Financial Services and Markets Bill

Baroness Penn Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

Moved by

[Baroness Penn]

That the Bill be now read a second time.

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

My Lords, this Bill is a landmark piece of legislation—the most ambitious reform of our financial services regulatory framework in over 20 years. Perhaps it is a signal of the significance of this legislation that we have the pleasure of three maiden speeches during this debate. I welcome my noble friends Lady Lawlor, Lord Remnant and Lord Ashcombe to the House. I very much look forward to hearing their contributions.

I also pay tribute to the former Chancellor and Financial Secretary to the Treasury, my noble friend Lord Lawson, who has recently retired, having served Parliament in both Chambers for nearly half a century. While serving as Chancellor he transformed the tax system, unleashed the City and revolutionised the approach to macroeconomic policy, setting the economy on the path of growth. His voice, reason and perspective will be sorely missed in this Chamber, and I thank him for all his service.

The Bill represents the platform upon which much of this Government’s vision for financial services will be delivered—a vision for an open, green and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens, creating jobs, supporting businesses and powering growth across all four nations of the United Kingdom.

Effective, efficient and easily accessible financial services are a foundation for people’s everyday lives and the bedrock upon which our economy is built. They also make their own direct contribution to our economic growth, with financial and related professional services employing more than 2.3 million people across the UK and, in 2020, contributing nearly £100 billion in taxes. In recent decades, the UK has become a leading global centre for financial services and, as the Chancellor highlighted in the Autumn Statement, the sector is one of the UK’s five key areas of growth for the future. Our exit from the EU creates the opportunity to ensure that continues by implementing a more agile and internationally competitive set of rules, better tailored to the UK market, while ensuring the sector remains well-regulated and effectively supervised.

The Bill has five overarching aims. First, it implements the outcomes of the future regulatory framework review. Secondly, it bolsters the competitiveness of UK markets and promotes the effective use of capital. Thirdly, it takes steps to make the UK an even more open and global financial hub. Fourthly, it harnesses the opportunities of innovative technologies, enabling their safe adoption in the UK. Lastly, but by no means least, it promotes financial inclusion and enhances consumer protection.

I turn to the first aim, to implement the future regulatory framework or FRS review. Clause 1 revokes retained EU law for financial services so that it can be replaced with a coherent, agile and internationally respected approach to regulation that has been designed specifically for the UK. This approach builds on the existing model established by the Financial Services and Markets Act 2000 which empowers our independent regulators to set the detailed rules that apply to firms operating within the framework set by the Government and Parliament. The Government consulted extensively on how the UK’s approach to financial services regulation should be adapted following EU exit, and there was widespread support for the approach taken in this Bill. Schedule 1 contains more than 200 instruments that will be repealed directly by the Bill. These instruments will cease to have effect when the Treasury and the regulators have put into place the necessary secondary legislation or regulator rules to replace them as appropriate.

It is important for the House to recognise that putting this into effect will require a significant programme of secondary legislation to modify and restate retained EU law. As part of the Edinburgh reforms announced on 9 December the Treasury published Building a Smarter Financial Services Framework for the UK, which set out how the Treasury intends to use these powers. Alongside this we published several illustrative draft statutory instruments demonstrating how the powers in the Bill can be used to replace retained EU law.

As the regulators take on greater responsibility for setting rules following the repeal of retained EU law, the Bill makes changes to the regulators’ objectives to ensure that they consider the sector’s critical role in supporting the UK economy. For the first time the Prudential Regulation Authority and the Financial Conduct Authority will be given new secondary objectives to facilitate the international competitiveness of the UK economy and its growth in the medium and long term. The status as a secondary objective strikes the right balance and sets a clear hierarchy by ensuring that the FCA and the PRA must work to advance growth and competitiveness while maintaining their focus on their existing objectives.

The Bill also ensures that the regulatory principles of the financial services regulators require them to have regard to the UK’s statutory net-zero emissions target. This will embed consideration of the climate target across the breadth of financial services regulators’ rule-making and cements the Government’s long-term commitment to transform the UK economy in line with their net-zero strategy and vision.

It is also imperative that the regulators’ new responsibilities are balanced with clear accountability to the Government and Parliament. I assure noble Lords that the Government recognise the importance of parliamentary scrutiny of the work of the Treasury and the regulators. There are already a number of provisions in this regard, and the Bill makes further provision to support Parliament in carrying out this important role. It introduces new requirements for the regulators to notify the Treasury Select Committee of a consultation and for the regulators to respond in writing to responses to any statutory consultations from any parliamentary committee. In addition, the regulators will need to be transparent about all respondents to a consultation, subject to their consent. These measures were strongly informed by the views of this House, as expressed during the passage of the Financial Services Act 2021. The Bill also gives the Treasury the power to require the financial services regulators—or, where appropriate, an independent person—to review their rules where it is in the public interest.

I turn now to the Bill’s second aim of bolstering the competitiveness of UK markets and promoting the effective use of capital. The measures in Schedule 2 make important changes to the MiFID framework, which regulates secondary capital markets. They do away with burdensome rules such as the double volume cap and share trading obligation while maintaining high standards and protecting the smooth functioning of markets. High regulatory standards are an essential element of competitiveness in UK markets, and the Bill introduces a senior managers and certification regime for key financial market infrastructure firms, ensuring high standards of governance in these systemically important firms. The Bill also expands the resolution regime for central counterparties to align with international standards and enhances powers to manage insurers in financial distress.

The Bill’s third aim is to strengthen the UK’s leadership as an open and global financial centre. The UK is now able to negotiate its own international agreements, and the Government are currently negotiating an ambitious financial services mutual recognition agreement, or MRA, with Switzerland. While the MRA itself will be scrutinised under the procedures in the Constitutional Reform and Governance Act 2010, Clause 23 enables the Treasury to amend existing legislation to give effect to this and any future financial services MRAs once finalised. Schedule 2 will enable the UK to recognise overseas jurisdictions that have the equivalent regulatory systems for securitisations classed as simple, transparent and standardised, or STS, providing more choice for UK investors.

As its fourth aim, the Bill takes steps to ensure that the regulatory framework facilitates the adoption of cutting-edge technologies in financial services. Clauses 21 and 22 and Schedule 6 extend existing payments legislation to include payment systems and service providers that use digital settlement assets, including forms of crypto assets used for payments, such as stablecoin backed by fiat currency. This brings such payment systems within the regulatory remits of the Bank of England and the Payment Systems Regulator. Clauses 65 and 8 clarify that the Treasury has the necessary powers to regulate crypto asset activities within the existing financial services framework, as extended by this Bill. To foster innovation, Clauses 13 to 17 and Schedule 4 enable the delivery of financial market infrastructure sandboxes, allowing firms to test the use of new and potentially transformative technologies and practices in the infra- structures that underpin financial markets.

The Bill’s final aim is promoting financial inclusion and consumer protection. The Government are committed to fostering a financial services sector that supports everyone, with appropriate consumer protections and measures to ensure that no one is left behind by the rapid advancement in financial technology. There is an extensive programme of work ongoing related to consumer protection, particularly in areas raised by noble Lords during the passage of the Financial Services Act 2021 such as buy now, pay later and the FCA’s new consumer duty. That Act also made legislative changes to support the widespread offering of cashback without purchase in shops and other businesses, following a proposal by my noble friend Lord Holmes of Richmond.

Clause 51 and Schedule 8 of this Bill go further and give the FCA responsibility for seeking to ensure reasonable access to cash across the UK. The Treasury will designate banks, building societies and operators of cash access co-ordination arrangements to be subject to FCA oversight on this matter. Clause 52 and Schedule 9 give the Bank of England new powers to oversee the wholesale cash infrastructure to ensure its ongoing effectiveness, resilience and sustainability.

Finally, the credit union sector plays a crucial role in providing access to affordable credit to its members. Clause 69 will allow credit unions in Great Britain to offer a wider range of products and services to their members. The Bill also strengthens the rules around financial promotions, requiring all authorised firms to undergo a new FCA assessment before they can approve financial promotions by unauthorised firms. This will reduce the risk of consumer harm. Additionally, Clause 68 enables the Payment Systems Regulator to mandate the reimbursement of victims of authorised push payment scams by payment providers for all payment systems it regulates. It also places a duty on the PSR to mandate reimbursement in relation to the Faster Payments system specifically.

This is a substantive Bill; in opening this Second Reading debate I have been able to touch only briefly on many of its main measures. I have no doubt that, when we enter Committee, noble Lords will subject the Bill to the level of scrutiny that it deserves.

As I conclude, I think it is worth reflecting on the journey that we have taken to the production of the Bill. It is the result of several years of consultation with industry, regulators and the public. The Government first consulted on the future regulatory review in October 2020, with a further consultation in November 2021 setting out detailed proposals for reform. It will enable a programme of essential reforms that will help drive our economy, including reforms to Solvency II and the prospectus regime and changes resulting from the wholesale markets review. So, as we conduct the important work of scrutinising this Bill, I hope that the Government’s broad approach will draw support from across the House and that many noble Lords share the Government’s ambition to ensure that the UK’s financial services continue to be an engine of growth for our economy. I beg to move.

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[Baroness Penn (Con)]

My Lords, I thank all noble Lords who have spoken in this debate for their valuable contributions, which reflect the breadth and significance of this Bill. I will try to get through as many points as possible but, looking at the stack of papers before me, I think I have been overambitious—so I will dive straight in.

Turning first to the future regulatory framework review, which is a once in a generation opportunity to update our rulebook and tailor it to UK markets, as I have said before, the Bill revokes retained EU law relating to financial services so it can be replaced by a coherent and agile approach designed for the UK, building on the FiSMA model. I reassure my noble friend Lord Hodgson that, when the repeal of retained EU law commences and the Government lay secondary legislation to replace it, the Treasury will fully assess the impacts of the exercise of these powers in secondary legislation. We will conduct impact assessments and post-implementation reviews in line with the Cabinet Office guidance and the Government’s Better Regulation Framework.

My noble friend and the noble Lord, Lord Sharkey, probed further on the process for replacing the different regulations and Clause 4 and the procedures associated with it. The affirmative procedure applies to statutory instruments made under Clause 4, except where the power is used to restate either EU tertiary legislation or legislation which was originally made under the negative procedure, or where there is no modification of retained EU law. In this case, it is appropriate to follow previous precedent and apply the negative procedure. EU tertiary legislation is technically complex and the same is true where the negative procedure was used for UK statutory instruments—these were technical SIs. Given the thousands of pages of retained EU law to deal with, as has been referenced in this debate, it is important that we ensure that Parliament can focus on potential policy implications from the changes we may make to retained EU law.

I turn now to the debate on the objectives for the regulators which are the starting point for the framework we will be taking forward. Those objectives are set out in FSMA and are amended in this Bill in two key ways: the introduction of the secondary objective on international competitiveness and medium and long-term growth, and a new regulatory principle to have regard to the Government’s net-zero commitment. The noble Lords, Lord Sharkey and Lord Tunnicliffe, the noble Baronesses, Lady Kramer and Lady Bryan of Partick, and others raised concerns about ensuring that the secondary objective does not dilute the regulators’ focus on the primary objective, whereas many other noble Lords spoke in favour of the new secondary objective. Noble Lords such as my noble friend Lord Bridges were perhaps concerned that it may not go far enough. The Government believe that having growth and competitiveness as a secondary objective strikes the right balance between providing a new focus on advancing medium to long-term growth and competitiveness while maintaining the regulators’ focus on their existing objectives. It provides a clear hierarchy of objectives to consider, and the regulators will need to balance those objectives and consider them in a way which respects that hierarchy.

The PRA’s existing secondary competition objective provides the model for how that hierarchy operates: the regulators must advance their secondary objectives in so far as that is compatible with their primary objective. However, with the introduction of the secondary objective, the Government expect that it will fulfil the expectations of many of those who have spoken in this House in support of delivering a step change in how the regulators approach growth and competitiveness, resulting in more proportionate rule-making while still ensuring high regulatory standards. As my noble friend Lord Remnant said in his excellent maiden speech, the UK is not unique in giving its regulators such an additional objective. He demonstrated the expertise that he will bring to this House, particularly in debates on this Bill.

