Tax Fairness
Chris Leslie Excerpts(11 years, 8 months ago)
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Chris Leslie (Nottingham East) (Lab/Co-op)
I beg to move,
That this House believes that a mansion tax on properties worth over £2 million, to fund a tax cut for millions of people on middle and low incomes, should be part of a fair tax system; and calls on the Government to bring forward proposals for such a tax at the earliest opportunity.
Let us consider the contrast that now exists as a result of Government decisions. Those who are on low and middle incomes—that is, the vast majority of the British public—have seen their tax credits cut, their child benefits squeezed, their cost of living rise as a result of higher VAT and their wages fall in real terms. However, the richest 1%, including the lucky few who earn £1 million a year, will see an average tax cut of £100,000 in four weeks’ time, and banking executives will not have to pay that annoying bonus tax, all thanks to the Chancellor’s generosity. This is a tale of two societies, with hard-working earners on low and middle incomes paying for the Government’s failure to get the economy growing while the richest elite are being rewarded by the Chancellor with a tax cut worth nearly four times the average annual salary.
Mark Reckless (Rochester and Strood) (Con)
Is it not also a tale of two sides of the House? Will the hon. Gentleman explain why his speech today has proved so popular with Labour Members?
Chris Leslie
The hon. Gentleman really needs to focus on the issue at hand. If he is standing up for the millionaires’ tax cut, he should simply say so. It will take effect in about three weeks’ time, and a number of his constituents will be absolutely astonished that he has voted for an average £100,000 tax cut for millionaires while they have lost their tax credits, found themselves paying more and seen a decline in the quality of public services.
Harriett Baldwin (West Worcestershire) (Con)
I am sure that the massed ranks of the shadow Minister’s colleagues behind him today would like to know whether he will pledge to increase the top rate of tax to 50p in his manifesto.
Chris Leslie
We certainly voted against the tax cut, and if we were in government now, we would not be cutting that 50p rate to 45p in April. Heaven only knows what other horrors the Government have in store over the next two years. We do not know what kind of situation we are going to inherit in regard to the deficit and to borrowing, so it is impossible to predict the tax situation that we will be faced with, if and when we inherit that position at the next general election.
Chris Leslie
I want to make some progress. I will give way in a moment.
The divide between the richest and the least well off is getting broader, not narrower, and the situation is getting worse. The Government are cutting taxes for one group this year—the very richest in society—with 13,000 people earning £1 million a year getting a tax cut. That is astonishing. Could any other policy better typify the twisted logic of trickle-down economics than that one?
Caroline Lucas (Brighton, Pavilion) (Green)
I welcome the mansion tax as a step towards equality, but why will the Opposition not go further and tackle the absurdity of our council tax rates still being based on 1991 rates? A house valued at £1 million in 1991 pays only 0.3% of its worth, while a house valued at £40,000 pays 2.4%, which is eight times more. Does the hon. Gentleman agree that that is unfair and should be tackled?
Chris Leslie
It is important to listen to the Liberal Democrats’ proposal for a mansion tax. They believe that £2 billion could be raised in that way from properties worth £2 million or more to help those on low and middle incomes. In our view, any such revenue should fund the reintroduction of a 10p starting rate of income tax.
I would say to hon. Members, and particularly to Conservative Members who are struggling with the state of the current economic policy, that there are independent authorities and budget watchdogs to correct them when they wrongly assert that growth will not be affected by the cuts and the tax rises and that they are paying down the national debt, but they cannot pull the wool over the eyes of the public, who know what fairness is and who know that the choices made so far have been deeply unfair.
Mr Jim Cunningham (Coventry South) (Lab)
Does my hon. Friend recall that it was the Labour Government who introduced the 10p tax? Does he also think that it would help those in poverty, as well as motorists and the building industry, if there were a cut in VAT?
Chris Leslie
That is our view. We want to do more to help those on lower and middle incomes, and to ask those privileged and wealthy individuals in society—particularly if they have a property worth £2 million or more—to make a fair contribution. The debate today presents an opportunity and a challenge to Government Members to do the right thing and to back what some of them profess to believe in.
Let me remind Members what our motion says. It asks the House to resolve
“that a mansion tax on properties worth over £2 million, to fund a tax cut for millions of people on middle and low incomes, should be part of a fair tax system; and calls on the Government to bring forward proposals for such a tax at the earliest opportunity.”
That is the extent of the motion. It is very simple and straightforward. Liberal Democrats who are in the Chamber today—for some are actually present—have repeatedly claimed to back a mansion tax. After going along with the Chancellor’s tax cut for millionaires, a failing economic plan, a VAT rise and a trebling of tuition fees, they finally have a chance to vote for something that was in their manifesto.
Chris Leslie
I shall put to one side the fact that the Liberal Democrats said one thing in opposition—about, for example, tuition fees—and have done completely the opposite in government. The hon. Gentleman should know that circumstances are now getting worse, especially given the millionaires’ tax cut which will take effect in April. We must do something to revive the fairness of the tax system, and that is why I think it important for the Liberal Democrats to stick to their 2010 manifesto pledge to introduce
“a Mansion Tax at a rate of 1 per cent on properties worth over £2 million, paid on the value of the property above that level.”
Jane Ellison (Battersea) (Con)
The hon. Gentleman speaks of fairness. The mansion tax that he proposes would be profoundly unfair on a great many of my constituents who have done nothing more than live in the same house for several decades in an area which, in terms of its property prices, has changed unrecognisably. That applies to many parts of London. I am amazed that London Labour Members do not make similar points. What the hon. Gentleman proposes is akin to a tax on living in London.
Chris Leslie
If the hon. Lady thinks that everyone in London lives in a £2 million property, she must be almost as out of touch as her party’s Chancellor of the Exchequer. Of course there are ways of introducing a mansion tax that could take account of the specific circumstances in which people are asset-rich and cash-poor, but there would probably be very few such cases. The Liberal Democrats have thought very carefully about that particular proposition.
Gloria De Piero (Ashfield) (Lab)
The public constantly tell us that they hate the infantile, Punch and Judy nature of politics. However, I read in today’s briefing paper from the Liberal Democrats that they will not back us because we have copied them. Is that not exactly the kind of behaviour that turns the public off politics?
Chris Leslie
My hon. Friend is entirely right. We cannot win. When we oppose the policies advocated by the Liberal Democrats, we are attacked, and when we support those policies, they still attack us. It is difficult to know what to do—but I do know that honour and integrity matter to the Liberal Democrats, which is why I still think that they should join us in the Aye Lobby in a few hours’ time. After all, on 17 February, when asked whether the Liberal Democrats would support this proposition, the Business Secretary said:
“It depends entirely how they phrase it. If it is purely a statement of support for the principle of a mansion tax, I’m sure my colleagues would want to support it.”
We look forward to seeing them in the Lobby.
Mr Nick Gibb (Bognor Regis and Littlehampton) (Con)
I am waiting to hear the shadow Minister mention that this Government have taken £2.2 million of the lowest earners out of tax altogether. Does Labour’s support for a mansion tax signal its return to high-tax policies, and a end to the new Labour project so admirably led by Tony Blair and Peter Mandelson, which transformed Labour into an electable party? Are we now seeing signs of a return to the hard left, high-taxing Labour party of the past?
Chris Leslie
No. The hon. Gentleman is in a coalition with partners, whom he no doubt does not regard as hard lefties, who are advocating the very policy that we recommend in our motion. We took the advice of the Business Secretary, a Liberal Democrat, who said “Table a very simple motion, and we will support it.” According to any objective measure, even the hon. Gentleman can see that we have held back from party-political rhetoric. The motion is very plain and simple, as requested. We have tried to find some common ground. If those 57 Members of Parliament—and perhaps even some Conservatives; who knows?—were to join us in the Lobby tonight, that would make the mansion tax a reality.
Jonathan Edwards (Carmarthen East and Dinefwr) (PC)
We are minded to support wealth taxes, and we therefore welcome the motion, but it is a bit thin on detail. Can the shadow Minister reassure me that farmers will not be dragged into the new tax because of the value of their land, and not necessarily because of the value of their property?
Chris Leslie
That is an important point. I am glad that we have the hon. Gentleman’s support on this issue. Obviously there is a difference between residential and corporate arrangements, but our motion says that we want the Treasury to bring forward proposals at the earliest possible opportunity. We have seen the proposition set out by the Liberal Democrats and used it as the basis for our motion, but let us see what further options can be drawn together. We think that it would be a good idea, for example, for the Chancellor to commission the Office for Budget Responsibility to present detailed suggestions of ways in which the arrangements might work.
Neil Carmichael
Will the shadow Minister remind the House exactly what the top rate of income tax was throughout most of the last Labour Government, and give us some insight into why it was at that level?
Chris Leslie
After the global financial crisis, we decided to introduce a 50p top rate of income tax so that those earning £150,000 and above would make a fairer contribution to society as a whole. Those people are the wealthiest 1% in society. How astonishing—how absolutely breathtaking—that in last year’s omnishambles of a Budget, the present Chancellor of the Exchequer decided to go for the right-wing trickle-down approach and cut the 50p rate to 45p. I hope that that decision will be reversed in the forthcoming Budget, in respect of which I take it that the hon. Gentleman’s intervention constituted a representation to the Chancellor.
Dame Angela Watkinson (Hornchurch and Upminster) (Con)
Will the shadow Minister remind the House how much was lost to the Treasury during the period of the 50p tax rate, and does he accept that 100% of 45% is more than 50% of 50%?
Chris Leslie
I am not sure about the hon. Lady’s maths, but we are still within the period of the 50p rate. Of course we want to see the details of what has been happening. However, while the Conservatives have the notion that for those who are very wealthy, the higher tax rates are a deterrent and create avoidance, they do not say the same about the poorest and the middle-income families in the rest of the country. They can pay VAT at 20%; they can pay higher taxes. The hon. Lady takes a view that is taken by so many Conservatives. There is one law for those who are very wealthy, but everyone else must suffer because of the Conservatives’ failure on revenue and borrowing.
Mr Geoffrey Robinson (Coventry North West) (Lab)
Does my hon. Friend not find it strange that the Government do not seem to understand that taxes are an element of economic policy that can be adjusted in line with economic circumstances? During the first period of the Labour Government, the prevailing circumstances meant that there was no case or need for taxes to be increased, by means of a mansion tax or by any other means. When the need appeared after the economic collapse, compounded by the financial crisis, it became clear that we had to do something, and of course the Government did. The trouble with this Government is that they think policies need not to be adjusted in line with circumstances, but they do need adjusting. Does my hon. Friend not agree with that?
Chris Leslie
I agree. It is instructive to observe the different choices that the different parties are making on this issue. The Conservatives choose to cut taxes for the richest—the millionaires in society—and to increase everyone else’s taxes. The Liberal Democrats have said that they believe in a mansion tax. Indeed, a fortnight ago the Liberal Democrat leader, the Deputy Prime Minister, said:
“Victor Hugo observed that it is near impossible to resist an idea once its time has come. Last week, he was again proved right as calls for a mansion tax, first proposed by the Liberal Democrats in 2009, gathered new momentum…I offer certainty: the mansion tax, or a version of it, will happen…The Conservatives and opponents of fairer taxes have a choice. They can dig their heels in and remain stuck in the past. Or they can join with the Liberal Democrats and the chorus of voices seeking to make our tax system fair.”
Well, here we are today. What more can we do? The issue is on the table, ready for that momentum to make it happen, so how can the Liberal Democrats resist that idea whose time has come?
Ian Swales (Redcar) (LD)
Is the shadow Minister going to acknowledge measures such as the raising of the tax threshold, the huge cut in pension tax relief and the huge rise in capital gains tax which have taken place under this Government? In a debate entitled “Tax Fairness” is his proposal really the only measure that his party could come up with?
Chris Leslie
The mansion tax is not our only measure, but is an important one and we think it is necessary. I had thought that the hon. Gentleman supported a mansion tax. It is there on the table and it cannot be put in simpler terms—it is a one-line motion.
Mr David Winnick (Walsall North) (Lab)
Is there not a contrast between the opposition of the Tories, in particular, to a mansion tax and their wholehearted enthusiasm for a bedroom tax? Does that not show the class divide on their side?
Chris Leslie
Absolutely, and I think that the contrast between the political parties is becoming clear. Let us contrast the Government’s approach where they feel they can get away with levying higher and more punitive costs—the bedroom tax being a classic example—with the enormous windfall that those earning £1 million a year will be getting from the cut to the top rate of income tax in only a few weeks’ time. It is grotesque.
Ms Karen Buck (Westminster North) (Lab)
My hon. Friend may be aware of current estimates that 60% of high-value properties in central London go to overseas buyers, and Conservative MPs, when they are being thoughtful, recognise that that is a serious problem. So he is right to look at the issue of high-value property taxes and getting a balance. Does he agree that there is scope to ensure that the small minority of people who have lived for a long time in areas with escalating property values and who are asset-rich but income-poor can be completely protected within a scheme such as he outlines?
Chris Leslie
It is entirely possible to design this scheme in a way that deals with those exceptional circumstances—the Liberal Democrats have said so. It is an important question that has to be addressed, and the Deputy Prime Minister answered it in his “Call Clegg” radio slot on London’s Biggest Conversation, which I know is becoming a popular, regular and welcome fixture in the media diary. He said that individuals in such circumstances might be able to defer payments until the house was sold or to “leverage” the value of the property by remortgaging. I am not sure that that strategy provides the complete solution to the conundrum, but I do think that those in the Treasury should turn their minds to how to tackle these rare circumstances. That is why our motion calls on the Government to bring forward proposals for us to consider in more detail.
Mr Rob Wilson (Reading East) (Con)
I have been listening carefully to what the hon. Gentleman has said so far. He seems to have two tax policies that are not yet full commitments, one of which comes from a failed previous Government who brought us to the edge of economic collapse and the other of which comes from the Liberal Democrats. Is that really a great recipe for success on economic policy?
Chris Leslie
I do not think the hon. Gentleman should be so partisan; he should look at the issues on their merits, as we have tried to do in our motion. We have stripped out all that party political rhetoric and put clearly on the table the proposition, “This House supports the principle of a mansion tax.”
Chris Leslie
We urge all Members, including the hon. Gentleman to whom I am about to give way, to support that proposition.
Chris Leslie
That was one of the solutions that the Deputy Prime Minister suggested. I think it is entirely possible to find solutions to deal with those rare circumstances. However, I ask the hon. Gentleman: what is he saying to all of his constituents who, like mine, face having to move out of their properties because of the bedroom tax that his Government are introducing in a few weeks’ time? Many of those people are probably still not aware what charge is going to hit them when the change to housing benefit comes in. He is expecting great upheaval—people having to move house—at one end of the spectrum but when the Deputy Prime Minister comes up with a particular solution his response is, “Oh no, that is entirely unworkable.” We need to get the Treasury and the Office for Budget Responsibility to think about these things in a detailed way.
We had hoped that Government Members would support the motion, but what does the Government amendment say? I urge hon. Members to pick up their Order Paper, turn to the relevant page and just look at the Government amendment—this pantomime amendment, whose logic is contorted. It proposes to delete the whole proposition of a mansion tax and replace it with a pleading defence of the different views held by different parts of the coalition. It would remove the resolve to back a mansion tax and retreat into a messy fudge as a means—I mix my metaphors—of brushing the whole issue under the carpet. It is an amendment that seeks to face both ways yet go nowhere. It is a push-me, pull-you amendment, and the Government should be deeply embarrassed at the drafting, which of course descends, as we can see, into a general attack on the Opposition.
Liberal Democrats need to grow some courage and stand up for themselves, for once. This measure is not just a bygone pledge from their now notorious 2010 manifesto; the Deputy Prime Minister made it the centrepiece of his leadership in the past few weeks. Kicking off the Eastleigh by-election last month, he called for
“taxes on mansions, tax cuts for millions”.
That is what is in our motion. He said:
“The mansion tax is an idea whose time has come.”
He said that opponents of it should
“join with the Liberal Democrats…seeking to make our tax system fair.”
Indeed, others have joined in that chorus.
On this Sunday’s “The Andrew Marr Show” Lord Ashdown said it would be “weird” if the Liberal Democrats did not vote in favour of the tax. The “Sunday Politics” had an interview with the Lib Dem president, the hon. Member for Westmorland and Lonsdale (Tim Farron), in which an interesting exchange took place. Andrew Neil said:
“It’s a simple motion. Will you vote for it?”
The hon. Gentleman said:
“Well, let’s say, I mean, when all’s said and done, that is pretty much Liberal Democrat policy”.
Andrew Neil then asked:
“Well, what part of that motion do you disagree with?”
The hon. Gentleman said, “None of it.”
Nic Dakin (Scunthorpe) (Lab)
Does my hon. Friend agree that the Liberal Democrats are in danger of being highly consistent? Having been against tuition fees they voted for them; having been against a bombshell VAT increase they voted for it; and now they appear to be for a mansion tax but are going to vote against it.
Chris Leslie
I hope that my hon. Friend is not accusing the Liberal Democrats of consistency in their inconsistency—that would be a step too far.
Caroline Lucas
The hon. Gentleman is talking about courage, so I wonder how far the official Opposition’s courage will go. Some £4.5 trillion is kept by the top 10% of wealthiest households, so the £2 billion that would be raised by a mansion tax, although welcome, is a tiny amount and would hardly bridge the chasm between the super-rich and the poorest. Given that, would the official Opposition support a genuine wealth tax?
Chris Leslie
I would be very interested to see the hon. Lady’s proposition, but I do not think it is necessary to go for that general approach that she takes. I say that because there are targeted ways in which we could try to build consensus on a property tax for high-value properties over £2 million and then use the revenue to help the vast majority of lower-income and middle-income families. That is the proposition before us today.
Mr Dennis Skinner (Bolsover) (Lab)
It was interesting to hear the remark by the Green Member of Parliament about the wealth tax and being brave. I looked at the list of candidates who stood at Eastleigh, where I thought it would be wide open for a Green to find a way through, and found that the party did not even put up a candidate—what courage!
Chris Leslie
We digress slightly, but that is an interesting observation. I did not realise that the Green party had fled from that Eastleigh by-election.
Mr Robinson
Before we leave the subject of the hapless Liberals and consistency, does my hon. Friend agree that they do show consistency in their inconsistency and in their insincerity—that is the only consistency we can identify?
Chris Leslie
There is time for those sinners to repent, and I hope that in three hours’ time they will re-examine the motion, seriously consider the outrageous stretch in the amendment, stick with their principles and support the motion. I accept that there is a need to flesh out the details of how the mansion tax arrangement would be designed. We need to commission the Treasury and the OBR to work on those particular details.
Some have suggested building on existing property tax systems, although that is not wholly straightforward. In New York City, apparently, a £2 million property owner can pay about £22,000 of property tax, but Lord Oakeshott, who, as we know, is a leading light in the Liberal Democrat firmament, argues against council tax banding as one way of approaching the question. He says:
“If you just put on one or two council tax bands, you can't make the superrich pay their fair share”.
Some Conservative Members, such as the hon. Member for Bognor Regis and Littlehampton (Mr Gibb), complain that a mansion tax is impractical, that it cannot be done and that it would be an administrative nightmare, but I simply refer them to their own Front Benchers. Unbeknown to most Government Members, Her Majesty’s Treasury is, with very little fanfare, actively talking about the viability of an annual charge on high-value residential properties and launched a consultation document last May entitled, “Ensuring the fair taxation of residential property transactions”. It contains a whole chapter about introducing an annual charge, as the Treasury calls it, as part of the regime to tackle the avoidance of tax on high-value residential properties, albeit for properties enveloped in non-natural person terms—in other words, those owned by a company or by partnerships or investment vehicles.
Let me draw the attention of the House to some sections of that Treasury publication, because it suggests that a mansion tax is entirely feasible. On page 8, it states:
“The aim of the new annual charge is both to deter avoidance and to ensure the owners of high value residential property pay their fair share of tax…The annual charge will be introduced in Finance Bill 2013.”
So, the measure is coming in the forthcoming Finance Bill at the other side of the Budget. The document states:
“The interest to which the charge will apply will be the freehold or leasehold interest”
and that the annual charge will be
“applied separately to the freehold (if valued over £2 million) and the leasehold (if valued over £2 million…)”.
It goes on to state that the value of the property interest is proposed to be the value determined on 1 April 2012 and, interestingly—let us remember that the document comes from the Treasury—states:
“Property valuations for the annual charge will be self-assessed by the persons liable to the charge and submitted to HMRC as part of their annual charge tax return. HMRC will have powers to enquire into returns and also to make assessments so that non-compliance can be effectively challenged… Properties will be re-valued every five years…The valuation required will be an assessment of the ‘market value’”.
It even goes on to give a helpful list of four bands of annual charge on properties worth more than £2 million. The Treasury knows in its heart of hearts—I do not know whether it has shared this with hon. Members—that the concept of a mansion tax has some feasibility.
Huw Irranca-Davies (Ogmore) (Lab)
That is tremendously welcome news, because clearly neither of the Government parties will vote for the amendment. I understand that the amendment suggests that the Liberal Democrats are in favour of the mansion tax but will vote against the motion, whereas the Conservatives are definitely against it so will on no account be voting for it. If they are both in favour of the tax, they can just support our motion.
Chris Leslie
I hope that the scales will fall from their eyes and they will see the light, but I do not know whether they will.
Chris Leslie
Perhaps the hon. Gentleman is changing his mind because of the weight of my argument.
Mr Wilson
The hon. Gentleman is being very generous and I thank him for giving way a second time. He might not remember that the Liberal Democrat proposals for a council tax were at one stage for properties worth over £1 million, not £2 million. Is not the concern that a Labour Government, desperate to raise tax, would row back to £1.5 million or £1 million? Can he give a cast-iron guarantee that there would be no rowing backwards from a figure of £2 million?
Chris Leslie
Absolutely. That is not our proposal, as we think that it is possible to develop a mansion tax proposition for properties worth £2 million and above. We could develop and build on the Treasury’s suggestions for how it might work and we hope also to build on the carefully thought through calculations made by the Liberal Democrats.
Andrew Miller (Ellesmere Port and Neston) (Lab)
Would my hon. Friend like to speculate on why the Government chose not to refer to the Treasury document in their amendment?
Chris Leslie
Let us be realistic: the amendment was getting rather long-winded, as it is about four or five times the length of the motion. In fact, it looks like a bit of a trashing exercise and does not add to the substance of policy choices before the House. Our view is that the circumstances are very simple.
Mr Jim Cunningham
My hon. Friend has been very generous in giving way. Does he think that now the Liberal Democrats have been exposed, they will probably hold off from voting against our proposals tonight but that when the Government bring forward their proposals, the Liberal Democrats will be in the Lobby with them?
Chris Leslie
Yes—especially on issues such as the bedroom tax, tax credit cuts and increase in VAT. Of course, let us not forget the tuition fee decisions that the Liberal Democrats have made. That is a matter for them, however. They must account to the electorate and they must go back and explain how they have voted today.
Let me say a little about how we would use the money raised from the mansion tax. Our view is that a fair tax system should include a 10p starting rate of income tax. We support the increases in the personal allowance, but a 10p band would mean a different tax rate for those on middle and lower incomes from that for those on higher incomes, helping the move towards a fairer tax system. Some argue that the 20p rate is adequate, but I believe that a steadier incline moving from zero tax to 10p and from 10p to 20p could be the bedrock of a more progressive tax system, sending out an important signal that tax cuts for working people are a priority.
The 10p starting rate would provide a tax incentive to enter work, especially for those on lower wages. It was a mistake to remove the 10p rate in 2007, even though it enabled the then 22p basic rate to be reduced to 20p, where it stands today. Reintroducing a 10p rate would be the right thing to do and, if the Liberal Democrats are correct that the mansion tax could raise £2 billion, the Chancellor could make that change next week in the Budget.
Just as there is support for a mansion tax from Members on the Government Benches, there is ample support for the return of a 10p starting rate for income tax, although strangely some of those Members have chosen not to take their place in the Chamber today. The hon. Member for Harlow (Robert Halfon) spoke about the 10p rate idea in his recent Adjournment debate, arguing that
“restoring the 10p rate would help the coalition to counter the war cry of its political opponents that it is only interested in cutting taxes for millionaires. It would prove to the public that ‘lower taxes for lower earners’ is not just a soundbite but that it can be a reality…the policy would be popular…it would be a symbol of the Government’s economic mission and…it would help to tackle the desperate stagnation in incomes that Britain has suffered”.—[Official Report, 22 January 2013; Vol. 557, c. 34-38WH.]
That argument was made by a Conservative Member.
Duncan Hames (Chippenham) (LD)
The hon. Gentleman is right that the previous Government were mistaken to scrap the 10p rate, but under this Government the income that would previously have been charged at the 10p rate is now charged at a 0p rate. If he supports the increases in the personal allowance, why is support for those increases totally absent from his motion in a debate on tax fairness?
Chris Leslie
We wanted to focus on the mansion tax proposition, because the hon. Gentleman’s Business Secretary suggested that we keep the motion simple and that if we did so, the Liberal Democrats would support it. That is what the Business Secretary said. We support the changes to the personal allowance, but in our view it is important to have that graduated step up. People go from the zero rate to the 20p rate and it is important to consider introducing a more graduated step as a work incentive, which is something we ought to have in the system.
Duncan Hames
Why does the hon. Gentleman think that a 10p tax rate is a greater incentive to go into work than a 0p tax rate?
Chris Leslie
The hon. Gentleman seems to think it is all or nothing, but we think that a progressive tax system argument needs to be developed. If people move from paying zero tax straight to 20p, there is a cliff edge. We think it is important to consider smoothing the transition to work and making work pay more effectively. That is not part of the motion; it is our preference for what we would do with the revenues from the mansion tax.
Chris Leslie
I will give way to the hon. Gentleman once more, if he wants to say whether he agrees with the text of our motion—not the flim-flam about the amendment. Does he agree with the text of our motion?
Duncan Hames
I will be voting for the amendment; it states Liberal Democrat policy, which I support. The hon. Gentleman has accepted that he wants to do something very different from us with his mansion tax, and on that basis I am not happy to support him.
Chris Leslie
What more can I say? I thought the hon. Gentleman supported the proposition in our motion, but clearly he does not. However cynical and defensive he may feel, Liberal Democrats should at least acknowledge that a principle of fair taxation is at stake today, and that it ought to transcend party differences as we try to create a more just society.
Geraint Davies (Swansea West) (Lab/Co-op)
Does my hon. Friend share my fear that the Liberal Democrats may become an endangered political species? Before 2010, they were very popular in Swansea but following the tuition fees, VAT and deep cuts turnaround, they lost the council. If they do not support the mansion tax, which was part of their manifesto, does he not think there is a real danger that we will never see them again in the political sphere?
Chris Leslie
It would be a great loss for the House to lose some of the skills and contributions of Liberal Democrat Members. Perhaps at our next Opposition day debate a Liberal Democrat protection order should be on the agenda. They may cling on in a number of ways in different places.
I am surprised that the Liberal Democrats do not support the mansion tax proposition. It is hardly surprising that Conservatives do not support the idea. After all, half of them are in politics to defend the wealth of the wealthiest, and the other half will probably need to declare an interest before they speak on the issue.
Let us consider the mansion tax in relation to the other tax benefits that the richest 1% receive. If the Lib Dem design for a mansion tax were to be enacted, it would just recoup a mere fraction of the money being given away to high net worth individuals in the millionaires’ tax cut from April—the first of too many examples of unfairness. In the last Budget, the Chancellor took the decision to hit pensioners with the so-called granny tax, which is more accurately described as a freeze on the old age personal allowance and has caused widespread disgust, especially because the Government chose to use the money to fund a cut in the higher rate of income tax. That is not fair and it is not right, and it certainly should not be part of the society we want to build. Even Liberal Democrats must know that it is deeply resented across the country, yet the Government continue to clobber lower and middle-income families, whether by freezing the maternity pay of new parents, taking child benefit away in a fiendishly complex tax assessment process or reducing the value of the tax credits on which so many working people rely. They cannot even ensure that the money men pay their fair share, with a bank levy that for two years running has undershot the supposed target of £2.5 billion that the Chancellor claimed it would collect.
On maternity pay, the bedroom tax and the cuts to tax credits, the Government have their priorities all wrong. They are handing a tax cut to millionaires when millions of hard-working families pay more. Voting for the motion is an opportunity, especially for the Liberal Democrats, to tell the Government that they need to rebalance their priorities.
Jim Shannon (Strangford) (DUP)
I thank the hon. Gentleman for introducing an admirable motion. Does he agree that it is not just about tax cuts for millions of people on middle and low incomes, but that it could also be an incentive for first-time buyers to get on to the first rung of the ladder? They do not want to buy a mansion, just a first house. Should the money be used for that too?
Chris Leslie
The hon. Gentleman makes an important point about finding ways to help those who aspire to own their home. I am certainly interested in discussing options for how that might be achieved, because it is important. It is becoming very difficult for people in those circumstances. They are the home owners that we really need to focus on. It is amazing that so many Government Members want to defend the massive super-wealth of those with properties of £2 million and above. All we want is that they pay their fair share, as the motion states in plain and simple terms. We are giving a timely pre-Budget opportunity for the House to express support for or opposition to a mansion tax as
“part of a fair tax system.”
It could not be more straightforward. The country is crying out for a tax system that focuses on helping the majority of the public and ensures that the wealthiest 1% pay their fair share.
First and foremost, Government Members have a duty to their constituents, who will be astonished if their MP flunks this opportunity to make real change because they are suppressing their principles in a bid to cling on to power.
Mr Gauke
I am not going to debate at length the spare-room subsidy, which is an area of public spending constraint that we need to engage in. There is a genuine issue in respect of the asset-rich, cash-poor that the hon. Member for Nottingham East appeared to recognise and which would have to be addressed.
The mansion tax would be administratively burdensome for HMRC to operate, not to mention intrusive for the person having their home inspected. We would have concerns that in Labour’s hands, the starting level for such a tax would not stay at £2 million for very long. What began as a mansion tax would soon become a homes tax. To coin a phrase, it would become a tax for the many, not for the few.
