Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018

Lord Bates Excerpts

Tuesday 30th October 2018 Grand Committee

Moved by

[Lord Bates]

That the Grand Committee do consider the Central Counterparties (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018 and the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018.

Relevant document: 1st Report from the Secondary Legislation Scrutiny Committee (Sub-Committee B)

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, HM Treasury is currently undertaking the necessary preparations to ensure that, in the event that no deal is agreed when we leave the EU in March 2019, a functioning legislative and regulatory regime will continue to be in place for financial services. The aim of the work is to maintain continuity at the point of exit as far as possible. The European Union (Withdrawal) Act 2018 will transfer existing EU legislation on to the UK statute book at the point of exit. It also gives Ministers powers to amend this legislation to ensure that it will operate properly in a UK context. The Treasury is laying the necessary statutory instruments to complete this work for financial services legislation. This is the third debate in this Committee as part of this programme of work and there will be many more over the coming months.

Last December, the Treasury announced that legislation would be brought forward to establish a temporary permissions regime enabling EEA firms operating in the UK to continue their activities in the UK for a time-limited period after withdrawal. At the same time, it was also announced that a temporary regime would be brought forward in relation to non-UK central counterparties. The two SIs being debated today deliver on these commitments. They are both extremely important to the financial services sector, as they make a key contribution to our aims of maintaining service continuity at the point of exit.

The EEA passport rights regulations deal with references to the EEA financial services passport in UK law and establish a temporary permissions regime to provide for continuity once the UK leaves the EU and passporting no longer operates in the UK. Many will be familiar with the passporting system, which allows firms in an EEA state to offer services in another EEA state on the basis of the authorisation granted by their home state regulator. In a no-deal scenario, the UK would be a third country outside the EU financial services framework and therefore outside the passporting system, meaning that any references to EEA passport rights in UK legislation would become deficient at the point of exit.

The Government therefore need to repeal provisions in the Financial Services and Markets Act 2000 that implement the EEA financial services passport. This would mean that any EEA firms currently operating in the UK via a passport would no longer be able to do so from exit day, just as UK firms would no longer be able to passport into other EEA states. EEA firms would then need to obtain authorisation from the UK’s regulatory authorities if they wished to continue doing business in the UK. In such a scenario, the volume of applications received by the UK regulators would increase significantly as many hundreds, perhaps thousands, of EEA firms submit applications for UK authorisation. This will include applications from large and complex businesses with a substantial UK presence.

The need for a large number of firms to submit these lengthy applications for authorisation before exit day, and have the UK regulators process them in time, therefore poses a substantial cliff-edge risk for firms and regulators. Ultimately, this would affect UK individuals and businesses who rely on services from passporting EEA firms and cause disruption to them. To mitigate those risks, in line with the Government’s commitment on 20 December last year, the Treasury has therefore put forward this legislation to establish a “temporary permissions regime”. This regime would enable EEA firms operating in the UK via a passport to continue their activities in the UK for up to three years after exit day, allowing them to obtain UK authorisation or transfer business to a UK entity as necessary.

To alleviate the potential scenario where some EEA firms cannot be authorised within the three-year period, this SI also gives the Treasury the power to extend the regime. This could be done only where it is “necessary” to do so, and it could be extended by only 12 months at a time. Any extension would need to be based on a robust assessment from the FCA and the PRA regarding the effects of extending and not extending the period. The instrument that would extend the regime would be subject to the negative procedure, which was drawn to the special attention of the House of Lords by Sub-Committee B of the Secondary Legislation Scrutiny Committee in its report published on 18 October. The Treasury judges this choice of procedure appropriate given that the power to extend the regime is conferred by this instrument, which itself is subject to the affirmative procedure. I assure Members that we take parliamentary scrutiny seriously. Although this affirmative instrument introduces a power to make regulations via the negative procedure, the Treasury believes that if a like provision were to be made by an Act of Parliament, it would also be via the negative procedure because the power is so tightly drawn.

The temporary permissions regime would ensure, first, that firms can continue servicing UK businesses and consumers for a temporary period after exit day and, secondly, that firms will have appropriate time to prepare for and submit applications for UK authorisation and complete any necessary restructuring. Finally, the PRA and the FCA can manage the expected applications for UK authorisation from EEA passporting firms that were previously operating in the UK via a passport in a smooth and orderly manner.

This SI is a pragmatic response to a complex issue. It is necessary to minimise disruption to users and providers in the UK financial services sector in a no-deal scenario. I note that the Secondary Legislation Scrutiny Committee report acknowledged the importance of these regulations in achieving this objective.

It is with similar considerations for minimising disruption and enabling the UK’s regulators to manage a no-deal scenario in an orderly fashion that I turn to the second of these SIs, which covers central counterparties. Central counterparties are central to the UK and global financial system. They reduce risk and ultimately improve the efficiency and resilience of the system as a whole. They stand between counterparties in financial contracts, becoming the buyer to every seller and the seller to every buyer. They guarantee the terms of trade even if one party defaults on the agreement, reducing counterparty risk. UK firms currently receive services from non-UK central counterparties under the framework set out in the European Market Infrastructure Regulation, known as EMIR.

Under EMIR, non-UK central counterparties are permitted to provide services to UK firms if they are either located in the EU and authorised by their home regulatory authority or located in a third country deemed equivalent by the Commission and recognised by the European Securities and Markets Authority. In a no-deal scenario, when the UK leaves the EU and is no longer within the single market for financial services, those non-UK central counterparties would be unable to provide services to UK firms until they were recognised under the UK’s domestic regime. Such a sudden dislocation in the provision of services would introduce substantial risks to UK firms, many of which rely on non-UK central counterparties to provide clearing services and for mitigating transaction risks. By extension, this could impact on customers of those UK firms. Day one disruption to these services would pose risks to UK firms, as well as stability risks to the broader financial system.

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I do not know whether I am getting this wrong, but this seems to me to be the most significant SI in the financial sector that we have had so far and that it is not likely to be overtaken by a more significant one. It says that in a no-deal situation the UK capitulates on the matter of international financial services. It creates a regime where EU and EEA firms carry on trading more or less as if nothing had happened and it implies that the UK cannot trade in Europe as it does today. As far as I can see, there are no mechanisms to allow it to trade. I hope that I am wrong, that out of the hat comes a rabbit and that the Minister will say there is a WTO rule or something like that, but I do not believe that is so. I think the situation is catastrophic. Perhaps I am over-exaggerating. Perhaps it is really not a big problem. Lots of eminent politicians for whom I do not have natural sympathy have expressed how wonderful no deal would be. I think this is the classic example of where no deal would be really bad for the industry. What is the Government’s estimate of the effect of no deal on financial services in terms of employment, tax revenue and the health of the economy? Aside from these instruments, because presumably the Government are, as we speak, working flat out to secure a better deal for financial services, what is the Government’s aspiration in this area? What position do they hope to reach to make up for the lack of reciprocity in this deal? Will it be a fully reciprocal situation where UK firms will have the same privileges as EU firms have trading in the UK?

