question for the Welsh Government, as it is a devolved area. On funding, I just go back to the point that the Welsh Government have had a record settlement. At the Autumn Statement we put increased money into the NHS and social care, which of course would have flowed through to Wales as a result of the Barnett consequentials. What the Welsh Government choose to do with that money is a matter for the Welsh Government.

[Lord Lexden (Con)]

My Lords, is it not extremely difficult to secure throughout our country the high level of prosperity that we would all like to see? My noble colleagues from Northern Ireland will testify to that.

[Baroness Penn (Con)]

It is a difficult thing, but one that this Government are committed to. That is why I am so pleased to see that as a result of the measures announced in this Budget today, we have seen the OBR adjust its growth forecasts upwards by the largest amount based on supply-side reforms since its establishment in 2010.

[Lord Morgan (Lab)]

My Lords, the noble Baroness mentioned the Barnett formula in terms of great approval. How does one reconcile that with the view of Lord Barnett about his own formula when he said he was deeply ashamed of it? Why are the Government not equally ashamed?

[Baroness Penn (Con)]

My Lords, I believe we are having a whole debate this evening about the Barnett formula. I simply say to the noble Lord that, yes, all allocation systems have strengths and weaknesses. The reforms I spoke about earlier in this Question, introducing a needs-based factor into the Barnett formula for Wales, have addressed one of the major weaknesses that was identified.

Silicon Valley Bank

Baroness Penn Excerpts

Tuesday 14th March 2023 Lords Chamber

[Lord Fox (LD)]

My Lords, I thank the Minister for repeating the Statement, albeit in the graveyard shift: she could have got in a bit earlier. Having read through the details of the events of the last weekend, I can understand why the Statement veers towards the slightly triumphalist: the sale of Silicon Valley Bank to HSBC averted existential problems for a huge number of UK tech businesses, and I am sure the Minister and colleagues are pleased to have done this. We should congratulate the Treasury and the Bank of England, as well as Coadec, Tech London Advocates and BVCA on the industry side, all of which came together very swiftly over the weekend. But where do we go from here?

First, can the Minister confirm that there will be a full investigation, both to confirm how this happened and, more importantly, what lessons can be drawn? One lesson we can all observe is that bank runs in the social media age happen in hours rather than days: the speed with which the run on this bank happened points, I think, to future issues if we ever came to them. As we know, Silicon Valley Bank’s UK wing oversaw roughly £7 billion in deposits from 3,000 entities across the country’s important tech industries and, contrary to US reports, it was not ring-fenced from its US parent. My first specific question is how we ended up in a situation where a huge proportion of a vital sector of the UK economy was reliant on one regional US bank. I am sure the answer is not simple, but it is important. For example, accessing connections to venture capital may have led banks to SVB, but there is also evidence that the traditional UK banks just do not have the appetite to take up this kind of business. Where will the tech start-ups go now for funding, especially in an environment where capital is getting more scarce?

History tells us that, when interest rates rise as fast and by so much as they have during the past period, bad things nearly always happen. It is a near certainty that one of two outcomes will occur: recession or a bank crash—sometimes both. I am sure we all hope that the failure of SVB, the closure of Signature Bank and the Tory-created crisis in UK government bonds and the pension sector are just outliers and do not herald something worse. They may, indeed, be one-offs; however, it seems to me that the Government, the Treasury and the Bank of England have to err on the side of caution. Can the Minister assure us that the tone of this announcement does not indicate a sense in our financial institutions that their work is done?

The SVB crash epitomises the risks buried in our financial system as central banks rapidly lifted borrowing costs. SVB’s unhedged investments in long-term, fixed-rate, government-backed debt securities left it doubly exposed to rising interest rates because it reversed tech companies’ growth and hit the price of its securities. There may be other issues that unwind when investigation of this bank carries on—we will have to wait and see—but how did the US regulators miss the issue at the heart of SVB? Since the 2008 financial crisis, the focus has been on liquidity, although I would suggest that not even that has been particularly successful. Interest rates have grabbed little attention because they had not posed a significant threat in recent decades, but they do now.

Can the Minister confirm that the Government have asked the Bank of England to review the stress tests it conducts in order to take into consideration the rapid rise in interest rates? Can the Minister confirm that the tests will be extended into the so-called shadow banking sector, which is increasingly grabbing large slices of business traditionally carried out by banks? Can the Minister also assure your Lordships’ House that the necessary horizon scanning is under way?

I do not think anyone predicted the LDI issue in the autumn, and I do not think anyone pointed to a sector-focused regional bank like SVB being the source of a crisis. So where could the next crisis come from? I can offer three options in the current environment: insurance funds investing in illiquid assets; overvalued real estate; and private equity funds with opaque valuations. I am sure the big brains in the Treasury will be much better at navigating the complex and interwoven investment landscape and come up with a better list to enable them to avoid unpleasant surprises. Can the Minister confirm that there are people digging down into the systemic risks which are buried deep inside the highly complex finance systems and finance products that exist around the world today?

At the heart of this is also politics. Republicans have loosened US bank regulations in recent years and banks such as SVB had previously lobbied successfully to be excluded from the category of systemically important banks—that meant they faced lower capital and liquidity standards. We are not immune from the same political pressures in this country. The Edinburgh reforms announced late last year also point towards deregulation, not least in the plan to reform the ring-fencing regime for banks.

But more than that, and as the noble Lord, Lord Tunnicliffe, referred to, we can see this trend in the Financial Services and Markets Bill that is currently being debated by your Lordships. For example, Clause 24 in that Bill requires the FCA to help drive the international competitiveness of the economy of the United Kingdom, in particular the financial services sector—help drive the competitiveness of the economy. This creates a huge conflict of interest within the FCA, and in light of the SVB it looks at least questionable. Can the Minister confirm that this clause will be reviewed with a view to future amendment when the Bill comes back on Report?

Finally, after 2008 the Government and the financial sector all said “Never again”, and there were significant changes to the banking regulations; much of this was based on a report led by Sir John Vickers. Speaking today on the BBC, Sir John said that the country made advances in 2009 and we must not row back on these advances. He explicitly said that the Edinburgh reforms should be reviewed again and that ring-fencing should be maintained. I would remind the Minister that, failing anything better, the Government are the scrutiniser in chief, and the buck stops with the Government. Will the Minister listen to Sir John and halt the slide towards deregulation in this country?

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, as noble Lords have recognised, the course of events over the weekend was a good outcome for the customers of Silicon Valley Bank in the UK and an example of the Bank of England, in consultation with the Treasury, using powers granted by the Banking Act 2009, as part of the post-crisis reforms, to safely manage the failure of a bank and, in this case, facilitate its sale, which has protected those customers and taxpayers. I add my thanks to both noble Lords’ to the officials in the Treasury and at the regulators who worked tirelessly through the weekend to grip the situation and prevent real jeopardy to hundreds of the UK’s most innovative companies.

The noble Lord, Lord Tunnicliffe, asked whether any assessment was made of the significant liquidity risks associated with SVB UK’s deposit base at the time its licence was granted. Those authorisation decisions are for the independent regulators to comment on. However, requiring SVB to subsidiarise meant that it was independently capitalised from its parent in the US and had its own liquidity buffers. That brought the firm into the scope of the UK’s resolution regime. Had SVB UK remained a branch, it would have been resolved by the US resolution authority as part of action taken with respect to SVB.

That distinction is important to make in relation to a few of the points from the noble Lord, Lord Fox, in looking at the potential differences between the regulation and the regime in the US and the regime in the UK. However, there is read-across between the two. That is why we have measures in place to ensure that banks that are of systemic risk to different jurisdictions have cross-jurisdiction oversight, and that regulators work together on these matters.