Chris Leslie
I am surprised the Minister thinks that “the many” own properties worth £2 million and above. I wanted to ask him about the Treasury’s own proposition that residential properties of £2 million and above, albeit owned by a company, should have an annual charge based on a self-assessed valuation, with a banding process. Is he saying that his own policy is administratively burdensome?
Mr Gauke
Let us be clear. One of the weaknesses in the tax system that we inherited was the fact that people were able to walk around the paying of stamp duty. On very valuable properties, it was all too easy for people to arrange their affairs thorough corporate vehicles and not pay stamp duty. In the last Budget this Government introduced measures that will deal with that enveloping and deal with one of the unfairnesses in our tax system. One of the ways in which we are going to do that, as well as a high stamp duty charge for properties held in corporate vehicles, is to bring in an annual residential property tax. That is focused only on properties worth more than £2 million held by a corporate vehicle. It would apply to only 6,000 properties, we estimate. It is a very narrowly focused policy that will enable us to deal with an area of avoidance that was allowed to carry on for far too long under Labour.
Mr Gauke
My hon. Friend makes a very good point. There is no explanation that civil servants can give for that. An explanation and an apology are due from the Opposition, but we await either of those. I think that they persist in the view that there was no structural deficit even before the crash—
Chris Leslie
There was certainly a global financial crisis. But can the Minister confirm that under the current Chancellor of the Exchequer, national debt has risen from £811 billion to £1.111 trillion? Has debt risen by that much—yes or no?
Mr Gauke
Debt is the accumulation of deficits. We inherited the largest deficit in our peacetime history, and every measure that we have taken to reduce that deficit the Opposition have opposed, and then they complain that debt is rising. That is the most absurd position. We are criticised for not borrowing enough, and then we are criticised for our debt going up. There is no consistency or credibility in the Opposition’s position, just as there was no credibility or consistency in their treatment of low-paid workers. In government, they raised the rate of income tax; in opposition, they make promises that they will cut it. When we remember the reality, why should those on low incomes ever trust Labour again?
Mr Gauke
No, I think my hon. Friend would be wrong to reach that conclusion from what I have said. There is an interesting debate on the balance between property and income taxes, however, and I note his suggestion in that context.
May I now return to the topic of the 50p rate, as I know the hon. Member for Nottingham East likes to focus on it? The Opposition may think that in this day and age 50p is the least the wealthy should pay in income tax. I want to put to them the question raised earlier by my hon. Friend the Member for West Worcestershire (Harriett Baldwin). In less than four weeks the 50p rate will have gone. The additional rate will be 45p. Will Labour seek to reverse that? I am happy to take an intervention on this point. Will Labour seek to reverse that after the next election?
Chris Leslie
The Minister is asking the Opposition what is going to happen in two years’ time, but can he tell us what will happen in next week’s Budget?
Mr Gauke
That is very amusing, but of course I am not going to do so. I am fairly confident, however, that at the next general election the Conservative party will not be advocating a 50p rate of income tax. The hon. Gentleman is calling for a 50p rate of income tax, however. He will not tell us why. He is now saying, “Well, we don’t know what the economic circumstances will be.” That is fair enough, but does he think that his party will make a manifesto commitment at the next general election to introduce a mansions tax? Is that a commitment? I am happy to give way again.
Chris Leslie
It is very simple: now, in 2013, we can see the deficit rising and getting worse and we can see borrowing increasing, growth flat-lining and living standards falling, and the Minister is asking us to predict what we are going to do in two years’ time. How on earth do we know what other horrors are in next week’s Budget box or, heaven forfend, in the spending review of 26 June? Can he tell us what is in that spending review?
Mr Gauke
This is starting to get interesting, because we have now learned that the Labour party has moved a motion trying to persuade Liberal Democrats to vote in support of a mansion tax, yet Labour will not confirm whether it thinks a mansion tax is a sensible policy for the next Parliament. The position of the Liberal Democrats is clear and the position of the Conservatives is clear; what is not clear is whether the Labour party, after all, supports a mansion tax. Will it be in its manifesto? That is a perfectly clear question.
Stephen Williams
Yes, it was. I said it on “Westminster Hour”, on Radio 5, on the “Daily Politics” show, and on other programmes as well. Indeed I could have written it myself. However, I know precisely what I mean by a mansion tax, but we have not heard spelled out in any detail what Labour Members think it should be. I know what I mean by a tax cut for low and middle-income earners, because that is what this Government are doing while we are in office. I am entirely clear what I mean by the text of the motion; the trouble is that it has not been exactly clear what Labour Members mean by their words.
Chris Leslie
We support the proposition that the hon. Gentleman has elucidated about a mansion tax, so, okay, we are clear about what we mean by a mansion tax. When the Business Secretary said that if the motion were
“purely a statement of support for the principle of a mansion tax, I’m sure my colleagues would want to support it”,
was he wrong?
Stephen Williams
The Business Secretary is never wrong; he is a very wise man. I do not see any great difference between what he said and what I said on the record several times yesterday and over the weekend. We know what we mean by a tax for low and middle-income earners. We know what Labour Members mean as well—a reintroduction of the 10p tax rate, and that is why we disagree with them.
Mr Foster
I may return to the hon. Lady’s comments in a second.
We are supportive of the motion because we agree with Adam Smith, the father of free market economics. He supported higher taxes on property to reduce taxes on more industrious endeavours. We think it unfair that the richest people in the country pay the same council tax on their multi-million pound palaces as a family in a three-bedroom house in the suburbs. We agree on that.
Both parties in the coalition have been open about our disagreement, but the Opposition’s attempt to drive a wedge between us is infantile. Both parties know where we stand, and the public are clear about it too. The hon. Lady has to remember that all coalition tax policy is made by agreement between the Conservatives and the Liberal Democrats, and the mansion tax is an issue on which we simply could not agree. However much Liberal Democrats want a mansion tax, we know that the country’s economic future would be in severe jeopardy if the coalition fell apart on this issue. The country’s future is far too important for us to engage in the Opposition’s petty political games.
Chris Leslie
On the point about putting the coalition first, to save us a great deal of time and effort, can the Minister tell us if there is any circumstance in which he envisages that he could ever support any motion tabled by the Opposition?
Mr Foster
As I said, this is the first time in three years that we have had any positive proposal from the Opposition in the Chamber. If the hon. Gentleman comes forward with further proposals to help deal with the economic mess that his Government left us, we will seriously consider them.
Financial Services (Banking Reform) Bill
Chris Leslie Excerpts(11 years, 8 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Greg Clark
I am disappointed that my presence here does not satisfy the hon. Lady. The Chancellor trusts his Financial Secretary to speak at the Dispatch Box. I do not know how it is in the Opposition.
Chris Leslie (Nottingham East) (Lab/Co-op)
Will the Minister at least tell us where the Chancellor is? Is he watching on television? Is he doing some shopping or knitting? What is going on? Where is the Chancellor right now?
Greg Clark
I should have thought that the hon. Gentleman would reflect on the fact that the Chancellor has many serious responsibilities and he is discharging them at the moment.
Let me talk about the process that we have followed, then I will address in some detail the particular aspects of content. The process that we have followed has sought to come up with the best possible way to address the dilemma that I described, and to do so by building, as far as possible, a broad consensus. That may not be there—yet—on every particular, but I think most Members would concede that Sir John Vickers’ commission has come closer to achieving that than many people thought possible.
The Independent Commission on Banking was established as soon as possible after the general election, in June 2010. It took extensive evidence before publishing an issues paper in September 2010 and an interim report in April 2011, on which it consulted, before publishing its final report in September 2011. The Government gave, and consulted on, an initial response in December 2011, before issuing a White Paper for consultation in June 2012. In the light of the responses to the consultation, a draft Bill was published last October and the Parliamentary Commission on Banking Standards was asked to subject it to pre-legislative scrutiny. The parliamentary commission’s report was published on 21 December last year and many of its recommendations were accepted in the Bill published in February and laid before the House.
At the time of introduction, I made it clear from the Dispatch Box that we would table further amendments in response to the commission’s future recommendations as the Bill proceeds through both Houses. I hope that Members on all sides would agree that this has been an exceptionally extensive process of both policy development and scrutiny of emerging proposals, and I repeat what I said to the right hon. Member for Wolverhampton South East (Mr McFadden) last month, that I will personally insist on taking a constructive and open-minded approach to the views of this House throughout the Bill’s passage. To the extent that the Bill reflects the unanimous views of Parliament, it is immeasurably strengthened.
Greg Clark
That was not a set of particular recommendations in the reports that were commissioned, but I know that it is of some interest to members of the parliamentary commission and, as I will go on to say, we stand ready to consider their further recommendations, and I dare say they might have something to say in that respect.
Chris Leslie
I want to pick up on the Minister’s statement that he wants to take this parliamentary process seriously and listen to the debates. If that is the case, why on earth has he ignored the clear recommendation of the Parliamentary Commission on Banking Standards that there should be a three-month gap between the publication of the Bill and the Committee stage in the House of Commons? We will not have a Committee stage at a time when we can fully take account of the final recommendations of the commission. Is that not totally contemptuous of the Commons parliamentary procedures? Perhaps that is why the Chancellor has not turned up for the debate.
Greg Clark
I just said that I intend to be constructive and to pursue the approach that we have taken. If the hon. Gentleman will be patient, I will respond shortly to that particular recommendation.
Let me summarise the principal contents of the Bill where they reflect the advice of one or both of the commissions, before I set out the areas in which we take a different view. One of the central recommendations of the Independent Commission on Banking is that the UK banks should ring-fence
“those banking activities where continuous provision of service is vital to the economy and to a bank’s customers.”
That recommendation has attracted widespread support, and the Bill creates the basic architecture of the ring fence by making it an objective of the regulator—the Prudential Regulation Authority and, if necessary, the Financial Conduct Authority—to secure the continuity of core services by preventing ring-fenced bodies from exposing themselves to excessive risks, by protecting them from external risks, and by ensuring that, in the event of failure, core activities can carry on uninterrupted, the so-called resolution objective. The core activities are defined, as recommended by Vickers, as the taking of retail and small and medium-sized enterprise deposits and overdrafts, but they can be added to if required through secondary legislation.
In response to the parliamentary commission’s recommendations, the Bill is now clear that to be ring-fenced means that the five so-called Haldane principles of separation should be followed, namely that the ring-fenced bodies should have separate governances, including boards; remuneration arrangements; treasury and balance sheet management; risk management; and human resource management. As the parliamentary commission has also recommended, directors of banks will be held personally responsible for ensuring that the ring-fence rules are obeyed. The parliamentary commission also made a recommendation that the ring fence should be electrified. That is to say that, if the rules are breached, the banks should be forcibly split.
While the Bill is before the House, the Government will bring forward amendments to provide a power to require the full separation of a banking group, where, in the opinion of the regulator and the Government, such separation is required to ensure the independence of the ring-fenced bank. As hon. Members know, the parliamentary commission made a further recommendation for a power to trigger separation of the entire system, which I will come to shortly.
Greg Clark
I cannot do that, but I repeat my commitment that this House will have the opportunity fully to consider the amendments proposed by my hon. Friend’s commission. He has not yet produced his report, so we do not know what he has in mind, but I have been as clear as I can at the Dispatch Box that there is no intent to avoid scrutiny; quite the opposite.
Chris Leslie
The Minister talks in very emollient tones, because he likes to sound moderate, but this is a series of instances of contempt for the House of Commons’ powers and our ability to scrutinise the Bill. The Government ignore the recommendation of the parliamentary commission, they then try to whisk the thing out of Committee before we have even had a chance to consider the recommendations of the commission, and now, when asked for a mere two days on Report, the Minister will not even give that commitment. The Chancellor is not here, either. In what seriousness do the Government hold this Bill? There is a sense that it is just part of a rubber-stamping exercise for them.
Greg Clark
The hon. Gentleman will discover that through our debates in Committee he will have plenty of opportunity to scrutinise the Bill. When we have the commission’s recommendations, if we think that they need more than a day on Report then I will make the case for that. Whatever happens, I will ensure that this House has the opportunity fully to consider these matters.
Chris Leslie (Nottingham East) (Lab/Co-op)
I am sorry that the Chancellor has not been able to join us for the debate. The Bill may be called the Clark-Javid Act, but it will certainly not be called the Osborne Act given his disappearance.
As the Financial Secretary said, the global financial crisis has cast a long shadow. Our recovery to pre-crisis levels of economic output has still not been achieved because of the drag anchor of the Chancellor’s austerity programme. The high-risk, high-reward culture of worldwide banking systems required a taxpayer bail-out; profits were retained privately in the good times, but losses fell on the shoulders of the public when things turned bad. We cannot allow a repetition of those risks to the taxpayer in future, which is why banks must be reformed in the UK, across the EU and across the globe.
The Bill has its roots in the 2009 G20 Pittsburgh summit when world leaders decided to insist on tougher loss-absorbing capital rules for banks. Britain’s financial services sector is larger than most, and with the greatest financial centre on the planet in the City of London we must take additional steps to guard against the risk of future collapse. The Financial Services Act 2012 sought to address regulatory shortcomings, but the jury is out on whether the Bank of England will be inherently stronger than the Financial Services Authority.
The advent of the FSA in 1998 was a step forward from the dark ages of self-regulation, but that regulatory framework was not capable of policing the extreme risks and dangers of a rapidly expanding global banking sector, interdependent from country to country. We agree with the need to introduce prudential regulation and greater systemic oversight, but that theory has not yet been translated into reality. Although there were regulatory shortcomings, we should be in no doubt that primary culpability rests with the banks, which should not be allowed to get away without reform.
The Vickers Banking Commission concluded that structural firewalls are needed to supplement capital safety buffers, which is undoubtedly true. With this Bill some of the legislative underpinnings for those firewalls will gradually take shape, and to the extent that it enables the ring-fencing of retail from investment banking, we welcome that. However, the Bill merely provides the scaffolding for the basic building blocks that will come at a later date, largely in secondary legislation by Treasury order. It focuses only on structural scaffolding, not on wholesale reform of the standard and culture of the banking sector—something we hope that the cross-party Parliamentary Commission on Banking Standards will help focus on to help fortify the Bill in due course. As the Banking Commission points out, it is perhaps not the beginning of the end of banking reform, but the end of the beginning.
The timing and process for consideration of the Bill, and the programme motion before the House, propose a ridiculously compressed Commons scrutiny process and for the Bill to be out of Committee by 18 April. As I said earlier, that shows total disregard for the parliamentary process and flies in the face of the Banking Commission’s careful recommendations. The Bill is already a cursory framework because it is largely a string of enabling powers for the Treasury to arrange for ring-fencing through secondary legislation. The Government established the Parliamentary Commission on Banking Standards to ensure that recommendations could be added to the Bill. So far, however, we have had only part 1 of that commission’s points about structural questions.
The Government now expect the Commons to consider this partial Bill in Committee without having the final report on standards and culture from the parliamentary commission. That is treating the Commons as though this is merely a tick-box exercise and a part of the process that does not matter, and there is no need to scrutinise the final proposals. Dropping in late additions to the Bill on Report or—more likely—during consideration in the Lords, is not an appropriate way to legislate. As I said, the parliamentary commission recommended a three-month gap between publication of the Bill and commencement of the Committee stage, but the Government rejected that idea.
Mr McFadden
My hon. Friend said, I think, that the timetable was inappropriate. Does he agree that it may also be unwise, given that if the amendments are moved in the other place, the first three speakers in that debate are likely to be the former Conservative Chancellor, the former Chair of the Treasury Committee, and the Archbishop of Canterbury?
Chris Leslie
Recently I have been looking at a number of Thatcher quotes, given that the Prime Minister mentioned TINA—there is no alternative—which hon. Members will remember. Another famous quote from Lady Thatcher was, “Always leave yourself a way out”, and I wonder whether the emollient approach taken by the Financial Secretary is because he realises that when there is inadequate scrutiny in this House, the questions go to the other place and it is likely that the Government will have to back down on some of these matters. Perhaps he is listening to the advice of Baroness Thatcher on some of these issues.
It is not adequate to expect, as the Minister suggested, that we will be able to scrutinise the Bill sufficiently on the Floor of the House on Report. As he knows, with the knives that come into effect during considerations on Report, one often finds that amendments are put without a full debate. It is a different process from the Commons Committee stage. The programme motion should reflect the right of the Commons to scrutinise the full version of the Bill, and that is not the version we have before the House today. If the Government were serious about this issue, the Chancellor would be here. Clearly, our downgraded Chancellor has downgraded the banking reform Bill.
Andrea Leadsom
The hon. Gentleman has mentioned a few times that the Chancellor is not here. Does he regret that his former boss, the ex-Prime Minister, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), is not here to make a sincere apology to the House for his role in the mess that put us in the place we are in today?
Chris Leslie
I presume that is almost an apology for the anti-regulatory approaches historically taken by the Conservative party. I do not seem to recall Conservative Members ever saying, “Please, more regulation! Let us have it now. This is insufficient; we must regulate far more firmly.” It does not seem that that was ever part of the lexicon in the approach taken by Conservative Members.
Alun Cairns (Vale of Glamorgan) (Con)
In the hon. Gentleman’s preamble, he talked about the shifting of powers to the FSA, and I was somewhat taken aback that he called it a step forward. Would he like to repeat the fact that he supported that as a step forward, or would he like to apologise for that move?
Chris Leslie
The Conservative party, I think, voted in favour of the creation of the FSA. I think even the Conservative party recognised at the time that moving from self-regulation—[Interruption.] I apologise if I have got that wrong. It may well have been that it opposed the legislation because it introduced statutory regulation. The state of affairs that existed before was self-regulation—the regulatory environment was not there.
Sir Peter Tapsell (Louth and Horncastle) (Con)
In the 1997 debate, I strongly opposed the establishment of the FSA, with its tripartite regulatory structure. I predicted it would be an absolute disaster, and it has been.
Chris Leslie
Without in any way casting aspersions on the motives of the Father of the House in voting against setting up the FSA, I wonder whether he voted against it because its regulatory stance was too weak, or whether he was anxious at the time that its regulatory approach would be overbearing. I suspect that Conservative Members know, in their heart of hearts. Were they really opposing the creation of the FSA because they thought that the strength of the regulatory arrangement would not be sufficient? Is that what they are really saying?
Sir Peter Tapsell
I opposed it, if I remember correctly, because I said that if the Treasury, the Bank of England and the FSA were all involved in regulation, they would all be quarrelling with each other and passing responsibility on to the other two when things went wrong. Those, I think, were almost the exact words I used, and that is exactly what happened.
Chris Leslie
Hindsight is a wonderful thing. All I say to the Father of the House is that we are now in a situation where we have a new Financial Conduct Authority, the Prudential Regulation Authority, the Financial Policy Committee and the Monetary Policy Committee. The Bank of England is of course still involved, and the Chancellor of the Exchequer will still have a number of powers. He may not have realised it, but the Government’s changes have not exactly simplified the regulatory environment. I digress. That was the Financial Services Act 2012, but we are addressing the Financial Services (Banking Reform) Bill in 2013.
Greg Clark
When I took over my role, I read the Hansard report of the November 1997 debate. I commend it to the hon. Gentleman because it makes it absolutely clear that we opposed the creation of the FSA in the form proposed because we predicted it would be a mess. The then shadow Chancellor, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley), said:
“The process of setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day.”—[Official Report, 11 November 1997; Vol. 300, c. 732.]
That is exactly what happened.
Chris Leslie
Conservatives have a tendency to try and rewrite history, but this really takes the biscuit. If the Minister is seriously saying that he would have preferred to have stayed with a non-statutory regulatory arrangement, which was the option available, he should stand up and admit it. He often asks where the apologies are, but we have accepted that we should have adopted a more prudential approach to regulation than the arrangements in the Financial Services and Markets Act 2000. It is now equally important, however, that Conservative Members recognise that regulation is a good thing, that we need regulation of the financial services sector and that they were wrong to prefer a self-regulatory, non-statutory environment. Until they do that, they will never really confront the demons that still exist within the Conservative party’s philosophy.
Mark Reckless (Rochester and Strood) (Con)
Surely, the argument is not about whether regulation is good or bad, but that the tripartite regulation was completely incoherent and led to a mess in the banking sector and the consequent recession that we are all paying for now.
Chris Leslie
I do not know whether the hon. Gentleman is telling the full story of what he truly believes about regulation. To listen to Conservative Members today one would think they were all keen market regulators. Perhaps the Conservative party has transformed—the Cameronian vision we have all been waiting for—but, as I understand it, it still regrets the regulatory encroachment on to the market in these matters.
Andrea Leadsom
Does the hon. Gentleman recall that back in 1995, when Barings went bust, there was not a run on a bank? I remember playing a very small part helping Eddie George, the then Governor, to call round international banks urging them not to allow a run on the banks in the following weeks. The reason was that he understood that he was entirely accountable for ensuring the integrity of the banking system. Is that not the point? When Labour came into power and created the tripartite system, it simply removed accountability from any one body. We are trying to return it to the Bank of England.
Chris Leslie
We will see what happens under the new Financial Conduct Authority, the Prudential Regulation Authority, the Bank of the England and the Chancellor. It is important that Conservative Members realise that self-regulation failed and that not having that statutory arrangement was no great thing. Eddie George was the Governor who said, “Let’s just trust the chaps at the desks to deal with these issues.” That was how banking reform was regarded during their tenure in office. But this is turning into a history lesson.
Stewart Hosie
Ten minutes ago, before the hon. Gentleman got dragged into a debate about how rubbish the tripartite system was—and it was—he was making a good point about the lack of time for scrutiny of the Bill. Not least, issues such as the one referred to some time ago—capital requirements for small building societies—took some time to emerge. Will he perhaps get away from the history of how rubbish the tripartite system was and continue to make the case for more time for proper scrutiny, so that those in the industry can tell us what they think of the final shape of the Bill?
Chris Leslie
For once, I am grateful to the hon. Gentleman for wanting to focus on the issues; it is important that we have enough time to look at the detail. It is also important to commend the work of the banking standards commission, which has done a phenomenal job so far. I will find today’s report of great use in the short Committee stage, because at least it has taken the rather helpful step of drafting suggested amendments that no doubt the Minister, I and others will be discussing in due course.
The banks have not changed sufficiently. The LIBOR scandal shifted the agenda away from the discussion about excessive risk taking in the financial services sector so that we are now talking almost about anti-corruption measures that need to be put in place. We have had the mis-selling of personal protection insurance and the fleecing of business customers with mis-sold hedging interest rate swap products, while the high-reward bonus season continues to roll on and on, with £600 million of bonuses at RBS sanctioned by the Government, despite a £5 billion loss, to take just one example, so why are they dragging their feet on reform?
Alison McGovern
Conservative Members point to times in history when things changed in banking. While my hon. Friend is talking about culture, is it not important to listen to those who were there at the time, such as the former Chancellor, Lord Lawson? He said of financial deregulation:
“When the Thatcher Government first took office in 1979 it inherited an economy beset by all manner of government controls…We judge these…regulations to be amongst the causes of Britain’s economic weakness and we wished to be rid of them.”
Does this story not go back much further? If we want to look at points in history, we might do well to look at the big bang, which changed the culture.
Chris Leslie
My hon. Friend is entirely right. Ducks go quack, cows go moo and Conservatives hate regulation of the market. It is part of their ingrained DNA.
Stephen Barclay (North East Cambridgeshire) (Con)
Will the hon. Gentleman give way?
Chris Leslie
I will make a bit of progress and give way in a minute.
There is not enough in the proposed legislation on the safety of the banking system, not enough to rebuild consumer confidence, not enough to reform the high-risk banking culture and not enough to support growth and create a banking system that serves the needs of our economy. Too often, Ministers sound as though they are acting like shop stewards for banking executives desperate to retain bonuses that are many multiples of their salaries. Instead, Ministers should roll up their sleeves and put the taxpayer, the consumer and the UK economy first.
I want to address some of the issues the Minister raised about the detail of the Bill. First, on banking safety and protections for the taxpayer, Labour believes that a reserve power for full separation is needed, not just the firm-by-firm approach that the Government have conceded. Stopping short on backstop powers will reduce the chances that ring-fencing will succeed. Ministers are ignoring the commission’s conclusions, claiming that it would be wrong to give the regulators full separation powers, but the commission is scathing in its report today, saying:
“The Government has erected a straw man which it has then successfully demolished, because we made no such recommendation”
in the first place.
It is clear that the commission wants a full separation power only after a full review and decision by Government and Parliament—perhaps it was being inadvertently misrepresented by the Treasury—so it would be far more sensible to legislate now, not just if one or two individual banks misbehave, but in case ring-fencing as a whole fails across the sector. Indeed, we see cross-sector failings, as LIBOR illustrates, so it is not enough to have a half-done backstop. Stopping short will deliver only half the backstop measures that we need and will have corporate lawyers across the City rubbing their hands with glee at the prospect of litigation against regulators who might want to intervene on a case-by-case basis. However, given the possible views of the other place, I suspect that the Government will eventually be forced to change their mind.
Let me turn to leverage and the risk-weighting of assets, which has been introduced as an antidote by regulators to the high-risk, high-reward culture that was pervasive in banks before the crisis. However, the risk-weighting process has been partial and, in some cases, self-defining by the banks, and in the EU the zero risk-weighting attributed to some palpably risky sovereign debts has brought the system into some disrepute. The Basel committee published new evidence in January highlighting the major variants between jurisdictions and banks on this issue. Regulators and the Bank of England need to get a grip of this, but as a counter-balance we also need protections against the over-extended vulnerability of bank balance sheets. That is why the leverage ratio powers need to be clearly set out in the Bill and phased in ahead of the European Union plans for the end of this decade, which is one of the main recommendations and conclusions of the Vickers report.
Mr Love
Vickers was absolutely clear in his evidence to the commission about the need for a higher leverage ratio, as were the current Governor of the Bank of England and the forthcoming Governor. With such evidence presented to the commission, we wonder why the Government simply refuse to listen.
Chris Leslie
My hon. Friend is spot on. A bank’s leverage is the ratio of its assets to its equity capital. Its equity is equal to the value of its assets minus the value of its liabilities. A higher leverage ratio magnifies returns because any growth in the assets will be proportionally greater if equity is thin. The corollary, however, is that any losses are also magnified if leverage is greater. Such a bank’s equity can be wiped out by a smaller shock than would wipe out the equity of a less leveraged institution.
Vickers recommended a 25:1 leverage ratio for systemically important banks—in other words, 4% of equity capital—but the Chancellor has dismissed that proposal. The parliamentary commission says that it is “not convinced” by the Government’s decision to reject Vickers’ recommendation to limit leverage in that way, and that it
“considers it essential that the ring-fence should be supported by a higher leverage ratio, and would expect the leverage ratio to be set substantially higher than the 3% minimum required under Basel III.”
Jesse Norman (Hereford and South Herefordshire) (Con)
Will the hon. Gentleman explain why the average leverage ratio for the banking system, which had been 20 times for the 40 years before 2000, went up to 50 times in the seven years between 2000 and 2007, according to the Independent Commission on Banking? Might that have had something to do with the present shadow Chancellor being the Minister for the City at the time?
Chris Leslie
No. With hindsight it is clear that we need a tough leverage ratio, and I think the hon. Gentleman’s question implies that he accepts that leverage is an important part of the regulatory toolkit. That is why it is wrong that the Bill ignores the recommendations of Vickers, in particular, but I am afraid that the Chancellor seems to have dismissed the recommendations of not only Vickers but the parliamentary commission on this issue. It is not good enough that the Government are leaving this matter out of the Bill, perhaps assuming that the European Union will somehow address it in the next eight or nine years.
Even the incoming Governor of the Bank of England, Mark Carney, pointed to the value of a higher leverage ratio as a backstop for a risk-based capital regime when he gave evidence to the Treasury Select Committee. There are ways of overcoming the impact of such a measure on a minority of non-plc institutions—I know that some of the bigger building societies, in particular, have expressed their concerns about a crude leverage ratio approach—but that is not a reason not to put a safeguard in place. At the very least, the Government ought to accept the parliamentary commission’s proposal for an annual assessment to be carried out by the Bank of England of the progress of the work to improve risk weightings and the work towards the leverage ratio.
Jesse Norman
Let me put the question to the hon. Gentleman in another way. Does he regard it as slightly ironic that he is now pushing for a leverage ratio that is roughly half the ratio that the Labour Government allowed to occur five years ago?
Chris Leslie
We have to learn the lessons of that global financial crisis, one of which is that leverage has come to the fore as a way of illustrating the over-extended nature of the banking system. I am glad that consensus is breaking out across the Chamber on this point. As the hon. Gentleman knows, he and I have almost been in concert in voting on a variety of amendments, some of which have been inspired by his very own articles. I therefore look forward to him joining us in the Division Lobby—if it comes to that—on the question of the leverage ratio.
John Mann
Before too much consensus breaks out, may I ask my hon. Friend to say a little more about how he envisages the problem of small building societies being addressed? They are saying unambiguously—although privately, of course, for commercial reasons—that their future is imperilled. Is a one-size-fits-all approach the right one? Is that the approach that my hon. Friend would take if he were in power?
Chris Leslie
Of course there are ways of ensuring that the building society sector can be accommodated in the leverage ratio framework. Building societies have a totally different equity structure, as my hon. Friend knows; they do not have the same equity as a plc structure. There are therefore important differences in that sector. In my view, however, it is important that all institutions, large and small, should be subject to safety requirements regarding capital loss absorbency and protection against over-extension in certain risk areas. There are ways and means of dealing with that, but I am annoyed that the Government have not seen fit to put any provisions on the leverage ratio in the Bill.
Neil Carmichael (Stroud) (Con)
Does that attitude not call into question the future of the Co-operative bank? What would the shadow Minister say about that?
Chris Leslie
I do not want any of our banks to be in a position of over-extending themselves, putting at risk either their customers or the taxpayer. It is very simple. We need to listen to the carefully thought through advice of the banking standards commission, the Vickers report and others, including the incoming Governor of the Bank of England, on these particular issues. The Government may call it the British dilemma, but it is astonishing that they always seem to be asking the European Union to come to their rescue at some point with some reform to deal with bail-in or whatever other problems happen to be around later on down the track. That is not adequate.