[Lord Bates]

I thank noble Lords for participating in this debate. It has lasted for 46 minutes, of which my introductory remarks were 13 minutes. In the 33 minutes, noble Lords have, by my calculation, managed to generate 24 questions which I will attempt to work my way through. I simply flag that up for colleagues on the Front Bench who are waiting for immediate business.

These are crucial issues. Noble Lords are quite right to raise them and seek further clarification. I commence by saying that I agree with the noble Lord, Lord Tunnicliffe, in this respect: this is not the outcome we are seeking or that we want or desire. It is not the outcome that we expect. We expect to secure a deal that will allow us to continue to have a good trading relationship in financial services with the European Union. We believe that that is in the interest of not only the UK but the EU as well. We are working very hard to secure that.

[Lord Tunnicliffe]

I want to explore that question a little bit further. Surely the test would be whether this is, in its elements, reciprocal to the privileges that EU firms will have as a result of this instrument.

[Lord Bates]

I will come on to that.

[Lord Tunnicliffe]

I am sorry.

[Lord Bates]

I do not want a 25th question; I will keep it at 24 and work my way through to that one. I have some remarks to address that particular point.

The noble Baroness, Lady Bowles, asked whether there could be a scenario in which a firm cannot be authorised within three years, which would extend the time limit. The answer is yes. The position is that although the PRA and the FCA have credible working estimates of the number of EEA firms that will apply to them for authorisation, there is an unavoidable degree of uncertainty about this process. That, coupled with the varying degrees of complexity in some of these firms’ applications, means that a power to extend the length of time is necessary. This will be crucial to mitigate the potential scenario in which some EEA firms cannot be authorised within three years from exit day, which could force the regulators to reject authorisation for the firms’ applications. Clearly, we do not seek that outcome.

The noble Baroness also asked whether there is enough flexibility to make equivalence decisions for CCPs. The powers in the EU withdrawal Act limit the fixing of deficiencies to retain EU law when the UK leaves the EU. It does not allow for policy changes beyond this element. The aim is to provide certainty to non-UK CCPs and their UK users during the period immediately following withdrawal from the EU. The criteria for recognition of non-UK CCPs will remain unchanged and will be onshore. This would allow recognised non-EU CCPs to resubmit the application used for EU recognition.

The noble Baroness then asked about the process for the joint assessment by the regulators. As set out in the statutory instrument, the PRA and the FCA would need to submit to the Treasury a joint assessment outlining the effect of extending or not extending the time period on the regime, on firms in general, on the UK financial system and on the ability of the regulators to discharge their functions in a way that advances their statutory objectives. That assessment would need to be submitted to Her Majesty’s Treasury no later than six months before the end of the regime. The Treasury would then make regulations to extend the duration of the regime only if it considers them necessary on the basis of the assessment.

The noble Lord, Lord Tunnicliffe, asked what protections would be available following exit day to UK customers who currently have access to the Financial Services Compensation Scheme. No one should lose FSCS protection as a result of this SI. If a UK customer is currently protected by the FSCS, they will be protected as long as the firm enters the temporary permissions regime.

The noble Lord also asked about the consequences for UK customers if a firm is denied authorisation. Any firms in the temporary permissions regime that are denied full UK authorisation by the UK regulators will lose their temporary permissions. Further legislation will be laid before Parliament at a later date to enable such firms to wind down their UK-regulated activities in an orderly manner. This legislation will ensure that the existing contractual obligations of these firms with UK customers can continue to be met. UK customers would no longer be able to enter into new contracts with these firms unless the firms had successfully reapplied for authorisation from UK regulators.

The noble Lord then asked what a firm being denied authorisation says about the passport regime and whether it suggests that it is not equitable, let alone equivalent. The EEA passport regime system is underpinned by the co-operation of EEA member states’ competent authorities. Each member state’s competent authorities supervise the activities of firms under its jurisdiction, even if those activities take place elsewhere in the EU. Once we leave the EU, we cannot rely on this co-operation continuing. We are therefore making these preparations.

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[Baroness Bowles of Berkhamsted]

Regulation 12 states:

“A central counterparty established in a third country”,


that,

“intends to provide clearing services … on and after exit day”,

has to make an application and that the application “must” be submitted before exit day. I do not think that is quite what the Minister said. I realise that time is short now, and there are quite a few things that the Minister has had to gloss over. I hope he will review what I have said, and I would welcome a written response.

[Lord Bates]

We may have misunderstood the point that the noble Baroness was making. I am very happy to undertake to write to her on that specific point and copy it to members of the Committee.

The noble Baroness asked why a CCP might not have been recognised within the initial period. While the Bank of England has credible working estimates of the number of CCPs that will apply to it for recognition, there is an unavoidable degree of uncertainty about this.

My noble friend Lord Lindsay asked whether third-country CCPs includes EU CCPs. EU CCPs will be treated as third-country CCPs post-exit. EU CCPs and third-country CCPs will be eligible for the temporary recognition regime if they were permitted to operate prior to 29 March 2019.

My noble friend Lord Kirkhope asked whether the regime could be extended continually each year. It is in everyone’s interest for firms to transition from the current system of EEA passporting rights to full UK authorisation as quickly and efficiently as possible. There would be no circumstances in which it would be desirable for the regulators or the Treasury to extend the length of the regime on a continuous basis. He also asked whether the negative procedure is an appropriate instrument. I respect the work of the Secondary Legislation Scrutiny Committee, whose report we have before us today. I addressed this in my opening remarks. We believe that the choice of procedure is appropriate, given the overall powers being scrutinised now through this affirmative instrument. The negative procedure would just be an extension of that. The power to extend the time period is not a provision which relates to fees and so would not, if made alone, attract the affirmative procedure under Section 8 of the Act, to which my noble friend referred. He also spoke about the process for registration with the PRA and its ability to deal with the volume of applications. I reiterate what I said to the noble Baroness, Lady Bowles: I am confident that the PRA and the FCA are making adequate preparations to deal with the scale of the challenge which they face, but it is a significant challenge.

The noble Baroness, Lady Bowles, asked whether the regulators may ask firms to apply for authorisation sooner than the two-year deadline set out in the statutory instruments if they so choose. The EEA Passport Rights (Amendment, etc., and Transitional Provision) (EU Exit) Regulations will give regulators the ability to direct firms to make an application for authorisation during a specified period within two years from exit day if they have not already applied for authorisation. This will help regulators manage the flow of applications in a smooth and orderly manner. I draw the Committee’s attention to the FCA’s recent consultation paper published on 8 October, in which it set out its intention to allocate each firm a three-month landing slot within which that firm will need to submit its application for UK authorisation. It plans to issue a direction shortly after exit day setting out which firms have been allocated to which landing slot.

The noble Baroness, Lady Bowles, asked how the two-year application period will operate. I dealt with that earlier but I did not cover one specific point: the two-year deadline for applications to be received cannot be extended.

The noble Lord, Lord Tunnicliffe, asked whether this is a one-sided arrangement and whether there will be any reciprocation. The Government are only able to take legislative action in relation to EEA firms’ passport rights to the UK; they cannot through unilateral action influence the status of UK firms. That is why we are seeking to agree a deep and special partnership with the EU, as well as an implementation period, so that important preparations can take place in an orderly manner.