The noble Lord, Lord Tunnicliffe, also asked about the ring-fencing changes made to facilitate the sale. To ensure the sale could proceed, the Government used powers under the Banking Act to provide HSBC with an exemption to certain ring-fencing requirements. This was crucial to ensure that a successful transaction could be executed, that the bank had the liquidity it needs, and that deposits and public funds were protected. We broadened an existing exception in the ring-fencing regime, allowing HSBC’s ring-fenced bank to provide intragroup lending to SVB UK. This should facilitate the smooth operation of SVB UK. In addition, SVB UK, which is now a subsidiary of HSBC’s ring-fenced bank, is not subject to the ring-fencing rules.

Both noble Lords spoke about the importance of doing everything possible to ensure that there is confidence in the UK’s financial system. We absolutely agree with the importance of that, which is why the UK authorities took such swift and decisive action this weekend to facilitate the sale of the firm. The noble Lord, Lord Fox, noted how quickly events unfolded. It is certainly true that the timeline including the weekend gave the time and space for such a resolution to be found, but that only adds to the point about the speed at which these events can take place.

Both noble Lords also asked about the stress test system for banks and about launching a wider systemic review of the risks facing the financial sector, including non-bank risks. Of course, both noble Lords will know that that is the role of the Financial Policy Committee of the Bank of England, which is responsible for identifying, monitoring and addressing systemic risks to financial stability.

The FPC meets quarterly, following which a record of its discussions is published. It produces a biannual financial stability report setting out its assessment of the risks facing the financial system and its resilience. It looks at it for the non-banking sector, but also sets the scenarios and coverage used for stress tests within the banking sector. Those decisions remain with the Financial Policy Committee.

Both noble Lords also rightly pointed out that, while we reached a good resolution in this instance, it is of course right that we reflect on what happened and look at whether any lessons can be learned. I can confirm that the Treasury and the Bank of England are looking to work together to ensure that we reflect properly on the events in this case.

Finally, both noble Lords also referenced the reforms that we are currently taking through this House in the Financial Services and Markets Bill and through the wider Edinburgh reforms set out by the Chancellor in December. I assure all noble Lords that the Financial Services and Markets Bill introduces ambitious reforms for a financial services sector that will give the UK the ability to continue to grow and be internationally competitive with other markets, while adhering to the highest-quality regulatory standards. As my honourable friend the Economic Secretary to the Treasury said to the House of Commons yesterday, having good, healthy businesses that grow and are profitable is the best way to avoid jeopardy. The Bill and the Edinburgh reforms deliver that commitment. We are confident that our reforms will deliver a high-quality regulatory environment for our financial services sector in future.

[Lord Tunnicliffe (Lab)]

I know it is unconventional, but will the Minister advise us whether the lessons learned report is going to be published?

[Lord Fox (LD)]

The Minister is getting a job lot of questions. I was hoping to hear her say that the shift in danger has gone from being just about liquidity to being about a lot of things connected with interest rates. We saw that in the autumn and again this week. When I suggested that the Treasury talk to the Bank of England about stress tests, I was suggesting not that the Treasury did the stress testing but that we would all be much more comfortable if we knew that shift had been taken on board and would inculcate future stress tests.

[Baroness Penn (Con)]

The point I was trying to make is that I am sure the Financial Policy Committee of the Bank of England will want to consider that. It updates its approach to stress testing both for banks and in its wider assessment of the risks to the financial sector more broadly. The noble Lord is not wrong in painting a picture of a changed context. We can also look at it for LDI, for example. While that is something for the FPC to take forward, I recognise the noble Lord’s points about that changed context. I hope that the points I made about how it holds its meetings and provides transparency about its considerations will reassure noble Lords about that process.

I will have to come back to the noble Lord, Lord Tunnicliffe, about the lessons learned and whether this reflection will be published. I do not know what form it will take. With the LDI process, interim findings have already been made public for people to take forward, but there is also further work. I imagine that a similar process may be followed here, but I will confirm this to noble Lords.

[Baroness Bennett of Manor Castle (GP)]

My Lords, I have been reading paragraph 11 of this Statement against paragraph 17. Paragraph 11 rather surprisingly says that

“the system worked as we would hope.”

Paragraph 17 notes that officials at the Treasury and regulators

“worked tirelessly through the weekend to grip the situation … and to prevent real jeopardy to hundreds of the UK’s most innovative companies.”—[Official Report, Commons, 13/3/23; cols. 560-61.]

As the noble Lord, Lord Fox, observed, it was lucky that it was a weekend. We surely do not want to have our financial sector and the stability of our economy dependent on that kind of luck.

Paragraph 11 states:

“the system worked as we would have hoped.”

If this is really how the system is supposed to work, I suggest that we need a new or at least significantly reformed system—a more secure, stable, less fragile system than what followed the collapse of the Silicon Valley Bank at the weekend. The noble Lord, Lord Fox, talked about the speed at which events happen these days. There is a Bloomberg article headlined, “The Digital Age Ushers In A Speedier, More Viral Breed of Bank Run”, and I think that was clearly demonstrated here.

The Minister mentioned the Financial Services and Markets Bill, which refers to maintaining the UK’s position as an open and global financial hub. Have not the events of the weekend demonstrated the extreme dangers of pushing that as far as we possibly can, and the dangers of Clause 24, on the competitiveness of UK markets, which the Finance Innovation Lab, among many others, has noted is a push towards deregulation—to reduce regulation and increase risk—when it is clear we cannot afford the amount of risk we have now, as demonstrated by this case and the events involving our pensions last October? As we speak, the situation with Credit Suisse in Europe is still very unclear, as is that of a number of US banks.

Will the Government take a real look at the Financial Services and Markets Bill and their positioning of the UK’s financial sector, and look for a safe, secure sector that meets the needs of the real economy, rather than chasing growth?

[Baroness Penn (Con)]

On the noble Baroness’s final point, I do not think that those two aims need to contradict each other. In fact, the Financial Services and Markets Bill aims to deliver on both. I emphasise to the House the importance of a healthy financial services sector to growing our economy in all parts of our country. I point out to the noble Baroness that no one has said that the events over the weekend have brought into question the UK’s prudential regulatory regime and the protections we have put in place.

However, the point made by the noble Lord, Lord Fox, about the changing context and being able to remain dynamic in our assessment of the risks and, therefore, in looking at how our system works, is absolutely right. The world changes very quickly and there is absolutely no room for complacency here. But do I think that the reforms we are proposing in the Bill are right? Do I think they will both promote growth in the UK and protect the safety and soundness of our system? I do, and we will continue to strike that balance as we take our reforms forward.

[Lord Grantchester (Lab)]

Although the main reason for Silicon Valley Bank’s collapse may be its poor handling of the bond market, whether or not augmented by aggressive raising of interest rates by the Fed in the US and turbulence from the Truss era in London, nevertheless, the fact that the bank’s business was focused on new technology and innovation has raised some alarm. Can the Minister give the House an assurance that the technology sector, with its own stresses, has been protected by the transfer to the safe haven of HSBC, and that the drive to net zero and the raising of finance for that imperative has not been impeded in any way?

[Baroness Penn (Con)]

I can absolutely reassure the House that all depositors’ money with SVB UK is safe and secure as a result of the transaction. The noble Lord is right that many of SVB UK’s customers represented large parts of the tech sector in the UK. Part of the success of securing that sale means that they can continue with their business and with investing in innovative solutions to challenges such as net zero, confident that their banking services remain in place.

UK Infrastructure Bank Bill [HL]

Baroness Penn Excerpts

Consideration of Commons amendments
Tuesday 14th March 2023 Lords Chamber

Moved by

[Baroness Penn]

That this House do agree with the Commons in their Amendments 1 and 2.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, with the leave of the House, I shall speak also to the other amendments and that in the name of the noble Baroness, Lady Hayman.