Let me deal with the issue of derivatives inside the ring fence, as I know that the parliamentary commission has been concerned about it. The Vickers report said that derivatives trading should not be allowed—full stop. The parliamentary commission recognised, however, that there were services on the margins where some simple derivative products might be permitted, but it added that
“allowing ring-fenced banks to sell derivatives other than as an agent creates additional prudential and conduct risks.”
I agree with the commission on that issue. We need clearer protections to prevent abuses within the ring-fenced retail banks where derivatives are sold. That was illustrated, of course, by the mis-selling of some interest rate hedging products to small and medium-sized enterprises. The danger is one of information asymmetry between customer and vendor and the fact that the trade became exceptionally lucrative for the banks. We have to move away from this era of the exploitation of the customer’s lack of knowledge, and the commission was clear about that in the three tests it set.
We have seen one of the drafts of the secondary orders, subsequent to the commission’s recommendations. It is therefore worth comparing that order with the tests that the commission has set. The commission said that there should be adequate safeguards against mis-selling, but as far as I can see, the draft order does not go into any detail about how the Prudential Regulation Authority or the Financial Conduct Authority will enforce anything new. The commission said that there should be a clear definition of simple derivatives, which will be allowed, versus complex derivatives, which will be disallowed, but the draft order seems to define simple derivatives quite widely—in other words, as instruments designed to tackle interest rate risk, exchange rate risk, default risk, liquidity risk or for dealing in assets included in the liquid assets buffer. It would be easier if the Minister set out what would not be allowed rather than what would be allowed in the ring fence.
The third test relates to limits on the proportion of a bank’s balance sheet. The commission thought that was necessary, but the draft order so far leaves out what that percentage should be. There is a space left for a figure before the percentage sign, so perhaps the Minister can give us a sense of what that proportion of the bank’s balance sheet should be. That was one of the commission’s tests, as I said, so we need to secure assurances from the Minister about the Government’s intentions. As Martin Taylor said in his evidence to the commission:
“I can’t see the point of having a fence round the chicken coop, electrifying it to keep the foxes out, and then inviting a family of tame foxes to live inside it.”
That sums up the problem quite neatly. I have already alluded to the bail-in powers. Again, it is disappointing that the Government are relying on future European directives as the means to achieve bail-in rather than building it into the Bill before us. I do not think that the frequent excuse of “We’re waiting for the European Union” will do any longer.
We need also to focus on some of the other issues that should be in the Bill today, particularly rebuilding consumer choice, financial inclusion and a diverse market. The Bill is silent on all those areas. There is nothing about challenger or new entrant banks; nothing to ensure a universal obligation on banks for basic bank account services. There is also pussyfooting around on switching of bank accounts, about which I know some Government Members are concerned. There is nothing on mutuality, despite the pledge in the coalition agreement to
“foster diversity in financial services, promote mutuals and create a more competitive banking industry”;
and nothing about a fiduciary duty of care for clients and customers. We will table amendments to ensure that high street lenders offer a basic bank account, which is particularly necessary because of the onset of universal credit. We want a report within six months addressing obstacles to new-entrant challenger banks and current account provision. We also want Parliament to have an opportunity, soon after Royal Assent, to examine the adequacy of customer switching arrangements, and we want the publication of bank data on “lending deserts”, the postcode areas where—as we are finding in our constituencies—some small and medium-sized enterprises and customers find it difficult to gain access to credit. Other tests need to be included in the Bill to fulfil the coalition’s mutuality pledge. We also want a duty to be imposed on directors of ring-fenced banks to operate prudently and to safeguard deposits, and we want them to have a fiduciary duty of care to customers throughout the financial services.
Andrew Bridgen (North West Leicestershire) (Con)
The hon. Gentleman has rightly described consumer choice as the main driver of any market. Does he believe that encouraging Lloyds Banking Group to buy HBOS, or intimidating it into doing so, increased or decreased consumer choice in this country?
Chris Leslie
The hon. Gentleman may not have noticed it, but there was a bit of a financial storm going on in the financial services sector at the time. He may think that his constituents who had deposits in Lloyds would have been better off had the bank not been saved in the way that it was, but I do not think that they would have enjoyed the experience of turning up at the cash machines and not being able to get their money out. I think that rescuing the banks was a necessary step at the time, but now we must learn from that crisis, which occurred not just in the United Kingdom but in the United States and throughout the developed world. If Government Members think that they can get away with rewriting history, and that the former Prime Minister uniquely got on a plane, caused the collapse of Lehman Brothers, and then went off to Greece and Spain, they must be living on a different planet.
Andrew Bridgen
Does the hon. Gentleman not remember that Lloyds Banking Group needed to be bailed out only because it was intimidated into taking over HBOS by the last Government?
Chris Leslie
I disagree. I think that there was a high-risk, high-return culture in the banking sector—we saw it in the United States, and we saw it here—which Government Members fuelled through their deregulatory philosophical approach.
Chris Leslie
Not at the moment.
We need improvements in the standards and the culture of our banking sector, and Ministers ought to have allowed enough time for them to be discussed in Committee. We will table amendments providing for the establishment of a professional standards body to enhance the approved-persons process. There needs to be a clearer complaints procedure, and a stronger facility for failing banks to be struck off. We need clarity in regard to the professional qualifications and competences that are expected, especially in the wholesale sector, and a code of conduct that is monitored and enforced effectively and applies not just to significant influences in the banking sector but to all bank employees. We need safeguards to secure the independence of board directors overseeing ring-fenced banking activities. The commission has very reasonably recommended a “sibling” rather than a “parent-child” corporate ownership structure.
Jesse Norman
I am trying to follow the hon. Gentleman’s argument, but it has become fatuous. The fact is that the banking system had a leverage ratio of 20 times in 2000, as it had had on 40 previous occasions. Deregulation under the last Government but one had nothing to do with this financial crisis, which was caused by an increase in leverage—an explosion of leverage—under the Labour Government between 2000 and 2007. It is in the Vickers report.
Chris Leslie
If the hon. Gentleman’s analysis is correct, he will no doubt join us in the Division Lobby to institute the recommendations on leverage from the parliamentary commission. Is that his intention? Will he join us in supporting our amendments? I will give way to him if he wishes to answer that question, but I do not think he does. That is a shame, because I know that he feels strongly about these matters, but I can detect the gagging influence of the Treasury Whip as he texts the message “Be careful: Jesse Norman is on his feet again.” Forgive me, Mr Deputy Speaker, I meant to say the hon. Gentleman. The alert has gone out that rebellion is in the air.
We need more protections to deal with standards and culture, and we need to make sure that whistleblowers in the banking sector are given protection. We also need to set up a financial crime unit within the Serious Fraud Office, using some of the resources that are flowing from the fines. We probably also need to deal with the statute of limitations issue, going beyond the three years to give the regulators additional powers.
Chris Leslie
I think I ought to make some progress, and I want to talk about the need for the banking system also to enhance our economic prospects, support enterprise and growth, and maintain the supply of credit to the economy. Those are some of the issues that our constituents are concerned about for the future. Nothing in the Bill looks forward at the challenges facing business or the economy more broadly. So we want to see urgent action—ideally in the Budget, but if not in this Bill—that improves the operation of the funding for lending scheme to ensure that lending to small business is prioritised. We called for that last summer when the scheme began, but since then net lending to business has fallen further and further still. It is very important that we take this moment to improve and adapt the funding for lending scheme in this way. We must recognise that we have had the failure of Project Merlin and we have had credit easing, which was given eight months to do the job. So funding for lending is the third scheme that the Chancellor has tried and we have to make sure that it is changed in a way that makes these things work.
Even if the Government eventually create a fully formed Bill, we need regular parliamentary oversight of how ring-fencing and the new structures are working. As the Parliamentary Commission on Banking Standards says today:
“The Government’s proposal for the periodic review to be conducted by the regulator is wholly inadequate.”
We also need to have more than the one-and-a-half-hour, rubber-stamping Committees to scrutinise the detailed secondary legislation, which is why we advocate a super-affirmative order-making process to give time for the Treasury Committee and others to examine the technical detail of the changes in respect of the clauses and the orders that flow from them.
We want a Bill that makes banking safe and protects the taxpayer, but this one falls short in several areas. We want a Bill that improves banking standards, enhancing probity and conduct, and reforming the culture of banking, but this Bill contains none of those changes yet. We want a Bill that helps to rebuild consumer trust and choice, supporting more competition, new entrants, mutuality and consumer switching. We want a Bill that creates a banking system that supports jobs and growth, and maintains the supply of credit to the economy. The Opposition will not oppose the Bill on Second Reading today, because reforms are clearly needed, but too many important policy changes are still conspicuous by their absence. After such a big global crisis, and so many scandals and inquiries, the Government have no excuses and they need rapidly to populate this shell of a Bill with some real substance.
Stephen Barclay
My hon. Friend is absolutely right, and he is right because, as I know from my time in banking, people in banks are usually aware of the problems, but there is a perverse incentive—a short-termism—that says, “If the rewards are delivered short term, but the risk is unlikely to crystallise”—
Chris Leslie
I believe that the hon. Gentleman was director of regulatory affairs at Barclays bank from 2006 right up, I think, until the general election. Will he assure the House that he was not aware of any of the LIBOR issues that took place under his watch?
Stephen Barclay
Once again the hon. Gentleman has got his facts plain wrong, because although I was—[Interruption.] We can all see that he has had a quick read, but as so often with Labour politicians he has not understood what he has read. I was director of regulatory affairs in the retail bank and, as anyone knows, the retail bank was not responsible for LIBOR. That was an investment banking issue.
Stephen Barclay
Unlike the hon. Gentleman, who repeatedly refused to take interventions, I will happily take another.
Chris Leslie
I did take a fair few interventions. If the hon. Gentleman was the director of regulatory affairs at Barclays bank from 2006 until the general election on the retail side, was he aware of the mis-selling of payment protection insurance?
Stephen Barclay
Once again the hon. Gentleman has not listened to the answer. I was actually head of anti-money laundering and sanctions for half the period, so once again he is getting the basic facts wrong. It is interesting that he does not want to debate the issues. He does not want to debate the fact that there were guaranteed bonuses or a fines system that incentivised the wrong things. He does not want to debate the fact that, as my hon. Friend the Member for South Norfolk (Mr Bacon) correctly pointed out, we had a Treasury that was not even aware of its own powers. We also had a tripartite system in which it was unclear who was in charge. We then had Treasury officials looking at banks and their assets without being able to rely on what was under their noses. That is the legacy that Labour left us.
Stephen Barclay
No. I have taken two interventions from the hon. Gentleman and he did not do well with either. I want to make progress, because I am conscious that time is moving on.
I shall return to the comments made by someone who, unlike the hon. Gentleman, speaks with professional expertise, namely the Father of the House. He was correct—as he is on so many issues, but particularly this one—to talk about the danger of focusing on structure and not rooting out conflicts of interest. That is at the heart of the point I want to make about individual accountability, linked to conflicts of interest—about the awareness, as my hon. Friend the Member for South Norfolk pointed out, of those in institutions who know where the risks are and how they are incentivised to speak up. On Thursday we will have a debate on the NHS and the fear of whistleblowers to speak out. Many of the issues in the NHS are similar to what we have seen in our banks. Let me give the House an example that makes the point highlighted by my hon. Friend. So far, the two biggest fines imposed on any individuals in banking were imposed on two Northern Rock executives. On both occasions they were less than those individuals’ bonuses the preceding year. How are people incentivised to do the right thing in our financial sector when they can see such short-term benefits from wrongdoing and very little downside risk?
I very much endorse what my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) said about empowering consumers by having portability in the system and grass-roots pressure. However, we cannot rely on that alone—I do not think she would suggest for a minute that we could—to address the regulatory failures or the asymmetry of information that customers face.
Financial Services and Markets
Chris Leslie Excerpts(11 years, 9 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Greg Clark
As my hon. Friend knows, that has been a matter of much debate in the Treasury Committee and the Banking Commission, both of which he chairs. It is appropriate to have regard to the international debate on this. There is a difference between the debate on the leverage ratio and the two other tools that we will move on to talk about, the sectoral capital requirements and the counter-cyclical buffer, over which, it has been established internationally, there should be domestic discretion. We are not at that stage with the leverage ratio, as he will know, but I can certainly confirm to the House that the Government’s intention is to provide the FPC with a time-varying leverage ratio by 2018, subject to a review by the European Banking Authority, which is planned for 2017.
Chris Leslie (Nottingham East) (Lab/Co-op)
I am intrigued by the Minister’s 2018 commitment, but would it not make good and prudent legislative sense to take the opportunity in the draft Financial Services (Banking Reform) Bill, which will arrive in the House imminently, to insert provisions that would allow the leverage ratio to be triggered sooner if there is a delay in the international discussions?
Greg Clark
We do not expect such a delay. The discussions are continuing and are live, as we know, so we do not expect to need that, but of course it is open to the House as it debates the Bill, presumably at some length, to keep that under review as the discussions progress.
The statutory instrument we are debating today relates specifically to the ability to set sectoral capital requirements. I will deal with that tool first before briefly covering the others. The interim FPC recommended that the statutory FPC should have a power of direction to vary financial institutions’ capital requirements against exposures to specific sectors over time. It argued that the over-exuberance that precedes crises often begins in specific sectors before spreading further. The Government agree that this targeted approach would allow these risks to be managed more effectively and proportionately than raising capital requirements more generally. The FPC has stated that it would wish to avoid what it terms an
“overly activist, fine-tuning approach”,
which should limit this risk. However, there may be times when using the tools in a granular way may be necessary, so the Government will keep the use of this tool under review to ensure that it is being used effectively and proportionately. There is also a risk that imposing sector-specific requirements could displace excessive risk into other sectors, so the FPC will need to monitor carefully the impact of any policy interventions using this tool and perhaps consider adjusting more general capital requirements if displacement turns out to be a significant problem.
I should take this opportunity to bring to the House’s attention the one change that the Government have made to the order following the consultation that we undertook on the draft version that was made available for that purpose. The current order excludes investment firms that are not regulated by the PRA from the FPC’s power. This will ensure that systemically important firms are captured while smaller firms that are not systemically important will not be subject to additional requirements.
Let me discuss briefly the other macro-prudential tools that the Government intend to give the FPC: the role of setting the UK’s counter-cyclical capital buffer; and, as we have briefly discussed, the power to intervene to limit leverage ratios. These are not covered by the draft order, but it might be useful if I provide a bit of context to the debate. The counter-cyclical capital buffer is part of the Basel III agreement, and it will be implemented in Europe by the capital requirements directive, commonly known as CRD 4. The directive aims to ensure that banking sector capital requirements take account of the macro-financial environment in which banks operate. It will be deployed by national jurisdictions when excess aggregate credit growth is judged to be associated with a build-up of system-wide risk to ensure that the banking system has a buffer of capital to protect it against future losses. Banks, building societies and larger investment firms will be required to build up capital during upturns. This will help to increase the resilience of the financial system and might also dampen the credit cycle. Unwinding these requirements in the downturn once the threat has passed might help to mitigate contractions in the supply of lending.
It is clear that with its macro-prudential focus, the FPC will be the body best placed to determine the level of the counter-cyclical capital buffer. This was supported by the results of the Government’s consultation. As the counter-cyclical capital buffer is expected to be provided for in CRD 4, on which discussions are continuing, the simplest way to incorporate it into UK law is via regulations made under section 2(2) of the European Communities Act 1972 to transpose into UK law the provisions of CRD 4 which relate to the counter-cyclical capital buffer.
It is vital that the FPC’s decisions in relation to the counter-cyclical capital buffer should be subject to comparable procedural and reporting requirements to the FPC’s other tools. Therefore, in addition to the requirements imposed by the EU legislation, the Government intend to ensure that the counter-cyclical capital buffer will be subject to the same transparency requirements as other FPC decisions, with a summary of the FPC’s discussions when taking decisions on the buffer set out in the FPC’s meeting records, and the FPC’s use of the buffer covered in the biannual financial stability report. The Government will make any necessary changes to achieve this in the regulations that incorporate CRD 4 into UK law.
The interim FPC recommended that the statutory FPC should have a power of direction to set and vary a minimum leverage ratio. The Government think that a leverage ratio could indeed be a useful macro-prudential tool for the FPC. The unweighted nature of the measure would guard against risk weights underestimating the true riskiness of assets and provide a directly comparable figure across firms. Firms’ leverage ratios were a useful indicator of failure during the last crisis, and the period immediately preceding the crisis was characterised by sharp increases in leverage. The Government strongly support the inclusion of a backstop leverage ratio in the EU prudential toolkit and consider it an essential measure to ensure that leverage remains at sustainable levels. It is clear that there is some way to go, but the review in 2017 will address that, and it will not be implemented across the EU until 2018, so we have some time to consider it.
Chris Leslie (Nottingham East) (Lab/Co-op)
The jargon in this order may deter not just members of the public but—dare I say it?—hon. Members from rolling up their sleeves and getting involved in this debate. I contend, however, that, in layman’s turns, the order involves an incredibly important set of issues. We are talking about giving the regulators of the unelected Bank of England’s Financial Policy Committee incredible powers that will enable them to tell people the level of deposit required for their home loan purchase and, potentially at a moment’s notice, that minimum repayments on their credit cards will need to rise from, for example, 2% to 5%. They will also be able to tell businesses that loans and overdrafts that they may have already arranged with their banks are no longer feasible. We are talking about the significant potential impacts that macro-prudential policy making could have downstream on the economy and consumers. As we have said many times, although prudential regulatory theory is fine—it is difficult to disagree with the concept—the practical reality and serious questions about how it will work merit consideration.
We support the creation of the FPC at the Bank of England. An important lesson from the global financial crisis is that we need better systemic oversight, not just firm-by-firm regulation. We have to see the wood for the trees. However, as was said last year during the passage of the Financial Services Act 2012, questions linger about the FPC’s accountability and the rationale behind the choices it will make. Asking very clever people to gaze into a crystal ball and predict the economic future is a big thing for Parliament to do. We are asking them to improve their foresight when most people find it easier to draw conclusions in hindsight. There is, therefore, a lot of responsibility on the shoulders of the Bank of England and, of course, this provides a perfect vehicle for it to be landed with the blame by politicians if things go wrong. Members of the FPC will no doubt be well aware of those responsibilities.
As the Minister has said, the order is relatively straightforward. It gives the Prudential Regulation Authority, which is an arm of the Bank of England, the power to make banks and investment firms increase their capital holdings—in other words, their additional own funds—in relation to their exposure to residential property, commercial property or the financial sector. It will also give the PRA the power to make those banks and investment firms treat exposures to other financial services companies, residential property or commercial property as riskier ventures than they might otherwise have done—in other words, to raise the risk weightings on those holdings.
It was interesting to hear the Minister say that, after the consultation, the Government changed things so that the PRA-regulated firms would be those that are systemically important. That throws up a question that has just occurred to me. I had assumed that all residential mortgage loans and commercial transactions would be affected by a turn of the dial by the FPC. As it turns out, the Minister is saying that only transactions undertaken by systemically important organisations or the larger banks will be affected. Will he tell the House what proportion of residential and commercial transactions will not be affected if the FPC decides to adjust the availability of finance in those sectors or the capital requirements affecting those sectors? I assume that the vast majority of the firms in those markets are systemically important, but it would be interesting if the Minister gave a breakdown. If he cannot tonight, I would be happy if his team wrote to me on that issue.
There are other macro-prudential tools. The Minister mentioned the counter-cyclical capital buffer. That is part of the Basel III requirements which will be implemented through European directives and so forth. I want to ask him about some of the other macro-prudential tools that were discussed in a long document by the FPC.
I am pretty sure that the Minister is saying that, by and large, the sectoral capital requirements are those that are dealt with in the order, but I am not entirely clear about that. If one wanted to be very theoretical about macro-prudential policy, one could argue that history shows, whether through the South Sea bubble or the tulip boom, what has happened to various sectors that nobody predicted would become overheated. I do not necessarily see all sectors coming under the potential purview of the FPC. I assume that the Government would simply vest the FPC with other sectoral issues if they felt that there were emerging pressures or credit bubbles in other sectors. It does not seem that the Minister is today allowing the FPC to intervene across the whole landscape.
The hon. Member for Chichester (Mr Tyrie), who chairs the Treasury Committee, rightly asked about the leverage ratio. I am surprised that the Minister wants to wait until 2018 for that. He says that he hopes there will not be slippage, but he has been around the European policy-making circuit for long enough to realise that a commitment to do something in 2018 means that it may well not materialise until 2022 or even later. One just has to look at the solvency II discussions, which seem to be generational. I regret that the Government seem reluctant to take a British approach to regulating on the leverage ratio. I do not think that we should simply wait for Europe to determine such matters for us. It would be better if the Minister gave a commitment that he would at least consider including in the Financial Services (Banking Reform) Bill the recommendations of the Parliamentary Commission on Banking Standards on giving the FPC the right to get into some of the leverage ratio questions.
I have a number of other points that I want to ask the Minister about briefly. On the enforcement of prudential regulation, will he elaborate on the penalties or disciplinary steps that the regulator will have at its disposal if an investment firm or bank contravenes the imposed requirements of the FPC? If we have a body that is making policy, we must ask how it will be enforced. So far, a lot of the penalties in the Financial Services (Banking Reform) Bill seem to involve an individual seeking redress through the civil courts, which seems quite weak. What will happen if a bank steps across a line?
Members will recall the debate that we had during the passage of the Financial Services Act 2012 on the stability rules that the Government originally proposed to give to the Bank of England. They wanted to emphasise stability, which of course is vital, but they left out the importance of getting the economy growing and creating jobs, especially when times are tough or when there is a deflationary environment. Eventually, the Chancellor of the Exchequer was forced to relent and an amendment was inserted in the House of Lords to ensure that the FPC has regard to the economic objectives of Government policy.
Are we in danger of repeating the same lopsidedness in the regulations, or of an asymmetrical approach to attempts to control the heat of the economy? The measures in the order specify that banks must hold “additional” funds if lending to households or businesses, with a view to slowing things down and taking the heat out of the economy. That, of course, is a necessary part of the toolkit, but what happens if things slow down too much and the economy needs more lending to businesses and households, or more inter-bank and financial services mutual investment? The order does not seem to contain corresponding or parallel powers to dial things down, relieve capital requirements or remove “additional own funds” provisions if they prove in retrospect to have gone too far. Is that a problem with the order? Should not the power be symmetrical? I would be grateful if the Minister would consider that point.
On enforcement, are there dangers and risks of gaming in sectoral capital requirements? If we draw up operational targets that focus on the means rather than the ends, will the Minister assure the House that some of the specific requirements on residential or commercial investment cannot be evaded by twisting definitions, deliberate misinterpretation or gaming? I gather that that point came up at the Treasury Committee last year and there are important concerns.
Will the Minister update the House on the latest information about who will make decisions on the loan-to-value and loan-to-income ratios on mortgages? There was a bit of pass the parcel between the FPC Committee and the Treasury last year when it came to mortgage regulation. The Treasury wanted the Bank of England to do the deed, but the Bank said it was a political decision and wanted Ministers to make decisions restricting LTV ratios. Will the Minister say where things currently stand, because such things do matter? As Adrian Coles from the Building Societies Association has rightly said, a change to the loan-to-value ratio may not matter much to those wanting to get a foot on the property ladder who have already got access to deep pockets or the bank of mum and dad, as it is known, but rapid decisions to increase the amount of deposit a home buyer needs will hit the least well off in society. Who will decide those things—the Treasury or the FPC?
My final two points are on geographical regulation and business lending. Will the sectoral powers be available for the Bank of England to use area by area, region by region, and locality by locality? In other words, will the Bank be able, or is it seeking, to take heat out of certain geographical housing markets and not others? I do not advocate this, but if it so wished could the Bank use these powers to make it harder to buy a house in London than in Cornwall, or vice versa? Will the Minister clarify how specific—or area-specific—the Bank can be with these powers?
Lending to small and medium-sized enterprises has fallen off and is still doing so. The funding for lending scheme was supposed to change that but its rules are skewed towards residential lending rather than business lending. Is the order to be seen in parallel with that scheme, and can the scheme be reformed to favour business lending? Will the Chancellor consider those issues in the Budget?
Transparency and the openness of the FPC must be considered and many, including the Council of Mortgage Lenders, have said that we need proper analysis by the FPC about what it is doing and an explanation of why it is using its powers. A narrative requirement on the FPC is a reasonable request, so will the Minister explain why that is not in the order?
The Opposition support these general powers but we hope for refinements and improved accountability in the enactment of some of these tools. We want Parliament to have better scrutiny of these measures and for the Treasury to ensure that when the tools are granted, whether or not that is in the next wave or regulations or legislation, the Treasury Committee and others will have a better opportunity for proper oversight of how the Bank of England is exercising these considerable powers.
Greg Clark
Let me go on to describe some of the other elements involved. I said that we had committed to bringing to the House particular measures that could be debated. The hon. Gentleman has anticipated one such possibility. He was correct in suggesting that, if we had been proposing a power over the loan-to-value rate, the House would have been substantially more occupied than it is at the moment, that such a matter would engage Members and that there would have been a fuller debate on the matter. However, this is not the only mechanism by which scrutiny can take place.
The secondary objective of the Financial Policy Committee has been mentioned. Through the scrutiny of the House and of the hon. Gentleman’s Committee, that objective has been set up, and it means that the FPC’s duty to support the court of the Bank of England in achieving its financial stability objective is subject to supporting the policy of Her Majesty’s Government, including their objectives for growth and employment. That is significant. That power is there for a reason, and we expect it to be used. It requires the Chancellor of the day to write annually to the FPC to set out what he expects it to have regard to in making its decisions. The House will have the ability through that mechanism to scrutinise and take a view on whether Ministers—in this case, the Chancellor—are giving the right directions to the Committee in terms of what it should understand the Government’s economic objectives to be. I believe that the mention of growth and employment will address one of the concerns that has been raised.
It is worth noting that the measures we are talking about relate to peacetime; they are not for use in a crisis. The Chancellor will retain the ability to give directions to the Bank in a time of financial crisis, for example, when that is in the public interest. The measures before us are for use in the normal course of events.
There will also be a requirement on the FPC to account for its decisions. It will appear before the Treasury Committee after it has held its meetings and published its reports, and it will have to explain the basis of its recommendations and directions. It has made a commitment to setting out in advance the types of indicators that it will bring to bear on those questions, so there will be no arbitrary use of discretionary powers. The committee will seek to be predictable in regard to the types of instrument that it will use.
On the format of statutory instruments, the parliamentary Delegated Powers and Regulatory Reform Committee will take a view on whether the choice of procedure is appropriate. I think that the hon. Gentleman will approve of the fact that the affirmative resolution procedure is to be used in these circumstances.
Let me address the hon. Gentleman’s point about residential property, which is of course a matter of interest to our constituents. It has been pointed out that all these matters have a bearing on our constituents. I think he would acknowledge that any review of the recent financial crisis—and, indeed, of financial crises around the world—would note that housing bubbles are often associated with the kind of over-exuberance and excess that contributes to financial instability, which the arrangements that we have in place are designed to address. It is appropriate for the powers to be there. These sectors have been debated at the European level, and this is one of a limited number of sectors for which it is anticipated that the national regulators should have a sectoral power.
I think it important to note that the power to make recommendations and give directions is available to the FPC, but that there is no requirement that it should get in the business of micro-managing these sectors. It seems to make sense, on the basis of history, for this initial set of sectors to be included. The powers are there, as I say, but there has been some debate about whether they should be more specific in respect of loan-to-value powers, which is not part of the proposals. It is no part of the Government’s purpose, as the hon. Gentleman rightly anticipates, to prevent what we hope will be an increase in home ownership and house building as a result of the order.
Let me deal with some points raised by the hon. Member for Nottingham East. He forcefully made the point that we need an explanation from the Financial Policy Committee of why it is using its powers. This should not take place in a vacuum or in secret. I completely agree, and this is provided for in the Financial Services Act, as the hon. Gentleman, a veteran of the Committee, knows. Section 9S requires the FPC to give an explanation of the reasons for its use of direction powers, and the explanation needs to be published in the financial stability report and it needs to account to Parliament for its use of the powers.
Let me pick up one of the hon. Gentleman’s earlier points, which was not quite right. He mentioned credit card repayments, for example. The powers provided for in the statutory instrument do not go into that level of detail, and the FPC will not have those powers and they are certainly not in this order—and neither are the loan-to-value powers available.
The secondary objective addresses the hon. Gentleman’s point about the necessary symmetry of these arrangements. Macro-prudential regulation is certainly about damping down excessive exuberance when it takes place, but on the other side of the cycle, by retreating from some of the provisions by varying requirements downwards, it also has the power to reverse the dampening of those sectors.
Chris Leslie
I am sorry, but as I read the order, I note that it says that UK firms can be required to maintain “additional” funds, but there seems to be no provision to dial it down the other way. Have I misread the order?
Greg Clark
What I am referring to is the fact that if the requirements have been dialled up, they can be dialled down. That will be required. The fact that they are time varying precisely reflects the different conditions that will apply from time to time.
The hon. Gentleman mentioned the exemption for small firms, and he was quite right to raise the issue of what proportion of mortgages might be covered. To be clear— when he sees my remarks, he will be clear—the exemption applies to small investment firms. It is still the case that all deposit takers and banks, including building societies, will be within the scope of the power. That contribution will be recognised.
As to whether we should take the power—either through the order or, more likely, through the Banking Reform Bill or previous legislation on the leverage ratio, which is a live issue—it is already possible by order under the Financial Services Act to make provisions to vary the leverage ratio. Such an order would, of course, be subject to prior parliamentary approval. There is no requirement for additional primary legislation; the powers will be there at the time we expect to bring the provisions into force.
The hon. Gentleman asked about the penalties for contravening the views of the Financial Policy Committee. The committee makes recommendations to the regulators, and it is the regulators—the PRA and the FCA—who are responsible for implementing them. The hon. Gentleman will know—again, from the Financial Services Act—that considerable powers are available to the FCA and the PRA, in the form of regulatory sanctions, constrictions on firms’ activities, and unlimited fines. That is why the sector regulators have the powers of direction.