The noble Lord asked what the impact on the financial services sector would be if there is a no-deal exit. Reaching a deal is in the mutual interests of both sides. We are focusing on the negotiation of the right future partnership based on a proposal published in the White Paper on 12 July. That White Paper outlined the Government’s position on financial services and Brexit. We propose a framework for financial services that will provide stability for the EU-UK ecosystem, preserving mutually beneficial cross-border business models and economic integration for the benefit of businesses and consumers in the UK and the EU.

The noble Lord asked what it says about the regime if a firm is denied authorisation. Once we leave the EU we cannot rely on this co-operation continuing and therefore we are making these preparations. It is important that these regulations go ahead so that consumers in this country have confidence in the financial services put forward here.

I have addressed the Financial Services Compensation scheme and I will now deal with one or two points relating to central counterparties. The noble Lord, Lord Tunnicliffe, made a point on the memorandum of understanding with the host state. Yes, there are a number of necessary steps for a non-UK CCP to be recognised in the UK. These include that the Treasury must determine that the relevant third country’s regulatory and supervisory framework is equivalent to EMIR; the bank must agree supervisory co-operation agreements or memorandums of understanding with relevant competent authorities of the CCP applicant; and the non-UK CCP’s application for recognition to be assessed by the bank must include information on its financial resources, internal procedures and various other relevant information.

The noble Lord asked what would happen if the central counterparty is not recognised. If a non-UK CCP were to continue to provide clearing services to UK firms without recognition, it would be in breach of a general prohibition under the Financial Services and Markets Act, which prohibits anyone carrying out a regulated activity unless they are authorised or exempt. The CCP would be guilty of an offence and subject to a fine or imprisonment. However, further legislation will be laid at a later date to enable such firms to wind down their activities in an orderly manner by being treated as being recognised for a short period.

I hope that has addressed many of the questions.

[Lord Tunnicliffe]

In the unlikely event that the Minister has missed anything, will he review his answer and, if he has missed the odd point, send a letter covering it?

[Lord Bates]

I am happy to give an undertaking to do that. We are in uncharted territory here—we have not been through this process before. The Economic Secretary to the Treasury, John Glen, is being incredibly diligent in engaging with the regulators on a regular basis and being guided through this process. That is why the announcement was made in December. We will continue to keep this under review. The noble Baroness, Lady Bowles, made a suggestion about how we might keep the House informed of developments and made particular reference to perhaps involving the Select Committees. If I may, I will take that back to the Economic Secretary to the Treasury because, in some of these areas, once we know the lay of the land—we hope it will not come to that but if it does—then we will clearly need to review these provisions. I am happy to take that suggestion back and include it in my answer to the noble Lord, Lord Tunnicliffe, which I will copy to my noble friends Lord Lindsay and Lord Kirkhope.

Motion agreed.

Brexit: Economic Forecasts

Lord Bates Excerpts

Wednesday 24th October 2018 Lords Chamber

[Lord Strasburger]

To ask Her Majesty’s Government whether their forecasts for the next ten years show a better outcome for the United Kingdom economy if the United Kingdom were to remain in the European Union than if it were to leave.

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, the UK is leaving the EU on 29 March 2019 and will begin to chart a new course in the world. The Government’s proposals set out in the 12 July White Paper are the best way to protect jobs and avoid a hard border between Ireland and Northern Ireland. When we bring forward the vote on the final deal, Parliament will be presented with the appropriate analysis to make an informed decision.

[Lord Strasburger (LD)]

My Lords, as full EU members we currently enjoy the best possible trading terms with the EU 27. Any other deal must, by definition, be worse. Our Government are striving for a deal with our biggest trading partner that can only downgrade what we have now—that is worth thinking about. Does the Minister know of any other country that has deliberately degraded its trading relationship with its biggest customer?

[Lord Bates]

I do not accept the proposition behind that question. The world is changing. Some 90% of the growth that will happen over the next 10 years will be outside the European Union. Six of our largest trading partners are in the EU, including Germany, France and the Netherlands, but the United States is No. 1, China is growing very significantly and there is Switzerland too. This is a great country in which to invest and trade. That is why we have the largest stock of foreign direct investment and why our exports and employment continue to grow, and I expect that to go on happening once a deal is reached.

[Lord Davies of Oldham (Lab)]

My Lords, the Minister is answering on a hope and a prayer. In this age of uncertainty, to claim categorically that Brexit will be beneficial to the nation is extraordinary. Will he not accept that economic predictors in the past have been broadly correct? They have been right over the last seven or eight years that the economic growth rate in the United Kingdom would decline to one of the lowest in the G7. They also got right that the people who would pay for austerity would be working people, as their wages would not increase over this period. But there was one prediction that the Government got wholly wrong; the Minister partially reflected on it a moment ago. That was for the Prime Minister to go post-haste to the President of the United States to take steps towards an advantageous trade deal after Brexit. What was the reply? “America first.”

[Lord Bates]

As far as we are concerned on this negotiation, we want a deal, we expect a deal and we want good, positive relations with our European friends. If it is important that we continue to have access for goods worth £423 billion into the EU, is it not also crucial that it continue to have access so that it can sell us goods worth £518 billion each year? It is in the enlightened self-interest of both parties to reach a deal, and that is what the Prime Minister seeks.

[Lord Howell of Guildford (Con)]

My Lords, in dealing with this Question, would it not be best to ask what will happen to the European Union over the next 10 years? Visegrad countries are pulling away, nationalism is growing in many European member states, Italy is considering whether it should leave the European Union, and Greece continues to have difficulties. Would it not be wise for us to work for a modern and completely different kind of European co-operation in the future, which might be better for Europe and us?

[Lord Bates]

My noble friend speaks with great knowledge and expertise in these areas. Of course, one of his points is the one I made right at the beginning: the fastest-growing economies will be outside the European Union. Last year, our exports to India rose by 31% and to China by 15%. Those are significant sums. Not just the UK but the EU needs to wake up to the competition around the world, and to ensure that we have markets that can compete in that new environment.

[Lord Howarth of Newport (Lab)]

My Lords, what are the Government’s economic forecasts for the next 10 years worth when their forecast of catastrophe in the 12 months following the referendum was so abjectly wrong?

[Lord Bates]

The noble Lord will remember the catastrophe that happened in 2008. I do not necessarily want to remind him of that. Growth has continued in every quarter since the referendum. We expect that to continue and that is what we are working for. We are also working for a deal—that is what the Prime Minister is working for tirelessly. She deserves our full support.

[Baroness Kramer (LD)]

My Lords, I am tempted to comment on our shocking growth numbers at 1.2% compared with those of the US and the EU, which are close to 6%. The noble Lord is relying on future free trade agreements. I am shocked to learn how low the utilisation of free trade agreements is. The requirements to qualify for zero tariffs under any existing free trade agreement are so heavy in documentation on rules of origin, certification, dealing with royalties and valuation that the overwhelming majority of companies choose to pay the tariff rather than opt for the zero. In some free trade agreements only 10% of qualified transactions opt for the zero tariff because of the costs; at best it is only 60%. Does that not damn the future trading relationships that he describes?