I start with Commons Amendment 2. As was noted in the other place, the Government agree that the bank will make it a stipulation that any investment into the water sector must be in line with the company having an appropriate plan and making sufficient progress against that plan to deal with sewage discharges. However, I want to make it clear that in this circumstance the word “preventing” is aimed principally at preventing harmful discharges and does not mean eliminating all discharges. I want to make this distinction in the House because I do not want the bank to be prevented by fear of legal action from investing in water companies which have a plan in place to meet their obligations.

I reassure the House that the Government are already taking major steps to improve water quality. We have announced legally binding targets on water quality under the Environment Act and ambitious interim targets to deliver these in our environmental improvement plan.

This Government have also implemented the strictest ever targets to crack down on poor water company performance. On sewage spills, our storm overflows plan requires companies to deliver the largest ever environmental infrastructure investment—£56 billion over 25 years. Where water companies are found to have broken the law and face fines for this behaviour, this Government have committed to reinvest those fines directly back into schemes to improve our water environment.

Commons Amendment 3 removes the Lords amendment to include nature-based solutions and the circular economy in the definition of infrastructure. As noble Lords will recall, we debated this issue extensively in this House and it came up frequently in the Commons. At the time, I noted that nature-based solutions were already included under the inclusive definition of infrastructure and, as such, we did not think it necessary to add it explicitly in the Bill. The Government have reflected on the debate and recognise the strength of feeling on the matter and, as such, think the amendment from the noble Baroness, Lady Hayman, strikes a careful balance of making it clear that nature-based solutions are within the bank’s remit without being overly prescriptive.

The Government agree with the removal of the circular economy from the definition. We do not think including the circular economy—which is an imprecise term—in the definition of infrastructure would be helpful for the bank. However, I thank all noble Lords, and in particular the noble Lord, Lord Teverson, for raising this issue during the passage of the Bill. We reassure them that the circular economy is an incredibly important principle and will be key as we transition to a more sustainable economy in a number of sectors. While we do not wish to expand the scope of the bank, I reassure the noble Lord that several of the areas highlighted in the debate on the circular economy are covered within its existing remit and objectives; for example, nature-based solutions, waste and energy efficiency, as was clarified in an earlier amendment to the Bill. I therefore anticipate that the bank will invest in and be a key proponent of a circular economy wherever it is in line with the overall objectives.

Commons Amendment 4 removes subsection (6) from Clause 2 of the Bill. The subsection included the wording “have regard to”, but this would still have had a significant impact on the bank. For example, on improving jobs, we understand the intention of the amendment and do not disagree with it as a general principle. However, we are concerned that there may be consequences if the principle were to be applied across the board as a statutory requirement in relation to every investment proposal. It could lead to the bank being overly cautious for fear of legal challenge.

The second part of this subsection, on reducing regional inequality, is also of concern. We do not want the bank to be under a statutory duty to consider regional disparities in the same way in relation to every investment proposal that comes before it. The strategic steer makes it clear that the bank must focus on geographic inequalities. However, this is best done on a portfolio basis rather than investment by investment, which would be required by the proposed amendment.

Although the Government agree with the Commons amendment, we recognise the concern of the House, and I pay tribute to the work of the noble Lord, Lord Tunnicliffe, on this matter. I recommit to this House that after the Bill achieves Royal Assent the Government will amend the bank’s framework document to provide clarity on the role on the bank in levelling up the United Kingdom. We will include under the operating principles the wording:

“The bank will also address the spatial disparities across and within UK regions.”


This is in addition to the wording already in the framework document under its second objective:

“to support regional and local economic growth through better connectedness, opportunities for new jobs and higher levels of productivity”.

Commons Amendments 5, 6, and 9 concern provisions to add a duty to consult relevant Ministers in the devolved Administrations on the use of delegated legislative powers in the Bill, including the power to amend the bank’s activities or the definition of “infrastructure”, and to issue the strategic steer. Commons Amendment 7 is related and sets out a requirement for UKIB’s board to appoint one or more directors to be responsible for ensuring that the interests of the devolved Administrations are considered in the board’s decision-making. These amendments have come as a direct result of positive engagement we have had with the devolved Administrations, and I am pleased to say we have received legislative consent Motions from the Welsh and Scottish legislatures. Unfortunately, given that the Executive have not formed, it was not possible to get a legislative consent Motion from the Northern Ireland Assembly.

Given we are on the subject of the board of directors, I know that the noble Lord, Lord Tunnicliffe, was interested in whether the bank would appoint a workers’ representative to the board. I reassure him that the bank is abiding with the requirements of the corporate governance code and has appointed a non-executive director, Marianne Økland, to facilitate engagement with the workforce.

Commons Amendment 8 reduces the time period for statutory reviews of the bank following the first such review from seven to five years. This balance reflects the fact that we need to allow a nascent institution time to embed and fully establish itself in the market, which is why the first review will take place after seven years. However, subsequent statutory reviews will take place every five years to ensure proper scrutiny of the bank’s performance.

Commons Amendments 1 and 10 are of a technical nature and broaden the definition of “public authority” in relation to the bank’s capacity to lend. The drafting as is broadly meets the policy aims and would allow the bank to lend to local authorities and the Northern Ireland Executive. However, given that primary legislation can be something of a blunt instrument, we do not want inadvertently and by implication to preclude the bank from lending to other public authorities, such as any public bodies created by local authorities or government departments in future.

Finally, as is standard for a Bill that starts in the Lords and concerns matters of public finance, a privilege amendment was passed. Commons Amendment 11 removed this.

The Government have listened to concerns in both Houses and have made changes to improve the Bill. I look forward to the debate and hope that noble Lords will accept these amendments. I beg to move.

[Baroness Hayman (CB)]

I declare my interest as co-chair of Peers for the Planet and rise to speak to my Motion 3A, which as the Minister said would reintroduce nature-based solutions into the definition of infrastructure in which the UK Infrastructure Bank may invest.

We had some very helpful conversations after Report and the debates in the other place, and I think we have now reached a highly satisfactory position on this amendment, in no small part due to the Minister’s customary constructive approach to the debates that have taken place in this House, for which I am very grateful.

Of course, the original amendment included the “circular economy”, and I know that there will be some disappointment that that is not included now, but the bank’s strategy is reassuring on that issue. Anyone who listened to the item on the “Today” programme this morning about data centres using the heat they normally have to dispose of to heat up the water in local swimming pools will have heard a lovely example of how we need to put those sorts of issues together.

I thank all the Members of this House who have taken part in the debates, and in particular those who signed the various iterations of my amendment, including the noble Lord, Lord Bourne of Aberystwyth, the noble Baroness, Lady Jones of Whitchurch, and the noble Lord, Lord Teverson. This amendment has had significant cross-party support because of the increased recognition that nature-based solutions have a critical role to play in the fulfilment of the bank’s objectives. The Chancellor’s strategic steer in 2022 encouraged the bank to

“explore early opportunities in nature-based solutions”

and aim to have

“a positive impact on the development of the market”.

The bank has since published a discussion paper setting out its initial thinking on how it can invest in and support the growth of natural capital markets, and I look forward to the results of this consultation.

The discussion paper clearly explains the importance of natural capital as a form of infrastructure and the vital contributions it makes to our society and economy, often in ways which are more cost-effective to the taxpayer. Carbon removals through creating and restoring woodlands, wetlands and peatlands, flood mitigation measures, providing “clean and reliable” water supplies, underpinning our food security and bolstering our resilience to climate change: these constitute numerous examples of how we can deploy nature-based solutions to support our infrastructure and provide social, economic and environmental benefits. There is also an ever-increasing recognition of the key role that nature can play in solving climate change, nature being our biggest asset with which to fight it. Nature-based solutions also provide significant co-benefits, such as jobs and good health and well-being outcomes, with considerable economic advantages.