The hon. Gentleman raised a geographical point, asking whether the sectoral powers could be used to specify a particular area. The answer is that they could, if there were evidence of a particular problem in a particular area. However, as he will recall, there is a general requirement for the FPC to act proportionately, and one of the principles that has been agreed is that it should not become involved in the micro-management of these matters or in close detail. I consider it unlikely that it would make recommendations on a narrow geographical basis.
I hope that I have responded adequately to the points that have been made this evening. I gather from the Whips that I may have done so to the satisfaction of the House, and I hope that it will agree to the recommendations.
Question put and agreed to.
Resolved,
That the draft Bank of England Act 1998 (Macro-prudential Measures) Order 2013, which was laid before this House on 24 January, be approved.
Financial Services
Chris Leslie Excerpts(11 years, 9 months ago)
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Chris Leslie (Nottingham East) (Lab/Co-op)
This is a very serious setback for RBS on its road to recovery, and another stain on the reputation of UK banking. It is not just a case of excessive risk-taking by investment bankers; it is about the corrupt manipulation, until quite recently, of what should have been a trustworthy and independent index determining the inter-bank interest rate.
How much more evidence does the Chancellor need before he can agree to truly radical reforms for our banking system? Yet again, we have seen an appalling saga of interest rate fixing—not confined to one bank, but across the whole industry—but the Government still refuse to take a back-stop power for full separation in case ring-fencing does not work. Just what will it take for the penny to drop? Why will the Financial Secretary not accept fully what we have been saying since last year, namely that the Government must implement both the letter and the spirit of the Vickers recommendations and that we must see fundamental culture change? If that does not happen, the banks will need to be fully split up.
Those doing business with the banks will be astonished by these revelations. Will the Financial Secretary explain in simple terms how ordinary companies and customers with mortgages or savings linked to LIBOR will ever find out if they have been fleeced as a result of this fraudulent activity? If those customers have lost out because of LIBOR rate rigging, how and when will they get their money back?
Despite the Financial Secretary’s claim that the Government reacted swiftly, does he regret not getting ahead of the scandal as it emerged last year? On LIBOR, I asked his predecessor, the hon. Member for Fareham (Mr Hoban), during a Financial Services Bill Committee sitting last March whether the Government had a view about whether there was manipulation and whether changes needed to be made to the regulatory arrangements. He stood up and answered with the single word: no. The Treasury has, of course, come to regret that stance and, several months later, this tremendous scandal began to leak out.
Will the Financial Secretary update the House on the process for extricating the LIBOR setting process from the British Bankers Association and when an independent and more transparent arrangement will be secured? Was not the 2012 Act a missed opportunity, not just because it failed to widen the regulatory perimeter to cover LIBOR, but because it left doubt over whether regulators can prevent benchmark rigging in other trades, such as the gas and electricity markets, commodities, metals and oil? Rather than wait for Europe to legislate, the UK Government need to wake up and take preventive steps now. We will table amendments to the Financial Services (Banking Reform) Bill in the coming weeks.
Does the Financial Secretary agree that we also need new rules to protect whistleblowers who highlight failures inside the banks, and that we must ensure that offences created to punish misleading statements also properly cover the foreign operations of our UK banks? The Financial Secretary has said that the large fines for RBS will be clawed back in part from the bank’s bonus pots, but is it not now clear that fundamental changes are needed to the pay and bonus culture across the banking sector, including a repeat of the banker bonus tax to pay for opportunities for young people across the country? The Business Secretary said this morning that he has a plan for the RBS shares owned by the taxpayer. Does the Financial Secretary agree or disagree with that? What exactly is the Government’s policy on the future plans for the RBS shareholding?
Taxpayers and bank customers are growing sick and tired of being let down by the banks day after day. Does this not all boil down to a question of trust—a question not only of whether British customers can trust their banks, but of whether investors across the world continue to trust their money with the City of London more than with other financial centres? Britain’s financial services reputation is on the line. Our economy needs a healthy and sustainable banking sector, so we must rapidly clean up the system and put UK financial services on the path towards respectability, integrity and professionalism.
Greg Clark
It is, of course, right that we do that. I have been very clear that we are taking the steps that we are taking to restore the international reputation of the City and to make it pre-eminent in the world as a place in which people have confidence.
I would have thought that the hon. Gentleman would have taken this opportunity to reflect on the contribution that the previous Government made to the decline in the reputation of the City. It is not as if the chaotic regulatory regime was not foreseen. In November 1997, during the passage of the legislation that set up the flawed Financial Services Authority, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) said:
“The coverage of the FSA will be huge; its objectives will be many, and potentially in conflict with one another. The range of its activities will be so diverse that no one person in it will understand them all.”
He went on to say that the Government of the day
“may, almost casually, have bitten off more than they can chew. The process of setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day.”—[Official Report, 11 November 1997; Vol. 300, c. 732.]
That was the warning that the Conservative party gave the Government at that time, but it was ignored comprehensively for their 13 years in office.
We have moved quickly, as most reasonable people would concede. We already have a Financial Services Act on the statute book and we have set up an eminent commission chaired by Sir John Vickers to recommend far-reaching changes to the financial services system. The previous Government’s contribution to the eminence of the City was to knight Fred Goodwin, for heaven’s sake. The Opposition spokesman brags about the reforms to the regulatory system that he recommended in a Public Bill Committee, but it was the shadow Chancellor, when he had my job, who said that
“nothing should be done to put at risk a light touch, risk-based regulatory regime.”
We are making the reforms that it falls to us to make.
I will answer some of the specific points that the hon. Gentleman made. We will have discussions about the Financial Services (Banking Reform) Bill. Most reasonable people would conclude that the reforms that we are making, with the advice of the Vickers commission and the Parliamentary Commission on Banking Standards, lead the world in this area. The Liikanen report, which is being recommended at a European level, explicitly refers to the reforms that we are contemplating. It is right that we should be ahead on this.
The hon. Gentleman is right that the Financial Services Authority must investigate whether any individuals or firms lost out as a result of the attempted manipulation. I call it attempted manipulation because we are talking about the rates that were submitted and it is not necessarily the case that the LIBOR reference rate changed in response. However, it is right that the FSA should make that assessment.
The process that Martin Wheatley recommended to replace the BBA is under way. It will become a regulated activity as soon as the statutory instruments are passed. Baroness Hogg and her committee are setting up a process to invite tenders, which will not include the BBA, to administer that process. As Martin Wheatley said, it is necessary that that is done in a way that does not undermine confidence in the rate-setting process during the transition, because it is fundamental to many contracts, as the hon. Gentleman implied, including people’s mortgages.
The hon. Gentleman mentioned other benchmarks. The powers that we took in the amendments that we made to the Financial Services Act 2012 before Christmas allow us quickly to specify any other benchmarks that might be subject to such abuse. Our response has been co-ordinated with the international authorities and nobody regards the powers that we have as inadequate to the task of dealing with other abuses.
On whistleblowers, the hon. Gentleman is right that it is important that people within banks and financial services should have the confidence to report abuse. A very small number of people are responsible for something that is besmirching the reputation of many millions of people up and down the country who work hard, day and night, for banks. Those people have had reason, over the years, to be proud of their career. It is important, not least for those people, that the institutions for which they work recover their reputations.
On the shareholding in RBS, it is of course the Government’s intention to return it, at the appropriate time, to private ownership. It is not right that we should own such a significant stake of a high street bank. It was necessary for us to do so because of the crisis that the hon. Gentleman and his colleagues know all about. As soon as it can be returned to independence, the better.
Banking Reform
Chris Leslie Excerpts(11 years, 9 months ago)
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Chris Leslie (Nottingham East) (Lab/Co-op)
Urgent Question: To ask the Chancellor of the Exchequer if he will make a statement on the Government’s approach to banking reform.
The Financial Secretary to the Treasury (Greg Clark)
The Government have today laid before the House the Financial Services (Banking Reform) Bill and their response to the Parliamentary Commission on Banking Standards report, which was published on 21 December 2012 following the commission’s pre-legislative scrutiny of a draft Bill.
I thank and pay tribute to the members of both the Independent Commission on Banking and the Parliamentary Commission on Banking Standards. The two commissions, whose membership comprises some of the most distinguished policy makers and formidable intellects in the world, have between them shaped a set of reforms to British banking that will lead the world and set an example to other countries in the seriousness, radicalism and meticulousness of the changes that are proposed.
The Bill published today reflects their painstaking work and the Government have accepted almost all their recommendations. The reforms address what the Chancellor has called the British dilemma—how Britain can be a leading global financial centre with more than its fair share of international trade in financial services while at the same time not exposing ordinary working people in this country to the catastrophic risks of banks failing.
The reforms were and are necessary because the previous regime was tested and failed. UK taxpayers had to bail out the banks with £65 billion of the hard-earned money of ordinary working people, while those who had taken a one-way bet with that money slunk away, losing nothing more than their jobs, and sometimes not even that. The anger that the country feels about what happened must be channelled into change to reset Britain’s banking system. The objective of the Bill—proposed by Vickers and endorsed by the commission—is that any failure of any bank in future should not impose a cost on the taxpayer and not interrupt for a second vital banking services. That is a high ambition, but one that is appropriate for a country with the reputation for financial stability and confidence, which has for centuries been one of Britain’s chief assets in the world.
As is well known, the Bill will erect a ring fence around the core operations of banks headquartered and regulated in the UK. Within that ring fence, banks must be completely insulated from activities such as using depositors’ funds to speculate for the banks’ own benefit in capital markets.
As a result of the commission’s recommendations, the Government are making a number of further changes to the Bill. First, in the acute phrase of my hon. Friend the Member for Chichester (Mr Tyrie), which will permanently enter the lexicon of banking, the ring fence will be “electrified”. The regulator will be given the power to order the full separation of any bank that attempts to undermine the ring fence. Directors of the banks will be personally responsible for ensuring that their banks comply with the ring-fencing rules, and the Prudential Regulatory Authority will conduct an annual review of the operation and adequacy of the ring-fence rules.
Secondly, there are explicit provisions on the face of the Bill for the principal aspects of ring-fencing, including that there should be separate boards of directors, remuneration arrangements, treasury management operations, balance sheet management and human resource management of ring-fenced banks.
Thirdly, the Bill gives us an opportunity to make an historic change in the competitive environment in UK banking. Competition is essential to ensure that customers benefit from innovation and from demanding customer service and efficiency from their banks. That has not always been customers’ experience in the past. As well as bringing in a seven-day automatic account switching service from September this year, the Government will take steps to tackle the cosy arrangement whereby the banks determine how payment systems will be run. Why should it be necessary in 2013 for a cheque to take six days to clear, with the banks and not the customers scooping up the interest on the balances during the delay? Why should a new bank have to beg an incumbent bank for permission to use their payment system? We will therefore require access to payment services that are fair, reasonable and transparent. The commission has rightly emphasised the importance of competition, and I am grateful to it for propelling that drive further, as I am to my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) for what she has done on greater competition in banking, which has been a personal crusade of hers.
The fourth and final change is that more parliamentary scrutiny will be built into the secondary legislation that implements what is a high-level Bill. Drafts of the principal statutory instruments to be made will be made available to the House before Second Reading, and the Government accept the recommendations of the Delegated Powers and Regulatory Reform Committee on the type of scrutiny each should receive.
These are historic reforms, but it is appropriate that, in our country—directly and indirectly, 2 million people work in the industry, it is our biggest export earner, and contributes £1 in every £8 of our tax revenue—we take the steps necessary to restore confidence in, and to, an industry that has fallen so far. There is much scrutiny of the Bill before us, both here and in the House of Lords, and I look forward very much to our discussions during the weeks and months ahead.
Chris Leslie
If the Government believed this issue was important, would the Chancellor have not made a statement to the House of Commons today? It should not take an urgent question for Parliament to hear why the Government are taking such a half-hearted approach to banking reform.
In a week when our national banks are facing record-breaking fines for LIBOR manipulation, when the Financial Services Authority is struggling to get a fair deal on payment protection insurance mis-selling for small businesses, whose customers have been mis-sold interest rate hedging products, when we see the bumper bonus season continuing to roll on and on for banking executives as if nothing had happened, and in a week when all this suggests we should be getting serious about real reform, what has the Chancellor said in his seaside speech today? He has fudged the tough stance recommended by the Vickers report, and has stopped short on backstop powers and legislation for the leverage ratio envisaged by the Parliamentary Commission on Banking Standards, a commission that the Chancellor himself agreed to set up last summer.
I have to ask the Minister: why then does it feel as though the Chancellor has to be dragged kicking and screaming towards serious reform? Is it because, despite all the rhetoric and feigned concern, the Government know they face certain defeat in the House of Lords on the sensible recommendations of the parliamentary commission, and so think it best to try to salvage something from what is in reality a strategic retreat? Why will the Minister not legislate for a full reserve power for total separation of retail and investment banking if ring-fencing does not work, something that we called for last year and the commission specifically recommended? Surely it would be sensible to legislate now, not just if one or two individual banks misbehave, but in case ring-fencing fails the sector as a whole. He may think he has found a cunning ploy, but stopping short with only half the backstop powers just means that they are unlikely to be used. Corporate lawyers across the City will be rubbing their hands with glee at the prospect of taking on the regulator on a case-by-case basis. Worse still, why is he ducking the main conclusion of the Vickers report? Specifically, why is he refusing to adopt the commission’s recommendations on the leverage ratio and rein in the over-exposure of banks whose excessive risk-taking caused the problems in the first place?
Should there not be a clause in the Bill so that regulators can restrain such hazardous behaviour? Does the Minister agree that the implementation of the Bill needs a full parliamentary review on a regular basis, with genuine scrutiny of detailed secondary legislation on exactly how ring-fencing will work in practice? If the commission recommends a tougher code of conduct for bankers, proper professional qualifications and a fiduciary duty of care for customers, together with stronger controls on bonuses and remuneration, will he accept its judgment in the Bill?
With the economy flatlining and no plan for growth, why is there nothing in the Bill to improve the funding for lending scheme? We should not still be seeing lending to businesses falling further and further, month after month. The Minister has to realise that the public, the taxpayers and Parliament want to tackle this issue once and for all. The Bill needs further amendment, and if the Government do not have the courage to radically reform the banks, we will.
Greg Clark
I had rather hoped for a serious response to a serious matter. When the Bill has its Committee stage, I hope the hon. Gentleman, with whom I am happy to work on the details, will be able to make some more substantial reflections than those he has offered the House today. Frankly, the idea that the Opposition should have the brass neck to table an urgent question on banking reform is almost unbelievable. At no point in 13 years of power did they show a scintilla of urgency in facing up to, never mind solving, the catastrophic absence of banking reform that led to the financial crisis being particularly damaging to this country. The failure of the botched regulatory system they introduced in 1997 has played a large part in the burden that the ordinary working people of this country are still having to shoulder today to bail out the banks. They were in office after the crisis, too. Even then they did nothing urgent apart from hurriedly plunge their heads in the sand to hope that the nightmare would pass.
It has fallen to this Government—as it regularly does, I am afraid—urgently to clear up the chaos in which Labour left the country. It should not have taken so long, but since the Government have been elected—from the beginning of our tenure in 2010—we have set up the Independent Commission on Banking, which has done a superb job, and we have created a separate conduct regulator and a prudential regulator that are now on the statute book. Why did we need to wait for this Government to be elected to do that? Why did Labour not set up a parliamentary commission on banking standards? [Interruption.] Of course, I will answer the pitifully few points that the hon. Gentleman made.
The hon. Gentleman asked, perfectly reasonably, why we had not given the Bank of England the power to split up the whole banking system. One of the principal reasons for not doing so was that the Governor of the Bank of England, in evidence to the commission, said that he did not want that power. It would seem odd to foist on the Governor a power that he does not want. The hon. Gentleman also asked why we did not adopt the higher backstop ratio. One concern expressed was by building societies worried about being disadvantaged by that. That was a concern we had.
The hon. Gentleman asked about a full review. If he had read closely the statement we published in response to the commission’s report, he would have known that the PRA would conduct a full annual review of the ring-fencing rules, and we will obviously act on any recommendations that it makes. He also asked about further recommendations that might come from the commission, which is chaired by my hon. Friend the Member for Chichester. The hon. Gentleman seems surprised that, having set up the commission, we might be interested in taking seriously its recommendations. I hope it is apparent from our response today that we take its recommendations very seriously, and I look forward to its further recommendations, particularly on competition, which have a great deal to offer. I greatly respect the commission’s work and look forward to making time available when the next report is published to make the necessary changes to the Bill to accommodate the recommendations.
Oral Answers to Questions
Chris Leslie Excerpts(11 years, 9 months ago)
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Mr Osborne
My hon. Friend is right to remind us that fuel duty is 10p per litre lower than it would have been if we had stuck with Labour’s Budget plans. We have also, as a medium-term measure, abolished the fuel duty escalator that the previous Government put in place. He mentions the Treasury Committee’s report. I hope that, as Chair of the Committee, he will welcome the fact that we have got the money in from Switzerland, because one of the issues that the report raised was whether that money would be forthcoming, and the fact that it came last night was very welcome.
Chris Leslie (Nottingham East) (Lab/Co-op)
While the headline rate of unemployment is falling, is not rising long-term unemployment bad for society, as my hon. Friends have been saying, but bad for the Exchequer too, because it is one reason why so far this year the deficit has been going up, with £7 billion more borrowing than in the same period last year? Can the Chancellor at least bring himself to admit that?
Mr Osborne
Unemployment rocketed because of the disastrous economic policies of the Labour party, and the deficit rocketed too. The good news is that 1 million jobs have been created and that the deficit has come down by 25%. Perhaps one day we will get an economic policy from the Labour party and we can make comparisons with what it would do in office. Until then, the hon. Gentleman should get behind the measures to clear up the mess that he left behind.
Financial Services Bill (Ways and Means)
Chris Leslie Excerpts(11 years, 11 months ago)
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Chris Leslie (Nottingham East) (Lab/Co-op)
I am conscious that time is moving on apace, but I have a quick question for the Minister. Under this motion, the destination of proceeds arising from fines imposed on financial services companies will henceforth not solely be the financial service regulators; it will also be the Consolidated Fund. What proportion of fines will still go to the regulators and what proportion will go to the Consolidated Fund, and is there a note on the methodology by which the regulators calculate the level of these fines? Barclays was fined almost £60 million for the LIBOR scandal in the summer, but there are issues in respect of how fines are set. Some £150 million has been levied so far this year, and it is understandable that these sums ought to come into the wider public purse, but will the Minister briefly say how that will happen?
Financial Services Bill
Chris Leslie Excerpts(11 years, 11 months ago)
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Greg Clark
It is a pleasure to be muscling in at this late stage of our proceedings on the Bill, but I feel it is a bit of a cheek to do so given that many Members have laboured many hours over these clauses in Committee—
Greg Clark
The hon. Gentleman was one such Member.
We are in agreement with all their lordships’ amendments, and this first group demonstrates that the Government have listened to Parliament’s concerns and have amended the Bill accordingly.
The governance of the Bank of England was one area of concern, and it was debated at length in this place and the other place. The Government agreed that the Bank’s expanded responsibilities warranted taking another look at its governance arrangements. The Treasury Committee produced an excellent report on this subject just over a year ago—I note that the Committee Chairman, my hon. Friend the Member for Chichester (Mr Tyrie), is present—recommending that the Bank’s non-executive directors be given a greater role in scrutinising the Bank’s work, including the ability to commission and publish reviews of the Bank’s performance.
The current version of the Bank of England Act 1998 does not actually describe the non-executive directors as non-executive, but various amendments before us in this group will finally clarify the terminology in respect of the Bank’s court of directors by distinguishing explicitly between the non-executive and executive members.
On more substantive governance matters, amendments 3, 6 to 9, 148, 149, 151, 152, 154, 155, 169, 172 and 173 fulfil the substance of the Treasury Committee’s recommendations in this area via the creation of a powerful new oversight committee made up of the non-executive directors of the Bank’s court of directors. The oversight committee’s remit covers the entirety of the Bank’s objectives and strategy. This remit is already broad enough to allow the oversight committee to look at any aspect of the Bank’s work it believes appropriate to examine, including the effectiveness of its crisis management co-ordination with the Treasury, as suggested in an amendment proposed by the hon. Member for Nottingham East (Chris Leslie). I am sure he will comment on that.
The oversight committee will have a statutory right to access the meetings and papers of the Financial Policy Committee and the Monetary Policy Committee, and it will have the power to commission reviews of the Bank’s performance from external experts or from the Bank’s own policy makers, and publish the reviews and monitor the Bank’s response to them. In line with the Treasury Committee report, these performance reviews will be undertaken retrospectively. The Committee recommended that they should take place at least a year after the period to be reviewed, in order to avoid second-guessing at the time of the policy decision. Just to be absolutely clear, the oversight committee’s remit to review the Bank’s performance is limited to the Bank’s objectives and strategy only; it does not extend to the Prudential Regulation Authority. The only role of the oversight committee in respect of the PRA is to determine the remuneration of the members of the PRA board. Because the PRA will be operationally independent in carrying out its statutory functions of regulation, it will be directly accountable to Parliament. The Government expect that the Treasury Committee will wish to summon the senior PRA executives and, where necessary, the non-executives to account for the PRA’s actions.
Amendment 167 will require the court of directors to publish a record of each of its meetings, fulfilling another of the Treasury Committee’s recommendations from its report. We have also listened to concerns in respect of the Financial Policy Committee, which focused on the role of economic growth in its decision making and the balance of its membership. Amendment 10 gives the FPC a secondary objective to support the Government’s economic policies, including growth, which will sit alongside existing requirements, such as the brake on the FPC taking action that would damage long-term sustainable growth. Amendments 4, 5, 150, 156 and 157 aim to rebalance the FPC by removing one of the Bank members, leaving a voting membership of 10 people—five Bank members and five non-Bank members.
Amendments 16, 17 and 19 to 21 go further to increase the transparency and accountability of the FPC. The FPC will be required to prepare an explanation of each of its actions, setting out publicly the reasons for its decision to take the action and its reasons for believing that the action is compatible with the FPC’s objectives, including to contribute to economic growth, and the various factors to which it must have regard, including proportionality. The FPC is also required to include an estimate of the costs and benefits of the action, where it is reasonably practicable to do so.
Amendment 17 requires the FPC to review the decisions that it has already taken in order to consider whether the actions are still necessary, or whether they should be revoked or removed. That will help to ensure that the FPC’s directions and recommendations do not remain in place for any longer than is necessary. The FPC must publish the explanations of its actions and a summary of its reviews in the next financial stability report.
The remainder of the amendments in this group represent further agreements made in the House of Lords in response to points raised in debate. Amendment 168 makes it absolutely clear that the Chancellor must always appoint a non-executive member of the court to be its chair. Amendments 174 to 176 continue the immunities from liability for damages that the existing regulators have and extends them to the new regulators. The Government have made amendments in the House of Lords to ensure that if the PRA or FCA commissions the other regulator, or the Bank of England, to carry out an investigation or produce a formal report on its behalf, the body that has been commissioned is also covered by the immunity.
This group of amendments represents a significant package of changes to the legislative framework for the Bank and the FPC, in response to points raised both in this House and in the House of Lords, and I commend it to this House.
Chris Leslie
It is a great pleasure to welcome the new Minister to these rather long-winded proceedings. I believe we started on this Bill back in February, but he should not worry, as this is shortly to be followed by the banking reform Bill and possibly even a banking standards Bill—to be determined—so we will probably have plenty more opportunities to chew over these issues then. It is a little preposterous to have a knife coming down at 7 o’clock, by which time we have to put the Question on 150 or so of these Lords amendments. That gives us about 25 seconds per amendment [Interruption.] I will get on with it; I lost about a dozen amendments just then.
That is why we have tabled several amendments to those Lords amendments—you will be impressed with that, Mr Deputy Speaker—and I wish briefly to explain why we have done so. The first Lords amendment that we are seeking to amend is Lords amendment 3, which, as all hon. Members here know, deals with the creation of an oversight committee within the Bank of England as a sort of subset of the court of directors, where it is to have a reviewing and, supposedly, a scrutinising role. There is a problem: the oversight committee has a series of responsibilities, not one of which is set out, in overseeing what the Bank of England does. The committee has a set of responsibilities to monitor, to review procedures and to conduct performance reviews, but all of that is retrospective—it looks backwards, not forwards. May I gently suggest to the Minister that it might be more appropriate if he were to call this a “hindsight committee” rather than an oversight committee, because as things stand I do not think there is a sense in which this is a proper check and balance within the governance of the Bank of England?
Why does that matter? It matters because the Government are giving phenomenal new powers to the Bank of England within our economy as an overarching financial regulator. The Minister says that the PRA is independent and will report to Parliament, but let us be honest: this is a creature of the Bank of England and the Bank will control very much what happens in the regulatory framework. Although we welcome the concession that was made to create an oversight committee, people have misgivings—we will probably hear about some of them, perhaps from members of the Treasury Committee, in a moment—that there is still a very hierarchical and centralised set of governance structures in the Bank of England.
We therefore need to make sure that this crucial verb “oversee” is included in the oversight committee’s remit. That would help to shift the balance of power between non-executives and executives in the Bank of England framework just that bit more. These are important lessons of governance, certainly from the private sector. While we are moving towards that executive and non-executive balance, it is important that we recognise that the Bank of England is being dragged into the 21st century. If we are taking the opportunity to do that in legislation, making that particular change would be very welcome.
The other amendment we wish to make to Lords amendment 3 relates to crisis management. As I said, the Bill gives massive new powers to the Bank of England, but in a crisis there will be very little time to figure out and design standing orders, or to work out arrangements for who will meet whom and for how decisions can involve the right people. You will recall, Mr Deputy Speaker, how during the global financial crisis crucial decisions affecting billions of pounds of taxpayers’ money and whether people could access the cash machines were made in the space of hours over weekends. In hindsight, it would have been nice to have had a carefully planned set of arrangements, and this Bill needs to learn the lessons from that. We are concerned that the crisis management arrangements are still thin and inadequate. We have suggested that if there is going to be an oversight committee in the Bank of England, the Bill needs to set out explicitly that it is to have a duty to ensure the adequacy and effectiveness of arrangements with the Treasury for crisis management.
There is no role for the new financial conduct authority in the drafting of the arrangements. Apparently it does have a veto, but it is not part of the drafting of that memorandum of understanding. The Government are still resisting proposals to ensure that deputy governors and the chief executive of the FCA can consult directly with the Treasury in circumstances where there might be differences of opinion. Given the import and the size of the FCA, the PRA and the FPC within the Bank, it is important that the deputy governors have an ability and a right to talk to the Treasury, so that everything is not hidden and suppressed within one view of the Governor of the Bank of the England.
There is a very bizarre set of provisions excluding the ability of the memorandum of understanding to make provision about the relationship between the Bank of England and the PRA, which goes to prove that the PRA is very much a creature of the Bank. It also suggests that the Governor will have powers to suppress the voice of the PRA in a crisis. Shockingly, there is no parliamentary approval process for that MOU; no statutory instrument arrangement has been made, as I understand it. The crucial paragraph of the MOU that deals with what happens in the white heat of an emergency simply says, “Oh well, there will be ad hoc or standing committees just to sort these things out.”
That is not good enough. The whole of best practice in preparedness and in emergency and contingency planning would suggest that now is the time for Her Majesty’s Treasury and the Bank of England to sit down and calmly and methodically work through what would happen in those circumstances. There should be some draft standing orders to pre-empt those scenarios.
Mr Andrew Tyrie (Chichester) (Con)
The hon. Gentleman will recall, of course, that the poorly drafted MOU that lay behind the tripartite agreement certainly played a role in the lack of understanding of how to handle the crisis. Does that not point all the more towards a need to think things through very carefully now? That MOU was scrutinised in Parliament; I was in Committee at that time and most of the points made were largely ignored. Surely now, while we have the time, we should think through what is required in such an MOU and take the opportunity to consider that in Parliament.
Chris Leslie
I entirely agree with the Chairman of the Treasury Committee, who is very knowledgeable and has some strong views on these questions. It is a pity that when we flick through the luminous list of Lords amendments, we find a gaping hole on those crisis management arrangements, where none was accepted by the Government. Some clauses in the Bill deal with that set of scenarios, and it is noticeable that such provision is not included there. That is in part why we have sought to amend Lords amendment 3, as one of the few areas where we can make an amendment is in respect of the role and duties of the oversight committee. I accept that that is only half of the scenario, as we also want Her Majesty’s Treasury to have a process for reviewing the adequacy and effectiveness of its arrangements with the Bank of England, but we do not have the opportunity today to propose such an amendment.
If we are to have an oversight committee, it should be able to play a role in ensuring that the crisis management arrangements are up to scratch and that there is joined-up thinking between these variously important branches of governance to ensure that someone at the Bank of England is tasked with thinking these things through very carefully.
Alison McGovern (Wirral South) (Lab)
Does my hon. Friend agree that it is incredibly important that Parliament gives its view on such issues, given the weight of academic insight into the arrangements in place at the time of the crash? We are trying to learn some of the lessons from that, and one of the key lessons is the importance of rules and thinking them through ahead of the scenarios, since it is literally impossible to know what the next unforeseen shock might be and where it might come from.
Chris Leslie
My hon. Friend is correct that this is about learning the lessons of preparedness and of what level of forward thinking we can undertake at this point in time. It is still amazing—I know she agrees—that although the FSA conducted a comprehensive review of its role in the financial crisis and the Treasury and Government did the same, we have to this day still not had a comprehensive review by the Bank of England of its role in the financial crisis. That is amazing. It begrudgingly had three minor reviews dragged out of it—it was like getting blood out of a stone—considering small particular areas where it had some failings. Those reviews concluded that there were serious issues to be addressed, and one of the individuals conducting one of those three small arrangements talked about the fact that the governance arrangements in the Bank of England were still too centralised. I hope that the Government will think more carefully about crisis management provisions.