[Lord Bates]

I point out to the noble Baroness that some of the markets in which we are trading most successfully and where growth is increasing are ones that we do not have a formal free trade agreement with and where we operate on WTO terms. But that is not the objective we are setting for the future; we want a good trade agreement with our friends in the European Union and good free trade agreements that we will be able to negotiate with other countries around the world.

[Baroness Deech (CB)]

My Lords, I have had the advantage of listening to the noble Lord, Lord King of Lothbury, speak about the reliability of economic forecasts. In summary it was, “Stuff happens”. No one 11 years ago would have foreseen what would happen in 2008 or the problems with the eurozone ever since. Indeed, the Treasury document that we had to see in private across the road itself fluctuated 5% this way and 5% that. Will the Minister understand if we take the forecasts with a great dose of salt?

[Lord Bates]

We should do, although of course we look at them. We somehow behave as though economic forecasts are some kind of target that we have to meet, when they are not. Our future is entirely in our own hands. What is better news for us is that it is entirely in the hands of British businesspeople, who have shown themselves to be world leaders the world over. I have great confidence in them and their ability to continue.

Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018

Lord Bates Excerpts

Wednesday 24th October 2018 Lords Chamber

Moved by

[Lord Bates]

That the draft Regulations laid before the House on 16 July be approved.

Relevant document: 38th Report from the Secondary Legislation Scrutiny Committee.

Considered in Grand Committee on 17 October.

Building Societies Legislation (Amendment) (EU Exit) Regulations 2018

Lord Bates Excerpts

Wednesday 24th October 2018 Lords Chamber

Moved by

[Lord Bates]

That the draft Regulations laid before the House on 19 July be approved. Considered in Grand Committee on 17 October.

Motion agreed.

International Solar Alliance: Framework Agreement

Lord Bates Excerpts

Wednesday 24th October 2018 Grand Committee

[Lord Collins of Highbury (Lab)]

My Lords, I am grateful to the noble Baroness for initiating this debate, and I, like the noble Lord, do not think she should apologise at all. When I read that she had put down a Motion on an international treaty, it prompted me to do the same, so I am having a debate on an international treaty next Tuesday. It is a great opportunity for more public scrutiny of treaties.

Like the noble Lord, I think this is a good agreement, and we should praise the international community and the United Nations for their focus on this, and also praise Britain’s involvement. I have a number of questions, which have already been partly raised. Why this is good is that from a DfID responsibility, we know that the key to economic development is access to energy. Many local economies, particularly in Africa, are inhibited from growing because they cannot access energy, and I think the key to this ISA—if I can call it that—is that it will not only use existing new technologies but a range of them that are not simply reliant on big generation. It is moving into smaller and local generation that can help more remote economies to grow.

I have some specific questions. Initially, DfID said that its engagement would be limited to providing expertise, and that there would be no monetary contributions, but then in the memorandum it states that the United Kingdom,

“may consider committing financial resources”,

directly. Have discussions taken place with the ISA over potential future financial contributions?

I also want to pick up the point that we are members of the alliance because of our overseas territories; the noble Lord raised the fact about consultation. The memorandum confirms that all the overseas territories were in agreement with our membership. That is good, but what else did they say? Did they actually ask how it will impact on them, what concerns do they have, and will they be able to utilise it? What is DfID’s programme in terms of the alliance and the overseas territories? The Minister may not be able to reply tonight, but it would be good to receive information about how the overseas territories were engaged.

I agree completely with the noble Baroness in terms of us advocating one thing internationally and doing something else domestically. The noble Lord has said many times that the UN 2030 agenda does apply. It is universal, so what we are practising in the alliance is something we should be implementing. We are accountable for all the SDGs—the decision to set up the alliance came out of the UN 2030 agenda and the SDGs. I hope that the Minister can talk about how the policy that DfID is leading on will be addressed in the cross-department activity on the implementation of the SDGs. Perhaps he will commit in the report that is going to be made next year to the United Nations—our voluntary review of the SDGs—on how we will meet this particular aspect.

I have mentioned the possibility of direct financing, but of course we have a development instrument in the United Kingdom, a huge one for which the Government have committed to providing additional investment funding, and that is the CDC. Of course, the CDC does have as part of its five-year business plan a commitment to address the SDGs. I am not sure whether the CDC is an instrument that might be involved in the implementation or be part of our ISA engagement, particularly in terms of investment. One of the things I have raised in the past, along with many other noble Lords, is the fact that there are CDC investments which are not carbon neutral. It has made investments which are contributing to global warming mainly because, as I have said before, there is an urgent need in some developing countries for access to energy. I would like to see how the CDC strategy fits in with the memorandum that has been circulated.

In the end, it is important that we are able to review these international agreements. I will conclude by saying that we welcome the Government’s commitment to the alliance. I hope that that will be more than just simply providing specialist assistance and that we ensure that we support fundamental changes. As the noble Lord said, India has a requirement to use energy and it has been utilising quite dirty energy. We want to see our support being given not only to middle-income countries but spread across all developing countries. Given that, I welcome the report.

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, I join others in thanking the noble Baroness, Lady Jones, for raising this issue and initiating this debate. It gives us a good opportunity to put several points on the record. I shall try to cover most of the questions which have been raised. Some relate specifically to other departments and therefore I will take up the kind suggestion of the noble Lord, Lord Collins, to write to noble Lords about them.

Perhaps I may begin, as did the noble Baroness, Lady Jones, by setting out the Government’s position in relation to the alliance and then move on swiftly to the specific questions. The International Solar Alliance is a ground-breaking initiative which aims to accelerate the deployment of solar energy. That deployment is critical to achieving the seventh sustainable development goal which seeks to ensure access to affordable, reliable, sustainable and modern energy for all. The ISA plans to raise $1 trillion of investment for solar projects, enough to provide 700 million of the 1.1 billion people who are currently without electricity with solar energy. It was quite right of the noble Lords, Lord Collins and Lord Teverson, to point out the rural aspect of this issue because most of those who do not have access to energy live in rural areas. The development of off-grid solar energy sources therefore offers life-changing opportunities for them. In doing so, it would reduce CO₂ emissions by over three gigatonnes per year. That is around 10% of the global CO₂ emissions from energy—a very significant contribution to SDG 13 on tackling climate change. In doing so, the ISA will also support global development, providing the energy that enables businesses to be productive, services—such as health centres and schools—to function, and providing safe and affordable light and heat to the hundreds of millions of people who currently live without it. The ISA can play a critical role in contributing to the low carbon future we need to ensure that dangerous climate change does not wipe out past development gains. If we are to protect our citizens and companies, we must tackle climate change abroad as well as at home; UK membership of the ISA will help this to happen.

--- Later in debate ---

[Lord Bates]

The noble Lord, Lord Teverson, asked specifically about the British Indian Ocean Territory and the Chagos Islands. We have regular dialogues with the overseas territories: there are Joint Ministerial Councils that are chaired by my noble friend Lord Ahmad and which I attend as the Minister responsible for some of the islands that are eligible for overseas development assistance. Of course, their attentions have been focused on the consequences of climate change, including hurricanes in the Caribbean last year. There was certainly a lot of interest and support for doing more on this. We are having discussions on the development of geothermal on Montserrat and about solar and wind on St Helena. These are very important elements.