I welcome that the UK is leading on the Taskforce on Nature-related Financial Disclosures, but there is an average $700 billion funding gap for protecting and restoring nature globally, and evidence that more needs to be done to help market participants mainstream and scale these products alongside growing investor demand. This simple addition to the definition of infrastructure in the Bill sends a strong signal to the markets that the UK recognises this and the Government are serious about taking action to help build and develop this nascent market. It also provides certainty to the bank, which recognises that it has a role in developing capacity towards a pipeline of investable projects and is poised to act. It will encourage others to do the same and further develop the UK finance sector’s position as a leader in this important emerging new market.

As I said, I am very grateful to the Minister and her officials for the support they have given and the resolution that I think we have reached.

--- Later in debate ---

[Lord Tunnicliffe (Lab)]

My Lords, I thank the Minister, both for her introduction today and for a helpful briefing held last week. When your Lordships’ House considered the Bill in the first half of last year, we were told that passing it should be a mere formality. The UK Infrastructure Bank was already operating, having made its first handful of investment decisions. The Bill was therefore essentially a technical exercise to give the organisation statutory underpinning. The Government resisted several sensible amendments, including one on worker representation on the bank’s board, partly on the basis that this legislation needed to be on the statute book quickly. I pause to note that the inclusion of a non-executive director at least moves in that direction. I thank the Minister, as I do for everywhere in the Bill where she has persuaded the Government to seek compromise.

However, in reality, it took some time for the Bill to get through the other place. The legislation having been introduced last July, Second Reading did not take place until November and Report not until last month. The delay was presumably the result of the Conservative Party’s summer of chaos, with a succession of Prime Ministers and Chancellors of the Exchequer, and—if I remember correctly—a short period when the noble Baroness was not a Minister on this subject. We are back to our familiar form. The extra time has seemingly allowed Ministers to reflect, in some areas at least, as evidenced by the various Commons amendments that we are debating today.

We welcome the clarifications around the definition of “public authorities” and the importance of costed plans should UKIB funds be used to support the work of water companies. The devolved provisions, which have facilitated the passing of legislative consent Motions—something of a novelty in recent years—are also welcome. We are also glad that the Minister and the Bill team have been persuaded of the merits of including nature-based solutions in the definition of infrastructure.

The noble Baroness, Lady Hayman, made a persuasive argument but, as we have often seen, that does not always lead to the Government making a concession. I pause again, however, to note, as happens with so many Bills, the extent to which she and her supporters are making incremental progress in embracing the green thrust. Even now, I have a bit of optimism that we might move quickly enough to save at least some of the planet that we now enjoy. It is good to see that thrust building on both sides of the House. I hope that in a couple of years the sides will change but, if one has that general direction in the membership and on the Front Benches, it is possible that we will get there. In another two years we may be passing green amendments that will amaze us when we look back five years, at when some official or other said, “You can’t put green in there because it is nothing to do with the Bill”. We have put green in here and have persuaded people that it is something to do with the Bill.

I understand the disappointment of the noble Lord, Lord Teverson, with regard to the circular economy, but that concept will become ever more apparent and he will no doubt have other opportunities to promote it.

I regret that the Government have overturned my amendment. Colleagues may think, “You would say that, wouldn’t you?”, but I remain unconvinced of the Government’s reasoning for removing their own levelling- up mission from the Bill. I reluctantly accept the offer to make changes to the bank’s framework document and articles of association after the Bill receives Royal Assent. It is not exactly where we want to be but it is a small step in the right direction.

Finally, we gladly accept the reduction of the interval between reports on the bank’s effectiveness. I was somewhat amused by this, as we were previously told that an interval of five years was simply not practical and could even somehow undermine the bank’s work.

Overall, while the Bill is a short, technical piece of legislation, the UK Infrastructure Bank could make a significant contribution to some of the big challenges that we face. We fully support the bank and, while there may be cause to revisit its mandate in the future, we wish it well in its work. Again we thank the Minister for her co-operation in bringing us to this consensus position.

[Baroness Penn (Con)]

My Lords, the Bill is mercifully short, so I shall also keep my remarks brief. I thank all noble Lords who have spoken today and who contributed when we took the Bill through its substantive stages in this House a while back. I reassure them that the time it has taken for the Bill to progress is not unusual: I was working on the skills Bill in this House, went off on maternity leave and was back in time for ping-pong, so it is not necessarily an unusual passage for a Bill in Parliament.

I reassure the noble Baroness, Lady Bennett, that the Government are committed to moving towards a more circular economy which will see us keeping resources in use as long as possible, extracting maximum value from them, minimising waste and promoting resource efficiency. I hope I made that clear in my opening remarks. When it came to including a legal definition of “infrastructure” in the Bill, that is where my remarks about the potentially imprecise nature of the terms lay, but it does not reflect a broader lack of understanding or commitment by the Government to that agenda.

I also reassure the noble Lord, Lord Teverson, that His Majesty’s Treasury is very much committed to ensuring that nature and climate change are on the agenda for the Government and that we meet our global goals, committed to both in terms of Paris alignment and the new framework agreed at COP 15 in Montreal at the end of last year. He knows better than most that we published the Dasgupta review that looked at the role of nature in our economy. We have had an amendment to the Bill today, and that commitment will be ongoing.

Most noble Lords were very kind in not replaying my words on the review period for the bank. All I can say is that it is always a pleasure to listen to the contributions of noble Lords and be persuaded of the art of the possible. I am pleased with the changes that we have been able to make to the Bill; I think these have shown how effective Parliament can be in scrutinising our legislation. The UK Infrastructure Bank has transformative potential, which I know is recognised and supported on all sides of the House. I beg to move.

Motion on Amendments 1 and 2 agreed.

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Moved by

[Baroness Penn]

That this House do agree with the Commons in their Amendment 3.

Amendment to the Motion on Amendment 3

Moved by

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Moved by

[Baroness Penn]

That this House do agree with the Commons in their Amendments 4 to 11.

Motion on Amendments 4 to 11 agreed.

Financial Services and Markets Bill

Baroness Penn Excerpts

Committee stage
Monday 13th March 2023 Grand Committee

[Viscount Trenchard (Con)]

My Lords, I support my noble friend Lady Noakes in her amendment. As she has explained well, Clause 38 requires the FCA, the FOS and the FSCS to co-operate and to consult with each other in exercising their statutory functions. However, it is important that FOS decisions with wider implications do not diverge from FCA rules, or there may be unintended consequences, and predictability and consistency may be negatively affected.

As my noble friend just said, this does not mean that the FCA or the FOS should act without thinking very carefully about what they are doing. Her amendment takes account of that and would be likely to encourage real thought about the consequences of making a particular decision in any case. Besides, Parliament never intended the FOS to be a quasi-regulator. UK Finance has recommended that the FCA should be given a power to overrule a decision by the FOS where it believes that the decision could have wider and perhaps unforeseen implications. My noble friend’s amendment would deal effectively with this potential problem.

Of course, the granting of additional powers to the FCA strengthens further the case that the FCA must be properly accountable to Parliament, and I regret that I have not yet heard my noble friend the Minister acknowledge that, as drafted, the Bill does not provide adequate arrangements for this. I firmly believe that a properly resourced joint committee is how to achieve that.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the Government agree that, where there are wider implications, it is critical that the bodies within the financial services regulatory framework, including the FCA and the FOS, co-operate effectively.

As my noble friend Lady Noakes noted, that is why Clause 38 of this Bill introduces a statutory duty for the FCA, the FOS and the Financial Services Compensation Scheme to co-operate on issues which have significant implications for each other or for the wider financial services market. Clause 38 also ensures that the FCA, FOS and FSCS put appropriate arrangements in place for stakeholders to provide representations on their compliance with this new duty to co-operate on matters with wider implications.

