Finance (No. 2) Bill

Debate between Gareth Davies and Tulip Siddiq

Committee stage
Tuesday 21st May 2024 Public Bill Committees

[The Exchequer Secretary to the Treasury (Gareth Davies)]

It is a great pleasure, as always, to see you in the Chair, Mrs Latham. Clause 20 begins the process of introducing legislation for a new type of investment fund—the reserved investor fund, which I will refer to from now on as the RIF. At Budget 2020, the Government announced a review of the UK’s funds regime, covering tax and relevant areas of regulation. The review had an overarching objective to make the UK a more attractive location to set up, manage and administer funds, as well as ensuring that UK investors can access a wide enough range of investment vehicles to suit their needs. In the years since, the Government have made a number of successful reforms. In order to build on these successes, the Government announced at spring Budget 2024 that we would be proceeding with the RIF.

The RIF will fill a gap in the UK’s existing fund offering by creating an onshore alternative to existing non-UK fund vehicles that are commonly used to hold UK real estate. Clause 20 provides a definition of the RIF and provides a power for the Treasury to make detailed tax rules through secondary legislation, consistent with the approach taken when introducing tax rules for other investment funds. A later statutory instrument will set out detailed tax rules for the RIF. The regulations will set out supplementary qualifying conditions for a RIF, entry and exit provisions, and rules that deal with breaches of one or more qualifying conditions.

The UK has a world-leading asset management sector. The RIF will play an important role in supporting that leadership by making the UK a more competitive destination for our fund management industry. Indeed, stakeholders from the financial services industry have already shown considerable support for the RIF. I therefore commend the clause to the Committee.

[Tulip Siddiq (Hampstead and Kilburn) (Lab)]

It is a pleasure to serve on this Committee under your chairmanship, Mrs Latham. I am pleased to respond to clauses 20 to 24 on behalf of the Opposition. Clause 20, as the Minister set out, introduces the necessary powers to set the scope and design of the tax regime and rules for the RIF. Labour welcomes the introduction of the RIF, as it will add to the investment products available here in the UK, particularly for the UK commercial real estate sector. However, the trade bodies representing investment managers and real estate fund managers, the Investment Association and the Association of Real Estate Funds, have raised some concerns that I would like to put to the Minister.

There was a widely held expectation across the sector that RIF would broadly mirror the conditions of the existing authorised contractual schemes, or ACSs, but offer less regulatory supervision, freeing the RIF to become a more flexible investment vehicle for a range of more experienced investors. Due, however, to the Government’s decision to categorise the RIF as an alternative investment fund instead of a special investment fund, the RIF and the ACS will now differ in two key aspects. First, the supply of fund management services will be standard-rated at 20% as opposed to being VAT-exempt, and secondly, an alternative investment fund comes with a requirement to raise capital from a number of investors with a view to investing it in accordance with the defined investment policy for the benefit of those investors. That makes sense for large-scale, open-ended funds with an ongoing investment strategy, but it clearly is not designed for funds that do not have a specified investment objective, such as funds of one, joint ventures, co-investment vehicles and acquisition vehicles, which instead were created for a particular purpose such as repackaging and selling existing assets to new markets. Since they do not exist to raise additional capital, the requirements associated with alternative investment funds risk being an unnecessary burden and disproportionate when applied to the RIF.

--- Later in debate ---

[Gareth Davies]

I am always grateful to see the hon. Member for Hampstead and Kilburn in her place in opposition in these forums, and I appreciate her comments. I will first set out the background to the establishment of the RIF, which was based on significant consultation with industry to fill a specific gap for an unauthorised, contractual-based vehicle. As such, it was based on specific feedback from the industry. The hon. Lady asked a very reasonable question about classification of the fund, and I can tell her that that was considered to be part of the consultation, but in the end we decided to proceed with the structure that we have gone with in the legislation. However, we will of course keep that under review and continue to engage with stakeholders, and we will issue a report on the progress of the RIF in due course. Although we have not established it in the way that some may have wished us to, it is based on consultation and will be reviewed in due course.

[Tulip Siddiq]

I thank the Minister for his response. He said that he considered the options and decided to proceed with it as an alternative investment fund, but he did not actually set out the reasons why. Was there any reason why he decided that it made more sense to do that as opposed to a special investment fund, especially in line with the international comparisons that I gave?

[Gareth Davies]

This is designed specifically to fill a gap that was previously or currently filled by things such as Jersey property investment trusts. Where there are unauthorised, contractual-based schemes, we do not currently have a vehicle that fills that gap. What we are introducing with the RIF fills that gap and satisfies a vast amount of stakeholders who fed into the consultation, and we are proceeding with that today.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Clause 21

Economic crime (anti-money laundering) levy

Question proposed, That the clause stand part of the Bill.