It might be helpful for the Committee to note that at the ISA General Assembly on 3 October the restriction on members having to have a territory within the tropics was removed from the original provision. It is correct that France and India established the ISA in 2015 in Marrakesh, but it is incorrect to suggest that the UK is slipping behind France. More solar is installed in the UK than in France. Significantly, 49% of all EU solar investment is from the UK. In the first half of this year, one in five EU electric vehicles was sold in the UK, second only to Germany.

Internationally, we do more too. The Powering Past Coal Alliance has been launched with Canada. Over the weekend I was in Copenhagen at the partnering for green growth summit. The initiative is being led very powerfully and effectively by the Prime Minister of Denmark. There was significant recognition on the international stage of the contribution that the UK is making in terms of green growth finance. One of the delegates specifically mentioned the Powering Past Coal Alliance which was launched around a year ago, and of course the International Climate Finance facility.

As for how this links with the SDGs, we had a light grilling by the Environmental Audit Committee just a couple of days ago on our readiness for the SDGs. What I was able to say there I also say to the Committee, which is that we view these issues through the lens of the SDGs: they are the best hope we have and they must be applied rigorously, as the noble Lord, Lord Collins, said, domestically as well as being the focus of our efforts internationally.

The noble Baroness, Lady Jones, spoke about fracking. In the UK we have been regulating for gas and oil drilling for many years and we have tough regulations in place to ensure on-site safety, prevent water contamination and mitigate air pollution. All projections suggest that the UK will require gas for decades ahead. By 2030 we could be importing three-quarters of the gas we need, and that is the rationale for exploring an alternative section of development.

We welcome the IPCC report on 1.5 degrees. We are a world leader when it comes to cutting carbon intensity but the evidence is clear: Governments, businesses and communities must take further action to confront this challenge. That is why we are asking the international climate experts of the Committee on Climate Change for a road map to a net zero economy, including how emissions might be reduced and the expected costs and benefits of doing so. Those will also be followed up at the next meeting, which will take place in Katowice in December.

The noble Baroness, Lady Jones, asked what we are doing domestically. The UK was the first country to introduce legally binding emission-reduction targets through the Climate Change Act of the previous Labour Government 10 years ago. Our current 2050 target is to reduce greenhouse gas emissions by at least 80% relative to 1990 levels. That was set in 2008 and we are already making progress, as evidenced by our strong domestic performance. However, there is more to do. Low-carbon innovation is at the heart of the Clean Growth Strategy published last year, and over £2.5 billion of government investment in low-carbon innovation from 2015 to 2021 is a key part of delivering that. This forms part of the largest increase in public spending on UK science, research and innovation in almost 40 years.

The noble Lord, Lord Teverson, asked about the specific bodies that might be involved in the ISA. We have a list that I am happy to provide to him, but the one that he may have been referring to is the India/UK virtual clean energy research centre, UK Research and Innovation India, formerly RCUK India, one of those announced some time ago by my colleague Sam Gyimah, a Minister at BEIS.

On what we are doing domestically about renewals and emissions reduction, we are committed to maintaining our position as a global leader in renewable energy. We hope that the ISA will present opportunities for British business abroad. Private sector investment, subsidy-free, may soon be a viable option for technology. The key message here is that the SDG gap in terms of funding to meet the SDG goals is running at some $2.5 trillion per year, and therefore it is impossible for $150 billion of aid flows to go anywhere near meeting that. That is the reason why we need to use vehicles such as the CDC, the City of London and the ISA to leverage in private sector capital investment. Of course, that is now available because the technology is now so advanced that solar-powered energy is indeed competitive and economic and can provide a return on investments.

We are pleased to see that the establishment of technologies such as onshore wind and solar is reducing the cost. If this continues, they may have the capability to play a significant role in the generation mix in future. No decisions have been taken about the future of CfD allocation rounds for established technologies but it is right that we should focus support on those technologies where the need is greatest.

[Lord Teverson]

Perhaps I can give the Minister good news. He may not be aware of this but UK Climate Investments is the organisation in question. The British Government, along with Lightsource Renewable Energy and UK Climate Investments, part of the Green Investment Group, are putting in the seed asset for the partnership that will lead to a 60-megawatt project in the Indian state of Maharashtra. The Government have made that investment this year and I congratulate them on that programme, but I was interested to understand what else they would manage to deliver in future.

[Lord Bates]

The noble Lord’s skills know no bounds. Would he like to take a place in the Box behind me? That is very good research and I am grateful for it.

Solar PV is a UK success story. The last eight years have seen the technology deployed rapidly, with over 99% of the UK’s solar PV capacity deploying since May 2010. In 2015, 49% of total EU investment in solar PV occurred in the UK. We have installed more than twice as much capacity as any other European country—more than Germany, France and Australia combined.

On how the UK is contributing to the environment of climate change following the IPCC report which the noble Baroness, Lady Jones, asked about, we have launched our 25-year environment plan. It sets out how we will replenish depleted soil, rid seas and rivers of rubbish and cut greenhouse gas emissions. We have talked specifically about eliminating avoidable plastic waste and supporting the creation of a new northern forest. We have embedded environmental net gain principles for development, including housing and infrastructure. We have created a new network of sites covering 500,000 hectares where nature and wildlife can thrive, and we have implemented a sustainable fisheries policy.

Those are the main points that were raised during the debate, but of course I will review the Official Report and write to noble Lords should there be any gaps.

[Lord Teverson]

Can I clarify a point? The report says that all the overseas territories were consulted. As the British Indian Ocean Territory is on that list, who do the Government consult with?

[Lord Bates]

The noble Lord makes a very specific point. He will be aware of some of the challenges we are currently facing in our consultation with the Chagossians, who are based largely in Mauritius. I do not have the name of a specific individual, but I can certainly undertake to write to the noble Lord and set out any other points that have not been covered.

[Baroness Jones of Moulsecoomb]

I thank the Minister for his response. He has raised a lot of issues and I could not keep up with them all. I can assure him that, probably against his preference, I shall pick up on them when I read the transcript. I thank the noble Lords, Lord Teverson and Lord Collins, for supporting me. I take back my apology for bringing this issue to the table. Ken Livingstone was right: one should never apologise.

The noble Lord, Lord Teverson, appears to be more optimistic than I am. Perhaps it is my job in the House of Lords to bring a hefty dose of green pessimism to our debates so that we have to stretch ourselves to accommodate it. As regards the noble Lord, Lord Collins, I am absolutely delighted that I have set a precedent for testing these treaties. It allows for more scrutiny of the things that the Government are doing.