As my noble friend also noted, these organisations already co-operate on a voluntary basis through the existing wider implications framework. The voluntary framework was launched in January 2022 to promote effective co-operation on wider implication issues. Clause 38 will enhance that co-operation and ensure that these arrangements endure over time while retaining the operational independence of the bodies involved.

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[Baroness Noakes (Con)]

My Lords, I thank my noble friend Lord Trenchard for his support; I was not expecting the noble Baroness, Lady Bowles, to support my amendment, because she and I have discussed the FOS in the past.

There is a potential problem in the relationship between the FCA and the FOS with the introduction of the new consumer duty. I think that is particularly concerning people: we are going a little into the unknown. We know that if regulatory pressures get too difficult for firms, their natural response is, ultimately, to leave or severely curtail the elements of the market that they are prepared to operate in. We need look only at the availability of advised investment to see what can be the consequence of heavy-handed regulatory action. If the new consumer duty becomes a nightmare, with individual cases being settled on particular circumstances but then having to be read across because of the FCA handbook, which requires cases to then be followed by firms, we could end up with a very confused understanding of what the consumer duty involves. That was the main burden of my tabling the amendment, but we may just need to see what happens when the consumer duty operates in practice to see whether those harms genuinely emerge.

As for the second leg of my amendment, which should have been a separate amendment, I was very interested to hear what my noble friend said about the case having been made. What I am not quite clear about, which she may be able to clarify, is on what timescale she believes the Government will be looking at this, because not many financial services Bills come along to get things done in.

[Baroness Penn (Con)]

I will have to write to the Committee to clarify the timescale for the noble Baroness.

[Baroness Noakes (Con)]

My Lords, I look forward to that letter with great anticipation. With that, I beg leave to withdraw the amendment.

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[Lord Tunnicliffe (Lab)]

My Lords, this group of amendments has a general direction which may be supported. It would be much better if the Government were to come forward with proposals in that general direction and improve the situation.

I, too, however, feel that there is some moral hazard. The extent to which victims are compensated draws attention from the fact that this is serious crime which, as I understand it, is growing exponentially. I hope that in looking after victims, which I am broadly in favour of, we massively increase our efforts to prevent fraud in the first place. I do not have a simple solution to that, but it is my understanding that the relationship between a preventive resource in the police and the banks is, compared to the general application to prevent crime, disproportionately low. More resource has to be put into combating this frightening industry. There is a sense of almost moral decay that allows this virulent industry to continue to grow. I hope that, while responding to the concerns of victims, there is also feedback to the Government as a whole that we must find a way to get on top of this very unpleasant crime.

[Baroness Penn (Con)]

My Lords, I recognise the keen interest across this Committee in the provisions in the Bill to tackle financial crime and fraud more generally, and, in this group of amendments, on tackling APP scams specifically and the related work of the Payment Systems Regulator to introduce mandatory reimbursement. The noble Baroness, Lady Bowles, said that she hoped that the sense of the amendments could be taken forward, or that the Government could provide reassurance to noble Lords that it will. I hope to be able to do so.

Measures in the Bill not only enable the Payment Systems Regulator to act on APP reimbursement regardless of the method of payment used, but also have a specific requirement mandating, within a specific timeframe, that they are taken forward under Faster Payments. We have sought within the Bill both to provide further powers for the regulator and to specify that it needs to act within a certain timeframe on the form of payments, which currently represents the largest form of fraud, not only by volume—97% of payments by volume—but by value. The figures I have are that Faster Payments account for approximately 85% of the value. The noble Lord and noble Baroness also mentioned CHAPS. That is the next highest in value, but it is about 4%, so it is right that we prioritise action on Faster Payments first. That does not rule out further action on other forms of payment further down the line.

I appreciate that we often have a debate on what needs to be in a Bill versus powers that, in this case, we are giving to the regulators to make rules. We have also heard during this debate about fraud how dynamic that situation can be, so enabling the regulator to update its response to approaching these questions through its rules is the right approach in this situation.

None the less, a lot of detail of the Payments Systems Regulator’s approach is in the public domain, and I hope it would reassure the noble Lord, Lord Vaux, on a number of his amendments that the approach being taken is consistent with many of the recommendations made by his committee. Indeed, having its proposals out for consultation on how mandatory reimbursement should work has provided an opportunity for all interested parties to comment.

Turning to the specifics in the amendments and hopefully updating the Committee on work that the PSR is taking in relation to each, I begin with Amendments 202 and 207, tabled by the noble Lord, Lord Vaux, on the scope of the requirement on the PSR to mandate reimbursement. As I have noted, under this legislation the PSR could act in relation to any designated payment system, but with a specify duty on Faster Payments which, as I said, accounts for 97% of scams by volume today. We expect the PSR to keep under review the case for action across other designated payment systems, in collaboration with the Bank of England and the FCA.

In relation to Amendment 204, on issues that the PSR should consider as part of its approach, I assure the Committee that the PSR has set out how it has considered these issues in its consultation. For example, as discussed, the PSR is proposing that the cost of liability is split equally between the sending and receiving banks, recognising that both parties have a responsibility in preventing fraud.

On Amendment 205 on the publication of data, the PSR is currently consulting on a measure to require payment service providers to report and publish fraud and reimbursement data. I was surprised to hear Green support for league tables. I did not know that they were supportive of them on schools, but in this case that data is important and the transparency we are talking about helps noble Lords keep track of how effective these provisions are once they are implemented.

Amendment 206 is on a duty to review. The PSR regularly reports on the discharge of its functions through its annual report and has committed in its consultation to a post-implementation review of its action on APP scams, to assess the overall impact of its measures for improving consumer outcomes. The Government will also monitor the impacts of the PSR’s action and consider the case for further action where necessary. While the Government recognise the intention behind the noble Lord’s amendments, we do not think it necessary or appropriate to further circumscribe the actions of the regulator in primary legislation at this stage, given the extensive consultation the PSR has undertaken on this matter and its responsibilities and expertise in this area as the independent regulator.

On Amendment 203, tabled by the noble Baroness, Lady Kramer, and spoken to by the noble Lord, Lord Sharkey, the Government’s intention, as already expressed in the legislation, is to ensure that more victims of APP scams across the Faster Payments system specifically, and wider payments systems in general, are reimbursed, and to enable the PSR to act in this area. The Government recognise that no one sets out to be defrauded and that APP scams are, by their very nature, convincing and sophisticated.

None the less, we also recognise that many banks take action to engage with their customers ahead of making a payment, and that questions of liability can be complex. As the noble Lord, Lord Vaux, set out, a blanket approach to mandatory reimbursement raises questions of moral hazard and the potential for APP reimbursement fraud itself to become an area of difficulty. This is a difficult balance to strike. While this amendment is well meaning, it will not help achieve effective resolution in these cases. We are confident that the PSR has the appropriate objectives, expertise and powers to develop proposals for APP scam reimbursement that both ensure strong protections for victims and incentivise banks to engage effectively with their customers to prevent fraud. In its consultation on its reimbursement approach, the PSR stated its intention to require firms sending payments over the Faster Payments system to fully reimburse all consumers who are victims of APP scams, with very limited exceptions. The PSR considers that this will ensure that victims are reimbursed in the vast majority of cases. In that regard, the PSR has already signalled its intention to set a high bar for customer liability—higher than currently applies within the existing code of voluntary reimbursement.

We do not believe that this amendment will improve outcomes for customers beyond the provisions already set out in the Bill, and it could impede the work of the regulator, which has already consulted on the proposals. I hope that noble Lords genuinely feel reassured by the level of detail in which the PSR and the Government have thought through these proposals, and acknowledge the ability to have a dynamic response in this area. I therefore hope the noble Lord can withdraw his amendment.