The noble Lords, Lord Sharkey and Lord Butler, and the noble Baroness, Lady Kramer, spoke of the context for some of their concern around the introduction of the secondary objective and the previous structure we had for regulating financial services prior to the financial crisis. The FSA’s objectives prior to the financial crisis were market confidence, public awareness, consumer protection and the reduction of financial crime. The FSA did not have a financial stability objective. Noble Lords are right that one of the regulatory principles that the FSA had to take into account was the international character of financial services and markets, and the desirability of maintaining the competitive position of the United Kingdom. However, the post-crisis reforms focused on the institutional design and allocation of responsibilities, with the FSA abolished and replaced by both the PRA, which focuses on the safety and soundness of the financial sector, and the FCA, which focuses on market integrity, consumer protection and competition. The Government’s view is that those post-crisis structural reforms, along with the regulators’ existing primary objectives, mean that the environment in which the regulators are considering competitiveness is very different from that which has gone before.

The noble Baronesses, Lady Hayman, Lady Sheehan and Lady Northover, and the noble Lord, Lord Vaux of Harrowden, questioned the Government’s decision to make the net-zero commitment a regulatory principle rather than an objective. The noble Lord, Lord Vaux, asked about the difference between the two, while my noble friend Lord Bridges asked what would happen if objectives and principles are in tension with each other. On the question of objectives versus principles, the FCA and the PRA are required to advance their objectives when discharging their functions. The regulatory principles, on the other hand, are principles that the FCA and the PRA are required to take into account when discharging their functions. Having the net-zero target as a regulatory principle ensures that the Government’s commitment to achieve net zero will be embedded across the FCA’s and the PRA’s considerations when they discharge their general functions. The net-zero target is a cross-cutting government policy that we have seen in many different pieces of legislation that we have taken forward through this House. On the specific goal, many of the levers sit outside financial services regulation, so it is appropriately progressed by the FCA and the PRA as a regulatory principle, which means that they will consider it in advancing their own objectives.

Another significant focus of today’s debate has been, rightly, on how we hold the regulators to account for their progress in furthering their objectives and regulatory principles and their broader approach to regulation. Any Minister would be wise to listen carefully when an issue draws such a diverse set of voices from across the House as we have heard today.

It is worth setting out the parliamentary scrutiny and oversight procedures that are already a key part of the FiSMA process and how the Bill builds on those. There are already robust mechanisms to ensure appropriate parliamentary scrutiny of the regulators. Select Committees play an extremely important role in this process, as we have heard. As noble Lords know and have pointed out, they have the power to call for persons, papers and records that they consider relevant, and committees in both Houses regularly exercise this power to hold the regulators to account. Senior officials from the regulators attend general accountability hearings. For example, the FCA chair and chief executive appear before the Treasury Select Committee, or TSC, twice a year, and the chief executive of the PRA appears before the TSC after the publication of each annual report.

Parliament, through the TSC, conducts the pre-commencement hearings following the appointment of the chair and chief executive of the FCA, and the chief executive of the PRA. Most recently, the TSC held a pre-commencement hearing for the new FCA chair on 14 December before he takes up his role next month. FiSMA requires the Treasury to lay the regulators’ annual reports before Parliament.

The Bill builds on and strengthens these existing mechanisms of parliamentary scrutiny. First, the Bill requires the regulators to notify the Treasury Select Committee when they publish a consultation. Secondly, the Bill requires the regulators to respond formally to representations made by any parliamentary committee. I note the suggestion from the noble Lord, Lord Tunnicliffe, that the Economic Affairs Committee of the House of Lords should also be notified, and I am happy to discuss that proposal with him as the Bill progresses. I note that the noble Lord, along with many other noble Lords, proposed alternative committee structures, including Joint Committee structures, to scrutinise the work of the regulators. But here it is Parliament’s responsibility to determine the best structure for its ongoing scrutiny of the regulators, and the Government do not intend to make any recommendations to Parliament on this matter. In response to the noble Lord, Lord Blackwell, and others, I am sure that those responsible for determining those structures in Parliament will follow our debate on this question very carefully.

However, I would add that the additional accountability and reporting mechanisms provided by this Bill are designed to assist Parliament and government in holding the regulators to account. For example, when the regulators make rules using the powers that FiSMA gives them, they are required to do so in a way that advances their objectives. When notifying the TSC of a consultation, the regulators will be required to set out the ways in which their proposals advance the objectives and are compatible with their regulatory principles. This will support ex ante scrutiny of proposed rules at a point in the process where there is scope to influence the final outcome.

The changes that the Bill makes regarding cost-benefit analysis, including the additional challenge provided through the formation of a new cost-benefit analysis panel, will ensure that Parliament has access to high-quality information on the expected costs and benefits of new regulatory proposals to inform their scrutiny. The Treasury may also make recommendations to the regulators on aspects of the Government’s economic policy to which the regulators should have regard, known as remit letters. The new provisions in Clause 33, with equivalent provision made elsewhere in the Bill for the Bank of England and the Payment Systems Regulator, will require the regulators to respond in writing to these recommendations and the Treasury to lay the responses before Parliament. Clause 37 enables the Treasury to require the regulators to publish relevant information on a more frequent basis than in their annual reports, or in greater detail. This can also be used to support parliamentary scrutiny and oversight. For example, it could be used to publish further information on authorisation decisions, as highlighted by my noble friend Lord Hill.

These changes are designed to support Parliament in fulfilling its existing role in scrutinising the work of regulators. If there is a concern that any of the regulators’ rules are not operating effectively, the Bill gives the Treasury a power to require the regulator to review its rules when this is in the public interest. When appropriate, the Treasury may specify that the review should be carried out by an independent person rather than the regulator.

I reassure the noble Lord, Lord Tunnicliffe, that the Government expect that this power will be used only exceptionally, and that any such direction must be laid before Parliament, but I think noble Lords will agree that it is an important element of these reforms. I also expect that, in considering the exercise of this power, the Treasury will consider representations from relevant parties, including within Parliament.

The provisions we have put forward in the Bill seek to balance the operational independence of the regulators with clear accountability mechanisms and appropriate democratic input. We have heard a range of views on where that balance should lie, and the Government are confident that we have struck it in an appropriate way. We will continue to listen and will discuss further ideas in Committee in a thoughtful and constructive way, and will welcome suggestions from noble Lords in this area, including from my noble friend Lord Ashcombe, who I congratulate on his maiden speech, as I do my noble friend Lady Lawlor on her contribution to the debate today.

More broadly, on the regulators’ capacity to take on their further responsibilities, my noble friend Lord Grimstone asked about the FCA board. The Government believe that the board comprises members with extensive and broad experience in financial services, consumer advocacy and governance, among other things. The Government are further strengthening the FCA board this year, with Ashley Alder starting as the new FCA chair, as I already referenced. The Government are also running a campaign to appoint at least two new non-executive directors.

The noble Lords, Lord Sikka and Lord Mountevans, asked about FCA capacity more broadly. As noble Lords will be aware, the FCA is part-way through a transformation programme designed to make it a more innovative, assertive and adaptive regulator. Among other things, it aims to ensure that the FCA can make fast and effective decisions and prioritise the right outcomes for consumers, markets and firms. The Government continue to engage the regulator on its work here.

On innovation more broadly, many noble Lords asked about the Government’s strategic approach to crypto assets. We are committed to creating a regulatory environment in which firms can innovate while crucially maintaining financial stability and regulatory standards, so that people can use new technologies safely and reliably. We have already taken action in the area of crypto—for example, bringing it into the remit of the anti-money laundering regime and banning the sale of crypto asset derivatives to consumers. We are committed to consulting on a broader set of crypto assets, including those primarily used as a means of investment, such as bitcoin. My understanding is that it is still the intention for the Royal Mint to create a new NFT, and an update on this work will be provided in due course. It will be the regulations under the Bill that will allow for the regulation of stablecoins, backed by fiat currency. I can say in response to the noble Lord, Lord Cromwell, that specific definitions will be provided for that in secondary legislation.

The noble Lord, Lord Vaux, asked about the operation of regulatory sandboxes. The Government have emphasised that the testing of technology and practices in an FMI sandbox should not compromise existing regulatory outcomes, including market integrity and financial stability. The Treasury and regulators will very carefully consider what sort of investors should be able to use platforms in a sandbox. If consumers are allowed to use a platform participating in a sandbox, it is essential that the platform operates in a way that is consistent with existing regulatory objectives relating to consumer protection.

I turn to consumer protection and financial inclusion, an issue raised by a number of noble Lords, many of whom have done very important work in this area, and I am grateful to them for that. The noble Baronesses, Lady Twycross, Lady Bryan and Lady Tyler, the noble Lord, Lord Tunnicliffe, my noble friend Lord Holmes and others highlighted the important role that cash continues to play for many. The Government are committed to ensuring through the Bill reasonable access to cash across the UK. The FCA is best placed to deliver an effective, agile and evidence-based approach to regulating access to cash that can endure over time, and the Bill will allow for that. In approaching the policy statement that will inform this, the Government will consider how effective industry schemes have been in ensuring reasonable, free access to cash for individuals, and the policy statement is the right place to consider this matter further. The Government will reflect on the views of parliamentarians when crafting that statement.

The right reverend Prelate the Bishop of St Albans asked how rurality will be considered in that process. The FCA will be obliged to consider local as well as national deficiencies in cash, which would be relevant in rural areas; even if it is not subject to the same rural-proofing guidance, it will be subject to the equality duties around protected characteristics in undertaking that work. Where closure of bank branches affects access to cash, intervening in a closure would be within the scope of the FCA’s new powers in the Bill, provided that this fulfilled the purpose of seeking to ensure reasonable provision of cash access services. More broadly, decisions on in-person banking services are made by the providers of those services. However, that is still governed by the FCA’s existing powers and recently strengthened guidance on actions that must be taken when people seek to close branches to ensure that customers are treated fairly.

Financial fraud was raised by the noble Lords, Lord Hunt and Lord Tunnicliffe, my noble friend Lord Northbrook and many others. In financial services specifically, this Bill takes a crucial step forward in protecting victims of APP fraud. I emphasise that the measure enables the Payment Systems Regulator to take action in relation to any payment system that it regulates, not just faster payments. However, the initial focus is on faster payments because that is where the vast majority of APP fraud currently takes place. The Government expect protections for consumers in other payment systems to keep pace with those established for faster payments.

More broadly, noble Lords are right that tackling fraud requires a unified and co-ordinated response from government, law enforcement and the private sector. I attended a meeting of the Joint Fraud Taskforce, which brings those different players together, just before the end of last year. The Government are committed to publishing their national fraud strategy later this year.

The consumer duty versus the duty of care was raised by many noble Lords. The FCA’s consumer duty consultation paper explains that there is a lack of consensus on exactly what constitutes a duty of care in this context. It cannot be exhaustively defined, but the FCA’s view is that a duty of care is a positive obligation on a person to ensure that their conduct towards others meets a set standard. It believes the consumer duty meets that definition.

The noble Lord, Lord Davies of Brixton, rightly and powerfully raised the challenges those with mental health issues can face when accessing or using financial services. The Government have taken quite a bit of action in this area, such as the introduction of the breathing space scheme for problem debt. The FCA has also been clear about the need for firms to respond flexibly to the needs of customers with characteristics of vulnerability, which includes mental health.

Buy now, pay later was raised by the noble Lords, Lord Hunt and Lord Balfe. We committed to bring this into regulation and will publish a consultation on draft legislation very soon. We intend to lay secondary legislation in mid-2023, so action on that is under way.

Finally, I am conscious of time, but I must turn more broadly to sustainability and green finance issues, as raised by the noble Baronesses, Lady Hayman, Lady Sheehan and Lady Northover, and many others. They are right that the financial services sector has a critical role to play in global efforts to meet net zero. That is why we have included the measure in the Bill to amend the regulators’ regulatory principles to advance the net-zero objective.