[Gareth Davies]

Clause 21 increases the economic anti-money laundering levy for very large firms, meaning firms regulated for anti-money laundering purposes and which have UK revenue greater than £1 billion per annum. The charge for very large firms increased from £250,000 to £500,000 with effect from 1 April 2024. There is no change to the charge for firms with revenue below £1 billion per annum. The levy was introduced in the 2022-23 tax year as a source of sustainable funding for measures to tackle economic crime and support the delivery of the Government’s commitments contained in the economic crime plan 2. The Government made it clear during the public consultation that levy charges may be adjusted periodically in response to new information, inflation or under-collection. The adjustment is made in response to receipts falling short of the levy’s stated £100 million revenue target.

The clause amends part 3 of the Finance Act 2022 to replace the current charge for very large firms with the new charge of £500,000 per annum. The change will impact an estimated 100 to 110 very large firms across the anti-money laundering regulated sector including, but not limited to, financial services, legal and accountancy firms.

No other aspects of the levy’s calculation or operation are changing and we therefore anticipate administrative impacts on affected firms to be negligible. This adjustment to the economic crime levy for the largest firms will put funding for measures to tackle economic crime on a sustainable footing, helping to protect UK citizens and make the UK a safer place to do business. Only the very largest firms will pay more and burdens will remain low. I commend the clause to the Committee.

[Tulip Siddiq]

We support the measures in clause 21 to raise the funds needed to tackle money laundering, fraud and other types of economic crime, but I cannot ignore the fact that the Government’s efforts to tackle economic crime have been a complete failure. Fraud and scams, for example, have rocketed under this Government, with at least £7.3 billion stolen directly from consumer bank accounts in the UK through fraud last year alone.

Last year, the Government published their fraud strategy to widespread criticism from industry for largely rebadging old measures and re-announcing existing national teams, such as the re-announcement on the replacement of Action Fraud from 2022. The consensus from experts in the industry is that the measures in the strategy will not significantly move the dial, as they do not establish a regulatory framework for tech companies and telcos to participate in the fight against fraud, including through data-sharing with financial services firms and enforcement agencies to enhance detection and prevention measures.

UK Finance, for example, has stated that it is increasingly difficult to understand the imbalance between the financial services sector’s contribution through the levy and that of other sectors that do not contribute but are known to be introducing risk into the same system. We also know that most scams originate on social media or via telecommunications networks yet those sectors do not face the same obligations regarding contributions, nor do they compensate victims defrauded through their platforms. Does the Minister agree with UK Finance? Does he accept that until the Government find a way to bring the tech giants to the table, efforts to tackle fraud and scams will continue to fail?

UK Finance has also raised concerns about the transparency of the levy and reporting on economic crime. On reporting for anti-money laundering purposes, I have heard from numerous City firms that, despite frequent requests, they receive little granular feedback on the impact their reports make. Does the Minister agree that better feedback and wider publicity around successes could help AML-regulated firms to see the value and importance of work in this area more clearly, keeping it at the forefront of their minds? What are the Government doing to ensure that happens?

[Drew Hendry]

This is a welcome move in principle and in targeting economic crime, but I would agree with the comments we have just heard—this does not shift things in the way that they need to be shifted in order to deal with the issue. It does not seriously tackle online crime, which is relatively rampant, with people being conned and funds being taken illegally. It does not really do much for fraud and economic crime and fails to tackle issues such as money laundering. There has still not been enough action on limited partnerships, for example, which continue to allow unknown individuals to funnel money through those mechanisms. Why are the Government not taking this issue more seriously than through these minor actions in the Bill?

Finance (No. 2) Bill (Except clauses 1 to 4, 12 and 13, and 19)

Debate between Gareth Davies and Tulip Siddiq

Tuesday 21st May 2024 Public Bill Committees

[The Exchequer Secretary to the Treasury (Gareth Davies)]

It is a great pleasure, as always, to see you in the Chair, Mrs Latham. Clause 20 begins the process of introducing legislation for a new type of investment fund—the reserved investor fund, which I will refer to from now on as the RIF. At Budget 2020, the Government announced a review of the UK’s funds regime, covering tax and relevant areas of regulation. The review had an overarching objective to make the UK a more attractive location to set up, manage and administer funds, as well as ensuring that UK investors can access a wide enough range of investment vehicles to suit their needs. In the years since, the Government have made a number of successful reforms. In order to build on these successes, the Government announced at spring Budget 2024 that we would be proceeding with the RIF.

The RIF will fill a gap in the UK’s existing fund offering by creating an onshore alternative to existing non-UK fund vehicles that are commonly used to hold UK real estate. Clause 20 provides a definition of the RIF and provides a power for the Treasury to make detailed tax rules through secondary legislation, consistent with the approach taken when introducing tax rules for other investment funds. A later statutory instrument will set out detailed tax rules for the RIF. The regulations will set out supplementary qualifying conditions for a RIF, entry and exit provisions, and rules that deal with breaches of one or more qualifying conditions.