[Lord Vaux of Harrowden (CB)]

Can the Minister comment on the Treasury Select Committee’s recommendation on the PSR, effectively subcontracting its responsibilities to Pay.UK?

[Baroness Penn (Con)]

I apologise to the noble Lord; I did have an answer for him on that. The Bill is clear that the Payment Systems Regulator has the duty to act on mandatory reimbursement. The PSR has the relevant powers and expertise, as well as the appropriate discretion, to determine the most effective approach in that area.

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All in all, I hope that the Government have heard what has been said and come forward with a solution. If not, we will have to consider whether we will support a modified amendment on Report.

[Baroness Penn (Con)]

My Lords, the Government have a lot of sympathy with noble Lords who feel that they or their families have been subject to unreasonable treatment due to their status as politically exposed persons, or PEPs. As noble Lords have mentioned, I have engaged with noble Lords to understand this issue and I am aware that the difficulties faced can range from seemingly disproportionate requests for information to accounts being blocked, leaving Peers and their family members at risk of being unable to effectively manage their financial affairs.

The Treasury and the FCA will continue to work to address this issue and to ensure that those subject to these rules are treated fairly and proportionately. Before discussing that work further, I will set out the importance of the PEPs regime to UK security and the fight against economic crime.

Enhanced due diligence by banks is a key component of the UK’s anti-money laundering and anti-corruption measures, and ensures that any suspicious activity is identified and reported to law enforcement. Given the potential for the positions of influence held by those subject to the PEPs regime to make them targets for serious and organised criminals and hostile state actors, law enforcement agencies have strongly favoured maintaining these requirements on domestic PEPs. The enhanced due diligence measures are a crucial part of the UK’s anti-money laundering regime and contribute to a coherent, systemwide approach to tackling economic crime, providing law enforcement with valuable and actionable intelligence to help protect the UK’s political system from hostile state actors, for instance.

However, the Government of course recognise that domestic PEPs often represent a lower risk than overseas PEPs. This is already explicit in FCA guidance, which states that domestic PEPs should be treated as lower risk by financial institutions unless other risk factors are present. The FCA remains committed to monitoring banks’ compliance with its guidance on PEPs, and will take action where it identifies systemic issues. The FCA did so last year, resulting in one financial institution apologising to all PEP customers after its failure to adhere to FCA guidance.

In last year’s review of the money laundering regulations, the Government committed to an assessment of the risk profile of domestic PEPs and made it clear that we would consider removing the requirement for mandatory enhanced due diligence if they were found to be sufficiently low risk. The Government’s assessment of the risk profile of domestic PEPs has concluded. As part of that work, they engaged with law enforcement and other operational partners to develop their under-standing of the risk posed by domestic PEPs. In light of that review, the Government consider that the existing requirements remain appropriate.

However, given the concerns raised, the Government will continue to work with the FCA to ensure that banks and other financial institutions appropriately and proportionately implement the guidance set out by the FCA regarding the treatment of domestic PEPs, that it is taken forward in a way that is proportionate to their individual risk and that adjustments are made to enhanced due diligence measures as necessary. I would like to reassure noble Lords that the Treasury continues to engage with the FCA on this issue and stress the importance of taking a proportionate, risk-based approach to the application of enhanced measures on domestic PEPs.

I turn to the specifics of the amendments. Amendment 215 from my noble friend Lord Moylan would remove those politically exposed persons who are tax residents from the regime entirely. As I have set out, including domestic PEPs in the regime is important because of the risks presented by their positions of influence. Such a proposal would weaken the UK’s protection from money laundering and corruption and leave us non-compliant with international standards. International standards for domestic PEPs, as my noble friend set out, are set by the Financial Action Task Force. They require countries to implement a legal framework that compels regulated firms to identify whether their customers are domestic PEPs and make an assessment of which due diligence measures to apply based on the risk presented.

Amendment 215 would remove the requirement for financial institutions to identify and treat those resident in the UK for tax purposes as PEPs, making the UK non-compliant with those international standards. The UK is a leading member of the Financial Action Task Force and was recognised in its mutual evaluation report in 2018 as having the most effective anti-money laundering regime of well over 100 countries assessed to date. The UK remains committed to ensuring that its anti-money laundering regime is compliant with these international standards. While I appreciate that, in drafting their amendments, noble Lords may have sought to remain compliant with those standards, I am afraid it is not possible to remove domestic PEPs from identification altogether and remain compliant.

[Baroness Hayter of Kentish Town (Lab)]

Why is it therefore possible to exclude councillors, as the guidance does, but not Peers?

[Baroness Penn (Con)]

That is a question of who is classed as a domestic PEP, not of the need to have a regime in place to identify domestic PEPs and then look at what enhanced due diligence measures should be applied to them.

[Baroness Hayter of Kentish Town (Lab)]

Does the Minister accept that we could therefore exclude all Members of Parliament?

[Baroness Penn (Con)]

I do not think that would be consistent with the Financial Action Task Force guidance that is interpreted at a UK level.

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[Earl Attlee (Con)]

Further to the questions of the noble Baroness, Lady Bowles, can the Minister point to any illegal activity on the part of a parliamentary PEP that has been detected as result of the money laundering regulations?

[Baroness Penn (Con)]

My Lords, to deal with the question of the risk assessment undertaken as part of this work, as I have already said, the Government have engaged closely with law enforcement and the intelligence community to inform our understanding of the risk in this area. It is a difficult area, and it is not particularly appropriate to go into detail on the contents of the risk assessment, given the sensitive nature of the information. As I also set out, the context is that there is potential for those in positions of influence to make domestic PEPs targets for influencing behaviour by serious and organised criminals and hostile state actors. The potential links between domestic PEPs and criminal activity vary, including abuse of political position for personal gain or links to overseas corruption.

I very much understand the desire by those directed by the regulation to hear more about that risk assessment. It was a question that I anticipated and to which I sought to get as full an answer as possible for the Committee. I am under constraints, but I shall none the less take away the requests from noble Lords to see whether there is any more I can do to provide more information on that point.

[Lord Kirkhope of Harrogate (Con)]

I follow up the inquiry of my noble friend Lord Attlee about statistics—whether parliamentarians have actually fallen foul—and take it one stage further. With regard to the particularly appalling way in which family members are implicated here, do we have statistics on how many family members of parliamentarians have fallen foul? Surely, they are implicated simply because they are related to someone who is classified as a PEP. We have mentioned human rights, but this provision cannot be fair or proper and should surely be removed.

[Baroness Penn (Con)]

As I said, I shall take away the point about what further I can say about the work on the risk assessment. The focus has been on looking at risk, and my understanding is that, in considering that, the question of close associates or family members—I believe that is the terminology in the regulations—has also been considered.

[Baroness Hayter of Kentish Town (Lab)]

I am sorry about this, but the Minister will not be surprised, because we have had 10 years of this issue. There was a review last year, which she reported on in the House, which said that no change was needed, which is extraordinary. She referred to the case where we all got an apology, but that was only because we kept on standing up and asking for it, otherwise it would never have happened.

The important thing that I wanted to raise is that this somehow is going further than anti-money laundering—it is about general corruption. Some of us have been debating the National Security Bill, where it is being dealt with in another way. I do not think that the Minister has been following that Bill, but I can understand that she has not because she has been involved with this one. We now have the FIRS scheme, which will be set up when the Bill becomes an Act and which is about the other things—the approach to politicians by malign forces trying to corrupt us, or whatever. So can we take out corruption and that sort of thing, because the National Security Bill will deal with that? This is simply to be simply about anti-money laundering—in other words, dirty money.