I will not dwell on that any further, except to respond to a point made by the noble Baroness, Lady Hayman, on the French and German regulators having climate change objectives. The codes and objectives for French and German regulators focus on instances of financial risk and greenwashing; the FCA can already consider these issues through advancing its operational objectives to ensure appropriate consumer protection and protect market integrity, and the PRA can similarly consider climate-related financial risks under its existing objective to ensure the safety and soundness of its regulated firms.

More broadly, noble Lords asked about measures that go beyond those in this Bill. I reassure them that work continues on taking forward the policies in the Greening Finance road map, including introducing economy-wide sustainability disclosure requirements—the FCA has launched its consultation on this already—and introducing transition planning requirements. We have also launched the transition plan task force, which has published its consultation, which will close next month. We are committed to updating our Green Finance Strategy early this year, setting out our approach on the green taxonomy and having a net-zero aligned financial sector. I am sure we will have many more discussions on this topic in Committee, which I look forward to, including on deforestation, which was raised by the noble Baroness, Lady Sheehan, and my noble friend Lord Randall.

On deforestation, financial institutions rely on the information disclosed by companies trading in these forest-risk commodities in order to take action, so a global framework for this disclosure is needed to make any action by UK financial services and firms overseas workable. That is exactly why we are a leading backer on the Taskforce on Nature-related Financial Disclosures. I was really happy to meet the task force in Montreal at COP 15 to discuss its work and how we are taking it forward.

I am out of time. I will pick up further questions from the debate in writing; I have not been able to cover them all here. To conclude, this is a landmark Bill, which I think many of the speakers in this debate have recognised, and the most ambitious reform of our regulatory framework in over 20 years. The Government are committed to building an open, green and technologically advanced financial services sector to deliver better outcomes for consumers and businesses. I am confident that the Financial Services and Markets Bill delivers on this commitment.

Bill read a second time.

Moved by

[Baroness Penn]

That the Bill be committed to a Grand Committee, and that it be an instruction to the Grand Committee that they consider the Bill in the following order: Clause 1, Schedule, Clause 2, Schedule 2, Clauses 3 to 8, Schedule 3, Clauses 9 to 13, Schedule 4, Clauses 14 to 20, Schedule 5, Clause 21, Schedule 6, Clauses 22 to 48, Schedule 7, Clauses 49 to 51, Schedule 8, Clause 52, Schedule 9, Clause 53, Schedule 10, Clause 54, Schedule 11, Clause 55, Schedules 12 and 13, Clauses 56 to 69, Schedule 14, Clauses 70 to 79, Title.

Motion agreed.

Russia: UK Companies

Baroness Penn Excerpts

Thursday 8th December 2022 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, having reviewed the record of the exchange in another place on this issue, I was struck by the near unanimous condemnation of the Government’s position on this matter. The Minister’s refusal to comment on or act in response to British businesses that continue to operate in Russia is unacceptable. As Russian missiles continue to rain down on Ukraine’s energy infrastructure, an already cold winter is becoming even more difficult for the Ukrainian people to endure. With the Prime Minister seemingly in listening mode these days, will the Minister and her Treasury colleagues go to Mr Sunak and encourage him to speak out against British businesses that have opted to profit from Putin’s war?

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

My Lords, my right honourable friend the Prime Minister, when Chancellor, called on and welcomed UK firms who had taken the decision to divest from Russia in the wake of the invasion of Ukraine and said that we would welcome further such decisions from those companies. In terms of the Government’s actions, we have imposed the widest set of sanctions in our history against Russia, which limits the space for companies to operate in Russia, targeted at degrading the Russian war machine and also more broadly degrading its economic ability to continue this war. The noble Lord mentioned the condition of Ukraine’s infrastructure and the attacks on it by Russia in recent weeks. My right honourable friend the Foreign Secretary announced that we are looking to support energy generation in Ukraine in response to those attacks.

[Lord Fox (LD)]

It is good to hear the Minister talk about strong sanctions. I ask her to direct her department to look at the relationship between OneWeb and Eutelsat. OneWeb was absorbed into Eutelsat in an all-share deal, except for one share, the special share that the Government retain. Eutelsat continues to broadcast Russian channels, including two of the largest Russian pay-for television channels. Is it appropriate, given the Government’s special shareholding in OneWeb, which is a part of Eutelsat, for this relationship to continue?

[Baroness Penn (Con)]

I hope the noble Lord will understand if I do not comment on the specific case in the Chamber, but if he writes to me, I will look at Hansard and get back to him in writing on that point.

[Baroness Kramer (LD)]

My Lords, do the Government agree that private citizens in the UK should follow the example that is being urged on British businesses and sell any shares they have in businesses that still operate in Russia?

[Baroness Penn (Con)]

My Lords, that is an individual decision for people to take. Where individuals have found themselves invested in companies that are subject to sanctions, the Office of Financial Sanctions Implementation has issued some general licences to facilitate the divestment of those shares where individuals need to do so.

[Lord Anderson of Swansea (Lab)]

My Lords, British companies are able to call on the very best professional advice to conceal their relationships with Russian companies, both direct and indirect, in Russia and outside Russia. Are we totally confident we have the best intelligence to bring to light those relationships?

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[Baroness Penn (Con)]

If British companies were seeking to circumvent the sanctions that we have put in place, that is something that we would take extremely seriously. The noble Lord is right that the scale and range of sanctions that we have now put in place against Russia need to be matched with increased efforts to ensure that those sanctions are properly enforced.

[Lord Bellingham (Con)]

My Lords, is it the case that there are still a number of Russian oligarchs with assets in this country and the Channel Islands who have not yet been fully sanctioned? What other discussions has the Minister been having in the Treasury with the Channel Islands authorities?

[Baroness Penn (Con)]

As I have said to the House, the UK has undertaken the largest-scale sanctions programme that we have ever had in our history. We continue to look at new sanctions, and obviously that has to be done within the legal framework that we have set. We amended elements of that framework early on after the invasion to ensure that we could take the widest possible range of action. We continue to look at what we can do, and we continue to speak to our Ukrainian partners about where they would find our efforts most effectively directed.

[Lord Griffiths of Burry Port (Lab)]

And what about the Channel Islands?

[Baroness Penn (Con)]

The UK operates its sanctions regime and will continue to have conversations with all Crown dependencies, overseas territories and others.

[Baroness Kramer (LD)]

My Lords, the Minister will be well aware that one of the ways in which members of the Russian oligarchy became resident in Britain was through the use of the “golden visa” mechanism. The Government have undertaken a review of that but, as I understand it, Parliament has not seen it. Could she tell us when we can expect that report to be published?

[Baroness Penn (Con)]

I do not have that information with me, but I can take it back to the department and write to all noble Lords.

[The Deputy Speaker (Baroness McIntosh of Hudnall) (Lab)]

My Lords, it appears there are no further questions on that Urgent Question.

Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 3) Regulations 2022

Baroness Penn Excerpts

Wednesday 7th December 2022 Lords Chamber

Moved by

[Baroness Penn]

That the draft Regulations laid before the House on 7 and 14 November be approved.

Relevant document: 19th Report from the Secondary Legislation Scrutiny Committee. Considered in Grand Committee on 6 December

Motions agreed.

Social Security (Class 2 National Insurance Contributions Increase of Threshold) Regulations 2022

Baroness Penn Excerpts

Tuesday 6th December 2022 Grand Committee

Moved by

[Baroness Penn]

That the Grand Committee do consider the Social Security (Class 2 National Insurance Contributions Increase of Threshold) Regulations 2022.

Relevant document: 19th Report from the Secondary Legislation Scrutiny Committee

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

My Lords, in the Autumn Statement, the Government set out their prioritisation for taxation to be fair by following two broad principles: first, that we ask those with more to contribute more; and, secondly, that we avoid the tax rises that most damage business.

Noble Lords will remember that the National Insurance Contributions (Increase of Thresholds) Act 2022 increased the point at which class 1 and class 4 NICs are paid to align with the personal allowance for income tax. As a result of that legislation, almost 30 million working people are better off. We are here today to discuss the final element of the Government’s ambition to align national insurance contribution thresholds with the personal allowance for income tax.

I note that, in its 19th report, the Secondary Legislation Scrutiny Committee raised these regulations as an instrument of interest. The regulations introduce a new threshold within class 2 NICs from which self-employed individuals start to pay class 2 NICs. This will be known as the lower profits threshold. Class 2 NICs will now be due only if profits exceed the new lower profits threshold, set at £11,908 for the 2022-23 tax year.

The new lower profits threshold will be aligned with the personal allowance. However, the threshold is being set at £11,908 for 2022-23 to reflect the fact that personal NIC thresholds were increased from July this year, meaning that individuals will benefit from an increased threshold for nine months of the tax year. For 2023-24, the self-employed thresholds will be set at £12,570. This means that no one will pay a penny of income tax or national insurance contributions on their first £12,570 of income from 2023-24 onwards, allowing people to keep more of what they earn.

However, this measure goes further. Class 2 NICs are the mechanism by which the self-employed become entitled to certain contributory benefits, such as the state pension and statutory maternity pay. To ensure that individuals do not lose access to their benefit entitlement, the existing small profits threshold will be maintained as the point at which the self-employed gain access to certain contributory benefits. This means that individuals will benefit from the increased threshold for paying class 2 NICs without losing their entitlement to contributory benefits.

This measure will apply retrospectively from the start of the 2022-23 tax year, in line with the provisions made in the parent Act. This means there will be no delay in this measure benefiting around 500,000 self-employed individuals, saving them £163.80 a year. Changes will be delivered via the annual self-assessment process for the vast majority of customers, following the end of the tax year.

These regulations fulfil the Government’s obligation to increase the point at which the self-employed pay class 2 NICs. Importantly, they ensure that thresholds are aligned and our tax code is simplified. I beg to move.

[Lord Davies of Brixton (Lab)]

My Lords, as a supporter and fan of national insurance, I did not want these regulations to pass unnoted. I am a believer in the national insurance system—I guess there are not many of us left—where people pay contributions and that provides entitlement to national insurance benefits.

It has been understood, from the beginning, that there are people in employment and people who are self-employed. For practical reasons, different sets of rules have to apply to each group of workers. Nevertheless, the objective should always be neutrality in the financial impact, otherwise it is bound to give rise to issues of financial arbitrage regarding being employed or self-employed. That is all well understood. I will avoid going off down the IR35 track; there will be plenty of other opportunities to pursue that.

On the face of it—I would be interested in the Minister’s views—this change might be seen as a move towards reducing inequality between the employed and self-employed. However, in practice, it increases the difference. The tell is the fact that there is a cost, in a normal year, of £100 million. In the context of the figures we have seen in recent Budgets, that is not an enormous sum, but it suggests that this is a move away from neutrality and that it further increases the advantages that people perceive in being self-employed as opposed to being employed, with all the problems that flow from that. The background to this is clearly the extent of the acknowledged problem of fake self-employment for financial reasons. Perhaps the Minister would indicate, in broad terms, quite how this change fits in with what I hope is an understanding that there should not be excessive financial advantages in being self-employed.

I heard what the Minister said about the changes to entitlement to benefits. I emphasise that, in achieving neutrality between employed and self-employed contributions, there should equally be neutrality between the benefits paid to people who have paid the different types of contribution.

--- Later in debate ---

Of course, when considering this instrument we must also remember that the Government are freezing tax thresholds in the coming years. This means that some of those benefiting from this measure may find themselves paying NICs once again in future years. That will not come as a surprise to many, given successive Conservative Governments’ habit of increasing personal taxes, but it highlights the inconsistency of Mr Sunak’s thinking.

[Baroness Penn (Con)]

My Lords, I thank both noble Lords for their contributions to this brief debate. We discussed some of these issues when the parent Act was passed. We also discussed issues around the national insurance system with the introduction and then removal of the health and care levy.