Alison McGovern
I thank my hon. Friend for being so generous in giving way again. This is a crucial point: Parliament rarely discusses the strategic role of the Bank of England and rarely legislates, in part because the independence of the Bank of England is still a valid economic principle on which we hope to rebuild our economy. We must therefore get the discussion right at this time.
Chris Leslie
It is worth noting that when we talk about the independence of the Bank of England we are talking about operational decisions of the Monetary Policy Committee. They have to be made, of course, without political interference. We can come on to the questions of quantitative easing and the Chancellor’s recent decisions on that, but we will put them to one side for now. The questions of governance of the Bank of England are a matter for Parliament to take very seriously indeed.
As the debate progresses, we will discuss the vast powers that the Bank will be taking, which are known rather opaquely as macro-prudential powers of regulation. Essentially, the Bank of England can intervene in any number of financial services, products and transactions and affect the financial well-being of businesses, consumers and households in the constituency of my hon. Friend the Member for Wirral South (Alison McGovern). We are talking about mortgages, lines of credit and supply and so on. That is why we need to get the arrangements right, and it is a shame that the Government did not do that.
I want to skip on, if I may, to Lords amendment 16, to which we have suggested another small amendment.
Mr Gareth Thomas (Harrow West) (Lab/Co-op)
While my hon. Friend has his arguments firmly in his mind, may I remind him that for some time many Members of this House have been concerned that the Bank of England has not done enough to encourage our high street banks to invest in deprived communities. Does he think that his amendment to Lords amendment 3 might help to encourage the Bank of England to pay a little more regard to those concerns?
Chris Leslie
Indeed, and I am grateful to my hon. Friend for taking the time to participate in this debate. A string of amendments that we will discuss later cover consumer credit and the interests of consumers, and we will talk about ease of access to financial services when we consider them. He is right, as the Bank of England is a key player in this regard.
That point neatly takes me on to our amendment (a) to Lords amendment 16. It tries to ensure that under the new arrangements the Bank of England—in particular, the new powerful committee that is being established, called the Financial Policy Committee—will, when it explains the decisions it is taking, also have to include an assessment of the impact of its decisions on economic growth. I know that the whole question of jobs and growth is somewhat of a blind spot for Treasury Ministers, but notwithstanding their rather peculiar inability to see the importance of these issues, we feel that it is important to put that requirement in the Bill.
We are delighted and overjoyed that the Government finally relented and granted a concession in the other place, after months of labour in Committee in this place, by agreeing to Lords amendment 10. It was a major victory for the Opposition when the Government were forced to change the Bill to ensure that the FPC would not only contribute to the financial stability objective but, subject to that, support the economic policies of Her Majesty’s Government, including their objectives for growth and employment. That concession was made because of the amendments we tabled and the evidence heard in Committee from a wide number of organisations, including the British Bankers Association, the CBI, the London stock exchange and others. They all said in submissions to Parliament that the new regulators should have regard to growth, so we are glad that the FPC has that general backstop requirement on its shoulders. However, we do not think it goes far enough.
As I said earlier, the powers the Bank of England will take—that rather opaquely described set of macro-prudential tools—will be very wide ranging. Each time it pulls one of those levers, each time it makes a particular decision, it should explain the impact of that change. The Bank of England will be able to affect a number of key areas. Perhaps the Minister will tell us when the draft order at the back of the Treasury’s consultation document is likely to find its way on to the Floor of the House for debate, because I know that a number of hon. Members will be interested in that.
The Bank will have powers called counter-cyclical capital buffers. I know that the Treasury Bench has a difficulty with the concept of counter-cyclicality, but it essentially means that banks will be required to build up capital when times are rather exuberant and things are going well in the economy, but to unwind those capital buffers in a downturn. The Bank will say that there should be sectoral capital requirements. In other words, the FPC can make the residential mortgage sector have a certain amount of capital or structure its business in a particular way. The commercial property sector will have to do the same. This is a Bank of England decision, not the result of parliamentary or legislative changes. Consumer credit decisions will be made. If my hon. Friends have constituents who pay off their credit card, perhaps currently a 2% or 5% minimum repayment on a monthly basis, at the flick of a switch the Bank of England will be able to say, “No, you have to pay off 10% each month,” or perhaps even more. That is the sort of power that the Bank of England will have.
Mr George Mudie (Leeds East) (Lab)
The situation with mortgages will be similar. I am certain that the FSA’s and the Bank’s insistence on a higher deposit will harm the construction industry. The average price of a two or three-bedroom house is £160,000, and 10% of that is £16,000 and 20% £32,000. We are getting more and more tales of young couples who simply cannot get on to the housing ladder because they are paying excessive rents and cannot save that deposit.
Chris Leslie
My hon. Friend will not be surprised to learn that there was a little argy-bargy between the Treasury and the Bank of England. As I understand it, the Bank initially said, “Loan-to-value ratios on mortgages, and loan-to-income ratios, are an awfully big decision. There is a lot of politics in that. We are not that keen. Push that back to the Treasury.” I think the Treasury has been saying, “No, Bank of England, this is a decision for you to take.” These are inherently political issues and our constituents would rightly ask whom to hold to account for such big decisions that affect their daily lives: whether or not someone can get a mortgage, what is happening in the housing market, and so on. That is why we still have some reservations about the governance structures and the lack of accountability on policy making. That is why we are asking for an assessment of the impact on economic growth whenever these levers are pulled and whenever these decisions are taken. I accept that there are careful balances to be struck. The FPC of course has to have an eye to stability, but it also needs to recognise, as the Chancellor has said, that we do not want the risk-aversion of the graveyard so that there is no economic activity. That is why we have suggested this particular change.
I am conscious of the time and I know that a number of hon. Members want to speak. Those are the main points that I have to make about our particular arrangements and it would useful if we could hear the views of others.
Mr Tyrie
The Bill came out of the other place only last Wednesday night and it was heavily amended there. It is the most complicated, and one of the most important, pieces of financial legislation for decades.
Much of what we are considering today amends provisions in the Bill, which themselves amend the Financial Services and Markets Act 2000 and the Bank of England Act. The Bill is incomprehensible without constant referral to FSMA. I would go further and say that it is incomprehensible in parts even after considerable referral to FSMA. We now have a piece of legislation that passeth all man’s understanding, like God’s will. FSMA itself was arguably the most complex piece of legislation ever passed by Parliament. I was on the Bill Committee and it was certainly pretty testing.
We are now legislating in a huge rush to get this on the statute book by the end of the year in order to meet an entirely arbitrary deadline. The deadline has been rendered all the more absurd by the fact that we will be back here next year anyway amending it as part of the banking Bill, which is required to give effect to the Vickers commission’s recommendations, parts of which have to be done by amending FSMA and cannot be done in any other way. I am not making some recondite point about parliamentary procedure; I am making a point about how to make the Bill effective. It is a point that is being made to me right now by senior regulators, who would very much prefer that we just take a little bit more time to get the legislation right.
This group of amendments deals largely with Bank of England governance. Everyone is agreed that Bank of England governance is in a huge mess. That is why last April the Treasury Committee took the highly unusual step of tabling a new clause in an effort to try to sort it out. I am particularly grateful to colleagues from four parties on the Committee who all co-operated to enable that amendment to go down with unanimous support. I am also particularly grateful to my deputy Chairman, who is sitting on the Opposition Benches, who assisted with the tabling of that clause. It was needed because the Bank has ramshackle governance arrangements that reflect their 17th century origins, as the name “court” demonstrates. As has already been pointed out, better governance would improve its accountability to Parliament. But much more important in some respects, it would also improve the Bank of England’s authority to act and to speak to the rest of the country as it takes tough decisions, such as those that have just been referred to. This is a point that is not lost on very senior people in the Bank of England right now, on the Monetary Policy Committee, the Financial Policy Committee, and also a number of deputy governors.
The Treasury Committee clause would not have solved all that, but it would have gone some way to bringing the Bank into line with good practice on corporate governance generally. It would have placed a duty on the court to conduct retrospective reviews of Bank performance and to publish the results, and it would have required the court to publish its minutes. I withdrew the amendment in the Commons only when the Government gave undertakings to make those changes in the Lords. I will come back to that.
In May, the Treasury Committee took another highly unusual step of reporting on the Financial Services Bill, after we had looked at it in the Commons, in order to assist the other place with its examination. Most of the conclusions that we came to in that report were raised as amendments in the Lords. The Government responded to some of them and that is what we are debating now. The Government’s Lords amendment 3 sets up, as we have heard, an oversight sub-committee of the court’s non-executives. That would give the court the power to commission retrospective reviews of the Bank’s performance —that is a step forward—to be carried out either externally or internally. The Government have also inserted an amendment to require the publication of court records of its meetings. While these amendments improve the Bill, they fall well short of what we were hoping for, and what in our view is still required, for several reasons.
First, the amendments place the power of review in the hands of a sub-committee of the court, rather than the court itself. This will further confuse the lines of accountability, not least to Parliament and to the Treasury Committee. These accountability lines are now very complex. I urge the Minister to try drawing them on the back of an envelope. I wager that he will have quite a task on his hands. Senior regulators agree that they will not do as they stand, and they have been telling us that publicly and privately. They want an improvement. They want the legitimacy for their decisions that comes with effective parliamentary scrutiny. Senior people in the Bank of England have seen how the Monetary Policy Committee has been strengthened and bolstered as a result of effective scrutiny by the Treasury Committee.
Greg Clark
The hon. Gentleman has more experience of questioning the Governor than I have. The Joint Committee on the draft Financial Services Bill, of which he was a member, volunteered to agree with the Governor on that assessment, at least. We followed the Committee’s advice on that, as was recognised in the other place.
Chris Leslie
I understand the Minister’s argument. However, we are talking about a lot of power in the hands of a single individual—the single point of potential institutional disruption, as the Chairman of the Treasury Committee called it. Surely the sun king is capable of responding to some internal questioning, scrutiny and challenge, and that would be a healthy thing to have. Some kind of more proactive oversight might therefore not be such a bad idea after all.
Greg Clark
All those things are provided for in the Bill; the question is whether the word that the hon. Gentleman seeks to introduce is a matter of semantics or would bring in scrutiny of current decisions. That is a point of difference between us. In the House of Lords there are many people with experience of being very effective non-executive directors, as I know from my distinguished constituent, Baroness Noakes. Most people would recognise that she is meticulous and robustly independent in the scrutiny that she brings to matters, and she regarded the wording of the Bill as entirely compatible with that. It is not right to go against what the Treasury Committee recommended and to have the second-guessing of immediate decisions.
Let me say something about the existing powers. The report by the Treasury Committee recommended that ex-post reviews of the Bank’s performance should be carried out, and those are provided for. In fact, the current wording of subsection (2) of new section 3A of the 1998 Act requires the oversight committee to
“keep under review the Bank's performance”,
and that is consistent with the Committee’s recommendations. We think that this wording strikes the right balance between ensuring effective retrospective scrutiny of the Bank’s policy performance and avoiding a situation whereby the non-executive members of the court would be constantly second-guessing the decisions taken by the Bank’s expert policy committees and executives.
Amendment (b), tabled by the hon. Member for Nottingham East, would give the oversight committee an additional function to keep under review the adequacy and effectiveness of the Bank’s arrangements with the Treasury for crisis management. It is very important that that should be under review, for all the reasons he said. Subsection (2) of new section 3A gives the oversight committee a broad remit to keep under review the Bank’s performance in relation to all its objectives and strategy. It is absolutely clear—I would like to confirm this from the Dispatch Box—that the effectiveness of the Bank’s relationship and co-ordination with the Treasury in crisis management is fundamental to the Bank’s achievement of its objective to protect and enhance stability. As such, the oversight committee can already undertake or commission a review into the effectiveness of these arrangements if necessary. In fact, in January this year the Bank said in its response to the Treasury Committee that the oversight committee should, among other things, assess whether the Bank is fulfilling effectively its duty to notify the Treasury of risks to public funds at the appropriate time. There is no substantial difference between us that the amendment is seeking to expose.
Chris Leslie
The problem is the threadbare nature of the memorandum of understanding, particularly the infamous paragraph 20, which says:
“However, the Chancellor and the Governor may agree to establish ad hoc or standing committees.”
That is so thin that it is important for the oversight committee to make it a top priority to ensure that there is preparedness and that it is thinking through the circumstances in which a crisis may occur, and that needs to be placed explicitly in the Bill.
Greg Clark
I am grateful for the hon. Gentleman’s clarification. We should bear it in mind that the Bill requires the Treasury to lay the MOU before Parliament and to publish it. It will be subject to full transparency. For example, I would be very surprised if my hon. Friend the Member for Chichester did not call the Chancellor or the Governor to explain it. The oversight committee will be responsible for overseeing the Bank’s performance and, clearly, the MOU is a key part of its work in bringing to bear the Bank’s financial stability work. The committee will, therefore, consider from time to time whether it is working well and Parliament will itself have every opportunity to address the issue.
Amendment (a) to Lords amendment 16 would require the Financial Policy Committee to produce explanations of its decisions to exercise its recommendation and direction powers. Proposed new section 9QA(1) of the Bank of England Act makes it clear that the FPC’s explanations must set out how its decisions are compatible with its objectives, including the new objective to support the Government’s objectives for growth. It is clear that it has an explicit responsibility to do that. The FPC’s explanations will have to set out publicly how it has considered the impact on economic growth when deciding to take action and its reasons for believing that the action is compatible with its obligations in relation to economic growth.
Lords amendment 16—specifically subsection (3) of proposed new section 9QA of the 1998 Act—already requires the FPC to produce estimates of the costs and benefits of the decisions, including those areas to which the hon. Member for Leeds East (Mr Mudie) has referred. This will cover the impact on financial stability, both directly and indirectly, and the impact, both positive and negative, on economic growth.
I reassure the House that the FPC is giving considerable care and thought to the impact of these tools. The Bill requires the committee to produce and maintain policy statements for its direction tools. The statements will discuss the likely impact on both financial stability and economic growth. The Bank is preparing a draft of the statements, to be published early next year, so that they can be considered alongside the secondary legislation that will set out the FPC’s direction powers. We do not, therefore, think that amendment (a) to Lords amendment 16 is necessary.
Greg Clark
I am grateful for the hon. Gentleman’s point. I am not able to produce a novel parliamentary procedure, but I can certainly tell him and the Chairman of the Treasury Committee that when the time comes to publish the statutory instruments, if they or their Committee would like to consider and advise on the discharge of the commitments, I would be happy to engage with them in good faith and take on board any suggestions.
Chris Leslie
I am delighted to hear that concession from the Minister. We have suggested a super-affirmative procedure for some of the regulations. That would give the Treasury Committee and others more time to look at the issues and ask the other Select Committees about the effect on, for example, housing and communities and local government. If the Minister is willing to open that door, we would support him.
Greg Clark
I give the hon. Gentleman an inch and he takes a mile. I will not commit to a different procedure but, as I have said, I will certainly commit, in good faith, to considering personally any points that are made. [Interruption.]
Greg Clark
The short answer to that is yes. The FCA’s powers will be broad, and defined by practice rather than activity. We have been clear that it might not be just the level of interest charged, but other practices associated with the lenders that come within the ambit of the regulator. It is clear that it will use those powers vigorously to promote the interests of all our constituents.
I will leave my introductory remarks on that point. I am sure that Members wish to contribute and I will seek to respond to any points raised when I make my winding-up speech.
Chris Leslie
There is a large number of amendments in this group, that focus on consumer credit and the best interests of consumers. I want to concentrate on two in particular—Lords amendments 25 and 78.
Lords amendment 25 was extracted from the Government and we are glad that they gave way on it. The amendment will henceforth make it clear that the new Financial Conduct Authority will have a requirement to ensure basic access to financial services particularly in deprived areas and neighbourhoods where some of our banks and financial institutions do not necessarily think that they can make millions and millions of pounds. That is the hope placed on the shoulders of the FCA. The key question is whether the regulator will roll up its sleeves and use the full extent of the powers that the Bill should provide. I, for one, will be seeking a very early meeting with the new chief executive of the FCA to extract commitments on how it intends to use the new powers.
It should not have taken months of persuading and cajoling Treasury Ministers for them to accede to the changes. Perhaps it was the fresh air provided by the new broom, the Financial Secretary to the Treasury, sweeping clean with perhaps more of an open mind than his predecessor on some of these issues. If that is the case, I commend him for it. We need to begin to look at the detail, so I have a series of questions for him, starting with Lords amendment 25.
There are already what some people call lending deserts. In some communities, bank branches are not as readily available as they are in other, more affluent areas. In some deprived areas of the country, it is hard for consumers to access affordable credit. The key word—affordability—is of course now well known. If people want to be completely ripped off, they can pay for high-cost credit, often on a very short-term basis, with immense interest rate charges that can accumulate and get them into severe jeopardy. That will lead to further financial exclusion if they cannot keep up with the repayments, and to them being trapped in a spiral of poverty.
It is important to hold the big five banks to account. As large institutions, they are not just private companies with no obligations beyond and above those that rest on the shoulders of any other private company. In this day and age, they are a social utility and have a duty to the community to ensure that all parts of the country have access to basic banking facilities. The work of the financial inclusion taskforce, under the previous Administration, sought to ensure that basic bank account facilities were available. With the onset of universal credit in April 2014, it will be even more important for everybody to understand and have access to those facilities. However, I am increasingly worried about the fragile deal put together under the previous Administration to support and extend those basic services. There are signs of a creeping onset of charges. As banks come out from the era where the taxpayer was essentially keeping them going, they are now starting to look to the consumer to extract more charges. I do not want a situation where banks get together and think about introducing basic charges on current accounts, especially for those who are taking care to ensure that they are in credit. There are worrying signs that that might be in the air. Even the regulators have started to say, “Well, let’s start charging a little bit for in-credit current accounts. It might be a way of ensuring we don’t have to charge such high costs for unauthorised overdrafts.”
Sheila Gilmore (Edinburgh East) (Lab)
My hon. Friend talks about regulating to ensure that these bank accounts remain available. Sometimes, if people find themselves being charged for an account, they simply give up, because it is too expensive, and sometimes they cannot open another account, because they have got into difficulty. That has been the experience in the past few years. I hope that the regulators will be alive to those issues.
Chris Leslie
Indeed, that is the case. Anxiety is spreading and rumours are circulating that people with credit impairments or county court judgments against them are finding it increasingly difficult to access basic bank account services. One of the most shocking changes has been the way some of the big banks have started gradually to pull out of the LINK cash machine network. That network depends on all the banks taking part, because, if some big banks withdraw, as has happened, more of the cost of maintaining the network falls on a minority of banks, which, as a result, are more likely to walk away. I have worries, therefore, not just about the basic bank account networks, but about the LINK cash machine system, and I would be grateful if the Minister set out to those banks in no uncertain terms that, given their social duties and responsibilities as a utility, we expect—as a de minimis requirement—that they maintain those basic, fundamental activities.
Alison McGovern
Will my hon. Friend slightly broaden his comments about the LINK system? In too many of our towns and cities, cash machines in the most deprived areas are the ones that charge. Unfortunately, the principle that those with the least pay the most is creeping back into financial services. If we do nothing else this evening, let us send the message to the financial services industry that such a principle is wholly unacceptable.
Chris Leslie
That is true. The Opposition take the view that the financial services sector needs to move away from the old model of essentially extracting profit on the basis either of the ignorance or lack of awareness of customers—basically taking advantage of the inertia in the system—or of the fact that the consumer has no other choice. We need to support a financial services sector that genuinely adds professional value and acumen to products fairly and transparently. That is the modern sort of financial services sector that this country deserves and can have. We need to get away from that old era, in which the banking system essentially raked in multiples of small penny packets of income and profit off the backs of people who were not necessarily aware they were being charged 25p or 50p for cash withdrawals. That is the sort of bad practice we need to move away from.
The Opposition have called for action to ensure that pockets of the country are not left isolated and on their own. In the United States, they have clear safeguards requiring banks to reinvest in communities and provide basic coverage. That counts not only for consumers, but for small businesses, which, as we know, also struggle to access affordable loans.
Mr Thomas
My hon. Friend is making an extremely important point. He will be aware that President Obama, in backing stimulus legislation in Congress, ensured that it required banks to disclose their lending to businesses across the USA, allowing us to see the lending deserts not only for individual financial consumers, but for individual business financial consumers. Surely that is something the FCA might usefully consider requiring of our banks.
Chris Leslie
In Labour’s view, amendment 25 ought to allow that. If we are talking about ease of access to affordable financial services, it should be a responsibility of the FCA to think of new ways to map what is happening across the country and to ensure that there are not these deserts or vacuums of poor availability or no availability. That is why there should be a requirement for a map to be drawn up of where and what lending is available, perhaps on a postcode-by-postcode basis. It would provide transparency and enable hon. Members to find out what is happening in their constituencies. Anecdote is not adequate; we need a more rigorous system of regulation and monitoring. That is how it is often done in other developed countries, such as the US, as my hon. Friend said.
In the past, Ministers have said that they are opposed to that level of transparency. I am not sure about this Minister—I know he will want to take a fresh perspective—but previous Ministers said: “It’s too burdensome to require transparency in respect of lending patterns, and there might be anti-competitive issues as well.” It would be entirely feasible to collect anonymised data in the way suggested, however, and I hope that Lords amendment 25 could be so interpreted.
Mark Durkan
Like my hon. Friend, I welcome amendment 25, which, I note, was something he laboured on valiantly when we spent our Lent in Committee. Does he recognise, however, that in one part of the UK —Northern Ireland—the five high street banks he referred to are not part of the banking profile? In Northern Ireland, we are facing a twilight zone of banking, with changes happening almost by default squared—as a result of changes here and in Dublin—and that will change further in the context of banking union. That is why we need to question how the FCA would use the powers being given to it under amendment 25.
Chris Leslie
Exactly. I imagine that what my hon. Friend describes is absolutely correct. Incidentally, I pay tribute to him for his endeavours in trying to improve the legislation, month after month after month, as we proceeded through Committee and on Report. The situation in Northern Ireland will be compounded by different factors, so how much more useful would it be if he and his neighbouring parliamentary colleagues had access to data about lending availability in a more rigorous form? That is how we want to interpret amendment 25 and how we will press the FCA to interpret it.
Mr Thomas
Is there not a danger that the Minister might see amendments 25 and 78 as a “Get out of Jail” card when it comes to taking real action to tackle the problem of payday lenders and the lack of access to financial services in many of our most deprived communities? Might he not say, “Well, 2014, when the FCA comes in, will be the time to act”? Does he not need to adopt the same initiative as my hon. Friend mentions by having a meeting with the chief executive of the FCA and saying, “We want action on these issues. We want you to set out clearly before you take office what you’re going to do about the problem of payday lenders and what steps you’re going to take to require better access to financial services in the most deprived communities”?
Chris Leslie
That is correct. The Minister ought to be meeting the FCA regularly, and clearly those are the questions the House expects Treasury Ministers to put to the new regulators.
Lords amendment 78 was another concession that had to be dragged from the Government at great effort. I do not expect too much sympathy from you, Madam Deputy Speaker, but it is quite difficult for the Opposition to win votes in this House. Occasionally we have the odd success, such as on the EU budget—I do not want to talk about these things too much, as I know the Minister is a bit raw on that point—but by and large we try our best, we make our suggestions and we do not get very far. However, on this issue the Government were faced not just with the weight of argument by many hon. Members—including, of course, my hon. Friend the Member for Walthamstow (Stella Creasy)—but with the spiritual hand of assistance from the new Archbishop of Canterbury-designate in the other place, the Cross-Bench Bishop of Durham, as is. The Government had no choice but to make that historic concession when faced with the overwhelming moral and political case and the breadth of cross-party agreement.
The Commercial Secretary to the Treasury admitted that amendment 78 would not be a silver bullet for the problem of high-cost credit—payday lending or however we characterise these things. Although we are slightly disappointed that the new expanded Lords amendment 78 does not refer to “consumer detriment”, we hope that some of the provisions will open the door to enabling the Financial Conduct Authority to take urgent action to clamp down on some of the high costs involved, as well as the duration and rolling over of some payday loans or high-cost credit arrangements again and again, getting people into a spiral of dependency with massive credit costs, which are severely damaging to very many people.
My questions for the Minister are these. If the legislation no longer contains the “consumer detriment” litmus test, what will trigger intervention by the regulator? What will be the test? We are keen on many of the ideas in the amendment. The power to recover funds for consumers, the power to strike down enforcement action by an unreasonable lender and the power to insist on compensation for customers are all good, but we need the Minister to explain in slightly more detail how the Financial Conduct Authority will trigger those powers. Will individual complainants ring up the FCA hotline? Will litigation or a set of class-action cases be needed to get the FCA to take note, or might it send mystery shoppers around the country to undertake proactive investigations and say, “This is not good enough; we will see action”?
We are glad that Lords amendment 78 also makes changes on unlawful communications. That is welcome. Hon. Members will be looking at the clock and thinking, “Well, usually about now”—some time between 7.30 pm and 8 o’clock—“we get text messages from companies trying to convince us that all our debts can be written off in a voluntary arrangement under new Government legislation.” We might get spam or a cold caller saying, “Did you realise you’ve got £2,500 overdue, if only you put in your PPI claim before Christmas?” It is around this time in the evening that people will be getting these sorts of automated calls. There are all sorts of advertising, text and cold-call arrangements proliferating across the country.
Many of our constituents are totally baffled about what is being done and what can be done by the relevant authorities to stop such exploitative behaviour. Apparently, some of the companies trying to exploit vulnerable individuals use mechanised arrangement to poll thousands and thousands of people, and even if only 1% pick up the phone and say, “Oh well, I’d like more information”, the volume of calls means that they can make significant profits. A lot of these automated telephone arrangements are routed through foreign jurisdictions—often not even in the European Union—as a way of skating around advertising regulations.
We want amendment 78 to get a grip on some of those questions. I know that financial services companies are not always the ones directly involved—it could be what are known as claims management companies. There are also organisations peddling debt management plans that have high fees associated with them. People are sold a product by a company that says, “Let’s consolidate all your expensive loans and we’ll take a single payment instead.” People think, “That sounds rather good,” and they start making payments. Perhaps months go by, during which they pay, thinking that they are defraying their debts, but when the company goes bust, they find that they have paid down absolutely none of their debts. All they have been doing is paying for the profits taken by a fee-charging DMP provider. Those are the sorts of services we want the Financial Conduct Authority to tackle.
We have had a lot of shilly-shallying on these issues. Quite frankly, it should not have taken nine months of hard effort to extract this concession from the Government since we first tabled an equivalent amendment in Committee back in March. We are glad for small mercies—this is a step in the right direction—but it is now for the Minister to explain how Lords amendments 25 and 78 will bite and how they will help people in their daily lives. I look forward to hearing his response.
Helen Goodman
I want to speak to Lords amendment 25. The Minister was not terribly clear in his opening remarks about whether it concerned consumers as individuals or whether it would be interpreted more widely, to address the branch networks that the main clearing banks operate. When he winds up, I urge him to say something about the significance of having a nationwide branch network to ensure that all communities can be financially included.
This issue came to my attention in July, when I received a letter from HSBC, which wanted to close its branch in Shildon in my constituency. Shildon is a town of slightly more than 10,000 people, many of whom have been banking with HSBC for a long time. Many local businesses—600 of them—bank at the Shildon branch. It is much cheaper for everybody to have a local branch than to get on the bus, go down to Bishop Auckland, put money into the bank or take it out, and then come back again. The round trip on the bus costs £4. It is absolutely ridiculous that people should face such barriers. We mounted a great campaign and a huge petition, but of course HSBC has paid no attention whatever to the needs of the people of Shildon. I happened to come across a man at the Labour party conference who revelled in the title of “Director for wealth management”, and who was apparently the person responsible for the branch network. It is true that there is not a lot of wealth to manage in Shildon; none the less, people in Shildon need a proper banking service, just like those in other parts of the country.
As well as thinking about that need, we need to think about the impact on the rest of us. Let us suppose that somebody who lives in a perfectly well-banked part of Durham wishes to make payments in Shildon, belong to an organisation there or make transactions with people there. It is far easier and better for everybody if they know that there is a proper national network of bank branches. I urge the Minister to comment on the branch network in his closing speech.
I remind the Minister that over the last four years taxpayers have given the major banks a considerable amount of support through subsidies and guarantees, yet although they are too big to fail, they are not too big to fail their customers, which is exactly what they are doing. HSBC claims in its slogan to be “the world’s local bank”, but it is not very local in my constituency.
Greg Clark
I come now to the Government’s implementation of the independent review of LIBOR conducted by Mr Martin Wheatley. I announced the Government’s response to the Wheatley review in mid-October and three sets of amendments to the Bill have been made to implement those recommendations that require legislation. The first is to enable activities in relation to benchmarks, such as LIBOR and potentially others, to be brought within the scope of regulation under FSMA. The second is to create criminal offences designed to tackle misconduct in the financial sector, including a new criminal offence for making false or misleading submissions in connection with the determination of a benchmark. The third is to provide the FCA with a rule-making power to require banks to submit to LIBOR and other benchmarks. Those amendments complement the market-led reforms to LIBOR as recommended by the Wheatley review. Martin Wheatley recommended that submission to, and the administration of, LIBOR become regulated activities, and amendments 59 to 62 create a framework to enable activities in relation to benchmarks to be specified as regulated activities under FSMA.
Amendment 60 defines “ benchmark” as an “index, rate or price”, defined from time to time by reference to the state of the market and used in relation to investments. A benchmark is capable of being regulated only if it meets that definition. The precise benchmarks that are subject to regulation will be specified by way of statutory instrument. The Government recently published a consultation paper on this legislation. Initially, the activities to become regulated will be LIBOR submission and administration, as recommended by the Wheatley review. However, further benchmarks can be added and the Government are considering and consulting on whether additional benchmarks should be brought within the regulatory perimeter. The types of benchmarks that could be eligible include equity or bond indices, derivatives and commodity or energy benchmarks. The definition of benchmark, as drafted, requires that it be used for one or more purposes that relate to section 22 of, and schedule 2 to, FSMA.