A lot of what the Minister has said goes beyond that, and the fact that she cannot tell us means that the spooks—who tell us that they do not want it, by the way—want it for some other cause. That is not the purpose of the provisions on anti-money laundering; it is about dirty money. Perhaps the Minister could talk to the Home Office and Tom Tugendhat about how much is covered now on the approach to any of us as politicians by malign forces, because this is separate.

[Baroness Penn (Con)]

My Lords, although I have not been following the detail of that Bill, I am aware of the provisions in it. As part of looking at this question, one question asked is, in our broader ecosystem of the checks and balances that we have on our politicians and people defined as PEPs—the other requirements of disclosure that they are held to and the other tools that we have at our disposal—how they influence the risk assessment has been done. I reassure noble Lords that that question has been asked. I should also reassure noble Lords that I am seeing the Security Minister tomorrow to discuss economic crime, but also that issue. We are seeking wherever possible to ensure that there is join-up across government in our assessment of the risks and the tools available to deal with them, ensuring that where we have measures in place they remain proportionate. That is something that I continue to engage with, with the Security Minister and others across government.

I shall just try to answer the point on the Financial Action Task Force, the difference between domestic and foreign PEPs, and the requirements within that, as I understand it. I commit to following up in writing if it remains unclear or if anything I say is not correct. The requirement for automatic enhanced due diligence applies to foreign PEPs. However, within the FATF guidance on recommendations 12 and 22—I think that this is particularly around 12—there is still the need to take steps to identify whether someone is a domestic politically exposed person and then review the relevant risk factors. So they need to determine whether a customer or beneficial owner is a domestic PEP, then determine the risk of the business relationship in that context—and then, in low-risk cases, there are no further steps to determine whether a customer is a PEP. In other words, there is still a requirement to identify whether someone is a domestic PEP or not and to look at the risk around that.

Where there is a difference, in my understanding, from the Financial Action Task Force requirements, is that for foreign PEPs you need to apply automatic enhanced due diligence. Under the EU regulations, that also applied to domestic PEPs—and we therefore ensured that automatic enhanced due diligence applied to domestic as well as foreign PEPs was a system in our regulations. The review we did last year into all of our anti-money laundering regulations did not conclude that on this matter no further action was to be taken but that we needed to look at the risk profile and risks associated with domestic PEPs before determining whether those requirements of automatic enhanced due diligence remained appropriate, now that we had the ability to vary our money laundering regulations, having left the EU. So that was a further piece of work that needed to be done after the review was published last summer of our money laundering regulations overall. That further piece of work has been undertaken, and I have undertaken to write to noble Lords with further details if I can provide them on that risk assessment, but that concluded that it was appropriate to maintain automatic enhanced due diligence for domestic PEPs.

[Baroness Noakes (Con)]

Did this review involve the FCA? When the FCA reissued its guidance in 2017 it was very clear about domestic PEPs being low risk, but it was constrained by the regulations, which said that you had to do enhanced due diligence. It was within that context. There seems to have been a shift between the FCA’s apparent position on the risk profile of UK PEPs and what my noble friend the Minister is now saying that she is being told by the security services, which will always try to find things that can go wrong. It is quite easy to construct a case that we are potentially capable of being corrupted by whoever and involved in money laundering, but they are not involved in the money laundering processes; the FCA is. I am getting a bit confused about how robust this risk assessment is in the context of money laundering.

[Baroness Penn (Con)]

I believe that it aimed to get relevant information from all those involved and take a holistic view. I appreciate and agree that we need to ensure that, when these measures are put in place, they are proportionate to the risk faced, so it is entirely right to interrogate that risk assessment. I also appreciate that it is a slightly frustrating process when the sensitive nature of some of these issues means that we cannot always go into all the details noble Lords want at this time. I have tried to explain the context as to why domestic PEPs are viewed as having sufficiently high risk so that enhanced due diligence should still apply. I have the FCA guidance in my pack but I will not go through it, but it is also true to say—this is another point that I checked—that although the risk is sufficient to have enhanced due diligence measures, it is lower for domestic PEPs than for foreign PEPs. That assessment still applies.

[Lord Jackson of Peterborough (Con)]

The Minister is doing a very good job on a very sticky wicket. I am not surprised. Notwithstanding what she said about risk assessments and how that has to be, of necessity, a discretionary issue, the problem we are identifying, which the Government should address if they come forward with an amendment at Report, is the opaque nature of identifying these individuals and the offence against natural justice, because when people have accounts closed they are often not told why, who made the decision, on what basis and using what methodology. That is a serious issue and, after 10 years, one that the Government should address, if necessary by a government amendment.

[Baroness Penn (Con)]

I absolutely take that point. It comes back to the appropriate and proportionate enforcement of these regulations. I know that that is something noble Lords have raised previously, but we need to continue to work to ensure that it takes place.

[Baroness Bowles of Berkhamsted (LD)]

This goes back to when the Minister mentioned the FATF provisions. I thought she mentioned the risks in business relationships. All the stuff we get as PEPs is our personal stuff; it is nothing to do with business relationships. I have not been interrogated about anything to do with the London Stock Exchange, of which I am a non-executive director; I am interrogated about my father’s will and that kind of stuff.

Again, I am happy—in fact I would almost prefer—for the Minister to write the replies because it is hard to put together quoted bits and pieces, even when we get them back in Hansard. It seems that the whole risk assessment business is being set aside at the behest of the security agencies, which just like the idea that they have another captive load of people and that they may be able to track something with money—which I doubt, because these forms go to an outsourced place, they are filed, and nobody ever looks at them. There is no “know your client” going on. They may look at one or two, but I do not see how it adds up at all, even taking that security aspect into account, because if anybody was really a security threat, there are other ways of vetting.

[Baroness Fox of Buckley (Non-Afl)]

I am confused. I always encourage people to find out what is happening in this House by telling them to look at the speeches and follow Hansard, but now I am dreading anyone watching this because we have a government Minister implying that the security services at looking at us, particularly our private financial affairs, because we are high risk. Why? I do not think that is true. I want to denounce the notion that because you are in the House of Lords you are more likely to be doing something such as that.

I do not think the Minister can answer my second point, but I think we would all feel that it is a generalised accusation rather than specifically going after individuals who might be doing things that are wrong based on evidence, which nobody here objects to. Never mind the families; I have got to the point now where it is not just the families. I am sitting here feeling embarrassed, thinking, “Oh god, somebody is basically saying that the security forces think that we are all up to no good”. If the public find that out, it is said by a Minister and it is the general atmosphere, that is not good, is it? I usually put my speeches up on social media; I am not putting this one on. I do not want anyone to know about this conversation, because it will discredit the reputation of this House far more than anything else.

[Baroness Penn (Con)]

My Lords, I have already set out for the Committee, and I repeat now, the reasons why UK domestic PEPs may be at greater risk of money laundering. For example, in the general sense, the positions of influence that we have can put us at greater risk. I have also tried to set out—and will set out in writing for noble Lords—the approach that we are taking to look at risk in this area. I will share any further details that I am able to.

[Baroness Bowles of Berkhamsted (LD)]

Following on from what has just been said, I would quite like the Minister to rephrase what she said: that we are at greater risk of money laundering. I cannot let that stand on the record.

[Baroness Bowles of Berkhamsted (LD)]

I can let stand that we might, in some instances, be at greater risk of being targeted for various things, and I hope that we also have a greater capacity for repelling such actions, given the experience of people in the House and having done the sorts of things that we have done throughout our lives. I am not prepared to accept that kind of statement with any acquiescence whatever on my behalf or, by the sound of it, on behalf of colleagues here.

[Baroness Penn (Con)]

I am very happy to clarify for the Committee and anyone who may be reading our proceedings, that we, due to our positions of influence, are at greater risk of being targeted by those who may seek to engage in money laundering.