In response to the noble Lord, Lord Davies of Brixton, the intention behind this change to the national insurance system, which I think reflects a longer-term ambition in the manifesto to align the income tax threshold and the NICs threshold, and the reason the measure was brought forward last spring, was to provide people with more money back in their pockets at a time when the cost of living was rising significantly. The most effective option to do this, particularly targeting it at lower-paid, self-employed people or workers, was an uplift in the NICs thresholds. Although it may not deliver on the wider ambition to have greater equality between NICs contributions from the employed and self-employed, none the less it had a very good policy rationale, one that the Government were keen to deliver on.

On that longer-term ambition, perhaps I should not have expressed it in that way because I do not think the Government have any intention at the moment to change how employed and self-employed NICs are treated. The raising of the threshold was a measure focused on helping people with the cost of living. It was seen to be an effective way to target resources at those further down the income scale. This SI seeks to complete the process that started with the Act, but we had to take the powers to do this last element because it was a bit more complicated and we needed a bit more time to work it through. I hope that answers the noble Lord’s question.

Motion agreed.

Cross-Government Cost Cutting

Baroness Penn Excerpts

Tuesday 6th December 2022 Lords Chamber

[Lord Bird]

To ask His Majesty’s Government what estimate they have made, if any, of the savings that might be realised by their cross-government cost-cutting exercise.

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

My Lords, the Government announced the efficiency and savings review in the Autumn Statement to keep spending focused on government priorities and to help departments manage the inflationary and other pressures on their budgets; all savings will be reinvested in departments’ budgets. We need to be ambitious as a Government in finding ways of working more efficiently and focusing spending on where it delivers the greatest value for the taxpayer. The Government will report on progress in the spring.

[Lord Bird (CB)]

Does the Treasury also measure the costs of cost-cutting, because that is the important thing, is it not? It is all well and good to cut something, but if the damage is greater than the savings, surely it is not wise government to do that.

[Baroness Penn (Con)]

I put it to the noble Lord that there is a cost to not having efficiency and value for money in our services. That means we can deliver less for people for the money that we are putting into them. We want to see it the other way around, and that is the aim of this review.

[Lord Wallace of Saltaire (LD)]

Does the Treasury consider capacity when enforcing efficiency cuts on other departments? Later this afternoon we shall discuss the National Security Bill, which has several clauses imposing a new foreign influence registration scheme, which will lead to a great surge in new submissions to the Home Office, which I suspect it does not currently have the capacity to cope with, so it will need to recruit additional civil servants. The Retained EU Law (Revocation and Reform) Bill will also impose new tasks as they are repatriated from tasks we used to share with our European allies. We know what happened when the Home Office cut police numbers and when the criminal justice system’s budget was cut: capacity decreased and the Government are now having to recruit additional police officers. Does the Treasury think about this or is it simply budget-cutting?

[Baroness Penn (Con)]

Can I reassure the noble Lord that these questions are considered in spending reviews? They are also considered as part of the process of collective agreement when new policy is made between the periods of spending reviews. The noble Lord mentioned the MoJ and the Home Office; they will grow by, respectively, 3.6% and 3.1% a year over this Parliament.

[Lord Howell of Guildford (Con)]

The noble Lord, Lord Bird, made a very sound and good point. Would the Minister recommend to her Treasury colleagues that the “10%/slash everything” approach to public expenditure used in recent times is not the best way of controlling and curbing the size of the public sector, of improving its efficiency or of cutting out waste? There are techniques that have been tried in the past, namely the policy programme budgeting system, learned from the original Bureau of the Budget in America 40 years ago, and which should be revisited. Such techniques are much more effective in delivering real, effective, cost cuts, which take into account all the side effects that can sometimes overwhelm the original attempt at economy.

[Baroness Penn (Con)]

My noble friend is right: we must ensure that when we undertake these exercises, we really are delivering efficiency and value for money gains, rather than short-term fixes for departments’ budgets that, in the long term, may create other problems. I can reassure him that no figure is attached to the current exercise; it is about working with departments to see where they can find efficiency savings to help them manage the pressures they are under.

[Lord Blunkett (Lab)]

My Lords, does the noble Baroness not agree that what she has just said underlines the total failure of the short-term and damaging fixing over the last 12 and a half years?

[Baroness Penn (Con)]

No, I would not agree with the noble Lord at all. Efficiency savings are something that Governments of all colours have striven to deliver, including in previous comprehensive spending reviews under the Labour Government. It is absolutely right that, when we look at departmental spending, we build in an assumption of improved efficiency and value for money, but also that, at this time of increased inflationary pressures, we put even more work into looking at where we can achieve efficiencies and release savings to be reinvested into those budgets.

[Lord Young of Cookham (Con)]

My noble friend said that the Government were ambitious in their search for cost-cutting savings. May I suggest that ambition be extended to the number of Ministers in the Government? In 1979 there were two Ministers in the Department of Transport; there are now five. In 1979 there were five Ministers in the DHSS. That department has since been split into two and there are six Ministers in each. Is this not an area worthy of some exploration?

[Baroness Penn (Con)]

I take my noble friend’s point. The scope of government and what it is attempting to deliver has changed somewhat over that time, but whether the growth in Ministers has matched that scale of delivery is another question.

[Baroness Uddin (Non-Afl)]

My Lords, I cannot help but wonder what the damaging impact of the lost billions spent on poorly chosen PPE orders is, but will the noble Baroness’s department ensure that services for women fleeing domestic violence are ring-fenced and protected, as we have promised to do in this very Chamber many times?

[Baroness Penn (Con)]

My Lords, I am sure the Home Office takes that into account. This Government have a strong record on protecting women who have had to flee violence; we brought forward the Domestic Abuse Act, among other things. Even when looking back to previous years, from 2010 onwards those budgets were protected.

[Baroness McIntosh of Pickering (Con)]

My Lords, would my noble friend look closely at the property portfolio? As of January this year, only 34% of government office property had been onboarded, as it is apparently called. There is obviously scope to add more to this. Will my noble friend look closely at NHS properties in particular? For example, in a city such as York, with all the different organisations that have owned various properties, I would be interested to know how many are occupied and used for NHS purposes at this time.

[Baroness Penn (Con)]

I reassure my noble friend that the Government continue their efforts to reduce the government estate, and progress is being made to hit the £500 million per annum asset disposal target. There are significant property sales under way, including the empty sites and outdated buildings around the Royal London Hospital, which will create a new home for life sciences in London: the Whitechapel Road life sciences cluster.

[Lord Hunt of Kings Heath (Lab)]

My Lords, one of the best examples of cross-government working is the vaccine task force headed by Dame Kate Bingham. The noble Baroness will know that Dame Kate very heavily criticised the Government last week for dismantling our vaccines capability and stopping all the initiatives she had put in train. Is that an example of cross-government cost-cutting?

[Baroness Penn (Con)]

The noble Lord will know that we have increased the budgets in the health service, but that does not reduce the need to look for efficiencies. I pay tribute to the work of Dame Kate Bingham in delivering the results from the vaccine task force. We are now living in a different world from the one in which she did her work. I am sure we will look to learn the lessons from her work and take it forward in the most appropriate way.

[Lord Butler of Brockwell (CB)]

My Lords, in following up the question from the noble Lord, Lord Young of Cookham, could the Minister also carry out an audit of the number of special advisers?

[Baroness Penn (Con)]

I do not believe that it is within my responsibilities to carry out an audit of special advisers, but I will take the noble Lord’s point back to the department. I should probably declare an interest as a former special adviser myself; I would not be best placed to undertake such work.

[Lord Berkeley (Lab)]

My Lords, perhaps I could be helpful to the Minister and give her some advice. If she wants to save £150 billion, she could cancel HS2.

[Baroness Penn (Con)]

I always welcome helpful advice. However, I am not sure that I can take it up in this case.

[Lord Tunnicliffe (Lab)]

My Lords, even though markets have stabilised somewhat in recent weeks, our borrowing costs are extraordinarily high. Debt payments are second only to spend on health and social care. Most straightforward efficiency savings have already been implemented, meaning that the Government may have to spend now to achieve savings later. What would that mean for the Chancellor’s fiscal rules, which have already been broken 11 times in 12 years?

[Baroness Penn (Con)]

My Lords, initiatives to spend to save were included in the different departments’ spending review bids and they are welcomed by the Treasury. Increased evaluation of policy and programmes allows us to divert resources to where they can make the most difference. Another example of spending to save in SR 2021 was putting more money into the Supporting Families programme. That was informed by a strong evaluation which showed that those targeted interventions up front for families experiencing hardship delivered savings in terms of the number of children entering care and the number of adults and juveniles entering the criminal justice system. It is really hard to deliver spend-to-save measures, but where they work, they can be a really effective tool for delivering better public services for less money.

Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 3) Regulations 2022

Baroness Penn Excerpts

Tuesday 6th December 2022 Grand Committee

Moved by

[Baroness Penn]

That the Grand Committee do consider the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 3) Regulations 2022.

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

My Lords, these regulations provide the legislative framework for tackling money laundering and terrorist financing and set out various measures that businesses must take to protect the UK from illicit financial flows. Under these regulations, businesses are required to conduct enhanced checks on business relationships and transactions with high-risk third countries. These are countries identified as having strategic deficiencies in their anti-money laundering and counterterrorist financing regimes that could pose a significant threat to the UK’s financial system.

This statutory instrument amends the money laundering regulations to update the UK’s list of high-risk third countries. It adds the Democratic Republic of the Congo, Mozambique and Tanzania to the list and removes Nicaragua and Pakistan. This is to mirror lists published by the Financial Action Task Force, the global standard setter for anti-money laundering and counterterrorist financing.

This is the sixth time we have updated the UK list to respond to the evolving risks from third countries. This update ensures that the UK remains at the forefront of global standards on anti-money laundering and counterterrorist financing. In 2018, the Financial Action Task Force assessed that the UK has one of the toughest anti-money laundering regimes in the world. The UK was a founding member of this international body, and we continue to work closely and align with international partners such as the G7 to drive improvements in anti-money laundering and counterterrorist financing systems globally.

FATF has identified that the Democratic Republic of the Congo, Mozambique and Tanzania must each make a range of domestic reforms to address their non-compliance with FATF standards. These include improving their understanding of risk, increasing the effectiveness of their domestic supervision, supporting money laundering investigations and prosecutions and more effective implementation of sanctions.

FATF found that Pakistan and Nicaragua have made the necessary domestic reforms to improve their compliance with FATF standards, which have been confirmed through on-site visits to both countries. In its October public statement, FATF expressed concern at the potential misapplication of FATF standards by Nicaragua, resulting in the suppression of Nicaragua’s non-profit sector. Therefore, although Nicaragua has been removed from FATF’s list, FATF will continue to monitor this issue to ensure that Nicaragua’s oversight of the non-profit sector is risk-based and in line with FATF standards.

Lastly, this high-risk third country list is one of many mechanisms that the Government have to clamp down on illicit financial flows from overseas threats. We will continue to use other mechanisms available to respond to wider threats from other jurisdictions, including applying financial sanctions as necessary.

This amendment to the money laundering regulations will enable them to continue to work as effectively as possible to protect the UK financial system. It is crucial to protect UK businesses and the financial system from money launderers and terrorist financers. I therefore hope that noble Lords will join me in supporting these regulations. I beg to move.

[Lord Tunnicliffe (Lab)]

My Lords, I am grateful to the Minister for introducing the latest iteration of the Financial Action Task Force’s list of high-risk countries. As she outlined, this is a routine piece of secondary legislation. These Benches are pleased to support its passage.

I want to pick up on a couple of outstanding questions from the Commons debate on this instrument, which took place on Monday. The Minister’s colleague, Andrew Griffith, noted that the

“removal of Nicaragua and Pakistan does not bring to an end any monitoring of those countries, which are covered by a much broader set of arrangements.”—[Official Report, Commons, Delegated Legislation Committee, 5/12/22; col. 6.]

He talked of an “ongoing duty of care” to fight money laundering but did not go into any detail about what that looks like. My understanding is that the duty of care has often been found wanting. Does the Minister agree with that assessment? If so, what work is under way to strengthen the current arrangements? I appreciate that she may not be able to answer that today, so I would be happy for her to write with further details.