The UK has a world-leading asset management sector. The RIF will play an important role in supporting that leadership by making the UK a more competitive destination for our fund management industry. Indeed, stakeholders from the financial services industry have already shown considerable support for the RIF. I therefore commend the clause to the Committee.

[Tulip Siddiq (Hampstead and Kilburn) (Lab)]

It is a pleasure to serve on this Committee under your chairmanship, Mrs Latham. I am pleased to respond to clauses 20 to 24 on behalf of the Opposition. Clause 20, as the Minister set out, introduces the necessary powers to set the scope and design of the tax regime and rules for the RIF. Labour welcomes the introduction of the RIF, as it will add to the investment products available here in the UK, particularly for the UK commercial real estate sector. However, the trade bodies representing investment managers and real estate fund managers, the Investment Association and the Association of Real Estate Funds, have raised some concerns that I would like to put to the Minister.

There was a widely held expectation across the sector that RIF would broadly mirror the conditions of the existing authorised contractual schemes, or ACSs, but offer less regulatory supervision, freeing the RIF to become a more flexible investment vehicle for a range of more experienced investors. Due, however, to the Government’s decision to categorise the RIF as an alternative investment fund instead of a special investment fund, the RIF and the ACS will now differ in two key aspects. First, the supply of fund management services will be standard-rated at 20% as opposed to being VAT-exempt, and secondly, an alternative investment fund comes with a requirement to raise capital from a number of investors with a view to investing it in accordance with the defined investment policy for the benefit of those investors. That makes sense for large-scale, open-ended funds with an ongoing investment strategy, but it clearly is not designed for funds that do not have a specified investment objective, such as funds of one, joint ventures, co-investment vehicles and acquisition vehicles, which instead were created for a particular purpose such as repackaging and selling existing assets to new markets. Since they do not exist to raise additional capital, the requirements associated with alternative investment funds risk being an unnecessary burden and disproportionate when applied to the RIF.

--- Later in debate ---

[Gareth Davies]

I am always grateful to see the hon. Member for Hampstead and Kilburn in her place in opposition in these forums, and I appreciate her comments. I will first set out the background to the establishment of the RIF, which was based on significant consultation with industry to fill a specific gap for an unauthorised, contractual-based vehicle. As such, it was based on specific feedback from the industry. The hon. Lady asked a very reasonable question about classification of the fund, and I can tell her that that was considered to be part of the consultation, but in the end we decided to proceed with the structure that we have gone with in the legislation. However, we will of course keep that under review and continue to engage with stakeholders, and we will issue a report on the progress of the RIF in due course. Although we have not established it in the way that some may have wished us to, it is based on consultation and will be reviewed in due course.

[Tulip Siddiq]

I thank the Minister for his response. He said that he considered the options and decided to proceed with it as an alternative investment fund, but he did not actually set out the reasons why. Was there any reason why he decided that it made more sense to do that as opposed to a special investment fund, especially in line with the international comparisons that I gave?

[Gareth Davies]

This is designed specifically to fill a gap that was previously or currently filled by things such as Jersey property investment trusts. Where there are unauthorised, contractual-based schemes, we do not currently have a vehicle that fills that gap. What we are introducing with the RIF fills that gap and satisfies a vast amount of stakeholders who fed into the consultation, and we are proceeding with that today.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Clause 21

Economic crime (anti-money laundering) levy

Question proposed, That the clause stand part of the Bill.

[Gareth Davies]

Clause 21 increases the economic anti-money laundering levy for very large firms, meaning firms regulated for anti-money laundering purposes and which have UK revenue greater than £1 billion per annum. The charge for very large firms increased from £250,000 to £500,000 with effect from 1 April 2024. There is no change to the charge for firms with revenue below £1 billion per annum. The levy was introduced in the 2022-23 tax year as a source of sustainable funding for measures to tackle economic crime and support the delivery of the Government’s commitments contained in the economic crime plan 2. The Government made it clear during the public consultation that levy charges may be adjusted periodically in response to new information, inflation or under-collection. The adjustment is made in response to receipts falling short of the levy’s stated £100 million revenue target.

The clause amends part 3 of the Finance Act 2022 to replace the current charge for very large firms with the new charge of £500,000 per annum. The change will impact an estimated 100 to 110 very large firms across the anti-money laundering regulated sector including, but not limited to, financial services, legal and accountancy firms.

No other aspects of the levy’s calculation or operation are changing and we therefore anticipate administrative impacts on affected firms to be negligible. This adjustment to the economic crime levy for the largest firms will put funding for measures to tackle economic crime on a sustainable footing, helping to protect UK citizens and make the UK a safer place to do business. Only the very largest firms will pay more and burdens will remain low. I commend the clause to the Committee.