The hon. Member for Nottingham East (Chris Leslie) has tabled an amendment that would extend that definition to include commodities. Let me say first that I totally understand the requirement that we should be able to address some of the alleged abuses that have taken place and have the powers in statute to include those benchmarks that are relevant to some of the concerns that have been expressed recently. We do not believe that there is any requirement to extend the legislation on that. In fact, the Bill was drafted to anticipate the Wheatley review and the work going on in other benchmarks. Benchmarks can represent many things, including commodities or energies, provided that they are traded financially in the way we often see. Under the definition, regulation by the FCA extends to benchmarks that involve financial matters consistent with FSMA and the objectives of the FCA as the financial services regulator.
The Wheatley review also recommended that banks should be encouraged to participate in LIBOR—participation is currently voluntary. In the absence of such submissions, LIBOR would cease to be a representative benchmark and, in an extreme scenario, would not be published at all. Therefore, Lords amendment 79 allows the FCA to require firms to participate in particular benchmarks, while making reference to a “code or other document”. That allows the detail of the requirement to be determined by the benchmark administrator, not by the FCA. It might not be necessary for the FCA to use that power immediately, if at all, and it has recently opened a discussion on how and when the use of that power could be considered.
The Wheatley review also recommended the creation of a new criminal offence in relation to the manipulation of benchmarks such as LIBOR and the re-examination of the criminal sanctions for market manipulation under FSMA. Although such conduct could already be a criminal offence under legislation, this is a helpful clarification of some of the powers. There will be three criminal offences: first, we are re-creating the offence of making a false or misleading statement; secondly, we are widening the offence in section 397(3) to include creating a false or misleading impression as to the market in, or the price or value of, an investment for the purposes of making a profit or avoiding a loss; and thirdly, we are creating a new criminal offence related to misleading statements and impressions in respect of specified benchmarks.
The amendments also replicate the penalties for existing offences: a person found guilty might face a prison sentence of up to seven years and an unlimited fine. The detail of the investments, agreements and benchmarks for which those criminal offences apply will be set out in secondary legislation. That is included in the public consultation currently under way.
Under the current arrangements, where enforcement action results in a firm paying a financial penalty, that is applied as a discount to fees paid by other firms the following year. Without reform, unprecedented fines, such as those relating to the attempted manipulation of LIBOR, would have represented a significant windfall to regulated firms. In future, regulatory fines revenue in excess of enforcement case costs will go to the Consolidated Fund. The hon. Member for Nottingham East and I had an exchange about that earlier. The regulators will be able to net off enforcement case costs before handing over the penalties to the public purse. The new arrangements will apply to FSA fines received from 1 April 2012, so the measure will include the penalty imposed on Barclays in relation to the attempted manipulation of LIBOR.
The Government have announced that £35 million of fines imposed from attempted LIBOR manipulation and other unacceptable behaviour received this year will be used to support Britain’s armed forces community. In addition, £5 million will go to the creation of new, groundbreaking first world war galleries at the Imperial War museum. I hope that the House will agree to these amendments but, of course, I stand ready to respond to any points Members make.
Chris Leslie
We have moved on to another series of amendments that have arisen largely as a result of the scandal that was discovered this summer, when it was found that some of the largest banks—obviously, we have heard about the concerns in relation to Barclays—had been manipulating LIBOR, the benchmark from which flows billions, if not trillions, in financial services products and investments worldwide.
The scandal had massive ramifications across the banking sector. It was as though having gone through three or four years of attempted reform following the global financial crisis, after which it was clear that the risks that many in the banking sector had been taking were not properly understood or accounted for, the sector was again knocked sideways. It turns out that it was not just about exuberant risk-taking; it was, in fact, about corrupt manipulation of what people had thought was a trustworthy index. What is worse, it hit the reputation of the City of London in particular. It was all in the name: the London interbank offered rate. This was taken by many other international financial centres to be a moment of weakness for the UK financial services sector, and we saw several examples of other jurisdictions taking action swiftly to capitalise on the disarray in which many in the financial services sector found themselves. It was therefore important that the Government took urgent action and commissioned a review of what happened in the LIBOR scandal.
At the time, we felt that the matter was of such significance that we called for an independent judicial inquiry into the whole question of banking standards and ethics. As I am sure you will recall, Mr Deputy Speaker, we had a very heated debate in which the Government said, “We’ll have a parliamentary banking commission,” while we said, “Go for an independent judicial variant.” Of course, the Government won the day, and hence the Chairman of the Treasury Committee is now demonstrating his stewardship of that commission, which is due to report shortly. I hope that it has an opportunity to look into the wider issue of ethics and standards in banking. The Government have been keen that it starts to focus, almost in pre-legislative mode ahead of the banking reform Bill, on the Vickers reforms, but these questions of standards, ethics and culture also matter tremendously.
The Government made several amendments to the Bill in the House of Lords. In amendment 79, it is envisaged that there will be new provisions for a benchmark administrator, but it is not certain that a private sector organisation, even if it has a certain amount of experience, will be totally immune from conflicts of interest. Did the Government give any consideration to establishing a more independent body or entity for that administrative process? It is vital that the process of finding a new benchmark administrator is open and transparent. Will the Minister give more details about the process that he is undertaking and how the tender process is happening?
On amendment 115, it is important to ensure that the new criminal offences have a strong effect in respect of misleading statements on benchmarking and in general. In terms of its jurisdiction, is the amendment limited to British banking and financial services activities, or does it cover activities undertaken by UK organisations or UK-approved persons in operations in countries beyond our shores? Clearly, in a globalised world, that is relevant to how we see the behaviour of those in the sector.
The Government’s proposals to regulate benchmarking currently apply only to investments. We want to ensure that the regulatory net is also cast around commodities, including oil trading, gas market trading, silver, gold, foodstuffs, and so on. I am sure, Mr Deputy Speaker, that you can think of a range of potential commodities. Therefore, in the marvellous parliamentary way in which we do these things, we are seeking to amend a Lords amendment to ensure that the definition is focused not only on investment but, for clarity’s sake, puts commodities into the Bill. The Government say that they are consulting on this arrangement and might have the power to include those things later down the line but do not believe that there is a requirement to do so at this stage. However, it is time that we got ahead of these issues early on.
In the Public Bill Committee in March, after several hours of debate—it had been a bit of a long day—I asked the Minister’s predecessor, in relation to LIBOR and the benchmarking of these arrangements, “Do the Government have a view about whether there is manipulation and whether changes need to be made to the regulatory arrangements?” He stood up and answered with the single word, no. Of course, he came to regret that stance and several months later—I think it was in June—we learned that a tremendous scandal had taken place. If we have these legislative vehicles, it is important that we take the opportunity to deal with any potential issues.
Alison McGovern
My hon. Friend mentioned ethics a moment ago. Although we need a financial services system that is internally ethical and that has the right culture, there is a broader problem. The LIBOR scandal bit in the way it did not because it was a usual Whitehall story, but because the Government rely on LIBOR, among other indices, to know what is going on in financial services. This might not be the part of the Bill that has been most hotly debated this evening, but we are all reliant on these indices. Is that why my hon. Friend is suggesting that we should cast the net a little wider and try to get ahead of the problem rather than constantly chase ourselves?
Chris Leslie
My hon. Friend makes an excellent intervention. She is right. In our debates about financial services we sometimes talk in rarefied or esoteric technical terms, but this issue is certainly of relevance to all our constituents, whose mortgage rates, the interest they pay on loans, and, in the case of oil markets, the price they pay for petrol at the petrol station and the price they pay to heat their homes, as well as prices in the gas and food markets—the price of a loaf of bread, for example—are all too often rooted in the costs of these commodities and investments, as determined by the global trading environment.
This is what it boils down to: it is a question of trust. Hitherto, people assumed that all the market benchmark arrangements were simply transparent exchanges of data and prices that showed the true value of an investment, product or commodity, and that people were buying and selling in an open and fair process. It turned out that those in the know, who were often highly paid traders in the bigger banks—incidentally, even more revelations will come out over the coming months about the banks that might have been involved in LIBOR—knew how to wangle the system and play the market in a way that helped not only the profits of their particular company, but that boosted their own personal bonus arrangements. It was a question of using other people’s money in order to shift massive volumes of trades. Even if the changes in price were fractional and seemed irrelevant, when they were multiplied by the billions of trades that were taking place they could have massive financial advantages to those traders involved.
It was alleged recently that banks rigged electricity markets in the United States and record fines have been issued. That involved British institutions, so British regulators should be explicitly equipped to tackle attempts to rig commodities trading, whether it be spot trading, forward contracts, futures contracts or hedging arrangements. Global commodities markets include a vast range of products, such as grains, fibre, other food, precious and industrial metals, energy, carbon offsets and so on.
As I have said, British households are affected by commodity market manipulation—perhaps even more than attempts to rig LIBOR. Commodity speculation has contributed to the record costs of staple foods in recent years. In fact, some people argue that the riots and social unrest in Egypt, Tunisia and other countries were influenced by pricing issues and distortions.
Last month, after the Energy Secretary made a statement to Parliament, the Financial Services Authority and Ofgem confirmed that they were conducting an inquiry into claims that British companies manipulated the wholesale gas market on 28 September. The Government have said that it would not be appropriate to use legislation to cover pure commodities, such as gas, but that if commodities are referenced by derivatives or other financial instruments, it is covered by the definition of investments. However, a derivative instrument may essentially be a traded instrument and there is no reason for it to fall within that definition. It could be regarded as an insurance product and so does not fall clearly within the definition of investments in Lords amendment 119.
Total, the French oil company, recently made open allegations against one of the PRAs. That is not the PRA as we know and love it—the Prudential Regulatory Authority—but another acronym. Price reporting agencies are companies or organisations that essentially gather information, almost as a journalist might do, and figure out broadly what is happening in the market. However, it is not necessarily a true reflection of what is happening. Total alleged that there were erratic processes involved and that it was not a true reflection of the state of the market. There were also questions over the methodologies of the price reporting agencies. Does the Minister think that price reporting agencies need to be within the regulatory ambit? Again, they are important component players in the financial services sector, but are not familiar to all our constituents—but by goodness, they would become familiar to all our constituents if they were not trusted or were seen to be failing in some way.
Mike Freer (Finchley and Golders Green) (Con)
Much commodity trading is still focused on trading on the floor, rather than on the screen. Does the shadow Minister not accept that as the trend moves towards trading on the screen, that should drive transparency? Should we not let the transparency of the market work first, before we rush to regulate?
Chris Leslie
I do want to see more transparency. Electronic data exchanges certainly have the potential to provide the regulators, including the Bank of England, with more real-time transactional information about what is actually happening. I do not necessarily want to see regulators wading through reams of information, but I want to ensure that, if need be, they have the scope to act. It is not clear that the Financial Services Bill, as it first entered Parliament in February, would have captured the LIBOR benchmarking situation within the regulatory perimeter. There were suggestions from the FSA that it was not something that it could deal with. That was not good enough and the Government have come forward with amendments. I want to ensure that those amendments allow the regulators to trigger inquiries and oversight for all benchmarking indices and arrangements, especially in the commodities market.
The hon. Member for Harlow (Robert Halfon), who has been campaigning on oil and petrol prices, has called for an OFT and FSA investigation into manipulation by oil firms in recent times. The United States Commodity Futures Trading Commission has raised questions about price fixing and manipulation in the silver market. That study was inconclusive, but questions linger over metals markets more broadly. The Minister’s good friend, the European Commissioner for Internal Market and Services, Commissioner Barnier, has suggested that all commodity indices should be covered in this way. Rather than waiting for European regulators to ensure that this happens, why do we not take this opportunity to deal with the issue?
We should not just say that benchmarking means investments; it is vital that we put it beyond doubt that the question of commodities is included. It is a stitch in time to ensure that we cast the regulatory perimeter correctly. I commend amendments (a), (b) and (c) to Lords amendment 60 to the House.
Alison McGovern
I promise not to test your patience, Mr Deputy Speaker, or that of the House by speaking for too long. Some, I know, will be of the view that indices and benchmarks are dry, dull, technical subjects—[Hon. Members: “Never!”] Hon. Members may say that, but I suspect them of sarcasm.
I begin with an explanation of why I think this part of the legislation so important, and why the amendments tabled by my hon. Friend the Member for Nottingham East (Chris Leslie) are crucial. In my view, they relate directly to the subject that currently fills our newspapers and television screens—the indignity and horror of food banks. The reason my constituents, and those of other hon. Members, cannot just pop to the shops and buy food is that food costs more than the amount of money in their pockets. In the long term, the answer to that problem is not charity—grateful though we are for those efforts—but a food system that provides sustenance for people to buy in shops at a price they can afford. Price is not a technical, dry issue that ought to be left to economists in the academy; it should be of importance to every family, as I know it is to every MP.
Food prices unite those who are finding life difficult at the moment both at home and far away. Although I applaud the efforts of those who try to help people out, in the end we must seek a better solution. Whether we like it or not, since the 18th century this country has taken part in global trade. We had a strategic role in that which I will not bore the House with, but part of it means that we, more than others, have a special responsibility to understand global trading systems, not least the one that ensures there is enough food for us to buy here at home, and that farmers in this country and far away get paid a fair price.
This morning I was with the UN Secretary-General’s special representative for food security. He described two current problems in the commodity market that I hope will help people to realise why we must understand that phenomenon. First, global food prices are currently extremely volatile. Secondly, although prices are moving sharply up and down, they are trending upwards. That means that those most vulnerable to the price change in that commodity face an ever-worsening scenario as they try to feed themselves and their families. How can benchmarks and a better understanding of the data help? Well, when we understand those movements we can try to find out what is behind volatility in global prices.
Briefly, let me take hon. Members back in time to about 2005 until the end of 2007. Economists around the world were busy writing papers on derivatives and what we now call shadow banking, and saying that sharing risk in that way was a good idea and helped to manage investment and the finance markets globally. We now know that facts and information were available that we could not see, and my question concerns what is going on now that we cannot see, specifically in relation to food prices. Is there an issue with derivatives based on commodities? My hon. Friend has already given some indications of why we might think that.
Mr Speaker
With the leave of the House, I propose to put Lords amendments 98 to 290 together.
Chris Leslie
Amendment 98 is in a separate group relating to clearing houses, and I would like to make some remarks.
Mr Speaker
The Minister will need to move amendment 98, and can do so.
Clause 27
Powers in relation to recognised investment exchanges and clearing Houses of Parliament
Motion made, and Question proposed,
That this House agrees with Lords amendment 98.—(Greg Clark)
Mr Speaker
With this it will be convenient to consider Lords amendments 99, 122 to 127, 224 and 225.
Chris Leslie
I would have thought the Minister wanted to speak, as Lords amendment 98 is the lead amendment of a group relating to the extension of resolution schemes from banks and building societies to investment firms and in particular UK clearing houses. There is a wider set of issues, therefore.
UK clearing houses stand between two parties in a trade, ensuring that a deal goes through in the event of one party defaulting. Once a deal is agreed, the transaction is honoured even if one party goes bust.
The Government’s decision to extend a set of resolution arrangements to clearing houses is incredibly important, as the debates in the other place set out. Clearing houses are highly significant entities nowadays. After the 2009 G20 summit, it was clear that several hundred trillion dollars of market transactions, especially in over-the-counter derivative arrangements, were part of the clearing house ambit. Therefore, a failure in a clearing house could clearly mean a big problem—a series of problems—for the financial services sector more broadly.
I have a series of questions for the Minister, as I would be grateful for his help in respect of the provisions of this amendment and others in this group. First, I want to ask him about today’s Financial Times, the front page of which talks interestingly about the extension of resolution plan arrangements from covering just companies within the UK to an agreement between the United States and the UK that the Bank of England seems to have struck which will mean, for the first time, that there is a template for larger, serious, significant international financial institutions to have resolution arrangements that span borders. Clearly that is relevant to these amendments on clearing houses. [Interruption.] I can tell that hon. Members are very familiar with these arrangements. Clearing houses have a great deal of cross-border interoperability, they cut across jurisdictions and there is a need to co-ordinate their work. Will the Minister assure the House that steps will be taken to ensure that international efforts are made to promulgate resolution arrangements that also cut across borders for clearing houses?
Central counterparty clearing arrangements these days contain a requirement also to hold Government bonds as collateral. As we know, Government bonds are not what they once were; there have been some questions about their safety. The Minister needs to explain: are we guarding against the deterioration of standards in central counterparty collateral arrangements? If we are increasingly reliant on gilt-edged securities of an international variety, are we actually ensuring that there is sufficient strength behind our central counterparty clearing arrangements?
Finally, may I ask the Minister a further question? Basel III arrangements will be ensuring that banks that are members of clearing houses need to capitalise their exposure to central counterparty contingent liabilities. Can he just give us a sense of the impact on the UK banking system, particularly on its capital adequacy, of processes that will see a rapid change on central counterparty arrangements from an over-the-counter arrangement to an exchange-based arrangement? If the regulators are insisting more and more on exchange-traded arrangements in those clearing houses, there will be an imperative for those clearing houses to become more and more price sensitive and they will be more desirable for the market more generally. That is why we are seeing so many mergers and acquisitions of clearing houses. Are these costs eventually going to be finding their way on to customers and our constituents? I would be grateful if the Minister replied.
Greg Clark
Let me give a bit of context to amendments 98 and 225. Taken together, they make provision with regard to the Bank of England’s role in insolvency proceedings relating to a UK clearing house. The amendments will ensure that the Bank of England is put on notice of any application for administration in respect of a UK clearing house, of any petition for a winding-up order in respect of a UK clearing house, of any resolution for the voluntary winding up of a UK clearing house and of the proposed appointment of an administrator of a UK clearing house. That will give the Bank the opportunity to consider whether to exercise a stabilisation power provided for in part 1 of the Banking Act 2009 in order to minimise the impact of the clearing house’s failure on financial stability. Amendment 225 gives the Bank of England the power to direct insolvency practitioners appointed in relation to a company that is or has been a UK clearing house. The direction would operate without prejudice to the existing statutory requirements relating to company insolvency.
The financial crisis of 2008-09 highlighted many deficiencies in the regulation of the global financial system. Most importantly, we found that the disorderly failure of systemically important banks could have catastrophic effects on the stability of the UK and international financial markets.
The hon. Member for Nottingham East (Chris Leslie) mentioned the piece that featured in the Financial Times today, which was a joint paper, in effect, between the Bank of England and the Federal Deposit Insurance Corporation on plans for resolving global systemically important financial institutions. The Bank of England and FDIC paper is a perfectly proper collaboration between brother regulators across the world and is exactly the sort of approach we would expect regulators to take to make the financial system safer. It should be seen as part of the wider international and European work to deliver a credible resolution regime for the biggest banks and for—
Public Service Pensions Bill
Chris Leslie Excerpts(11 years, 11 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Chris Leslie (Nottingham East) (Lab/Co-op)
I beg to move, That the clause be read a Second time.
Mr Speaker
With this it will be convenient to discuss the following:
New clause 3—Fair deal—
‘A member of a public service pension scheme is entitled to remain an active member of that scheme following—
(a) the compulsory transfer of his contract of employment to an independent contractor; and
(b) any subsequent compulsory transfer of his contract of employment.’.
Amendment 11, in clause 3, page 2, line 25, at end insert—
‘(5A) This Act shall not apply to scheme regulations relating to local government workers in Scotland unless the Scottish Parliament approves its application.’.
Amendment 12, in clause 7, page 4, line 29, at end insert—
‘(3A) A scheme under section 1 which replaces a final salary scheme may only be established as a career average revalued earnings scheme or a defined benefits scheme of such other description as Treasury regulations may specify.’.
Amendment 4, in clause 12, page 8, line 9, after ‘scheme manager’, insert ‘and employee representatives’.
Amendment 19, in clause 16, page 9, line 36, leave out subsection (1) and insert—
‘(1) New scheme regulations made under section 1 and 3 shall replace existing schemes’ current regulations and shall take effect on the amendment date.
(1A) Following the implementation of new scheme regulations under subsection (1), benefits shall only be provided in accordance with those new regulations.’.
Amendment 20, page 10, line 5, leave out ‘closing’ and insert ‘amendment’.
Amendment 21, page 10, line 6, leave out ‘1 April’ and insert ‘2 April’.
Amendment 32, page 10, line 7, after ‘scheme,’, insert—
‘(aa) 1 April 2016 for a Scottish scheme,’.
Amendment 22, page 10, line 8, leave out ‘5 April’ and insert ‘6 April’.
Amendment 23, page 10, line 10, leave out ‘(1)’ and insert ‘(1A)’.
Amendment 24, page 10, line 21, leave out ‘(1)’ and insert ‘(1A)’.
Amendment 25, page 10, line 23, leave out ‘closing’ and insert ‘amendment’.
Amendment 26, page 10, line 27, at end insert ‘regulations’.
Amendment 27, page 10, line 28, leave out ‘(1)’ and insert ‘(1A)’.
Amendment 28, page 10, line 28, leave out from ‘benefits’ to ‘includes’.
Government amendment 35.
Amendment 7, in clause 28, page 15, line 12, leave out ‘may’ and insert ‘must’.
Amendment 8, page 15, line 12, after ‘new’, insert ‘defined benefit’.
Government amendments 36 to 39.
Chris Leslie
Having spent a considerable number of weeks serving on the Bill Committee, I am pleased that we now have the opportunity to press the Government on questions that remain unanswered and largely unaddressed. Considerable changes are being made to many of the public service pension schemes as a result of Lord Hutton’s report on the future shape of those schemes. The report was largely welcomed throughout the House and that has contributed greatly to the improvement of the reforms. However, a number of the report’s aspects have not been adopted in full by the Government in this Bill, and we are concerned about that.
New clause 2, the first in a considerable group of suggested changes specifically to pension schemes, would implement recommendation 18 on page 132 of the Hutton report that
“public service pension schemes should issue regular benefit statements to active scheme members, at least annually and without being requested”.
At present, defined benefit public service schemes are obliged to provide such information only if they are requested to do so. That limited obligation is set out in the Occupational Pension Schemes (Disclosure of Information) Regulations 1996, but normal occupational pension schemes that do not have an arrangement for either a final salary or career average payment at the end of the scheme are obviously a different state of affairs from defined contribution schemes. New clause 2 would simply implement Lord Hutton’s recommendation and ensure that public service workers have a better understanding of the benefits that they have accumulated to date and what they stand to receive if they continue working until their normal retirement age.
We had a very healthy debate on this matter in Committee, where the exchange of views did not follow the usual to-ing and fro-ing of partisan speechmaking. A number of Members agreed that it would be very healthy if we improved the information and transparency for employees to enable them to make more informed decisions in planning for their savings and their financial future. For example, members of the schemes would be better able to judge whether they were saving enough for their retirement. The new clause is therefore compatible with the aim of reducing people’s need for state benefits in retirement—something that many Members across the House want to achieve.
When we tabled a similar amendment in Committee, it gained quite a degree of vocal support. The hon. Members for Bedford (Richard Fuller) and for Finchley and Golders Green (Mike Freer), who are in the Chamber today, helpfully pressed the Minister to resist his usual logic, which says in big block capital letters, “This is an Opposition amendment; thou shalt resist this devious device by Labour Members to do something nasty in the legislation.” That was not our intention. We actually wanted to implement Lord Hutton’s recommendation and bring defined benefit schemes into the modern age, especially in respect of communicating more regularly and effectively with scheme members. I live in hope that those hon. Gentlemen will chip in and offer their support again, because surely the goal of improving people’s understanding of their pension and helping them to plan more effectively for their retirement should find favour on both sides of the House.
Mike Freer (Finchley and Golders Green) (Con)
Will the hon. Gentleman give way?
Chris Leslie
I will give way. In fact, I was just about the quote the hon. Gentleman. He said:
“If we want people genuinely to prepare for their pensions, we need to give them the maximum amount of information. Just suggesting that it is good practice without putting in place any requirement is the wrong thing to do.”––[Official Report, Public Service Pensions Public Bill Committee, 22 November 2012; c. 455.]
It gives me great pleasure to give way to the hon. Gentleman.
Mike Freer
I am flattered that the shadow Minister should pay such attention to my words. Does he agree that it is rather perverse that when taking out a pension, particularly a private pension, a customer has to read reams of documentation about the risks, the forecasts, the potential growth rates and what might or might not happen, but when one has a public service pension, that level of detail is not provided and, most importantly, the annual statement provides scant information, even if it is requested?
Chris Leslie
That is an anachronism that has to change. The hon. Gentleman is correct that just because somebody is in a public service scheme or a defined benefit scheme does not mean that they should not think through carefully what the financial consequences will be for them on retirement. This Bill is the perfect opportunity to take that small but significant step forward.
In Committee, the Minister initially went into rebuttal mode and said that we could not have the new clause for a number of reasons. At first, he said that there were different ways of providing information to members of the scheme, that we did not want to be too prescriptive and that legislation was not necessary. However, the new clause does not prescribe the manner in which the information is provided; it would merely ensure that annual statements were provided in some form.
The Minister’s other objection in Committee was that defined benefit schemes in the private sector are not obliged to provide annual statements, so it would not be right for public sector schemes to do so. However, Government Members again disagreed. I cannot do better than to quote again the hon. Member for Finchley and Golders Green:
“We have a pensions problem in this country, and saying that private sector schemes are not required to provide statements—though many do…—is not a good enough reason for not requiring public sector schemes to provide them.”––[Official Report, Public Service Pensions Public Bill Committee, 22 November 2012; c. 455.]
Amen to that excellent argument. The Minister said at the time that he would consider the issue further.
Last week, I wrote to the Minister saying that it was our intention to table new clause 2. I rather hoped that he would table his own variant. Usually, there are accusations that the Opposition have not thought through the drafting of the phraseology of an amendment and there is some technical reason why it cannot be accepted. However, we have offered the Minister the chance to correct that. It is a matter of great regret that the Minister did not come forward with his own new clause. Perhaps I should be more optimistic and assume that that means that the Minister will stand up and accept new clause 2 straight away. That would be fantastic.
It is worth noting that all defined contribution pension schemes are required by the 1996 occupational pension schemes regulations to provide much more detailed statements than those proposed in the new clause. There is therefore no reason to think that there would be any problem in implementing the arrangements.
It would be helpful if the Minister made this change. If he wants to do it in the House of Lords when the Bill gets down there, we could probably accept that, but I think that most Members would accept the change.
Richard Fuller (Bedford) (Con)
In Committee, we also talked about the risk of people with public sector pensions making the perverse decision not to contribute to their pension because they feel that the contribution rate is going up significantly, missing the fact that a significant contribution is being made to their pension scheme by the taxpayer. Does the hon. Gentleman feel that the new clause would assist members of public sector pension schemes in identifying what a large contribution the taxpayer is making, and therefore help to reduce the number of people who take the irrational step of opting out of the pension scheme?
Chris Leslie
Even though the quality of the scheme has been eroded, as we saw with the unilateral imposition of the average 3% increase in employee contributions—that might even have been before Lord Hutton reported—they are still good defined benefit schemes and we encourage public sector members to stay in them. We have debated our concerns elsewhere over whether the viability of the schemes will be jeopardised by employees being deterred from joining or deciding to opt out. However, we encourage members to stay in the schemes. Unfortunately, the 3% additional contribution is not part of this legislation, so it would be outwith the scope of the Bill to table amendments on that or to debate it. That is a great shame.
It is important that annual benefit statements include not only the employee’s contribution, but the employer’s contribution, as set out in the new clause. If the defined benefit schemes are good, there is no reason not to have that level of clarity and transparency. I have no problem with accepting that that should be part of the information that is given to scheme members. I hope that the Minister will accept that.
New clause 3 is one of the most important proposals in this group. The Government promised to implement what is known as the new fair deal, which is one of the most important aspects of the agreement that was reached in the negotiations between the employee side and Government or employer side of the scheme. The new fair deal would ensure that all public service workers who were compulsorily transferred to an independent contractor, be it a private company, a charity or another third sector body, would be entitled to remain an active member of their public service pension scheme. That is a basic requirement and it was a core part of the agreement. We were glad that the Government committed to it.
The Chief Secretary to the Treasury confirmed the Government’s commitment to the new fair deal in a written statement in July, which stated that
“the Government have reviewed the fair deal policy and agreed to maintain the overall approach, but deliver this by offering access to public service pension schemes for transferring staff. When implemented, this means that all staff whose employment is compulsorily transferred from the public service under TUPE, including subsequent TUPE transfers, to independent providers of public services will retain membership of their current employer’s pension arrangements.”—[Official Report, 4 July 2012; Vol. 547, c. 54WS.]
That is an improvement on the current fair deal arrangements, which ensure that outsourced staff receive broadly comparable arrangements to those under the public service schemes. The Government’s promise to implement the new fair deal was central to the rationale and at the heart of why many public service workers agreed to support the new proposed pensions reform, even though aspects of it were detrimental to them.
Sheila Gilmore (Edinburgh East) (Lab)
A few months ago in the Open Public Services White Paper, the Government expressed enthusiasm for transferring services to voluntary organisations and social enterprise—we have not heard so much about that recently. If that is to work, however, is it not particularly important to have the proposed provision on pensions?
Chris Leslie
Many public service workers whose services have been transferred to independent providers, whether they have been outsourced, find themselves in the voluntary sector or wherever, still want to ensure that their deferred wages—that is what pensions are—will be protected in a particular way. That was a positive development in the negotiations, but to what extent has such protection found its way into the Bill? That is why the Opposition are concerned and have tabled new clause 3.
Mr Nick Gibb (Bognor Regis and Littlehampton) (Con)
The hon. Gentleman will know that the fair deal arrangements introduced in 1999 by the Labour Government were not statutory. Why was he happy to support and serve in a Government who had a non-statutory approach to the fair deal, but in opposition he seeks to make that approach statutory?
Chris Leslie
The situation now is different because of the level of trust on which public service employees feel tested when looking at significant changes by the Government. Employee contributions were unilaterally increased by 3% without consultation or discussion—that was simply imposed, even though Lord Hutton was putting measures through. The evaluation arrangement was unilaterally changed from the retail prices index to the consumer prices index. A typical public service employee must have said, “Hold on a minute. Are we supposed to just take this on faith? We are glad that the Government are in negotiations, but as we know, Ministers are here today and gone tomorrow.” In no way do I cast aspersion on the Economic Secretary who I am sure will remain on the Front Bench in days to come. However, we cannot simply rely on statements from particular Ministers at a particular point in time.