My colleague, Tulip Siddiq, raised the Government’s plans to make future versions of these statutory instruments subject to the negative procedure. We appreciate that parliamentary time is finite and that there is an ever-growing body of secondary legislation for us to consider, in part because the Government keep presenting skeleton Bills full of broad delegated powers. The Commons Minister committed to writing with details of how the Government will ensure that Parliament gets the information it needs to discharge its rightful job of scrutinising such decisions. Will the Minister see that such information is passed on to interested parties in this House?

We came across this problem before with the end of EU laws coming to some extent almost between affirmative and negative regulations. That was in the middle of the pandemic, so it got lost there, but there is a need for something more consultative than the negative procedure. The problem with negative procedures is that they are almost invisible. Unless the Secondary Legislation Scrutiny Committee picks up on them, it can be difficult to realise that the instruments are there. If the Government are to introduce a propensity to use negative procedures more, and we can obviously see some sense in that, I hope they will make sure that they have a rethink about how such negative instruments are brought in front of this House in particular.

Finally, I note that Gibraltar continues to feature on the list, despite assurances that the authorities there are making good progress on implementing FATF’s recommendation. Is the Minister able to offer any further comments on that?

[Baroness Penn (Con)]

I thank the noble Lord for his questions. I can probably expand on my answers in writing, if needs be. On his point about the procedure used for future updates to this list and parliamentary scrutiny of that, I will certainly ensure that any response from my colleague—I believe the EST took this debate—is copied to Members of this House and answers those points.

In this area, future updates to the list will continue to mirror the findings of FATF as an international standards-setter where it has identified countries as having weak anti-money laundering controls. FATF’s decision-making process is underpinned by a robust technical methodology and has a high level of scrutiny of the multilateral process, which the UK is involved in at all stages. We are committed to continue to provide written updates to Parliament on the outcomes of each FATF plenary, as these inform the list.

On this measure, we consider that the procedural change will have quite limited impact, given Parliament’s full support on all updates to the list so far. We can consider the attendance at this debate as perhaps an indicator of that, but I take the point that updates may not always be uncontroversial. Ensuring that Parliament is kept up to date with the outcome of FATF meetings, from which we derive our list, might be a good way to ensure that parliamentarians feel that they are kept abreast of the changes that might then flow through the negative statutory instrument procedure.

On Nicaragua and Pakistan having been removed from the high-risk third country list and the ongoing monitoring in these areas, I mentioned that the Government have concerns about allegations of misuse of AML powers by Nicaragua. We have agreed that Nicaragua should report in February to FATF members on how it is applying anti-money laundering powers proportionately to charities and civil society organisations. We will consider that report and next steps at the time.

In relation to both countries, the list of high-risk third countries is only one of many measures used to combat illicit finance. There are many other measures available to the Government. I am not sure that that completely answers the noble Lord’s point, so I will make sure I read Hansard and write with any further points that I should make.

Motion agreed.

Front-loaded Child Benefit Bill [HL]

Baroness Penn Excerpts

Friday 2nd December 2022 Lords Chamber

However, these new amendments make it clear that, in fact, it is the Secretary of State who can determine all the details and impose them by regulation. Although the regulations will be affirmative, this House cannot amend them and would not reject them, save in exceptional circumstances, so this is our only opportunity to find answers to these questions where we can usefully interrogate them on the Floor of the Chamber. Given that, I look forward to the replies from the Minister and the noble Baroness, Lady Berridge.

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

My Lords, I start by thanking my noble friend Lord Farmer, and my noble friend Lady Berridge, for bringing these amendments in Committee on his behalf. I acknowledge the dedication they have both shown to this issue. As my noble friend knows, the Government wholeheartedly share her ambition to support parents in caring for their children. Recently, the Chief Secretary to the Treasury has confirmed that, subject to parliamentary approval, child benefit payments will increase in line with the September rate of inflation in 2023.

Like my noble friend, the Government are committed to supporting parents, regardless of whether they choose to leave the workforce in order to carry out childcare duties or remain in the workforce. Details of the UK’s generous parental pay and leave policies were set out at Second Reading. Moreover, it has recently been confirmed that, subject to parliamentary approval, statutory maternity pay, maternity allowance, paternity pay and shared parental pay will all also be uprated in line with September’s inflation in April 2023. For parents who wish to return to the workforce, the Government offer a range of support with childcare costs. I will not go into the details of these policies, which were described at Second Reading. However, the Government do consider these to be appropriate and robust measures to support families with childcare costs. These initiatives also ensure that families on the lowest incomes receive additional support.

To answer the noble Baroness, Lady Sherlock, I do not know exactly why the Government put the child benefit tax charge through the tax system, but I can tell her that the child benefit system is not designed to front-load child benefit payments in the way the Bill intends. It would involve a complex change to the IT system, which would include significant costs for both the IT system and upskilling staff—and we all know the risks around significant IT upgrades and the delays that can occur.

On the noble Baroness’s other questions, current legislation gives His Majesty’s Treasury the power to prescribe different rates of child benefit for different cases. For example, to date that power has been exercised to prescribe different rates, according to whether payments are being made in respect of the first child or subsequent children. Full legal analysis would be needed to determine whether current legislation allows for different rates to be prescribed for different patterns of parenting, but it would not be possible under the current system to prescribe different rates or make child benefit conditional on different parenting behaviours, as the noble Baroness set out. I hope that answers her questions.

Returning to the amendments tabled by my noble friend Lord Farmer, as I say, the Government set out our full position at Second Reading on why we cannot support the Bill as a whole. In addition to the previously raised issues, I will add a few further points worth considering in relation to these proposals. First, the current child benefit system already takes into account the higher costs that families face when they first have children, hence the higher rate paid for the eldest or only child.

Secondly, as the noble Baroness, Lady Sherlock, outlined, a parent’s circumstances may change over time, affecting their eligibility for child benefit payments. This may occur for many reasons. For example, a child may leave full-time non-advanced education, or a parent may lose custody of a child. A parent’s income may also increase, such that they become liable for the high-income child benefit charge. If they have chosen to front-load their child benefit payments but become ineligible or opt out in later years, that could affect the fiscal neutrality of this measure. Furthermore, different individuals may claim child benefit in respect of the same child but for different periods of time. The proposals in the Bill would mean that new claimants could be affected or bound by the decisions of the previous claimant. This could be particularly problematic in cases where separated parents are already in conflict over who should claim child benefit.

Thirdly, as the noble Baroness, Lady Sherlock, also noted, the Government currently review the rates of child benefit annually in light of inflation, helping families with rising costs. However, the lack of certainty around how child benefit rates will change in future means that it is not possible to ascertain what an appropriate rate for front-loaded payments would be.

I apologise; I said I was turning to the amendments, but those are our objections to the Bill in principle. I now come to the amendments themselves. I acknowledge that the amendments tabled by my noble friend Lord Farmer would make the Bill more workable for the Government. Amendment 1 would mean that the Bill no longer constrains the Government in setting up a system that specifically front-loads payments on a so-called sliding scale. Instead, as set out in Amendment 3, the Government would be given more flexibility to design such a system, which does not necessarily have to be on a sliding scale. Therefore, the Government have no objections to the amendments. The Bill would potentially need further tidying up to become fully workable, but we recognise that the amendments are a step in the right direction.

Nevertheless, although the Government remain committed to supporting families and children, it is for the reasons previously outlined at Second Reading, and the further points raised today, that the Government cannot support the Bill. I welcome the passion and commitment of both my noble friends in this area, and I am sure that they will continue to press the Government on these important issues. The Government will continue to listen to what they, and all noble Lords, have to say on family policy in the future.

[Baroness Berridge (Con)]

My Lords, I am grateful for the contributions made, and I hope to briefly answer the points raised. I accept that the calculations are very detailed, even if they on the back of an envelope, and this is precisely why the Bill is in the framework that it is. The modelling and viewing of real-terms changes and nominal rates can be done by the Treasury—we are in this strange triangular relationship here as it is a Private Member’s Bill—so that the Government can do the policy work in advance and work out how we would cope with the change in inflation and purchasing power, and what would happen during those years. I cannot give the noble Baroness detailed answers, but this is precisely why the Bill is in the framework that it is.

The Government should commend themselves rather more on infrastructure. They have set up systems recently that have worked very well—including for vaccines and the EU settlement scheme—so it is possible to create that infrastructure, though I am mindful obviously of the cost. As to what we could give parents, budgets are so tight at the moment that families may want to choose front-loading.

On conditionality, it is not envisaged by the Bill that we would have any kind of sanction. I recognise that think tanks have suggested that, but, again, that is for the Government to work out in the policy detail on people who want to front-load. The noble Baroness has raised queries before about people understanding what they are doing, so there may be some requirement to make sure that they understand what the implications of taking the child benefit, or a proportion of it, in a front-loaded way are.

On legislation, whether it is an additional clause here or it is done under previous primary legislation, I would rely on the Delegated Powers Committee to say which is the best piece of legislation to use to enact these changes.

In many areas of a child’s life, those the child is living with and who have parental responsibility are making all kinds of decisions that affect the outcomes for that child. If they then move, the other parent or foster carer might say that they would not have made that decision. The reality here is that, as in other areas of life, decisions will be made that will affect the child in future.

Repaying money is not what is envisaged, but the noble Baroness, Lady Sherlock, inadvertently raises precisely the first case in which a parent might want to front-load benefits, which is where they sadly have a young child or baby who has a limited life expectancy. Why would you not want to enable that family to front-load their child benefit, bearing in mind the prognosis they have been given? I know that they are often entitled to other benefits and support, but they might also want to do that. That would be a laudable way of using the Bill.

I accept that it is a skeleton Bill. I accept the criticisms and comments made about our statutory instrument procedure, which allows debate but not the opportunity to vote down. However, this is a principle Bill, which would then enable the Government to construct the detailed policy. I thank all noble Lords for their contributions.

Financial Inclusion in England

Baroness Penn Excerpts

Wednesday 30th November 2022 Lords Chamber

[Lord Holmes of Richmond]

To ask His Majesty’s Government what steps they are taking to increase financial inclusion in England.

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

The Government want to ensure that people, regardless of their background or income, have access to useful and affordable financial products and services. To increase financial inclusion, the Government work closely with regulators, industry and consumer groups. Since 2019, we have allocated £100 million of funding from dormant assets towards this. The Government are also promoting financial inclusion through the Financial Services and Markets Bill, for example by introducing legislation to protect access to cash.

[Lord Holmes of Richmond (Con)]

My Lords, when it comes to financial inclusion, cash still matters materially to millions. Would my noble friend agree that it is not just about access to cash? Acceptance of cash is equally important. Further, as we move increasingly towards digital, would she agree that it is time for the Government to undertake an access to digital payments review to ensure financial inclusion for all?

[Baroness Penn (Con)]

My Lords, our approach is that accepting cash is a decision for the firms involved. We have taken action to ensure that people can access cash through ATMs and elsewhere. My noble friend also makes an important point about digital inclusion and digital payments. We are looking at how we can promote that alongside financial inclusion in our work through the Financial Inclusion Policy Forum and other avenues.

[Baroness Tyler of Enfield (LD)]

Will the Minister say which Minister has formal lead responsibility for financial inclusion now? Under the previous arrangements, it was not one but two Ministers: one in Treasury and one in DWP. It is not clear to me who is currently leading. The Minister just referred to the Financial Inclusion Policy Forum. What is going to happen moving forward and how frequently will it meet?

[Baroness Penn (Con)]

The noble Baroness asks a very good question, and I am afraid I will have to double-check and get back to her. The reason that it has traditionally been a DWP and a Treasury Minister is their joint role on that policy forum. It is not me in the Treasury, but I will find out who it is. The Government and others have found it a useful forum to drive forward action in this area and I am sure they will want it to continue with its good work.