[Tulip Siddiq]

We support the measures in clause 21 to raise the funds needed to tackle money laundering, fraud and other types of economic crime, but I cannot ignore the fact that the Government’s efforts to tackle economic crime have been a complete failure. Fraud and scams, for example, have rocketed under this Government, with at least £7.3 billion stolen directly from consumer bank accounts in the UK through fraud last year alone.

Last year, the Government published their fraud strategy to widespread criticism from industry for largely rebadging old measures and re-announcing existing national teams, such as the re-announcement on the replacement of Action Fraud from 2022. The consensus from experts in the industry is that the measures in the strategy will not significantly move the dial, as they do not establish a regulatory framework for tech companies and telcos to participate in the fight against fraud, including through data-sharing with financial services firms and enforcement agencies to enhance detection and prevention measures.

UK Finance, for example, has stated that it is increasingly difficult to understand the imbalance between the financial services sector’s contribution through the levy and that of other sectors that do not contribute but are known to be introducing risk into the same system. We also know that most scams originate on social media or via telecommunications networks yet those sectors do not face the same obligations regarding contributions, nor do they compensate victims defrauded through their platforms. Does the Minister agree with UK Finance? Does he accept that until the Government find a way to bring the tech giants to the table, efforts to tackle fraud and scams will continue to fail?

UK Finance has also raised concerns about the transparency of the levy and reporting on economic crime. On reporting for anti-money laundering purposes, I have heard from numerous City firms that, despite frequent requests, they receive little granular feedback on the impact their reports make. Does the Minister agree that better feedback and wider publicity around successes could help AML-regulated firms to see the value and importance of work in this area more clearly, keeping it at the forefront of their minds? What are the Government doing to ensure that happens?

[Drew Hendry]

This is a welcome move in principle and in targeting economic crime, but I would agree with the comments we have just heard—this does not shift things in the way that they need to be shifted in order to deal with the issue. It does not seriously tackle online crime, which is relatively rampant, with people being conned and funds being taken illegally. It does not really do much for fraud and economic crime and fails to tackle issues such as money laundering. There has still not been enough action on limited partnerships, for example, which continue to allow unknown individuals to funnel money through those mechanisms. Why are the Government not taking this issue more seriously than through these minor actions in the Bill?

High Street Bank Closures and Banking Hubs

Debate between Gareth Davies and Tulip Siddiq

Thursday 11th May 2023 Westminster Hall

[Gareth Davies]

I accept the challenge, of course. The hon. Member for Motherwell and Wishaw (Marion Fellows) also asked me to comment on what support the Government are providing to post offices. I can respond to both points.

In the 2021 spending review, some £227 million was secured in Government investment between ’22 and ’25, including a subsidy of £50 million to protect access to post office services in commercially challenging locations. That later increased to £335 million, including a £150 million subsidy to those in commercially challenging locations. I therefore accept what the hon. Member for East Renfrewshire (Kirsten Oswald) says, but the reality for the 93% who live within 1 mile of a post office cannot be ignored. For those who are not within that catchment area, the Government have stepped in with subsidy and significant funding to ensure access to a post office.

[Tulip Siddiq]

We are lucky in this place, with two post offices that hardly ever have queues, but in my constituency there are massive queues outside the post offices, in which people have to wait a long time. Also, some of the services that constituents want to use a bank for are just not appropriate in a post office. Some post offices, certainly in my constituency, are based in WHSmith or another shop; it would not be appropriate to go in there to talk about personal banking services. Will the Minister comment on that?

[Gareth Davies]

What services banks provide is a commercial decision for them, but they provide a lot of different ways to interact with them these days, including several online options. As I pointed out right at the start, the majority of the British public access banking in those ways, whether online through a website, web chat or a mobile banking app, or via the telephone. Customers of commercial banks have a variety of ways to interact and get advice, and I would encourage them to do so. It is not the Government’s place to intervene in the commercial decisions of banks on what services they provide and where.

In addition to what I have just laid out on the variety of online services, many banks and building societies have programmes in place involving community centres, libraries, mobile banking vans or semi-permanent banking pods. The pods are structures that provide a dedicated private space to support customers with banking services. They can be moved around to different locations, depending on demand—the hon. Member for Hampstead and Kilburn (Tulip Siddiq) may wish to engage the banks on those for her area. For people who need to speak to their bank face to face, such places can make a vital difference.

Alongside those programmes, there is the high-profile innovation of shared banking hubs, which many Members have referred to in the debate. The hubs provide a dedicated space where customers can meet community bankers, who support them with more complex services. The hubs also offer a range of everyday banking facilities, allowing customers to deposit cheques, check their balance, and withdraw and deposit cash. More than 50 shared banking hubs have been announced for communities across the country, as has been said. Four have opened their doors already and two more are expected in the coming weeks.