The noble Lord, Lord Bates, talked about the road map and I would be interested to hear more about that. I am sure that there are links which I can refer to. We cannot live on past glories. I realise that some of the things he talked about are happening not because of the Government but in spite of the Government. People like me have put solar panels on their houses in spite of the Government slashing feed-in tariffs simply because the technology is becoming cheaper. The Government should support solar panels. I lived on a semi-tropical island in the Seychelles for six years and I am well aware of the impact that climate change is going to have on many islands in the Indian Ocean, as well as other places. Even a small rise will mean the loss of a lot of land because many of the islands’ perimeters are quite shallow. That in turn will mean the loss of livelihoods. I can well understand why the small island states are extremely anxious about the fact that we are such big polluters. It is up to us as well as places such as China, India and the USA to make sure that we limit our disastrous carbon emissions. One of the points made in the UN report is that we have to reduce inequality and poverty. That will be a major factor in helping to reduce our impact on the planet. It is something that I believe in very strongly as well. Most of these states do have a source of energy. The tides are small, the waves are often big, but of course they have the sun, so solar energy is a way to find more energy.

On fracking, I am sure the Minister knows that up at Preston New Road in Lancashire the fracking started and within days there have been six tremors. Fracking is a nasty way to recover fossil fuels at a time when we should be keeping fossil fuels in the ground. Fracking is not only unnecessary—it is not necessary for a secure energy future—it is dirty and dangerous. I am delighted about the growth of green finance, but Greens have strong suspicions about the growth of finance and whether or not there is real green finance. It is wonderful if there is growth in green areas, but there has to be a concomitant scaling back in other areas.

Finally, I know that a Conservative Government, naturally, but a Labour Government as well—or even a Lib Dem Government—would care very much about the cost of things. The question of how much this is going to cost us is a good one, but of course the real question, the question Greens always ask, is: how much will it cost us if we do not do it? Actually, the amounts are phenomenal, and they include global insecurity and a lot of quite bad impacts on us. I beg to move.

Online Marketplaces: VAT Evasion

Lord Bates Excerpts

Monday 22nd October 2018 Lords Chamber

[Lord Leigh of Hurley]

To ask Her Majesty’s Government what steps they are taking to ensure that operators of online marketplaces take all reasonable steps to mitigate VAT evasion.

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, the UK is the first country in the world to make online marketplaces jointly and severally liable for VAT fraud committed on their platforms. Since 2016, HMRC has received around 43,500 VAT registration applications from non-EU based online sellers, which compares with 1,650 in 2015.

[Lord Leigh of Hurley (Con)]

This issue is of course important to UK high street retailers which are facing intense competition from Amazon. Does my noble friend the Minister share my concern that HMRC estimates that the loss of VAT through evasion by foreign online supply companies is between £600 million and £900 million? However, despite having the powers to do so, HMRC has not frozen any funds, it has not blocked any listings and it has not seized one item of stock from warehouses where goods from overseas suppliers are stored awaiting dispatch the next day.

[Lord Bates]

My Lords, I congratulate my noble friend on his commitment and consistency in raising these very important issues which the Government recognise. That is why, for exactly the reasons he has outlined, we were the first country in the world to introduce joint and several liability for market sellers. We have issued more than 3,000 joint and several liability orders since they were introduced and the amount of tax revenue, which is the crucial point raised by my noble friend, is expected to increase to £1 billion over the review period leading up to 2023. However, more needs to be done.

[Lord Campbell-Savours (Lab)]

My Lords, are Ministers seriously considering any Treasury recommendations to increase the VAT threshold and thereby bring a lot more traders under the rules? Would that not increase the tax take substantially?

[Lord Bates]

There are other ways of approaching the issue, one of which is to crack down on the loopholes. We have introduced successive initiatives and we have spent some £2 billion for HMRC to cut down on evasion. Next April, we will bring in an important measure to address the point made by my noble friend Lord Leigh. It will require that due diligence is carried out on online marketplaces to ensure that people are actually paying the correct amount of tax. Our emphasis and focus is on closing the gap and ensuring that more people pay the tax that is due rather than looking at the rates.

[Baroness Kramer (LD)]

My Lords, despite its expanded powers, HMRC is shockingly poor at collecting VAT from overseas sellers. The number has been 4% of the amount that it is owed, and if I understand the Minister’s numbers, it will not even attempt to get the figure up to 10%. As we go through the Brexit process we run the risk that another 27 countries are going to fall into the same overseas sellers category without the single market and the ECJ to ensure that we can collect VAT from entities that are based elsewhere but selling in the UK. What does he anticipate will be the consequence of that?

[Lord Bates]

We have to recognise that the UK has the largest online marketplace in the EU. We also need to recognise that beyond the EU, this is a global issue. Most of the goods coming in are actually from outside the EU, and that is why the G20 and OECD base erosion and profit shifting initiatives are so important, as well as moving our tax system on to a digital basis so that we can ensure that digital businesses pay the correct amount of tax due.

[Lord Naseby (Con)]

Does my noble friend not understand that small retailers are now being required to produce their returns online, although that has been temporarily suspended, while in the meantime their main competition is committing evasion on a substantial scale—never mind the fact that business rates are hugely generous for online businesses? Are Her Majesty’s Government saying that they are not concerned about the loss of the high street? If they are, is it not time that they showed a little more understanding of what faces our shopkeepers up and down the country?

[Lord Bates]

We sympathise with those people, which is why we have listened to the calls that have been made. We have introduced pioneering joint and several liability for marketplaces and are introducing a due diligence system. While we are working through the G20 and the OECD, we are looking at initiatives that could be considered to solve the problem, such as split payments to ensure that VAT is automatically paid when someone domiciled in the UK makes a transaction.

[Lord McKenzie of Luton (Lab)]

My Lords, the PAC noted that HMRC does not know how many fulfilment houses, or packaging establishments, there are in the UK and is therefore unable to systematically target VAT fraud. Is that right? If so, what will the Government do about it?

[Lord Bates]

That is right, which is why we require those establishments to register.

[Lord Cormack (Con)]

My Lords, does my noble friend think that Sir Nicholas Clegg may have some spare time to devote to this?

[Lord Bates]

I do not know whether he is domiciled in the UK any longer.

[Lord Tunnicliffe (Lab)]

My Lords, is this not a problem of HMRC resources? Is it not very difficult now to reverse the cuts that have been made in HMRC over the years? This is a clear example of loss of revenue to the Exchequer and the damage it does to the high street.

[Lord Bates]

I do not accept the premise that we are reducing the amount of money going into HMRC. Since 2010, as I said earlier, we have spent some £2 billion on closing that loophole. The increased yields which that has brought into the Exchequer are evidence that it is working.

Brexit: Economic Effect

Lord Bates Excerpts

Thursday 18th October 2018 Lords Chamber

[Baroness Quin]

To ask Her Majesty’s Government, further to their assessments of the economic impact of Brexit made available in February, what analysis they have made of the economic effect of Brexit on (1) North East England, (2) other regions of England, and (3) Scotland, Wales and Northern Ireland.

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, we have committed to ensure that Parliament is presented with the appropriate analysis to make an informed decision when we bring forward the vote on a final deal. At this stage of the negotiation it would not be practical or appropriate to set out the details of exactly how the Government will analyse that final deal.