[Baroness Bull (CB)]

My Lords, will the Minister say what the Government are doing to tackle poverty premium issues in financial services? We know that people on the lowest incomes pay more for credit and insurance, for instance, but issues such as this seem to be kicked between the Treasury, which says it needs more data in order to take action, and the regulator, which says that it is not within its remit to collect that data. How does the Minister expect that the new FCA consumer duty and consumer vulnerability guidance will help tackle the poverty premium, given that they deal primarily with existing customers and do not address the needs of those consumers whom the market finds more expensive and therefore less profitable to serve?

[Baroness Penn (Con)]

The Government are conscious of the poverty premium. We have used the Financial Inclusion Policy Forum as somewhere that we can bring together different actors on this. I will give some examples of action that we have taken in this area. The FCA, the regulator, has taken action on motor and home insurance to stop customers who are renewing being charged more than new customers. We have also seen the age agreement put in place for older customers to be able to access travel and motor insurance, and some work has been done with the Association of British Insurers looking at the poverty premium, specifically in the rented sector, and it has provided some recommendations to the Government that we are considering how best to take forward.

[Lord Young of Cookham (Con)]

My Lords, I applaud my noble friend Lord Holmes’s campaign to ensure that physical currency is available and valid, but what are the Government doing to ensure that the currency is fit for purpose? Many noble Lords may recall the farthing. The farthing was withdrawn in 1960 because it was redundant. The 1960 farthing is worth 2.8p today, but the halfpenny was withdrawn in 1984 for the same reason. So what is the life expectancy for the 1p coin languishing in saucers up and down the country?

[Baroness Penn (Con)]

I am afraid to say to my noble friend that I do not recall the farthing myself. The Government had a consultation on cash and digital payments in 2018 and the responses strongly supported not changing the denominational mix of coinage at that time. However, as with all areas of policy, we keep this under review.

[Lord Sikka (Lab)]

My Lords, I have met many people who are visiting pawnbrokers, putting down their everyday things just to get a few pounds to enable them to survive. They are paying interest rates of 160% upwards. Does the Minister consider that to be affordable? If not, what is she proposing in order to help these people?

[Baroness Penn (Con)]

I do not consider that to be affordable at all. We are taking a number of actions in this area. We work closely with Fair4All Finance, the organisation set up to distribute funding from dormant assets. One of its projects is working on the no-interest loans pilot scheme to try to provide a different route and access to credit for those who need it. At the Autumn Statement, we heard from my right honourable friend the Chancellor the action we are taking to direct our support this winter and next year to the most vulnerable households.

[Baroness Sater (Con)]

My Lords, the Money and Pensions Service has highlighted that children’s attitudes to money are well developed by the age of seven. According to the CBI, prioritising financial education could add nearly £7 billion to the UK economy each year. Does the Minister agree that the Government should consider making financial education a statutory part of the primary school curriculum?

[Baroness Penn (Con)]

My Lords, financial education in England is covered within both the citizenship and mathematics curricula. The Money and Pensions Service has also published financial education guidance for both primary and secondary schools in England to support school leaders and education decision-makers to enhance the financial education currently delivered in their schools. More broadly, after Covid and other disruptions there has been a commitment by this Government not to make any changes to the national curriculum for the remainder of the Parliament.

[Lord Tunnicliffe (Lab)]

My Lords, access to bank accounts and other financial services is vital, but so is better protecting people from financial scams and fraud. The Government currently have the economic crime Bill, the Financial Services and Markets Bill and the Online Safety Bill before Parliament; we will shortly see a data Bill too. Can the Minister assure us, perhaps in writing, that the final versions of these Bills will include clear and consistent measures to tackle the scams and other forms of fraud that blight so many people’s lives?

[Baroness Penn (Con)]

The noble Lord is right to point to the range of Bills before Parliament that will address this issue. We will not be able to address fraud and scams through financial services regulation alone. For example, many fraudsters access people through online platforms, so we need to look at that approach too. Those Bills will contain measures to tackle this, and the Government are also committed to bringing forward a fraud strategy that will bring together work from regulators, government and law enforcement to get a grip on this issue.

[Lord Flight (Con)]

My Lords, financial involvement is important because it represents people being willing to invest in British businesses and help them to grow. Unfortunately, the volume of direct citizen investment has fallen rather than increased in recent years. I am afraid that the increase in dividend tax and other investment expenses will also discourage this. Can the Government think about methods of encouraging people to invest in this country?

[Baroness Penn (Con)]

We absolutely want citizens to invest more and we have products, for example to help those on lower incomes form saving habits. We also want institutional investors to invest more in this country, which is why we are taking action on things such as Solvency II.

[Baroness Lister of Burtersett (Lab)]

My Lords, the primary cause of financial exclusion is poverty. What exactly is the Government’s anti-poverty strategy?

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[Baroness Penn (Con)]

My Lords, as I said earlier, in the Autumn Statement we set out the significant support that this Government are providing to the most vulnerable households. In fact, in the analysis of that Autumn Statement, it was those in the lowest income deciles who stood to gain the most from the policies we announced.

Autumn Statement 2022

Baroness Penn Excerpts

Tuesday 29th November 2022 Lords Chamber

Moved by

[Baroness Penn]

That this House takes note of the Autumn Statement 2022.

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

My Lords, it is a privilege to open this debate on behalf of the Government and to set out today our plan to tackle the cost of living and to rebuild our economy. I start by welcoming the noble Baroness, Lady Lea of Lymm, to the House, and I look forward to hearing her maiden speech. I congratulate all noble Lords on their dedication to this debate over other, footballing matters that may be happening this evening.

The Government’s priorities in this Autumn Statement are

“stability, growth and public services”.

We have been honest about the challenges we face and fair in our solutions. We have taken difficult decisions to tackle inflation and to keep mortgage increases down but, in doing so, we have protected the most vulnerable. Our plan will lead to a shallower downturn, lower energy bills, lower interest rates, higher long-term growth and a stronger NHS and education system.

I turn to the first priority in the Autumn Statement: stability. High inflation is the enemy of stability. The Office for Budget Responsibility confirms that “global factors” are the primary cause of current inflation. The world is still dealing with the fallout from the Covid pandemic: furlough, vaccines and the response of our NHS protected us from the worst of the pandemic, but they all need to be paid for, and the lasting impact on the supply chains has made goods more expensive. This has been made worse by an energy crisis made in Russia. Since Putin’s invasion of Ukraine, wholesale gas and electricity prices have risen to eight times their historical average. The OBR forecast the UK’s inflation rate to be 9.1% this year and 7.4% next year. However, inflation is higher in Germany, the Netherlands and Europe, and the OBR has confirmed that our actions in the Autumn Statement will help inflation to fall sharply from the middle of next year.

Higher energy prices have fed through to forecasts for growth. Overall, this year, the economy is still forecast to grow by 4.2%. GDP is then forecast to fall by 1.4% in 2023, before rising to 1.3% in 2024, and 2.6% and 2.7% in the following years. This has also impacted our public finances, so we need a clear plan to support our economy and to restore our public finances.

The decisions that the Chancellor made in the Autumn Statement mean that, over the next five years, borrowing will be more than halved. This year, we are forecast to borrow 7.1% of GDP; next year, it will be 5.5% of GDP; and, by 2027-28, it will fall to 2.4% of GDP. The Chancellor also confirmed two new fiscal rules: first, that underlying debt must fall as a percentage of GDP by the fifth year of a rolling five-year period, and, secondly, that public sector borrowing over the same period must be below 3% of GDP. In short, as growth slows, we will use fiscal policy to support the economy; then, once growth returns, we will increase the pace of consolidation to get debt falling. With just under half the £55 billion of consolidation coming from tax, and just over half coming from spending, this is a balanced plan for stability.

I turn now to our plans for tax. Our decisions on tax have been guided by two broad principles: we are asking those who have more to contribute more, and we will avoid the tax rises that most damage growth. On personal taxes, we are reducing the threshold at which the 45p rate becomes payable from £150,000 to £125,140. At the same time, we are maintaining at current levels the income tax personal allowance, the higher rate threshold, the main national insurance thresholds and the inheritance tax thresholds for a further two years, until April 2028.

We are also reforming allowances on unearned income, something that we have discussed many times in this House. The dividend allowance will be cut from £2,000 to £1,000 next year and then to £500 from April 2024. The annual exempt amount for capital gains tax will be cut from £12,300 to £6,000 next year, then to £3,000 from April 2024. Those changes still leave us with more general core personal allowances overall than countries such as Germany, Ireland, France and Canada.

On business taxes, we have decided to freeze employers’ NICs thresholds until April 2028, but we will retain the employment allowance at its new, higher level of £5,000. That means that the smallest 40% of businesses will still pay no NICs at all. On VAT, we already have a registration threshold more than twice as high as the EU and OECD averages, but we will maintain it at its current level until March 2026. We will implement the internationally agreed OECD pillar II global corporation minimum tax rate and take further steps to tackle tax avoidance and evasion. Together those measures will raise an additional £2.3 billion by 2027-28.

We will also increase the energy profits levy from 25% to 35% from 1 January until March 2028, and we will introduce a new temporary 45% levy on electricity generators, reflecting the fact that the structure of our energy market creates windfall profits for low-carbon electricity generation too. Together those taxes will raise more than £14 billion for the public purse next year.

Finally, on business rates, we believe that bills should accurately reflect market values and so will proceed with the revaluation of business properties from April 2023. However, we will soften the impact on businesses, with nearly £14 billion of support over the next five years. Nearly two-thirds of properties will not pay a penny more next year.

Just as we want to support businesses, we need to provide a shelter for those most at risk from the economic storm. To do so, we are uprating pensions and benefits by 10.1% next year, and we are accepting the recommendation of the Low Pay Commission to increase the national living wage by 9.7% next year, which is worth more than £1,600 to a full-time worker. We are also providing £55 billion in help for households and businesses with their energy bills, one of the largest support plans in Europe. This includes continuing the energy price guarantee for a further 12 months from April at a higher level of £3,000 for the average household.

Despite some difficult decisions, we are protecting our public services, with funding rising in real terms over the next five years. Overall departmental spending will grow at an average of 3.7% per year over the spending review 2021 period, but departments will be required to find efficiency savings to manage pressures from inflation. After the spending review period, day-to-day spending will continue to grow in real terms at 1% a year until 2027-28.

This does not mean that there will not be difficult decisions. For example, while we remain committed to the 0.7% ODA target in the longer term, the OBR forecasts show the fiscal situation means that ODA will remain at around 0.5% for the forecast period. In the current global context, we recognise the need to increase defence spending, but we must first review and update the integrated review, written as it was before the Ukraine invasion. Until then, we will continue to maintain the defence budget at least 2% of GDP, consistent with our NATO commitment.

We must promote our security abroad, but we also need to invest in priorities at home. Our first priority is investment in our health and care system. To recruit and retain our dedicated NHS workforce, the Department of Health and Social Care and the NHS will publish an independently verified plan for the number of doctors, nurses and other professionals we will need in five, 10 and 15 years’ time—something that I know this House has called for.

I turn to social care. The 1.6 million employees in the sector are working extremely hard. Local authorities have rightly raised concerns about their capacity to deliver the Dilnot reforms immediately, so we will delay their implementation for two years, allocating the funding to allow local authorities to provide more care packages. We also know that we must expand the capacity of the social care system to free up some of the 13,500 hospital beds that are occupied by those who should be at home.

To expand the capacity of the social care system in England, we will make available up to £2.8 billion of extra funding, increasing to £4.7 billion in 2024-25. To deliver ever greater care, the NHS will also need to look at efficiency savings, but we will still need to invest more to meet our aims. Because of the difficult decisions taken elsewhere, we will increase the NHS budget in each of the next two years by an extra £3.3 billion. Taken together, these actions will ensure that up to £8 billion of additional funding is made available for health and social care in 2024-25.

However, a healthy country is not sufficient; we need a skilled one too, so we are not just going to protect the education and schools budget, we are going to increase it. The core schools budget will rise by £2.3 billion in both 2023-24 and 2024-25, restoring 2010 levels of per-pupil funding in real terms, and the Barnett consequentials mean an extra £1.5 billion for the Scottish Government, £1.2 billion for the Welsh Government and £650 million for the Northern Ireland Executive.