John Healey (Wentworth and Dearne) (Lab)
My hon. Friend is absolutely right about trust, which is critical following the experience of many public service workers and Government decisions on pensions. Does he not underplay the importance of the fair deal? He described it as a positive development in the negotiations, but for many public service workers and their unions it was not just a positive development but a deal maker that allowed them to accept a package which, as he said, was detrimental in other areas. It was important that people took that provision as a clear guarantee, but doubt has now been cast on it, which underlines the importance of including it in the Bill and therefore the importance of new clause 3.
Chris Leslie
My right hon. Friend is correct. When we get a sense of the Government pulling the odd thread here or there or watering down elements of the provision—if I may mix my metaphors—it is no wonder that people start to question whether the words of Ministers at a particular point in time will carry through into what should be a 25-year commitment as set out in legislation. The provision was part of those negotiations but it has not found its way into the Bill.
Even more worryingly, the Economic Secretary made some peculiar statements in Committee about something that we thought was a done deal. He said:
“it is important that we consider in full the views of all stakeholders, including of course those who will be affected, through further consultation before making a final decision on the issue. It would therefore be inappropriate to include the fair deal policy in the Bill.”––[Official Report, Public Service Pensions Public Bill Committee, 22 November 2012; c. 459.]
It is as though negotiations had not been completed or decisions reached. Indeed, it sounded very much as if the Government were reneging on their commitment.
The Government need to lay to rest any suggestion that they are going back on their promise, and the only way to do that is to accept new clause 3. Failure to do so risks reopening debates and potential disputes with public service workers who will—justifiably—feel they have been misled.
John McDonnell (Hayes and Harlington) (Lab)
Part of the concern and need to write such provisions into the Bill comes from the fact that no one predicted clause 3. It has been described as a Henry VIII clause, as it gives sweeping powers to Ministers to legislate on schemes through statutory instruments or even retrospectively.
Chris Leslie
Indeed; we will debate some of the worst aspects of clause 3 later. It feels as though when writing the Bill Ministers did not consider it as enshrining an arrangement involving give and take on both sides. They have included certain things to the advantage of the employer, but there are scant—if any—safeguards of sufficiency and longevity for the employee, and that is causing anxiety.
John Healey
My hon. Friend is making an important argument in response to the intervention by my hon. Friend the Member for Hayes and Harlington (John McDonnell). It is not just that the Bill includes certain things that advantage employers; the measures are principally to the advantage of the Treasury, which is given the whip hand and ultimate say over schemes that should be run by their members and managers accountable to them.
My hon. Friend quoted the Economic Secretary in Committee. When the Minister rises to his feet, is it not important that he explain the discrepancy between what he said in Committee and what the Chief Secretary to the Treasury said to this House in December last year? He said:
“Because we have agreed to establish new schemes on a career average basis, I can tell the House that we have agreed to retain the fair deal provision and extend access for transferring staff.”—[Official Report, 20 December 2011; Vol. 537, c. 1203.]
There is a big difference between those two statements and the Economic Secretary needs to explain himself on that point.
Mr Speaker
Order. Before the hon. Member for Nottingham East (Chris Leslie) replies, let me say that although I have indulged the right hon. Member for Wentworth and Dearne (John Healey) on this occasion I hope he will not repeat such a long intervention. I do not want him to induce the hon. Member for Corby (Andy Sawford) into following bad habits. That would be a very undesirable state of affairs.
Chris Leslie
It may be a bad habit but it was a jolly good intervention. I do not often do this, but I commend my right hon. Friend for quoting the Chief Secretary to the Treasury. What is the difference between the Chief Secretary and the Economic Secretary? Well, one is a Liberal Democrat and the other a Conservative. However, my right hon. Friend should take that with a pinch of salt, as I too have a quote from the Chief Secretary, who said that
“establishing a relationship of trust and confidence between the Government and public service workers is critical to the success of these reforms.”
How long will this coalition Government persist? What we need is not just a commitment from a Liberal Democrat Chief Secretary to the Treasury whose parliamentary and ministerial career might not endure. We need to know what would happen should there be the dreadful set of circumstances of a Conservative majority Administration. Would a promise on the new fair deal, given only verbally by Ministers, endure in such circumstances?
Given the Minister’s trajectory and career momentum, I want to hear a commitment from him to the new fair deal on behalf of the Conservative party. That might mean something, although I would still prefer to see it in the Bill. It would be invidious for the Government to speak against new clause 3, let alone vote against it if we decided to test the opinion of the House. I am conscious of the time so I will move on.
Amendment 11 relates to issues of local government workers in Scotland and would exclude the Scottish local government pension scheme from the Bill, unless agreed to by the Scottish Parliament. Primary legislation on public service pension schemes has always been reserved to the UK Parliament. Scottish Ministers have had responsibility for regulations for public service schemes but those have been subject to Treasury approval and have tended to mirror arrangements for England and Wales. The exception is the Scottish local government pension scheme, which is a funded scheme that has not been subject to Treasury approval in the past. The Bill extends certain prescriptions to the design of the Scottish local government pension scheme that, in practice, have previously been left to Scottish Ministers to negotiate and decide—most importantly, they negotiated and decided on normal pension age; that benefits should be based on career-average revalued earnings and not final salary; on the cost cap, as it is known; and on rules for governance and fund valuations.
Mr Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP)
Does the hon. Gentleman agree that, if the Scottish Government can find the ways and means to fund their pensions, they should be free from penalties from the Treasury at Westminster?
Chris Leslie
That comes down to how the legislation is drafted. There are different financial consequences for local government pension schemes than for other public service pension schemes. That is why we need clarity in the legislation. I am conscious that the Scottish National party Government in Scotland have argued that there is no need for a legislative consent motion to cover the matter because, in theory, the UK Parliament always had primary legislative power over the local government pension scheme in Scotland but has hitherto chosen not to use it. The Government in Scotland have been quick to accept the UK’s proposals, which is unusual, because they normally argue that more power should sit with Holyrood. The movement of the regulation-making powers means that the Scottish Government will not need to grapple with difficult decisions on the reform of certain pensions, but the Opposition feel it would be better for Members of the Scottish Parliament to have an opportunity to scrutinise and debate the application of the legislation to the local government pension scheme in Scotland. Amendment 11 to clause 3 would mean that the Bill would not apply to the local government pension scheme in Scotland unless that is explicitly approved by the Scottish Parliament. The hon. Member for Banff and Buchan (Dr Whiteford) and others have tabled parallel amendments—I gather they are in the third group, so we will probably return to this debate later.
Amendment 12, which is in my name and that of my hon. Friend the Member for Kilmarnock and Loudoun (Cathy Jamieson), relates to another key Government promise made to public service workers. It seeks to enshrine in the legislation another Government promise made to public service workers—the Government promised that their final salary schemes would be replaced with career-average revalued earnings schemes. That would ensure that public service workers continue to receive a defined benefit pension.
The Bill does not explicitly honour that promise, and clause 7 provides that schemes created under the Bill can be defined benefit or defined contribution schemes, or any scheme of any other description. That is fundamental to the arguments on the Bill, but it is also fundamental to the arguments that Hutton made and the agreements that were reached. All schemes were supposed to be succeeded by career-average defined benefit schemes. In some cases, the Government might like to continue small defined contribution schemes, but the amendment would not affect those; it would apply only to final salary schemes and ensure that they are replaced with another defined benefit arrangement. The amendment therefore simply seeks to put the Government’s promise to public service workers on a statutory footing.
A similar amendment was opposed in Committee, but the reasons given by the Minister were concerning. He claimed that the Government intended to replace the final salary schemes with career-average schemes, but that “the flexibility embedded in” the Bill
“could be helpful to scheme members in future.”
He added that
“it would not be appropriate for this Government to tie the hands of future generations and pension scheme members who might decide that, subject to the protection offered by the enhanced consultation and reporting obligations of clause 20, defined benefit schemes were no longer the most appropriate for public service workers.”––[Official Report, Public Service Pensions Public Bill Committee, 13 November 2012; c. 291-92.]
That is not the first time we have heard the Minister’s bizarre argument that legislation could bind the hands of future Governments. No Government can bind the hands of their successors in that way. Unless the Minister has an insight into changes in the democratic process of which we are unaware, that remains absolutely the case.
Therefore, the argument that clause 7 provides welcome flexibility to scheme members now or in future is, in the Opposition’s view, potentially misleading. In the rare circumstances that a defined contribution scheme is better than the defined benefit one, and scheme members and the Government wish to change schemes to defined contributions schemes, clauses 19 and 20 allow that to happen. Clause 7 provides no flexibility that does not exist in clauses 19 and 20. If we do not make the amendment, we allow the Government to go back on their promises. We seek to keep them to their word on those arrangements.
I know that many hon. Members wish to speak to proposals in this large group, so I shall make my final point on the question of closing local government pension schemes. My hon. Friend the Member for Corby (Andy Sawford) and the hon. Member for Finchley and Golders Green (Mike Freer), among others, have had extensive experience of local government schemes. In Committee, there was anxiety that the Bill mentions closing existing LGP schemes and beginning new ones. The problem with closing schemes is that there can be unintended and adverse consequences. We heard in Committee about triggering debts which might need to be crystallised on closure. Of course, not just big local authorities but small academies, charities and others are members of such schemes. They might find that they suddenly need to shell out one great lump of money simply because an existing scheme closes and the deficit needs to be dealt with there and then.
The Minister assured us that regulatory provisions did not require such crystallisation, and that there could be protections. The Opposition are not massively happy with that, but even if we accept the Minister’s word that closure does not mean closure, thousands of employers in the local government pension fund have individual admission agreements governing the terms of their participation—the agreements are not necessarily in a standard form, meaning that there could be thousands of different admissions contracts for the schemes. It is likely that at least some of the agreements will set out various powers for local authorities in the event of closure, including the power to collect a debt from the employer equal to its share of the scheme’s deficit. That would put a massive strain on participating employers and could put some of them out of business.
The Minister gave assurances on some of those points in Committee, but he missed the problem that the Bill allows local authorities to close their funds. The Government cannot prevent them from doing so under the Bill. The problem of triggering debts therefore remains substantive. There is also the question of whether closure means closure or continuing a scheme. The Opposition believe that a different approach is needed and that the Bill needs better drafting, which is why we have tabled amendments 20 to 28. We are not trying to add costs to the public purse and are keeping the Government’s proposals, but we are saying that it would be better to amend an existing scheme rather than to close and reopen it. They are in some ways technical proposals, but it would be better to err on the side of caution and provide that new regulations can amend scheme rules to ensure that all future benefits are accrued according to the provisions of the Bill and negotiated arrangements.
Those are essentially my comments on the Opposition’s proposals. My hon. Friends and others have tabled amendments in this group, but I shall let them make the case for them.
Mr Gibb
I rise to speak briefly to Opposition new clause 3, which is on fair deal arrangements. Hon. Members will be aware that fair deal arrangements were originally addressed by Lord Hutton in his interim report in October 2010. Hutton was concerned that the arrangements at that time created barriers to the plurality of public service provision. He said:
“At present, when employees are transferred to non-public service bodies, the organisation they move to is required to ensure that there is ‘broadly comparable’ pension provision for future service, through the Fair Deal provisions…This arrangement has maintained the level of pension provision for those compulsorily transferred out of the public sector. However…this can make it harder for private sector and third sector organisations to provide public services because providing a ‘broadly comparable’ defined benefit pension scheme can be significantly more expensive and risky for private sector organisations than for public sector employers.”
That was the starting point of the debate. In box 1.A—a shaded box, the hon. Member for Nottingham East (Chris Leslie) will be intrigued to know—Lord Hutton concluded:
“Ultimately, it is for the Government to consider carefully the best way of moving forward with Fair Deal in a way that delivers its wider objective of encouraging a broader range of public service providers while remaining consistent with good employment practices.”
Mr Gibb
I congratulate the hon. Member for Corby (Andy Sawford) on his election to the House. His intervention indicates the seriousness with which he takes his new role. I am grateful for that and I take his point. All of us on the Government Benches want to ensure that we have sustainable, good-quality defined benefit pensions in the public sector, but to achieve that there has to be major reform to public service pensions for a raft of reasons to do with longevity, cost, poor performance of the stock market in the past 12 years and tax changes that occurred in 1997. For all those reasons, if we are to have good-quality, defined benefit pensions for public service employees, there have to be major reforms.
The Government have been clear, open and transparent in the negotiating process, and an ample number of documents are circulating that set out precisely the conclusion to the negotiations, not least the proposed final agreements. The idea that without changing primary legislation the Government can somehow slip through major changes to the quality of benefits to the employees, which the hon. Gentleman is talking about, is just not in the real world. All Governments have to behave reasonably, and this Government are no different from any other. Not only have they behaved reasonably in these negotiations, but, I believe, they have given rise to high-quality public service pension arrangements that offer benefits way beyond the arrangements in the private sector. That is a sign that the Government recognise the important contribution that public sector employees make to our society.
I point the hon. Gentleman to the consultation on the new deal that took place between March and June 2011. That was a broad consultation, to which there were more than 100 responses. In July this year, in a written ministerial statement, the Chief Secretary to the Treasury stated:
“the Government have reviewed the fair deal policy and agreed to maintain the overall approach, but deliver this by offering access to public service pension schemes for transferring staff…this means that all staff whose employment is compulsorily transferred from the public service under TUPE…to independent providers of public services will retain membership of their current employer’s pension arrangements.”—[Official Report, 4 July 2012; Vol. 547, c. 54WS.]
That is on the record and should provide the hon. Gentleman and the rest of the House with the assurance they need.
Chris Leslie
We hear what the Liberal Democrat Chief Secretary to the Treasury says, but can the hon. Gentleman, as a Conservative MP, give us a guarantee that that would also be the case under a future Conservative Government?
Mr Gibb
I listened carefully to my hon. Friend and to the Chief Secretary and I did not find any difference. My hon. Friend was addressing whether particular matters should be in primary legislation; the Chief Secretary was setting out the case for the policy.
On teachers’ pensions, there was anxiety that the current arrangements, under which teachers in the independent sector can be members of the teachers’ pension scheme if their employer signs up to the scheme, might be put in jeopardy by the words of Lord Hutton’s interim report, so the Chief Secretary’s statement was welcome news to teachers. Paragraph 8 of the proposed final agreement states:
“the Government agrees to retain Fair Deal provision and extend access to public service pension schemes for transferring staff. This means that all staff whose employment is compulsorily transferred from maintained schools (including academies)…under TUPE…will…be able to retain membership of the Teachers’ Pension Scheme when transferred.”
That is welcome news. The agreement goes on to state:
“The Government’s decision on Fair deal means that…independent schools which already have access to the Teachers’ Pension Scheme will continue to do so (for existing and new teachers); and new teachers and independent schools will continue to be able to join the scheme under the existing qualifying criteria.”
When we debated the issue in Committee, the hon. Member for Nottingham East conceded that the new fair deal
“is an improvement on the current fair deal arrangements”,
but, as he has just now, he complained that
“the promise does not appear in the Bill.”––[Official Report, Public Services Pensions Public Bill Committee, 22 November 2012; c. 458.]
He will be aware, however, that the fair deal arrangements were non-statutory when they were introduced in 1999, and that they remained non-statutory when they were revised in 2004. Notwithstanding the fact that the new fair deal arrangements are an improvement on the old ones, if it is good enough for a Labour Government for the policy to be non-statutory, it ought to be good enough for the hon. Gentleman. As my hon. Friend the Minister made clear in Committee, the recently published Government response to the fair deal consultation included draft guidance setting out how the new policy would work in practice. Given all the public statements by my hon. Friend the Chief Secretary and the published guidance and consultation documents, the hon. Gentleman should be assured by the commitments given.
Chris Leslie
Does the hon. Gentleman not understand the sense of anxiety that many public sector employees feel? Their trust was shattered because of the unilateral decisions on RPI to CPI and the 3%. They are saying, “Don’t we need more safeguards?” Can he understand why they would want safeguards now that might not have been necessary in the past?
Mr Gibb
Of course, that is an assertion by the hon. Gentleman. I do not recognise that crushing of confidence. What the Government had to do when they came into office was tackle a huge public sector deficit of £156 billion, and they have done that. As a consequence of the difficult decisions the Government have taken, the capital markets have been assured that the Government are getting the public finances under control. That itself should assure beneficiaries of public service pensions that the Government will put the public finances in a stable condition and so avoid the need for the sort of draconian changes to public service pensions being implemented in other European countries as they seek, rather belatedly, to tackle their public deficits.
Sajid Javid
As I said, virtually every month the Chief Secretary has written to the Scottish Government, and they have had plenty of opportunity to respond. As I said to the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson), if, even at this stage, the Scottish Government wanted to suggest amendments, those amendments would be given serious thought in the other place.
I commend Government amendments 35 to 39 to the House.
Chris Leslie
I will start with the good news that the Minister is willing to concede the principle, if not the words, of new clause 2 on member communications. That is an important change of heart. We wanted annual benefit statements to be sent out proactively to members of defined benefit public service pension schemes, as they are for defined contribution schemes. We encountered a bit of resistance in Committee, but the Minister has thought again, particularly in the light of the views of the hon. Members for Bedford and for Finchley and Golders Green, and of many of my hon. Friends who made the same argument. I welcome the fact that the Minister has been persuaded of the spirit of the amendment. We do not get many victories for common sense in legislation, but this is one of them, and I pay tribute to him. It is a mark of distinction for him that we have managed to have him think afresh about the argument, reflect on it, and bring matters forward in the House of Lords. When our constituents receive these annual letters in the post, they can thank him for that extra information, as well as the hon. Members who have argued for it. [Interruption.] The letters may of course arrive online as well.
The Minister did not say much about Government amendment 35, but that also feels like a famous victory. It means that existing members of final salary schemes in public bodies will definitely be able to stay in those schemes. We are sometimes grateful for small mercies in these legislative processes.
I turn now to the less good news. I heard what the Minister said about our amendment 12, which would ensure that defined benefit schemes that have ended are superseded by new defined benefit schemes. It is a moot point, and we have our disagreements about it. I shall not press the amendment to a vote at this stage, although I am sure that the issue will be revisited in the other place.
Amendments 19 to 22 relate to the closure of local government pension schemes and whether that means that they are really being closed or merely amended. We are worried about the potential for unintended adverse consequences in how the legislation is drafted. However, the Minister said that our amendments were well-intentioned, and that is good enough for me at this stage. They were, indeed, well intentioned and that is another issue that we will want to revisit in the other place.
We have debated the question of devolved responsibilities and amendment 11, which would clear up some of the confusion, particularly in relation to applications by the Scottish Government for legislative consent motions. We feel strongly that there needs to be some clarification on the issue, but the Minister was helpful in saying that the Government want to consider it, so I shall not press that question, although it is very important.
The new fair deal is a promise whereby existing members of public sector pension schemes will be allowed to retain their membership even if they are transferred or outsourced to the private sector, but we have still not received a commitment to that beyond Ministers’ verbal promises. The Minister has said that more work needs to be done, that they need to explore further the issues and that they do not want to pre-empt ongoing work, but that does not sound like the decision that we and many on the employee side thought had been made for a clear and unequivocal commitment to the new fair deal. It is integral to the deals that were agreed in the process leading up to this Bill. I cannot see what harm can be done by including the new fair deal in statute. It is a question of trust, so I want to press new clause 3 to a Division. With those words, I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 3
Fair deal
‘A member of a public service pension scheme is entitled to remain an active member of that scheme following—
(a) the compulsory transfer of his contract of employment to an independent contractor; and
(b) any subsequent compulsory transfer of his contract of employment.’.—(Chris Leslie.)
Brought up, and read the First time.
Question put, That the clause be read a Second time.
Chris Leslie
I beg to move amendment 10, page 2, line 16, at end insert—
‘(3A) Scheme regulations shall not make any provision which would have the effect of reducing the amount of any pension, allowance or gratuity, insofar as that amount is directly or indirectly referable to rights which have accrued (whether by virtue of service rendered, contributions paid or any other thing done) before the coming into operation of the scheme, unless the persons specified in subsection (3B) have agreed to the inclusion of that provision.
(3B) The persons referred to in subsection (3A) are the persons or representatives of the persons who appear to the responsible authority to be likely to be affected by the regulations if they were made.’.
Mr Deputy Speaker (Mr Lindsay Hoyle)
With this it will be convenient to discuss the following:
Amendment 3, page 6, line 27, in clause 10, at end insert—
‘to be agreed with employee representatives’.
Amendment 5, page 11, line 8, in clause 19, at end insert—
‘with a view to reaching agreement’.
Amendment 34, page 11, line 24, in clause 20, leave out from ‘—’ to ‘(b)’ in line 27 and insert—
‘reach an agreement through consultation with the persons specified in subsection (3), and’.
Chris Leslie
Clause 3 is an important part of the Bill, as it makes a series of arrangements for scheme regulations. Hon. Members will now be turning to page 2 in their copies; when they merrily flick through to it, they will discover that subsection (3)(c) states:
“Scheme regulations may…make retrospective provision.”
The theme of retrospectivity gives the Opposition great concern. Essentially, the Bill allows the reduction of accrued pension benefits.
The measure is not qualified in any way: it allows all retrospective provisions, including, essentially, the reduction of the savings that people have put aside, which many regard as sacrosanct—the contributions from their monthly salaries or income into a pensions pot that is supposed to safeguard their financial future in retirement. We now discover that the Bill contains a provision that allows the Government to dip their hand into what are normally regarded as safe amounts of money—the accrued benefits for which people have paid in over their years of service. The Opposition believe that that breaches a central tenet of pension provision. Benefits that have been accrued are deferred earnings and should not be reduced. Retrospectively reducing accrued rights is essentially akin to taking back a portion of an employees’ wage that has already been paid; there is very little difference.
Many hon. Members and many of my constituents find it difficult to resist the grey mist that descends and the heaviness of the eyelids that pensions law tends to bring about, but hon. Members should wake up and realise what is in the legislation. They should recognise that we are talking about the Government’s ability retrospectively to reduce the amounts that ordinary employees have saved for their retirement, which they believe are safe.
Public sector workers and their representatives are extremely concerned about the retrospective powers that the Bill gives to this and any future Government. Understandably, they believe that as long as the Bill contains those powers, the pensions of ordinary working people—public sector employees—are not safe. On 29 October, the Chief Secretary to the Treasury was asked about the retrospective provisions in subsection (3) by the hon. Member for Foyle (Mark Durkan). The right hon. Gentleman replied that there was no need to be concerned about the reduction of accrued benefits, because the Bill mirrored the Superannuation Act 1972 in that respect. It is important to read out his exact words:
“The hon. Gentleman will know that the provisions in the clause to which he refers mirror directly those in the Superannuation Act 1972, which this Bill in many cases replaces. It was passed in the year I was born,”—
in the year I was born too, but let me not digress—
“and it has been used by a number of Governments to make adjustments to public service pensions.”—[Official Report, 29 October 2012; Vol. 552, c. 60.]
The Chief Secretary went further than that when he gave one of those famous quotes—a bit like the George Bush “read my lips” quote—in a speech to the Institute for Public Policy Research on 20 June 2011. He said:
“We will honour, in full, the benefits earned through years of service. No ifs, no buts.”
Well, it turns out that the Bill does not mirror the Superannuation Act 1972 in relation to accrued benefits. The 1972 Act provides that accrued benefits can be reduced only with the consent of scheme members—in other words, only if members of those schemes, employees, agree to such retrospective arrangements—whereas the Bill allows for retrospective reductions without the consent of scheme members.
Given that the Bill does not mirror the Superannuation Act protections in the way the Chief Secretary said it would, we can only assume that it must have been a drafting error by the Minister—perhaps some sort of oversight or typo. We are not sure why the Government did that. We tabled an identical amendment in Committee to ensure that the protections for accrued benefits in the 1972 Act were retained, but, surprisingly, our amendment was rejected. The Economic Secretary said that there was no need to mirror the protections in the 1972 Act, which prompts the question: why on earth did the Chief Secretary to the Treasury say that the Bill contained certain protections when it obviously does not? It may be, as we have said, because the Chief Secretary is from a different political party from the Economic Secretary. We are not quite sure why the Chief Secretary said that it mirrors the Superannuation Act provisions, but this Minister, the Economic Secretary, resisted that arrangement.
As we have said time and again, when employees in the public sector find themselves facing changes, without any consultation, to their contribution rates and radical changes to the valuation arrangements for their pensions, the question of trust comes up again and again. This Minister says, “Oh, don’t worry, we’re not going to use this provision on retrospectivity,” but when employees voice their doubts and say, “Hang on a minute. Why on earth are you putting it in the Bill?” we have to sympathise with them. They will be extremely sceptical of the Government’s motivations.
We tabled the amendment to give the Minister another chance to include the protections that the Government—or at least one Minister—said were already in the Bill. When accrued benefits and retrospective changes were raised in Committee, the Minister did not dispute that the Bill allowed the Government unilaterally to reduce members’ accrued benefits, but he said repeatedly that the Government had promised not to reduce those accrued benefits. He said that that promise—a verbal promise—offered adequate protection to public service workers and that legislative protection was therefore unnecessary. That is an extraordinary argument. Even if this Government intend to keep their promise—that is a big “if”—their words will have no effect on a future Government, particularly a Conservative Administration. Surely the Government appreciate that, among the public, the level of trust in politicians and Ministers is low and that our request that they enshrine this protection in statute is a basic one.
Lady Hermon (North Down) (Ind)
The Bill must, of course, be compatible with the European convention on human rights and the jurisprudence of the Strasbourg Court. Will the hon. Gentleman reflect on whether this retrospective provision on accrued property rights is compatible with the convention? Would it be in keeping with our commitments under the convention to take away property rights retrospectively and without compensation?
Chris Leslie
The hon. Lady has hit upon an important point. There are questions about whether it impinges on basic human rights to claw back retrospectively property—assets—that has been legitimately accrued, yet there is a provision here in the Bill to allow that to happen. Of course, Ministers could say, “Well, even though we’ve allowed for the possibility of retrospectivity, we’re not actually legislating for it now, although we might want to leave open the door to do it in the future.” That would be the point when it would impinge on the convention. She makes an incredibly important point. That is the extent of the possible outrage being left open in the Bill. All legislation is supposed to be signed off as being compatible with the ECHR, but that is a moot point and a matter of interpretation. She has focused on a crucial point.
The explanatory notes state that clause 3(3) has been included to facilitate the necessary adjustments to
“pension schemes to accommodate changes in law or where the government does not want to delay the benefit of a particular change but needs time to work out the consequences and appropriate method of making the change.”
Amendment 10 would not necessarily hinder those technical operational issues. Given that it would retain clause 3’s intended purpose, as set out by the Minister, and that the Government have promised not to reduce accrued benefits, there can surely be no legitimate grounds for opposing the amendment.
This is not an Opposition whim. We are cutting and pasting text from the Superannuation Act 1972: for 40 years, those provisions have protected the accrued benefits and rights of ordinary working people, and we are seeking to replicate those protections in the Bill. The amendment would not hinder or adversely affect the Government’s intentions, but would be of enormous benefit and reassurance to millions of public service workers. As the Minister knows, that concern arose extensively in Committee, where we debated the issue at length. I shall be grateful, therefore, if he reflects seriously on the strength of opinion voiced so far from across the spectrum—from employee representatives and others who want those safeguards enshrined in the Bill.
Sajid Javid
I am pleased that the hon. Lady is asking for clarity on this important question. When the Government put this Bill together, it was important, as with any measure, to make sure that it was compatible with existing legislation, including the European convention on human rights. I mentioned it here not to raise the issue of compatibility—of that I have no doubt—but to say that the convention provides protection for property rights. It represents another layer of protection that should reassure people that high hurdles would exist if any future Government tried for whatever reason not to honour the commitments made by this Government.
Chris Leslie
I simply do not understand why the Minister refuses to put clearer unambiguous clarifications, protections and safeguards directly into the Bill. What is the purpose of leaving this as some sort of moot issue about whether there is sufficient jurisprudence to prove compatibility with umbrella protections in the European convention of human rights? That is not strong enough. The Minister must understand that people will be very anxious about this issue; why not clarify it and put it on the face of the Bill?
Sajid Javid
If the shadow Minister will allow me to continue my comments on this important issue, I shall, I hope, be able to give him some reassurance, but first I want to explain the reasons for the Government’s approach.
Since the courts could set aside unlawful scheme regulations, responsible authorities have strong reasons to respect pension protection rights.
There is a third reason for our approach. In order to provide the statutory protections that underpin our commitment on accrued rights, the Bill establishes a common set of member consent and consultation requirements. In the case of the new schemes set up under the Bill, any change in scheme regulations will require a prior, statutory consultation with all who are likely to be affected, or with their representatives.
Clause 20 provides that if any changes are made that could have “significant adverse effects” on members, consultation must be conducted with a view to the reaching of an agreement, and preceded by a report to Parliament or the relevant legislature. Any such changes will require explicit approval by that legislature under the affirmative procedure. They cannot simply be nodded through under the nose of Parliament. Taken together, the rule of law and the specific provisions in the Bill should give members the strong reassurance that there is already a very high hurdle against unlawful interference with pension benefits that have been built up.
As I have said, this is an important issue, and we must get it right. We are adamant that the application of universal consent locks is not an avenue that we intend to investigate. As a matter of principle, we do not believe that members, employers or anyone else should be given a ticket unreasonably to hold each other, or the Government, to ransom and to inhibit changes that are for the greater good. The Government feel strongly that it is right to prevent that scenario from occurring in the future, and that is why we cannot support the amendment.