[Baroness Quin (Lab)]

My Lords, when I last raised this question about the impact assessments and the huge concern that there had been among businesses in the north-east about them, the noble Lord, Lord Callanan, said that further analyses would be undertaken and completed by the time a deal with Brussels had been finalised. Can the Minister give the House and Parliament an assurance that those final impact assessments will be made available both to parliamentarians and to the public so that the economic consequences for our nations and regions can be taken fully into account before any votes are taken in Parliament on this issue?

[Lord Bates]

I am very happy to reiterate that commitment which was given to ensure that, before the meaningful vote—and, indeed, the debate in your Lordships’ House—takes place, there will be an appropriate level of analysis to look at the consequences of the deal. Of course, we cannot set that out in detail now, because we do not know what the shape of that deal will be, but when it comes, that analysis will be made so that people can make an informed decision.

[Lord Forsyth of Drumlean (Con)]

My Lords, given that the Treasury model for short-term forecasting has been right for only one quarter since the referendum, and that the Chancellor has indicated that it is defective, what faith can we put in any long-term forecast, and why does the Treasury believe that its long-term forecasts are likely to be any more accurate than its short-term forecasts?

[Lord Bates]

My noble friend raises an interesting point. When we look at the actual economic data rather than the forecast, we see: unemployment falling to record low levels; inflation and the deficit on the way down; employment on the way up; wage increases at their highest level for a decade; and exports increasing. All this points to the fact that, as with all forecasts, these are not targets to be met but something to be beaten.

[Lord Cunningham of Felling (Lab)]

My Lords, is it not the case, and does not the record show, that the north-east of England was one of the largest beneficiaries of Japanese inward investment exactly because the Japanese wanted to be in the UK because the UK was a member of the European Union? We know from statements by the Japanese ambassador and Japanese industrialists that decisions about investment in the UK have now been put on hold. Does the Minister anticipate that, whatever the decision and outcome of the negotiations, Japanese inward investment in the UK will continue as before as though nothing had changed?

[Lord Bates]

Certainly the evidence, though not specifically on Japanese inward investment, is that inward investment has been rising since 2015. I know how crucially important inward investment and exports are to the north-east of England. Those of us from that region were immensely proud to be one of the only net-exporting regions of the country. It is a very important element, but exports are continuing to rise and foreign direct investment is continuing to be made into the United Kingdom, up some 16% since 2015. We believe it is in both our EU friends’ interests and, of course, our own that there is a proper deal so that this can continue and unemployment in the north-east can continue to fall.

[Lord Beith (LD)]

My Lords, given what we already know about the potential severe impacts on the north-east, would not the honourable and honest position be, when we know what the deal is or whether there is a deal, to say, “This will cost in terms of jobs and prosperity in the future. If you want us to go ahead with it, we will need your explicit consent in another referendum”?

[Lord Bates]

There has been a referendum, which was endorsed by the votes cast in the general election that took place just last year—over 580 Members of the other place out of 650 stood on a manifesto to implement the decision taken in the referendum. We are now in the position of seeking to implement the decision that was taken in the referendum and endorsed in the general election.

[Lord Inglewood (Non-Afl)]

My Lords, I declare an interest as chairman of the Cumbria Local Enterprise Partnership. We are now being asked regularly by businesses large and small about what the Government think the impact of Brexit will be on Cumbria. They want to know this to start planning for the post-Brexit era. It seems both ignoble from the Government’s perspective and very unhelpful from the perspective of businesses, which will be so important in the future, to have so little to say and to say it so vaguely.

[Lord Bates]

I do not accept my noble friend’s view that we have had little to say. I was in the Chamber earlier this week when the Leader of the House repeated the Prime Minister’s Statement and some people suggested we had too much too say. Some 106 technical notes have been put out, and we have had significant debates. The crucial thing is that businesses have known since the referendum took place, and certainly since the general election, what the outcome of the referendum was and the Government’s intention in implementing the outcome of that referendum. As a result, they have done incredible work in boosting their exports around the world. We are seeing that export growth is at record levels in terms of goods and that the fastest growth for those markets is in countries outside the European Union, such as India and China.

[Lord Davies of Oldham (Lab)]

My Lords, the Minister knows that the north-east’s average disposable income is only three-quarters of the national average. That is why my noble friend has raised this issue at this point. The Minister’s reply that we will hear the Government’s analysis before the crucial vote gives no indication of just how much time there will be for it to be compiled and to be analysed by this House and the other House before the meaningful vote. He must recognise that there are great anxieties about the present situation, and the Government are doing nothing to give any reassurance.

[Lord Bates]

I accept that there will be anxieties, but we have to point to the hard facts: businesses are still coming here and people are still buying British goods in greater quantities than ever before. Furthermore, it is an incredible achievement that last year unemployment in the north-east fell faster than in any other region in the country. It is now lower in the north-east than in London or the West Midlands—something that we have never seen in our lifetime. Therefore, there is a lot for people in the north-east and in Britain to be confident about in the future.

Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018

Lord Bates Excerpts

Wednesday 17th October 2018 Grand Committee

Moved by

[Lord Bates]

That the Grand Committee do consider the Financial Regulators’ Powers (Technical Standards etc.) (Amendment etc.) (EU Exit) Regulations 2018.

Relevant document: 38th Report from the Secondary Legislation Scrutiny Committee

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, as this is the first in a series of SIs preparing the ground for a potential no-deal scenario, it may be helpful for me to set out in more detail in my opening remarks the context in which these SIs are being brought forward. I hope that it will help the Committee in considering future SIs.

Following the UK’s decision to leave the EU after the referendum of 2016, the Treasury has undertaken a significant amount of work with respect to the withdrawal negotiations themselves and in preparing for a range of potential negotiation outcomes. The best outcome is for the UK to leave with a deal, and we have put forward a serious and credible proposal for the future relationship. While we remain confident of agreement this autumn, in the meantime we must continue to work to prepare ourselves for the event of no deal. As the department responsible for financial services, the Treasury is working to ensure that there continues to be a functioning legislative and regulatory regime for financial services in a scenario where the UK leaves the EU without a deal or an implementation period. This includes using powers delegated to Ministers under the European Union (Withdrawal) Act 2018 to fix deficiencies in applicable EU law that will be transferred directly on to the UK statute book at the point of exit from the European Union.

The approach of the European Union (Withdrawal) Act is to maintain existing EU-derived legislation at the point of exit to provide continuity and certainty for businesses and consumers. While the fundamental elements of current financial services legislation will remain the same after exit, it will need to be amended to ensure that it works effectively once the UK has left the EU. The Treasury is therefore in the process of laying around 70 statutory instruments ahead of exit day to ensure that the UK’s financial services regime is prepared.

A key decision the Government had to make in approaching this work was how to allocate responsibility for the huge body of financial services regulation being brought on to the UK statute book by the EU withdrawal Act. The Government have decided to allocate responsibility in a way which respects democratic accountability and the UK’s existing regulatory framework, as set up by Parliament. Legislation which has been developed at the political level—proposed by the European Commission and negotiated through the Council of Ministers and the European Parliament—will become the responsibility of the UK Parliament, while rules developed at a technical level will become the responsibility of the UK regulators.