I turn to the third priority in the Autumn Statement: growth. As my right honourable friend the Prime Minister set out in his Mais lecture last year, to grow the economy we need to invest in three things: people, capital and ideas. On people, alongside our investment in schools and the health service, Sir Michael Barber will advise the Government on the implementation of our ambitious skills programme. Just as we look to improve opportunities for those in education, we are determined to help people already in work to raise their incomes, progress in work and become financially independent. That is why we will ask more than 600,000 more people on universal credit to meet a work coach so that they can get the support they need to increase their hours or earnings.

On capital, we remain committed to building the roads, rail, broadband and 5G infrastructure we need. To do so, we will maintain our capital budgets at the same level in cash terms for the next three years. We will proceed with Sizewell C and deliver the key Northern Powerhouse Rail, HS2 to Manchester and east-west rail. We are building new hospitals and rolling out gigabit broadband.

Finally, on ideas, we will continue to support innovation in our economy and remain committed to increasing public funding for R&D to £20 billion by 2024-25. We will also continue our work to support the transformation of scientific breakthroughs into breakout businesses. By the end of this year we will decide and announce changes to EU regulations in five key growth industries: digital technology, life sciences, green industries, financial services and advanced manufacturing. The Chief Scientific Adviser, Sir Patrick Vallance, will also lead new work on how we should change regulations to better support the safe and fast introduction of emerging new technologies.

It has been impossible to condense the full range of action in the Autumn Statement into my opening speech, and I look forward to responding to all noble Lords’ contributions at the end of the debate, but I hope I have been able to demonstrate that in the midst of a global economic challenge, this Government will respond in the way this country does best. United, we will use our resourcefulness and resilience to get through the storm. We will shelter the most vulnerable as we do so. We are taking difficult decisions but, in doing so, we are bringing about stability and security and setting our country up for growth in the days ahead. I beg to move.

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[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, I will spend my time directly addressing as many noble Lords’ comments as possible.

Many noble Lords reflected on the economic circumstances that we find ourselves in. My noble friend Lord Lamont is correct in his analysis that there is no greater enemy than inflation. He reminded the House, as did the OBR, that the inflation we face is predominantly down to global forces, as my noble friend Lord Flight also noted. High inflation puts pressure on households managing those rising costs and, in turn, dampens growth. We have to be honest with people that we cannot shelter them from all of the effects of this economic storm. In our fiscal policy, we must be careful not to stimulate the economy in a way that makes it more difficult for the Bank of England to reduce inflation, leading to higher interest rates. So we have had to target our fiscal policy carefully.

But it is worth reminding noble Lords of the extent of the support that we are providing. Overall policy decisions since the Spring Statement provide support of £64 billion this year and £40 billion next year, which represents a combination of universal support, through the energy price guarantee, and targeted cost of living payments. In response to the noble Lord, Lord Rogan, the Government are working to ensure that the people of Northern Ireland receive energy bills support scheme support as soon as possible. I reassure him and the people of Northern Ireland that support will reach them this winter.

We have also taken action to uprate pensions and benefits in line with inflation, which I note, in the context of the contribution of the noble Lord, Lord Rooker, was a recommendation from Barnardo’s. We have accepted the Low Pay Commission’s recommendation to increase the national living wage by 9.7%.

Some noble Lords, including the noble Lord, Lord Fox, questioned the profile of the Government’s consolidation plans. But, again, we have had to strike a balance, providing support to households and the economy while inflation is high and growth is low—then, once growth returns, we will increase the pace of consolidation to get debt falling. The OBR delivered its verdict on our plans, saying that the recession will be shallower than it would otherwise have been, jobs will be protected and inflation will come down.

I must also correct the assertions of the noble Lords, Lord Hain and Lord Howarth of Newport, the noble Baroness, Lady Jones, and others that these plans are a return to austerity. In 2010, total departmental spending fell by about 3% a year; in this Parliament, it will rise at 3.6% a year in real terms. This is not just more money for public services; it is also considerably more money than the Benches opposite have committed to.

The noble Lord, Lord Hain, also claimed that the Autumn Statement would open the door to a Labour Government, but I remain slightly at a loss as to what Labour’s economic plans are. The noble Lord opposite made a valiant attempt to set some of them out, but I remain unclear: does it sign up to the need to consolidate our public finances? If it does, does it agree that we have taken a balanced approach between tax and spend? If it does not, what would it do differently?

I also profoundly, and perhaps unsurprisingly, disagree with the Benches opposite on this Government’s economic record. Over the last 12 years, alongside EU exit, the Government have had the third fastest growth in the G7. Since 2010, we have grown faster than France, Germany, Italy or Japan, and we have the lowest unemployment in nearly 50 years.

I will correct one further point from the noble Lord, Lord Razzall, and others, on the London Stock Exchange missing out to Paris. We had a Question on this the other week, where we addressed in quite a lot of detail why that is not the case. I also thank the noble Baroness, Lady Kramer, for reminding us of Labour’s own record on the economy.

Perhaps it is time for a little more consensus, and, in this debate, I heard more consensus on the need to improve productivity. Many noble Lords—including the noble Lord, Lord Eatwell, my noble friend Lord Horam and others—spoke about the need for greater investment in public sources of growth. The Government agree, which is why public spending on capital investment will remain at the record highs set at the 2021 spending review, delivering more than £600 billion of investment over the next five years. I can only ask the noble Lord, Lord Eatwell, why he could not persuade his own party of the need for this in government, with capital budgets next year being more than double those under the previous Labour Government.

Noble Lords also spoke powerfully of the need to improve private sector investment, and many spoke about the need to support R&D. The noble Lords, Lord Fox and Lord Londesborough, among others, expressed concern about the Government’s planned changes to R&D tax credits for SMEs, and many noble Lords spoke about the importance more broadly of R&D, including my noble friend Lady Blackwood. I assure noble Lords that the Government remain unequivocal in their support for R&D, including recommitting to the largest ever R&D spending increase over an SR period. Our aim is to ensure that the spending is as effective as possible and to do more to work towards a simplified, single R&D tax credit for all.

The noble Lord, Lord Londesborough, asked whether the Government have considered the impact on productivity of the changes that we are proposing. From my experience looking at the R&D tax credit, the officials working on this think of almost nothing other than how we can make the R&D tax credit system the most effective it can be. We must recognise that the SME scheme has become a target for fraud. That is not to say that noble Lords did not make important points on the need to support research-intensive SMEs in particular. Ahead of the Budget, the Government will work with industry to understand whether further support is necessary for R&D-intensive SMEs without significant changes to the overall costs of the scheme. Over the SR period, we also increasing funding for Innovate UK by 50%, and 70% of Innovate UK’s grants benefit small and medium-sized enterprises.

Also on investment, the noble Lord, Lord Bilimoria, asked about doing more regarding small modular reactors. I agree with him that, for Britain to achieve energy security, a pipeline of new nuclear is needed, alongside the large-scale project that we have committed to in Sizewell C. Today, the Government have confirmed their commitment to set up Great British Nuclear, an arm’s-length body which will develop a resilient pipeline for new builds beyond just Sizewell C.

On energy more broadly, many noble Lords, including the formidable noble Baronesses, Lady Hayman and Lady Jones of Moulsecoomb, raised questions about our approach to energy and climate change. I reassure noble Lords that the Government remain fully committed to reaching net zero by 2050, and to seizing the opportunities for growth through that transition.

On specific questions around the energy profits levy, several noble Lords, including the noble Lord, Lord Sikka, expressed concern about the design of the levy and the investment incentives in it. The Government have always been clear that the tax regime is intended to strike a balance between ensuring a fair tax return for the UK from its resources and continuing to encourage investment in the North Sea, supporting jobs and our energy security. I reassure the noble Lord that the Autumn Statement sets out that the Government expect to raise £41.6 billion from the EPL between 2022-23 and 2027-28, in addition to the £39 billion paid through existing taxes, ensuring that oil and gas companies pay their fair share.

The UK will also receive tax revenues from the investments made under the investment allowance, as and when they generate a profit. Given that these companies are mostly the same ones that are innovating and producing renewable energies, their investments will bring wider economic benefits through jobs, a secure supply chain and more progress towards net zero. Conversely, my noble friend Lord Leigh of Hurley voiced concerns about the impact of the EPL on independent UK companies and suggested that we use an approach more akin to the one that we have taken with electricity generators. His concerns are precisely why we have included such a generous investment allowance, which demonstrates our commitment to encouraging investment in the North Sea to strengthen the UK’s vital offshore oil and gas sector, putting more UK gas on the grid for longer and bolstering our energy security.

The noble Baroness, Lady Hayman, was also concerned about investment incentives for renewables under the electricity generators levy. The EGL is charged on a different basis from the energy profits levy and at a lower combined rate; the EPL is applied to total profits, whereas the EGL applies to only extraordinary returns above a given level. I reassure noble Lords that the electricity generators levy is designed in a way that maintains incentives for investment and preserves the effect of existing government support. Renewable generators will be able to deduct investment costs from their corporation tax.

[Lord Eatwell (Lab)]

I know that the Minister would not want to mislead the House, so I was very surprised by her figures on government investment. I looked up the OBR figures and, as a share of GDP, public sector net investment is now half what it was in the last year of the Labour Government.

[Baroness Penn (Con)]

My Lords, the statistics that I gave referred to overall levels of investment, not expressed as a percentage of GDP. I stand by the figures that I gave to the House.

[Lord Hain (Lab)]

I am very grateful to the Minister, but can I ask her to correct her statement about the last Labour Government’s record? We had 10 years of consistent economic growth, never surpassed in Britain’s economic history, with low inflation, high employment and massive investment in public services, prior to the global banking crisis, for which we were culpable only to the extent that every Government in the world were culpable. Surely, she should correct what she has said in argument to me.

[Baroness Penn (Con)]

I am not sure exactly which bit of what I said the noble Lord wants me to correct. I stated the Government’s record on economic growth since 2010, and I simply referred to the comments of the noble Baroness, Lady Kramer, on the recession that was also experienced under the previous Labour Government.

I return to the subject of energy. The noble Baroness, Lady Hayman, asked about energy efficiency. Warmer homes and buildings are key to reducing bills, creating jobs along the way and meeting our targets on climate change. That is why we are committed to driving improvements in energy efficiency, with a new ambition to reduce the UK’s final energy consumption from buildings and industry by 15% by 2030. A new ECO+ installation scheme was announced earlier this week.

I disagree with the analysis that this is jam tomorrow; we have £6 billion of new government capital funding that will be made available from 2025 to2028, but that is in addition to the £6.6 billion allocated in this Parliament. The aim of that kind of longer-term projection of funding is to create consistency and allow businesses and the supply chain to build up and plan for the future, which can be something that we struggle with in the provision of energy efficiency measures. We are also launching the energy efficiency task force and expanding our public awareness campaign to help reduce bills for households and protect vulnerable people over the winter and beyond.

In response to my noble friend Lord Leigh of Hurley, on other tax measures and the taxation of US groups trading in the UK, the UK has long been committed to tackling base erosion and profit-shifting, which is why we introduced the diverted profits tax in 2015 and the corporation interest restriction rules in 2017. I am glad that he welcomed progress on Pillar 2, which we will legislate for in the spring 2023 Finance Bill, but I agree with him that we need to make further progress on Pillar 1. That is why we continue to work internationally on finalising Pillar 1, so that the corresponding multilateral convention can be ready for signature in the first half of 2023, allowing for implementation in 2024.

Other noble Lords noted some strange political alliances that seemingly might have formed in the course of this debate. The noble Lords, Lord Sikka and Lord Howarth of Newport, but also my noble friends Lord Bridges and Lady Noakes raised concerns around the Government’s decision to freeze the personal allowance and other tax thresholds. I say to noble Lords that despite the need to increase taxes—I fully acknowledge that freezing thresholds is a tax increase, I am not trying to hide it in any way—given that the personal allowance nearly doubled across the last decade, it will still be £2,150 higher by April 2028 than it would have been had it been uprated by inflation each year since 2010. The noble Lord, Lord Sikka, also asked about the distributional impacts of tax. I cannot answer his specific point, but on average it is households in the poorest income deciles that are gaining the most next year as a result of decisions taken in the Autumn Statement.