[Earl Attlee (Con)]

My Lords, I say to the Committee that if someone tried to target me in any inappropriate way, I would report it to the appropriate authorities immediately.

[Baroness Penn (Con)]

I am sure that many of us in this Committee would do so—

[Noble Lords]

All!

[Baroness Penn (Con)]

I am sure we all would. The noble Baroness, Lady Bowles, asked me to set out in writing the position of the Financial Action Task Force in terms of the requirements for foreign and domestic PEPs. I will also set out in writing the position on the risk assessment that has been undertaken, so that everyone has it and it is not just in the toing and froing of the exchanges in this Committee. I will clearly set out for the Committee the Government’s position on this.

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[Baroness Penn (Con)]

Others are involved in looking at the risks of money laundering in counterterrorist and proliferation financing, which I believe are subject to these regulations.

[Baroness Noakes (Con)]

As far as financial institutions are concerned, all of those are dealt with by the FCA, not the security services or any other shadowy agencies that seem to be involved in this latest risk assessment, so I am struggling to see what wider issues could possibly have been taken into account.

[Baroness Penn (Con)]

The Government believe that the decision about the scope of the money laundering regulations is best taken by, and should remain with, the Government, rather than being delegated to the FCA.

I turn to Amendment 224 from the noble Baroness, Lady Hayter of Kentish Town. This would require the FCA to consult with consumers with regard to its functions relating to PEPs. In the discussion—

[Baroness Hayter of Kentish Town (Lab)]

The noble Baroness does not need to respond on this; it was a placeholder.

[Baroness Penn (Con)]

Okay—I was going to talk about the engagement that we have conducted so far and will continue.

My noble friend Lord Trenchard touched on my noble friend Lord Forsyth’s Amendment 234, but I am not sure whether anyone spoke to it specifically. In my response, I addressed the Committee’s desire to focus its attention on the statutory changes, and I am not sure we had a detailed discussion on the other proposals put forward here.

Noble Lords have made their position on the issue very clear. I hope that, to some extent, they have also heard the rationale for the Government’s approach and would agree with the desire to be in line with international standards in any action that we take in this area. As the noble Lord, Lord Tunnicliffe, said at the start of his remarks, we should bear in mind the context of the Government’s efforts, very much supported by this House—we are often pushed to go further by this House—in tackling issues of economic crime, which include money laundering. We have to recognise that London and the UK being such a centre for financial services, and the great benefits that that brings, also brings greater risks. It is right that we make sure that we have a regime that manages those risks as effectively as possible.

I shall write to noble Lords on the matters that I have mentioned, and any other matters in looking at this debate again, on which I can provide further clarity. I am sure that I will engage with noble Lords further on this issue ahead of Report.

[Lord Tunnicliffe (Lab)]

Would the Minister also engage with the banks and financial institutions to see whether they can improve their performance in being reasonable?

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[Baroness Penn (Con)]

The noble Lord is absolutely right to say that. This Government are committed to do that with the regulator. I understand this Committee’s desire to look at legislative change, but I have also heard from the Committee that the guidance is clear on the lower risks of PEPs, and the challenge really lies in the effective implementation of that guidance. We should not take our eye off that work. It is something that the Government are absolutely committed to doing.

I know that noble Lords have raised the challenges of engaging with the FOS on this issue, but I remind them of that route. I have also said to noble Lords, as the FCA has said, that in the list of contacts that we have provided to parliamentarians with issues with their status as politically exposed persons, the FCA will monitor any of those points of contact in terms of complaints to look more systematically at whether there are issues in individual institutions so that further action can be taken on that basis. The Treasury will continue to engage with the FCA on how we can ensure that that takes place.

[Baroness Hayter of Kentish Town (Lab)]

I think that we have already mentioned why the FOS is so inappropriate. To expect a judge to take a complaint to the FOS is frankly out of order. It is no way for this issue to be raised. It is a very small number—but it is not appropriate to ask very senior judiciary to go via FOS, if their children are being affected. That is really not the right way forward.

[Baroness Penn (Con)]

I appreciate that it will not be the right route of recourse in many circumstances, but I do not agree that it is never the right form of recourse for people. It is important for people to know that that route is there. For particular cases, it may be appropriate. The noble Baroness has set out why, in many other cases, that is not the form of recourse that people want, which is why we have also set out other points of contact and ways in which to try to resolve these issues, which also act as a data point for the FCA as the regulator to look at issues in particular banks or institutions that are not applying the guidance appropriately.

[Lord Moylan (Con)]

My Lords, we have had a very valuable debate. I am grateful to all noble Lords who spoke in it and, if I do not thank them individually, I hope that they will forgive me, given the length of the debate so far. It is unusual, at the end of such a long debate, to be able to summarise the arguments made in one or two sentences—but I can, because everybody, in effect, said the same thing. That is that we want to see change, and the majority of us want to see legislative change.

Having said that I am not going to refer to individuals, there are two speeches to which I will briefly refer, because they were important. The first was the winding-up speech from the Labour Party Front Bench by the noble Lord, Lord Tunnicliffe. He spoke very briefly, but his words were very pregnant and important as we approach Report.

The second, which I will deal with at greater length, was the speech made by the noble Baroness, Lady Bowles of Berkhamsted, who acutely put her finger on a key issue that must be addressed if we are to achieve the legislative change that we want to see. That is about the definition that we choose. When I spoke earlier, I said that there must be a way in which to distinguish satisfactorily between domestic and foreign. In doing this, I will not use the term “non-discriminatory”, because that has legal implications, but we want to do it in a way that is fair and is seen to be fair by everybody who might be affected. At least a couple of suggestions have been made, and they both have merits. This is something to which we need to return as we approach Report, to make sure that we are comfortable with it—but I thought that the noble Baroness put her finger on that very acutely.

Normally, at this stage in a speech of reply, I would turn to a lengthy and careful analysis of the remarks made by the Minister, but she has been subject to a lengthy and careful analysis by practically everybody else in the course of her winding-up speech. So perhaps I will spare her that, and congratulate and thank her for taking, with such good grace, the questions and points that were put to her.

However, I shall refer to two points, the first being the security services. Frankly, I have never come across a case where the police or security services have given up a right to scrutiny that they already have. There is always some excuse for why it is necessary. I find that unconvincing—and the reasons are not, per se, on the grounds that it is the security services, but because of the arguments made here. It is astonishing that there is a special list of people in scope of suspicion of money laundering and terrorism, who happen to be the list in Regulation 35(14), when all of us could supply—even a five year-old could supply—a list of people much more likely to be in scope, who are not being subject to the same scrutiny.

On my second point, I do not think that I am in the wrong here, and suspect that my noble friend has not quite got it right, but am happy to be corrected. What are our international obligations to the FATF, insofar as we have legal obligations to it in a legal sense, given that it is not a legal body?

From this little iPad, I read out and referred very carefully to the current version of recommendation 12. It quite clearly says “foreign”; it places no obligation on the parties to the agreement to do anything about domestic PEPs. Clearly—this is where there may be a degree of confusion—in deciding who is a foreign PEP, you have to make a decision, if you like, that they are not a domestic PEP. Naturally, a sift is therefore required to get to the point of identifying that this is a foreign PEP, but I suspect that too much has been built on that, and there is some suggestion that that sift—are they foreign or are they domestic?—involves some obligation to scrutinise them. However, it simply is not there, so I referred in the course of my noble friend’s speech to the interpretative notes, and there is an interpretative note to recommendation 12, but it deals entirely with life assurance policies.

I think I also heard my noble friend say that recommendation 22 was relevant. That may have been a mishearing on my part but, looking at recommendation 22, it deals almost entirely with casinos, real estate managers and trusts. I do not know why they are all in the same recommendation, but there we are.