King’s Speech

Lord Altrincham Excerpts

Monday 13th November 2023 Lords Chamber

[Lord Altrincham (Con)]

My Lords, I declare my interest as a director of the Co-operative Bank in Manchester. I will make some comments on infrastructure investing and financial regulation.

The gracious Speech emphasised the importance of making long-term decisions, reducing debt and investing in energy. It went on to refer to the importance of investing and attracting private sector investment into renewables. In opening the debate today, the Minister reminded us of the importance of private sector investment to make that possible. The noble Lord, Lord Livermore, made the same comment for the Opposition, in particular referencing investment in the gigafactory project and a sovereign wealth fund investment project, which would attract up to three times the amount of public capital from the private sector. Both sides of the House support attracting private sector investment. That will become extraordinarily important given what has happened to government finances.

Unfortunately, renewable energy needs a lot of help. It is not just that the recent wind farm licence round did not work out—perhaps that was a one-off and the Government made some mistakes—but that the two largest wind farm operators in the world, Ørsted and Siemens, are in quite a bit of financial difficulty. In fact, they were running into financial difficulty at the same time as the gracious Speech.

Ørsted, by the way, runs 12 huge wind farms around the UK—one is out in the Thames estuary, in the Riddle of the Sands area. It said that its problem is not wind but interest rates. The problem we are running into is that these investments are very capital heavy and the decisions to make them were taken at a time when capital was very cheap. This is an enormous change for the Government, because renewable infrastructure inevitably rests on rates that are close to zero. As capital has repriced, many of those projects are no longer possible without a good deal of government help.

The other side of the equation is making more capital available from the private sector. The clue to that is in the financial services Bill that we have just passed. If it is successful, it may free up bank, private sector and asset manager equity to invest in the UK. We are all familiar with the possibility that legislation may be passed but that it may be ineffective, not be actionable and ignored or go out of date very fast. However, the Financial Services and Markets Act achieves accountability to Parliament for the regulators. This is a very important step which means that, in bringing back rules from Brussels, the regulators are not uniquely in a position to decide how to regulate. As your Lordships know, regulation has been somewhat cautious and there has been a gold-standard approach.

There will be accountability to Parliament and there will be two parliamentary committees—I will come on to that—which roughly replicates the kind of regulatory supervision that exists in Brussels; the ECON committee in Brussels supervises financial regulation quite effectively. Unluckily, the House of Lords made a recent approach to have a Joint Committee with the House of Commons, but we were rebuffed. It may be that we should not have asked, but the House of Commons’ committee will go ahead and ours needs to get going quickly. It needs to get going quickly because there needs to be a change in private sector investment in the UK and it is becoming rather urgent. A lot of the promises that the Government are making, our own expectations and often those expressed in this House rest on unleashing private sector investment.

That change would be a rebalancing away from looking at financial services regulations just through the lens of prudential regulation in favour of an underlying sense of growth, competition and promoting the wider good of the economy. It would be like the regulatory environment in Singapore, which allows for the growth of Singapore but also refers to and understands that without economic growth there are other risks to the economy and to the Government. We are perhaps running into those risks at the moment.

In supporting what is in the gracious Speech and the Government’s plans—and perhaps the next Government’s plans—we should get on with our own committee to look at financial regulation as quickly as possible. I wish the committee godspeed.

Financial Services and Markets Bill

Lord Altrincham Excerpts

2nd reading
Tuesday 10th January 2023 Lords Chamber

[Lord Altrincham (Con)]

My Lords, it is an honour to follow my noble friend Lord Ashcombe, to welcome him to this House and to reflect that it really is a blessing for this Bill that there are three maiden speeches. My noble friend has spent his whole career in insurance. We nearly met around the age of 30, when he was working at Lloyd’s of London but he has always otherwise been at Marsh. He brings expertise to us in financial services that is often, as he said, a little overlooked.

In addition to insurance experience, it is worth adding that my noble friend brings us experience in energy. His whole career has been around energy, which we quite often talk about in this House. Energy and energy infrastructure are important, as is understanding how that infrastructure in this country is laid out. My noble friend brings us expertise in that area. Finally, I would mention that three noble Lords have already asked him for insurance advice. At this time of year, we all have to work out endorsements and exclusions in policies, with the small print and all the rest of it. We may have only one Peer—certainly one Peer in the Chamber today—who really understands this stuff. He would be welcoming of any inquiries as well. He is very welcome and I look forward to working with him for many years ahead, and indeed on the Bill.

Turning to the Bill, I declare my interests as a director of South Molton Street Capital, Financial Services Capital and, in Manchester, the Co-Operative Bank. In the Autumn Statement, the Chancellor reminded us of the importance of growth. He specifically referenced energy, broadband, road and rail. The shadow Chancellor has made some very similar comments, so it is particularly important that we reflect on how the Bill, among the other financial Bills that we have seen, can help to support that growth, in particular with reference to infrastructure. We see Bills come through the Chamber and imagine that they will be financed by somebody, but there is going to be a limit to how much the Government can really support infrastructure investment. The OBR has already said that the Government will need to reduce infrastructure spending in two years’ time.

This means that spending on infrastructure will rest on the private sector and unlocking that private sector capital really rests on the Bill, so it is very welcome that Chapter 3 makes reference to growth. As we know and have heard from many Peers, the regulators have been somewhat cautious and prudent, for the reasons well expressed. At this point, we need to find ways to unlock capital to support infrastructure and for the wider economy. We might look carefully at Chapter 3 and reflect on how to address the growth opportunity, but also some of the concerns expressed about adding risk, or the prudential issues, which have been well covered.

The regulatory environment needs to be a little refreshed. Nearly immediately after this Bill was started in the House of Commons, on 7 September, we ran into the extraordinary pension LDI debacle. This was around the time when the Bill was going into Committee. It is worth reflecting on how we got to this extraordinary situation, which in some ways arises from an abundance of caution; that is to say, it goes in several steps.

Step 1 was to require companies to reflect actuarial changes in the valuations of their pension funds in their annual accounts. These are modelled changes of future liabilities and, because rates were very low, those liabilities felt very high at the time. It was a prudent thing to do; at the same time, it was not commercial and did not reflect a broader commercial understanding.

Step 2 was, remarkably, to de-risk these funds—that is to say, de-risk them from the point of view of the company and not, incidentally, necessarily that of the beneficiaries—by moving them into gilts. There not being sufficient long-dated gilts, they were moved into derivatives of gilts. These funds were suddenly hugely invested in derivatives for the purpose of de-risking. Again, this de-risking looked somewhat prudent. It is not, as we know, but it looked somewhat prudent then. At the same time, these enormous funds, which are effectively closed—they are in run-off and are barely supervised, while their beneficiaries have little control of them—were invested in an enormous amount of financial derivatives.

Had this growth chapter been in place, some of this error might have been caught. We had an extraordinary situation whereby very large captive funds were not invested in long-dated investments in this country or in infrastructure; we also had the savings of Canadian public schoolteachers making long-dated investments in UK infrastructure, while the savings of our own teachers were put into financial derivatives. This extraordinary debacle is an illustration of how prudent, cautious, step-by-step regulation can lead you into enormous risks.

I commend and support the Bill, which is extremely well thought through and, as the Minister explained, has been broadly consulted on. But regarding Chapter 3 and growth, I hope we will discuss in Committee the opportunities to invest in infrastructure and perhaps to meet the green agenda, which has been mentioned—again, that is often infrastructure. In Chapter 3 lies an opportunity to direct financial regulation for the benefit of the economy and of this country, and to meet the needs of this Government and indeed the next Government.