I take seriously the concerns expressed by my noble friends Lady Noakes and Lord Bridges. The Government have had to take difficult decisions and we are being honest about that. We want a low-tax economy, but first must come economic stability, and we need everyone to contribute a little towards sustainable public finances. I know it will be little comfort to them to be reminded that the UK tax system remains competitive, with the tax-to-GDP ratio meaning that we are still in the middle of the pack within the G7 and lower than such countries as France, Germany and Italy. As I say, the Government take their challenge on growth seriously and we have taken some tax decisions to prioritise this; for example, keeping the annual investment allowance level that was set in the growth plan permanently at £1 million, rather than reverting to £200,000 from 1 April 2023.

My noble friend Lord Bridges rightly identified a greater range of actions that we must take to set the conditions of growth beyond tax policy. A key area and opportunity post Brexit is regulation, and I hope he will welcome the action on Solvency II that we have announced and the measures in the forthcoming Financial Services Bill, which we will seek to replicate across other growth sectors across the UK economy, such as life sciences, as spoken about passionately by my noble friend Lady Blackwood. Many noble Lords, including the noble Lord, Lord Shipley, and my noble friend Lord Tugendhat, raised the issue of housing. The noble Lord, Lord Shipley, spoke about the need to build more houses for social rent: that is exactly what the Government are doing, through such measures as removing the cap on councils borrowing against their housing revenue account. I reassure him also that we are still committed to ending no-fault evictions.

My noble friend Lady Cumberlege asked about our commitment to community pharmacists and the issue of funding there. The plan for patients set out the further expanded role of pharmacies agreed in the community pharmacy contractual framework for the next two years, as well as an additional £100 million investment to recognise the pressures facing the sector. The Government have also committed to look further by enabling pharmacists with more prescribing powers and making more simple diagnostic tests available in community pharmacies.

In response to the noble Lord, Lord Rogan, I welcome the 25th anniversary of the Belfast agreement and I am extremely pleased that we confirmed in the Autumn Statement that we are funding the planned trade and investment event in Northern Ireland. DIT will work with local partners as this is taken forward, including with Invest NI.

The noble Lord, Lord Bilimoria, asked about defence spending. As I said in my opening speech, we recognise the need to increase defence spending, but before we make announcements on that, we need to refresh the integrated review, which was drafted before Russia’s invasion of Ukraine.

The right reverend Prelate the Bishop of Gloucester referred to the benefit of women’s programmes for preventing female offending and the savings to the Ministry of Justice as a result. In September, the Ministry of Justice announced that almost £21 million will be invested in women’s services to tackle the causes of female offending and cut crime.

The noble Lord, Lord Livingston of Parkhead, asked an interesting question about the difference between the Bank of England and OBR forecasts. Given the number of recent changes in fiscal policy and the volatility in financial and energy markets, the range of external forecasts is wide. Differences will partly reflect when each forecast was produced and the differences in assumptions about government policy, interest rates and energy prices, but I take his wider point.

I congratulate my noble friend Lady Lea on her excellent maiden speech. I know she brings a wealth of economic experience, not least from her own time working in the Treasury. I look forward to working with her in the future.

We have faced two enormous shocks in the last three years. The pandemic has caused supply chain disruption, slowed growth and increased debt levels, and Putin’s war in Ukraine has caused energy prices to spike. This has added up to inflation at levels not seen in a generation, hitting the pockets of families across the country. That is why tackling inflation is our priority. It makes everyone worse off, especially the most vulnerable, so we have taken difficult decisions that will mean taxes go up and spending will not rise by as much as previously planned. When we take into account the need to invest more in areas such as our NHS, it means hard choices to be made elsewhere.

However, I remind noble Lords that we fight these economic challenges from a position of relative strength. Unemployment is close to the lowest level it has been in nearly 50 years, and the UK is forecast to have had the fastest growth in the G7 in 2022. We also have incredible strengths within our country that aid our mission: our teachers, our NHS workforce, our armed services, and everyone who works in our public sector—day in, day out—to deliver the services upon which we rely.

We are inventive and resourceful, and the innovative, intuitive and ambitious people who make up our private sector will drive our growth. Combine this with the decisions taken over the last 12 years and the results are clear to see: employment is up by millions compared to 2010; we have had the third highest real GDP growth rate in the G7 since 2010; renewable energy production is growing faster than in any other large country in Europe since 2010; thousands more children are in good and outstanding schools compared to 2010; and we have record numbers of doctors in the NHS. Now, because of the difficult decisions we take in our plan, we are strengthening our public finances, bearing down on inflation and supporting jobs—all while protecting public services.

The Autumn Statement is a plan that provides stability. It is a plan for growth and a plan for public services. I beg to move.

[Lord Skidelsky (CB)]

Before the noble Baroness sits down, could I ask a question, please?

--- Later in debate ---

[Baroness Penn (Con)]

There were many questions that noble Lords asked that I did not get to in the time available. Maybe I should write to all those who have participated in this debate to make sure that I address all the points raised but do not detain noble Lords any further.

[Lord Skidelsky (CB)]

Could the Minister explain how fiscal consolidation, particularly cutting public spending, promotes growth?

[Baroness Penn (Con)]

My Lords, there is probably a longer conversation to be had, but I did set out how the profile that we have taken in our approach to consolidation supports growth at this time but also gets our public finances on to a sustainable footing. I am now sitting down; I will take no further interventions.

Motion agreed.

Farmers and Landowners: Tax Consequences

Baroness Penn Excerpts

Monday 28th November 2022 Lords Chamber

[Lord Carrington (CB)]

In begging leave to ask the Question standing in my name on the Order Paper, I declare my interest as a farmer and landowner. I also take this opportunity to humbly apologise to the House for failing to declare these interests during a supplementary question I was scrambling to ask during last week’s Question on the private rented sector.

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

My Lords, farming is going through the biggest change in a generation. The Government are introducing policies in England that work for farm businesses, food production and the environment. Some stakeholders have raised concerns that tax rules, particularly inheritance tax rules, might be a barrier to land use change in certain situations. The Treasury, HMRC and Defra have been working closely to consider the potential need for changes to the tax system, including where rules may need to be clarified.

[Lord Carrington (CB)]

I thank the Minister for her kind words; however, we need a little more action. It would seem to be a platitude to say that the tax system should align with the Government’s climate change and environmental objectives but, over a year since the passing of the Environment Act, there is still no legislation looking at how the tax system effects the sequestration of carbon and biodiversity net gain. Can the Minister confirm that these activities will have the same tax status as traditional farming activities, and be considered as trading income rather than investment income? Secondly, can she confirm that these activities will attract the same inheritance tax reliefs currently available? Without such reliefs, higher agricultural land values as a result of carbon sequestration and biodiversity net gain will disincentivise the farmer from joining these schemes.

--- Later in debate ---

[Baroness Penn (Con)]

I am afraid that I cannot give the noble Lord the Answer he desires. I can confirm that HMRC is discussing the issues he has raised with Defra both to clarify how existing law applies, for example, to the production, sale and use of carbon units in different environmental schemes, and to look at the inheritance tax question he raised. The Government have shown that we will act to clarify the tax rules where appropriate for the farming programme. For example, legislation is being introduced to clarify that payments under the lump sum exit scheme for farmers are treated as capital receipts and, therefore, charged to capital gains tax or, for companies, to corporation tax as chargeable gains.

[Lord Palmer of Childs Hill (LD)]

My Lords, I hear what the Minister says but the government paper of October 2021 said that the Government would

“review guidance on the tax treatment of trees and woodlands, to provide greater clarity to landowners on how new and existing trees on their land affect tax liabilities.”

Nothing has been forthcoming. Can the Minister update the House on the progress of the review? She mentioned HMRC but most people do not know what the guidance is.

[Baroness Penn (Con)]

My Lords, we are iterating our approach as we develop these schemes. Quite a lot of them are new, and many different aspects are being piloted or developed. It is important that, as development happens, we take into account the tax considerations and implications of the new schemes. I can reassure noble Lords that we are aware of some of these questions and issues. We are looking at them very closely and, as the policies are developed, we are taking that into account in the Treasury’s input into Defra schemes.

[Lord Jones (Lab)]

My Lords, does the Minister guarantee that her taxation policies will not bear down unjustly and negatively on the upland farming areas of England and Wales? I have in mind the Borders, Cumbria, the Pennines, Cefn Gwlad—the heartland landscape of Wales—and the moorland communities of the south-west. Does she acknowledge that, already, besides taxation, the big problems are elevation and climate, and that these historic communities do not need further problems arising from her department’s taxation policy?

[Baroness Penn (Con)]

I reassure the noble Lord that we are cognisant of the need to ensure that our tax policy and our environmental land management schemes are working with and not against each other. It is an area of some complexity. With respect to how different farmers are affected—the noble Lord mentioned upland farmers—we are trying to look at the whole system and its different levels of complexity to make sure that we get to the right approach.

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, the current environmental land management schemes have three elements: the sustainable farming incentive, which is up and running, and the local nature recovery and landscape strands, which are still in pilot stage and will not be fully launched until 2024. Farming is a profession that requires very long-term planning. How do the Government expect farmers to engage fully with ELMS if they do not know what the impact on them will be, either financially or in expected tax commitments?

[Baroness Penn (Con)]

Part of what the noble Baroness alighted on reflects our approach: as we pilot and iterate these schemes, we will learn and look at their implications for taxes. How they are designed might have different impacts, so we cannot prejudge that. I reassure noble Lords that tax rules should not have a bearing on many environmental activities under the ELM schemes, such as improving soil health. Many farmers already undertake these activities or have changed their land use within the tax rules currently in place.

[Baroness Hayman of Ullock (Lab)]

My Lords, I listened carefully to the Minister’s responses. There are a lot of doubts among farmers about what ELMS will actually mean, and there is too much uncertainty to allow them to plan properly for the future. Does the Minister properly understand why some parties are just not comfortable about entering into a scheme for which the tax implications are unclear, and which might not even exist in a few years’ time? Farmers need clear advice today, so when will the Government be able to provide that clarity?

[Baroness Penn (Con)]

As I said, many of the tax rules should not have a bearing on many of the environmental activities under ELMS. We already have several schemes under way, with a high take-up among farmers. But we understand that there could be broader implications, particularly for the landscape recovery scheme, and we are carefully looking at this. The 22 initial projects are receiving funding through that scheme, and people have felt able to sign up to them under the existing tax rules and systems. But we will look at those projects and implications as part of our design.

[The Earl of Caithness (Con)]

My Lords, I urge my noble friend to look urgently at this problem, which is very serious for farmers and landowners, who cannot make a decision with any certainty, given that the tax regime might change. What incentive is there for a farmer to do the good thing for biodiversity if they will be taxed badly for it?

[Baroness Penn (Con)]

As I said, the tax rules should not have a bearing on many environmental activities under the ELM schemes. We are cognisant, particularly where there may be a change of land use, that this could invoke questions of tax treatments—although, even if the land may not be used for agriculture any more, it may often still qualify for business property relief, for example, as an alternative inheritance tax relief.

[Baroness Meacher (CB)]

My Lords, following up the question from the Labour Front Bench, could the Minister indicate the timing? When will the Government be able to clarify these issues in relation to the many parts the Minister referred to?

[Baroness Penn (Con)]

As I understand it—I am working hard to make sure that I fully understand the tax implications of these schemes, but I am not yet as well versed in these things as my noble friend Lord Benyon—we are still designing the landscape recovery scheme and piloting different approaches. Those schemes are not expected to be rolled out in full until 2024, so that work is ongoing. On other schemes that are already in place, we do not expect the larger-scale schemes for farmers, such as the sustainable farming initiative, to have significant tax implications for farmers.