Most retrospective changes in accrued rights are either minor and technical, or in the interests of the vast majority of scheme members. As I have said, however, it is vital that we strike the appropriate balance between member protections and the efficient operation of public service schemes. Although I firmly believe that the provisions in the Bill achieve that balance, I can tell the House that the Government do not have a closed mind on this serious issue, which has been raised thoughtfully by Members on both sides of the House, both today and in Committee. I can only reiterate that we are listening and do not have a closed mind. I am sure that the issue will be discussed in the other place, and we shall listen carefully then as well. I hope that, in the light of the reassurances that I have tried to give, the shadow Minister will consider withdrawing his amendment.
Amendment 3 would place a statutory requirement on the Government to seek the agreement of employee representatives when the data, methodology and assumptions to be used in pension scheme valuations is set. I agree that we must get those elements of the valuations right. We must be sure that a valuation accurately calculates the scheme’s costs. I understand that Members want to be certain that the Government will honour their commitment to ensure that stakeholders are involved in the process, and I can tell the House that they will be so involved.
I believe that the amendment is both unnecessary and unworkable. It is unnecessary because we have already made it clear that the Government will engage with stakeholders over the directions on valuations. Transparency and consultation are extremely important principles, and it is important for everyone to have a say in how the valuation process works, but that does not mean that we will allow the whole process to be stymied by a very small group of people. That would hardly be democratic, let alone a rational way in which to proceed, and it would mean that the employer contributions would not be set at the correct rate. I am sure that that was not the intention of Members when they tabled these amendments, but we think it right for discussions about the valuation process to take place within the normal scheme governance procedures. I am also sure that in the normal course of events the vast majority of the discussions will prove to be sensible and constructive, resulting in broad consensus between all parties. I hope Opposition Members recognise that if the worst happens and the talks break down without a full meeting of minds, it is important that, where necessary, the Government can make the final decisions.
On amendment 5, I understand why Opposition Members want to ensure there is meaningful consultation with scheme members before scheme regulations are made, and clause 19 requires precisely that. All scheme consultations on regulations will be conducted in line with the Government’s consultation principles, as set out by the Cabinet Office. As they make clear, the Government are committed to consulting on our proposals and to ensuring consultations are carried out proportionately. Clause 19 as currently drafted provides for a good and comprehensive consultation standard. It also recognises the genuine interests of the members and employers in how their scheme is run.
The clause ensures that whenever a change is proposed to the scheme regulations, the responsible authority must consult everyone whom the authority considers to be affected. Since this will be a statutory consultation, the authority must set out clearly on each occasion the matters on which it is consulting. It must provide enough information and time to allow for considered responses. The authority also needs to keep an open mind until the consultation has closed, and must give fair and proper consideration to those responses before making its final decision. It is worth setting all of that out in detail in order to reassure those who might feel clause 19 does not provide for meaningful consultation; on the contrary, it does precisely that.
Moreover, there are many reasons why the Government may wish to consult scheme members and other stakeholders when making scheme regulations. In many cases the Government will consult with a view to reaching an agreement for proposed changes. Clause 19 as drafted does not prevent that. As the Government have made clear, the enhanced consultation standard should apply to some elements of the scheme, and they are specified in clause 20. It is not necessary to extend this provision to cover every other possible element of scheme design.
Chris Leslie
I have great sympathy with many of the arguments that my hon. Friend the Member for Hayes and Harlington (John McDonnell) made. He has tabled a series of amendments and has highlighted a couple of appropriate points. He seeks to pin down what happens in respect of changes that affect data, methodology, assumptions and valuations. Those are the long-grass details that many people often put in the box marked, “Too difficult to handle”. However, it is really important that people realise that a tweak here or a change there to the way in which some pension metrics are defined can seriously affect the retirement incomes of hard-working public sector employees, so he is right to shine a bit of a spotlight on those areas. I am not necessarily sure about his drafting, but he has brought an important proposition to the House’s attention. Similarly, he raised some issues we debated in Committee, such as why certain parts of the Bill talk about consultation being done in the way that many of our constituents have become used to—as a cynical box-ticking exercise. There is consultation, but most people have, sadly, grown used to the notion that consultation in that context means a form being sent out that they can send back if they want to, which Ministers will just ignore when it comes back.
Ministers then say that they will have a special enhanced consultation process, which means that it is done with a view to reaching agreement. As the hon. Member for North Down (Lady Hermon) pointed out, even in an enhanced consultation process there is no guarantee that agreement will be reached. It is difficult to know how anybody participating in that consultation would enforce the process, but that consultation is the so-called protection in the protected elements of the Bill. In a sense, my hon. Friend the Member for Hayes and Harlington is debunking a lot of the differentiation between consultation and enhanced consultation.
John McDonnell
I have not seen this before, but we now have two types of consultation. The first is, “We’re consulting you because we hope you agree with us,” and the other is, “ We’re consulting you but we couldn’t care what you say to us.” Amendment 34 is simply trying to protect the Government, so that they can demonstrate that they are adhering to their promised level of consultation.
Chris Leslie
I suppose it is a case of diet consultation—or consultation-lite—versus full-fat consultation, which I know that my hon. Friend would be far more keen to see. I think he has done the House a service by casting some light on those issues, but I hope he will forgive me if I focus mostly on amendment 10 and the issue of retrospectivity, which is, ultimately, to me one of the worst aspects of the Bill.
I am glad that the Minister said that the Government have an open mind on retrospectivity—at least, he said that they do not have a closed mind, which is a similar thing. We hope for great things in the other place when the question is considered. He gave a set of reasons: a court might come along and set aside scheme regulations or there might be technical reasons for raiding people’s accrued savings and pension benefits retrospectively. I must say to the Minister, however, that when the Chief Secretary to the Treasury—for it was he—promised “No ifs, no buts” and said that he did not want that retrospectivity, not to have put that particular provision clearly and explicitly in the Bill is a major failing that will leave many employees with a sour taste in their mouths. They want some pretty basic protections to stop the notion of clawback and the ability of Ministers to sequester savings that they thought were safe—the deferred wages they have set aside for their long-term well-being.
We need to ensure that we focus on the confidence of employees in the scheme, as this is their property too, as my hon. Friend pointed out. It is not just the preserve of the Government; they are not simply giving out a pension as though it were a state pension scheme or however they wish to characterise it. These pensions are a joint endeavour between employees and employers and that is why we have said that the Superannuation Act 1972 protections need to be transposed into the Bill. The provision, derived from that Act, states:
“Scheme regulations shall not make any provision which would have the effect of reducing the amount of any pension, allowance or gratuity, insofar as that amount is directly or indirectly referable to rights which have accrued”.
The protection we need is very straightforward and we wanted to put it into our amendment. The Minister needs to go back and think about this again, as it is a signal issue that is at the core of the trust we need to have in the scheme. We want the scheme to work and we want members to stick with it and not opt out, but they need to know that their money and their savings are safe. That is why I would like to test the opinion of the House on amendment 10 by pressing it to a Division.
Question put, That the amendment be made.
Chris Leslie
I beg to move amendment 13, page 5, line 21, after ‘age’, insert ‘or deferred pension age’.
Mr Speaker
With this it will be convenient to discuss the following:
Amendment 29, page 5, line 21,after ‘section 1’, insert
‘(other than a Scottish scheme)’.
Amendment 2, page 5, leave out lines 22 and 23 and insert
‘65, or current pension scheme age if lower’.
Amendment 1, page 5, line 27, at end insert—
‘(d) prison officers and psychiatric nurses.’.
Amendment 14, page 5, line 28, after ‘age’, insert ‘or deferred pension age’.
Amendment 30, page 5, line 28, after ‘section 1’, insert
‘(other than a Scottish scheme)’.
Amendment 9, page 5, line 28, leave out ‘must be 60’ and insert ‘shall be set out in scheme regulations but must be no more than 60’.
Amendment 16, page 5, line 29, at end insert—
‘(2A) Subsections (1) and (2) shall not apply in relation to any category of public service worker as the Secretary of State may by order specify following the publication of a scheme specific capability review.’.
Amendment 15, page 5, line 30, leave out subsection (3).
Amendment 31, page 5, line 30, after ‘section 1’, insert
‘(other than a Scottish scheme)’.
Amendment 33, in clause 33, page 19, line 25, clause 33, at end insert—
‘“Scottish scheme” means a scheme for the payment of pensions to persons specified in paragraphs (c) to (g) of section 1(2) in respect of service in Scotland;’.
Chris Leslie
We turn now to the part of the Bill relating to pension age. Let me first deal with what we think are drafting anomalies, with which we deal in amendments 13 to 15. Following our further scrutiny of the Bill after the Committee stage, we have noticed a potential anomaly on which we hope the Minister can reflect. There are to be some exemptions in the link between the retirement ages set out in public sector pension schemes and the state pension age arrangements. They are set out in clause 9(2) on page 5 of the Bill—I know that hon. Members are following this avidly—and relate to a person’s normal pension age under the scheme. The clause does not refer, however, to their deferred pension age, which means that the exemptions apply only to active members of pension schemes and not to those who have moved on from their occupation and are classified as deferred members.
The Bill will introduce increased pension ages, but clause 9 as drafted could lead to significant unfairness for some members of the fire brigade, the police and the armed forces, because, under the state pension age arrangement, those specified protected occupations will not be tied to the normal pension age. For example, a firefighter might decide to leave the fire brigade at the age of 58 because he or she feels physically unable to continue until 60, not necessarily due to any specific health problem, but simply due to their increasing age. They will then become a deferred member of the pension scheme, so they will not be entitled to receive the full pension until they reach the state pension age. That is a significant gap, so we think that the amendments are necessary to prevent unintended unfairness. Any extra costs resulting from such changes would need to be fully managed as part of the cost-cap mechanism. Our proposal would not add a burden to the Exchequer, but it would address a potential anomaly in the Bill. The Minister will, therefore, understand why we have tabled amendments 13, 14 and 15. I hope that this is a drafting error and I invite him to reflect further on it.
The Minister will not be surprised to learn that it is amendment 16 that most represents our ongoing anxieties about clause 9 and the problems with the link between the state pension age and an array of public sector employees whom we are asking to work for a considerable length of time. It needs to be said that, with life expectancies increasing, it is right to ask public sector employees to work longer before drawing their pensions. We do not disagree with that. Reforms of the age at which public sector workers retire are necessary if pension schemes are to remain sustainable, which, of course, is in everybody’s best interests. As such, we broadly agree that the normal retirement age for public sector workers should be linked to the state pension age. However, we have serious concerns about the inflexible way in which the Bill has been drafted and how it deals with exemptions to the state pension age.
The Government have understood that certain workers in physically demanding professions are not able to work past a certain age, regardless of their increasing life expectancy. As such, the Bill fixes the retirement age at 60 for fire and rescue workers and for members of the police force and the armed services. So far, so good, but my point is that those are not the only public sector workers with physically demanding jobs, and that is where the debate now takes us.
Richard Fuller
To press the hon. Gentleman on his point, he has made the assertion—it may be a fact—that the sole criterion for the exemption of these professions from the normal retirement age is the physicality of the job, but does he accept that there are other differences between those types of public sector workers and others and that that might be why they have been given a different retirement age?
Chris Leslie
I wonder what the hon. Gentleman is alluding to; perhaps he should elaborate. The Minister has not said that there are considerations other than the physically demanding nature of being a firefighter, a police officer or a member of the armed forces. Is the hon. Gentleman suggesting that there are different categories of public sector workers beyond some of those physical issues?
Richard Fuller
I will clarify my view, although I cannot speak for the Government. One criterion that differentiates these workers, other than physicality, is that they put themselves in danger in their public service, perhaps not routinely, but as an important aspect of their work. A firefighter will run into a burning building to rescue someone, a member of the police force will stop altercations and put themselves in physical danger, and members of our armed forces routinely put their lives on the line for our country. Does the hon. Gentleman not accept that that is an important point of differentiation and that it is not just to do with physicality, which is the basis for amendment 16?
Chris Leslie
While I do not disagree about the bravery of those in the professions listed in the Bill, I counsel the hon. Gentleman against taking the prescriptive view that only those categories of employee are engaged in brave acts or in risky professions. I accept that there are risks that go beyond the question of physicality, but there are other professions where the distinction is not as black and white as the Bill makes out. Mental health workers often take significant risks in the course of their duties, for example if they have to restrain patients. Prison officers are often in dangerous situations. Paramedics, hospital porters and others also have very physically demanding duties. There are gradations of physicality and risk.
My point is that there is an anomaly in the legislation, because one cannot be quite as prescriptive as to set out in the Bill particular classes of job and suddenly regard all others as not involving the same level of physicality or risk. I will not say that there are 50 shades of grey, but there are certainly gradations.
Mr Gibb
Perhaps I may help the hon. Gentleman to address the conundrum with which he is challenging himself by referring him to the Hutton report, which the Bill is implementing. I refer him to one of the shaded boxes that I know he is very keen on. Recommendation 14 states that the exception to linking the normal pension age to the state pension age should be
“in the case of the uniformed services where the Normal Pension Age should be set to reflect the unique characteristics of the work involved.”
Hutton also states that the uniformed services are in a different position because their current pension age is 55 or less. That is another key reason why there is a different normal pension age for the uniformed services, which Hutton specifically lists as
“the armed forces, police and firefighters”.
Chris Leslie
I do not deny the important role that is played by the professions listed in the Bill. What I am saying is that it is not as simple as saying that all other professions should therefore be exempt from considerations about the physicality of their endeavours. One could argue that prison officers, being a sort of uniformed service, have cause to have such protections. My point is that it is inconsistent and unfair to make exceptions for some workers in physical roles and not others. It is by no means clear that 60 is the appropriate age for all firefighters, police and Army personnel, when some of them undertake such demanding physical activity. There is no room in the Bill to make further exceptions to the state pension age link or to respond to any review that makes recommendations about the appropriate retirement age for firefighters, the police or Army personnel. Members who served on the Committee will recall that we cited the working longer review in the national health service, which was set up by Government Members. There is also an ongoing review of the working age in the fire service.
Mark Reckless (Rochester and Strood) (Con)
Is the hon. Gentleman’s argument on the basis of physicality collapsing? As my hon. Friend the Member for Bedford (Richard Fuller) said, three professions routinely place themselves in danger much more significantly than other professions. They currently have significantly lower pension ages, so it would be hugely unfair, a cliff edge and very disproportionate, to seek to increase their pension age to 65 or 68 as in other professions.
Chris Leslie
That is why amendment 16, which I urge the hon. Gentleman to look at, does not prescribe different pension ages for different categories of worker. We are looking only to give power to the Secretary of State, who
“may by order specify following the publication of a scheme specific capability review”,
to allow disapplication in relation to categories of public service worker for provisions in clause 9(1).
If reviews are ongoing—the Government have undertaken the working longer review in the national health service, and the fire service review—we must ensure almost as an issue of drafting that any conclusions of those reviews can be enacted and reflected in legislation, if the Secretary of State agrees. That is the extent of the amendment; it would simply ensure that if there are technical reviews of the capability of certain classes of employee, the Government will be able to create exemptions from any arrangement. That is why the amendment is narrowly defined. I accept there is a theoretical or philosophical argument about risk and physicality, but to return to the practicalities of our arrangements, we must look at how the legislation is drafted. That is our duty as a loyal Opposition.
Richard Fuller
The hon. Gentleman is being generous in giving way. He may regard the amendment as narrow, but I regard it as a broad generalisation that seeks to introduce uncertainty in an otherwise specific Bill. If his principle of physicality is an important test for public sector pensions, is it also an important test for private sector pensions or the state retirement age?
Chris Leslie
If a private sector scheme rules to make its own arrangements, it has the flexibility to do so. We are simply saying that in future, some degree of latitude and flexibility should be placed in statute to allow Secretaries of State to take account of the outcome of any reviews. We are not saying there should be a requirement for exemptions to be made; we want to give the Secretary of State the power to implement the findings of any reviews should that be deemed fit.
Mike Freer
I sometimes feel as if I am on the wrong side of the Chamber for this Bill, but perhaps I may help regarding the intervention from my hon. Friend the Member for Bedford (Richard Fuller). The private sector does recognise physicality for those such as steeplejacks, chimney sweeps and jockeys who have a significantly lower retirement age. I hope that is helpful to the shadow Minister.
Chris Leslie
If only we had been talking about jockeys when the Under-Secretary of State for Skills, the hon. Member for West Suffolk (Matthew Hancock) was in the Chamber; he would have found that helpful intervention most interesting. My respect for the hon. Member for Finchley and Golders Green (Mike Freer) grows by the minute and I am grateful for that interjection.
The key point is whether the reviews can find their course into effect. In Committee, the Minister repeatedly stressed that the working longer review for NHS staff was
“not in any way looking at the link between the normal pension age and the state one.”
Instead he said that it was
“considering the implications of working longer for NHS staff,”––[Official Report, Public Service Pensions Public Bill Committee, 13 November 2012; c. 327-28.]
That seems a slightly contradictory statement. Linking the normal pension age to the state pension age means that people will work longer, and therefore the review will look at the effect on the state pension age link for NHS workers.
The terms contained in the Department of Health document “Reforming the NHS Pension Scheme for England and Wales” include the following objectives for the working longer review:
“Identify any categories of worker for whom an increase in Normal Pension Age would be a particular challenge in respect of safe and effective service delivery and consider how this may be addressed;
Identify any categories of worker for whom an increase in Normal Pension Age would be a particular challenge in respect of their health and wellbeing.”
If that NHS review concludes that a higher normal pension age is inappropriate for certain categories of worker, either because working longer would be physically damaging or because it could lead to unsafe practices in the NHS, the current Bill would not allow those workers to be exempt from the state pension age link in clause 9. I therefore contend that it is irresponsible to make legislation before the findings of the Government’s review are published, without allowing the legislation to accommodate some or all of that review’s recommendations. Given that the working longer review was a key component of the agreement reached between health service workers and their employers, it is unfair to fetter the recommendations that the review can realistically make. It is similarly inappropriate and unfair to fix the retirement age for firefighters at 60 when the working longer review in the fire service is yet to report.
This is an incredibly important issue. I accept that we must note that the cost-cap mechanism in the Bill would ensure that any extra costs of the extra exemptions to the state pension age link will need to be met by the scheme—the Opposition are not saying that the additional costs should fall on the shoulders of the taxpayer—but bearing that in mind and the fact that the clause does not require the Secretary of State to make exemptions, the amendment simply allows flexibility. I cannot see how the Government can object to it.
Mr Gibb
Before hon. Members speak to other amendments in the group, may I refer the hon. Gentleman to the proposed final agreements? I have in front of me the one that applies to teachers pensions, but it is similar to other schemes. It states:
“Actuarially fair early/late retirement factors on a cost-neutral basis”
will apply in the agreement. That means that teachers can take early retirement if they wish. If the normal pension age is above 65, they will have an early retirement factor of 3% per year for up to three years. People can therefore take early retirement with a small actuarial reduction in the pension. That deals with the problems the hon. Gentleman describes.
Chris Leslie
With the greatest respect, that does not deal with the problems, because there is a difference between the early retirement benefits to which an employee is entitled and those they can get at the normal pension age as defined in scheme regulations. The Government set up working groups and committees in the NHS, fire services and services throughout the country. Those groups have been given terms of reference, but now discover that they cannot implement their findings because of a drafting anomaly in this Bill. All the Opposition are asking is that the Government think again about how the scheme capability reviews come to fruition. This ought not to be a partisan point. I am simply seeking to ensure that we have flexibility in the legislation.
Others will want to speak to the amendments in the group that they have tabled, but I strongly urge the House to support amendment 16.
Mike Freer
I said in an intervention that I had some interesting views on the Opposition’s stance. I have sympathy with the thrust of the amendments, but I assure the Minister that it does not extend to voting for them.
Our starting point on the retirement age must be the demographic pressures we face. UK National Statistics data show that in 2008, males were expected to live to 78.1 years and females to 82.1 years, yet by 2011, life expectancy had jumped to 90.3 years for men and to 93.8 years for women, and we could expect to pay almost as many pension cheques as pay cheques. One of my reasons for supporting the linkage—in the main— between public sector pension schemes and the state retirement age is that there is a huge gap between the contribution rates of the employer and employee and what is drawn out as a pension.
The NHS pension scheme tiered employee contributions data, which are published by the NHS, show that the employer pays about 14% and the employee about 8.5%. My rudimentary maths leads me to conclude that 22.5% goes in. Members who took part in the Bill Committee evidence sessions will remember the British Medical Association’s interesting contribution, not least because the BMA said that doctors should pay less and the lowest-paid should pay more for their pensions. The BMA confirmed that the average pension out in the NHS was 49%, so if the contribution rates are putting in only 22.5%, but 49% is coming out, that 26.5% gap has to be covered from somewhere, and it is being funded by the taxpayer. If that taxpayer gap is going to grow because of the demographic time bomb—people are retiring at the same age, but living longer and drawing pensions longer—it will start to be completely unsustainable, undermining the public sector pension schemes in total. That is why the Government are right to link the normal pension age with the state retirement age.
Chris Leslie
In an era of increasing life expectancy, it is right and necessary to reform public service pensions in order to ensure that they are affordable and sustainable in the long term. That is why Labour made significant changes to public service provisions when in office, including through increasing the normal pension age from 60 to 65, introducing a cap-and-share mechanism to protect taxpayers from increasing costs and reforming contribution levels. According to the Public Accounts Committee, those reforms, implemented by the previous Government, will save the taxpayer £67 billion over 50 years.
Unfortunately, instead of building on those reforms, the Government ripped up many of them, making sensible reform harder: they have imposed, without negotiation, a steep 3% rise in contributions and a permanent switch in the indexation of future pension income from RPI to CPI. Announcing those changes before the Hutton report on pensions was even published was unfair and needlessly provocative. Those changes are not in the Bill, however, so we did not have a chance to address them in amendments and in Committee and on Report.
Conversely, the main aims of the Hutton reforms in the Bill are ones with which we broadly agree, most notably the shift from final salary to career average defined benefit schemes, the increase in pension age to take account of increasing longevity, and a mechanism to ensure that increasing costs are contained within schemes and do not fall squarely on the taxpayer. It is important for the sustainability of public service pension schemes that those changes are implemented properly, which is why we do not wish to oppose the Bill this evening. However, as we said on Second Reading, we have serious concerns about the detail of the Bill. We said that we hoped the Government would work constructively with us in Committee and the other place to improve it. There was some movement from the Government, but in our view it was not sufficient.
Andrea Leadsom
Can the hon. Gentleman therefore confirm that his party would not change the future pensions link from CPI back to RPI?
Chris Leslie
I do not think it would be sensible to make a permanent “no review” announcement when it comes to indexation, particularly when some of the projections have been showing that the future burden on the taxpayer might not be as great as the Government have made out. For the time being, we have not been able to make propositions on that, because the scope of the Bill did not allow it.
However, we proposed amendments in a number of other crucial areas in seeking to improve the Bill, focusing particularly on the questions of trust and confidence. We sought to improve the Government’s proposals in a number of ways, most notably in implementing the fair deal—a commitment that was integral to the agreements that had been reached. I am glad that the Minister had the opportunity to correct his words on the local government pension scheme aspect of that, because there were some ripples emanating through the Chamber from some of the previous words he uttered. There is also the question of the Government’s ability to reduce accrued benefits retrospectively. They should have been stronger on that and firmer commitments should have been given as guarantees on replacing defined benefit schemes with new career average defined benefit schemes.
Richard Fuller
There is one other amendment, which I tabled in Committee, but which we did not push to a vote. Perhaps the shadow Minister can say whether he would be interested in having it proposed in another place. Constituents of mine in Bedford and Kempston are being asked to cough up to pay for the pensions of judges and others on salaries of £150,000. It seems particularly unfair that those on £24,000, which is the average income in Bedford—they are also on a pretty high tax rate—should be asked to contribute to a pension scheme for a judge who will retire on a pension that is two or three times larger than such an income. That has not been changed in the Bill so far. I was not sure in Committee whether the Labour party thought it was fair for my constituents to pay for judges’ pensions. Perhaps the shadow Minister can clarify whether he would like that amendment to be moved in another place.
Chris Leslie
We did not table any amendments on judicial pensions. I suspect that the question of relative taxpayer support for private pensions might come up tomorrow in the autumn statement. I am intrigued that hon. Members have castigated previous Governments for changes that have affected private sector schemes. It will be interesting to see what the effect will be on the sustainability of some of those pension pots, but we can only speculate at this stage and see what happens. However, this question is certainly of the moment. It is only a matter of hours before the Chancellor stands up and—undoubtedly—makes his announcement on pensions tax relief. We will see what happens at that point, but we felt that some significant proposals needed to be made.
Chris Leslie
I am conscious of the time. I would be grateful if the hon. Lady let me conclude my remarks.
It was argued that we must not bind future Governments by amending the Bill. That was not a very strong argument, given that legislation can be introduced at any time. We also felt that safeguards were needed to address people’s concerns about the effective sequestration of their deferred wages—their pension savings—by retrospective changes. At no point did we propose amendments that contradicted the Hutton principles. We sought to be constructive, and I am grateful that the Minister recognised the constructive changes that we proposed.
We had some significant victories, and I am grateful to the Minister for at least keeping an open mind on some of these points. In particular, I am pleased that we managed to get a guarantee—it is due in the other place—that future members of defined benefit schemes will receive an annual benefits statement setting out full information on changes to their pensions. That is a big step forward, and I am grateful that the Minister moved on that point.
We will want to come back to some of those questions in the other place, particularly those on scheme capability reviews and the working longer review in the NHS, and to ask why the Government are irrationally not letting those arrangements come to fruition in the drafting of legislation. I am still not fully convinced that the issue of the closure of local government pension schemes has been adequately dealt with, but I know that the Minister has said that he is happy to look into it.
Many colleagues will naturally have serious doubts about the Bill. That is entirely understandable, given the differences between it and the Hutton proposals. However, pensions reform is important both for the taxpayer and for scheme members themselves. Our hope is that the other place will see the strength of our arguments and make the changes that this House has been unable to secure. We hope that their lordships will appreciate that only through changes to the Bill will we achieve successful and sustainable pension reform. It is with that hope in mind that we shall not oppose the Bill at this stage, but we hope for further improvements in the other place.
Humber Economy (Fiscal Support)
Chris Leslie Excerpts(11 years, 12 months ago)
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Chris Leslie (Nottingham East) (Lab/Co-op)
In the short time that I have—because I want to leave enough time for the Minister to respond, and there might need to be dialogue with local Members—I want to commend my right hon. Friend the Member for Kingston upon Hull West and Hessle (Alan Johnson) for the skilful way in which he talked about the perhaps unrecognised and untapped advantages of the Hull economy and what they might offer. Those advantages include the fourth largest trading estuary in Europe and the fact that it is within four hours of 40% of the UK economy, as well as the excellent cultural and creative offer that my hon. Friend the Member for Kingston upon Hull North (Diana Johnson) talked about. There are some fantastic assets waiting to be tapped. However, as we have heard, this is a tale of two cities, and I want to spend a couple of minutes giving the perspective of the Opposition Front Bench.
We are undoubtedly at a critical moment for the economy in the Humber area, and the recession has not been an easy time for that part of the world. We have heard about Comet going into administration and about Kimberly-Clark in Barton. My hon. Friend the Member for Kingston upon Hull East (Karl Turner) talked about difficulties at the Seven Seas plant. Employment opportunities will be crucial for future prosperity. We want a diverse economy, rather than one where a part is doing well but the rest is not. We must make sure that there is the ecosystem—the right mix—to sustain the region, and my hon. Friends are very focused on that.
Enterprising businesses in the area have been battling against headwinds in the form of the Government’s tax rises and spending reductions, which have sapped confidence in recent years. We have heard this morning about an aspect of the Government’s approach: the Work programme might be worse than if they had done nothing. Given the performance of some schemes, things are going backwards. We are in a critical period and must focus every effort on getting things right.
We have heard from hon. Members of all parties about specific matters to do with critical Whitehall decisions. I am struck by the need to get clarity about renewables policy and the green energy sector. The point was well made about Siemens being poised for investment. The Humber is a part of the world where there are massive advantages for offshore wind, in particular, but others have talked about the biomass sector in Barton and elsewhere, about which we need clarity from the Treasury in particular. The Chancellor of the Exchequer obviously has strong views about renewable energy policy and we need more clarity about where it is intended that the country should go in the context of decarbonisation. We hope that the energy Bill will bring that, but a mist has descended over where the Government are going—and that is putting it kindly. My hon. Friends have been forceful in saying that they want clarity about that.
Transport infrastructure is also critical. The Minister needs to arrange a meeting with his colleagues in the Department for Transport as a matter of urgency because, as someone who had occasion many years ago to spend quite a lot of time in east Hull, I know well that the question of Castle street and the A63 upgrade is crucial to unlocking much of the area’s potential. The Minister could do worse than give us an update on how the Infrastructure (Financial Assistance) Act 2012 might help in the present case, perhaps in connection with guarantees, or the underpinning or underwriting that it facilitates.
My right hon. Friend the Member for Kingston upon Hull West and Hessle had some great ideas about the relocation of public projects, and Whitehall Departments might have the opportunity to move to the area. There is a strong case for that, especially on the question of cost-effectiveness, when the cost of buildings and infrastructure in the capital is compared with that in other parts of the country. That is the sort of thing that we should be considering. There have been signs that the Government are willing to listen with regard to some of these questions, because the Humber bridge toll decision was a good one, and the U-turn on VAT on static caravans was also very welcome.
Finally, some critical governance decisions need to be confronted. My hon. Friend the Member for Great Grimsby (Austin Mitchell), who has had to leave early, was right to say that the future rests with the co-operation of all players and bodies in the Humber region. The Humber local enterprise partnership is an important body, and we need it to make progress with development. It is a pity that the Financial Secretary to the Treasury is not responding to the debate, because he has a particular brief for cities policy. We want the Humber region to be in the vanguard of new cross-authority working, because that is how it has to be. We must have clarity about leadership and decision making in that part of the world so that it is possible to ask loudly and clearly for delegated decisions and the devolution of resources, which are evidently needed at the coal face—on the front line.
I commend hon. Members in all parts of the Chamber for the vocal and tenacious way in which they have made their case. They bang on the table effectively, and leave no stone unturned—if I may mix my metaphors—in making the case for the area. It is a strong case, and the Treasury must respond to it.