The EU’s directly applicable financial services legislation broadly falls into three categories. The most important category is regulations, which play an important part in setting the overall policy direction for areas of financial services activity; then there are the delegated regulations, which tend to be used for setting out more detailed requirements; and the lowest level of legislation is technical standards, which are used to flesh out the most detailed and technical aspects of regulations. It is only this last level, the technical standards, which the Government propose to delegate to the UK’s financial services regulators.

The responsibility for developing these technical standards currently lies with the European supervisory authorities, before they are adopted by the European Commission. As required by EU law, technical standards do not need policy decisions to be taken but lay out the granular level of the requirements that firms need to meet to implement policy set out in higher EU legislation. The existing stock of these technical standards runs to over 7,000 pages. Common examples of technical standards are those that set out the processes for providing supervisory information to regulators, including the specific form templates that firms should use.

The job of this SI is to set out the terms on which UK regulators will exercise the proposed new function for EU technical standards. It will also delegate the EU withdrawal Act’s deficiency-fixing power so that the UK regulators are able to ensure that these technical standards, as well as domestic regulator rules, work effectively from exit day. Part 1 of the SI, which will come into force the day after it is made, is necessary so that UK regulators will be able to use the EU withdrawal Act’s deficiency-fixing power in advance of exit to ensure that technical standards and UK regulator rules are amended to work effectively from day one of exit.

Part 2 of the SI delegates the EU withdrawal Act’s deficiency-fixing power to UK regulators and sets out the basis on which they are to exercise this power. The regulators specified are the Bank of England, the Prudential Regulation Authority, the Financial Conduct Authority and the Payment Systems Regulator. In delegating the deficiency-fixing power, Part 2 applies those requirements and constraints that would apply to a Minister’s exercise of that power. The regulators will be able to make changes only to the technical standards listed in the schedule to these regulations or to regulator rules in order to correct deficiencies that arise as a result of the UK’s withdrawal from the EU. The two-year time limit on using the power will also apply.

--- Later in debate ---

Finally, the noble Lord raised the point of whether it is reasonable to seek approval without an impact assessment. What is the point of an impact assessment produced after the commencement date? You might as well say we are not going to produce an impact assessment. I do not have the faintest idea what I will do with this document when it appears on my desk. I would like to claim that I have the energy to read it—but, knowing that there is absolutely nothing I can do with it, I suspect that that energy might drift away after the first two or three pages. I thank the Minister for introducing the instrument.

[Lord Bates]

I thank the noble Lords, Lord Wrigglesworth and Lord Tunnicliffe, for their questions. I guess that the noble Lord, Lord Tunnicliffe, and I are going to be spending many happy hours in this Committee over the next year, and I know that the noble Lord is always assiduous in the way that he prepares for these matters and in the questions that he puts. He is also right to say that this is an opportunity to provide scrutiny for these regulations and what is being put forward.

Many questions have been raised and I will go into a bit of detail in responding to each of them. The first issue is in relation to impact assessments. This statutory instrument would have no cost to business as it deals with the transfer of responsibility from the Treasury to the regulators. As a whole, these SIs will significantly reduce costs to business in a no-deal scenario. Without them, the legislation would be defective and firms would be left to deal with an unworkable and inconsistent framework that would substantially disrupt their business.

In making these changes we have attempted to minimise the disruption to firms and their customers and to maintain continuity of service provision. However, it is inevitable that firms will need to prepare for changes made by these SIs and the Government have committed to providing the UK regulators with the power to phase in regulatory requirements that change as a result of exit. This will substantially mitigate the costs to firms and give them more time to implement the changes.

On the issue which, I suppose, is at the heart of this initial—

[Lord Tunnicliffe]

It seems to me that the Minister has just given a précis of the impact assessment, which is designed to satisfy us when we do not need one. I would have been much more comfortable if the document had said, “We do not intend to produce an impact assessment because the argument is simple,” and then printed his explanation, rather than receiving a document that says, “We do not have an impact assessment because we have not finished doing it yet and we will publish it later”.

[Lord Bates]

We are in the process of preparing five impact assessments covering financial services and onshoring legislation. They will be considered by the Regulatory Policy Committee, the independent body that scrutinises impact assessments before they are released. As has been said many times, we are in extraordinary times in terms of what we are seeking to do with this work. I think we all recognise that the conventional form would be that the impact assessment would have been available at the same time. With that explanation about the context of the decision—

[Lord Wrigglesworth]

I wonder whether the Minister will mind if I emphasise the importance of this. We are dealing with thousands of businesses whose procedures are possibly going to be changed as a result of this. Not only are businesses going to be affected: millions of customers may possibly be affected. It is tremendously important that they and their customers know what impact this will have, so that if necessary they can change their forms and procedures, move their money and do whatever they want to do in the light of the impact of this. If changes are in the pipeline as a result of this, and they are going to affect businesses, it is vital that businesses know about them as soon as possible.

[Lord Tunnicliffe]

On the same point, I draw attention to page 33 of the statutory instrument:

“Explanatory Note (This note is not part of the Regulations)”.


The final paragraph states:

“An impact assessment of the effect that this instrument will have on the costs of business, the voluntary sector and the public sector will be available from HM Treasury, 1 Horse Guards Road, London SW1A 2HQ and published alongside this instrument”.


I apologise for this, but if we are going to get impact assessments, the Government have to realise the irritation it causes to the Opposition and our colleagues in the Liberal Democrats if we do not have them published on time.

[Lord Bates]

I fully accept the point the noble Lord is making. There is no need to apologise, because the point is that there should be scrutiny. I am trying to explain that this SI would not be expected to have an impact on business for the reason that I have set out. Other SIs will have impact assessments published. This SI has been published in draft form and we have been engaging in consultation with the Financial Conduct Authority and the regulators. The Financial Conduct Authority and the regulators interact most with businesses and consumers and therefore they have already commenced work on that part of the process to ensure preparedness.

On that point, the noble Lord, Lord Wrigglesworth, asked how industry will be involved in the regulators’ role. The regulators will consult on their deficiencies fixes. The Financial Conduct Authority has published its first consultation and the Bank of England will follow.

On the key issue of where the powers in the SIs are derived from, it is Section 8 of the European Union (Withdrawal) Act. That Act was subject to considerable debate in Parliament, including debate on the nature and scope of the deficiency-fixing power delegated to Ministers. Part of that debate considered whether it would be appropriate for Ministers to subdelegate the power to non-ministerial bodies. Parliament decided to leave open the possibility of subdelegation. Subdelegation of the powers is provided for in this SI so that UK financial services regulators can fix deficiencies in EU technical standards and regulator rules in time for exit. Section 8(6) of the Act provides for the transfer of EU functions to an appropriate UK body.

On the amendments to principal financial services legislation, which the noble Lord, Lord Wrigglesworth, asked about, some deficiency fixes will be put into primary legislation through SIs. These will not change policy but will be technical in nature.

On how we have consulted industry in drafting these SIs, we have not carried out a formal consultation on these particular SIs. What they can do is strictly limited by the enabling power of the EU withdrawal Act to fixing deficiencies. Therefore, there are limited policy choices. We discuss EU exit preparations regularly with the industry. This engagement has been invaluable for understanding the impact of these SIs. We share draft legislation with the industry to allow stakeholders the opportunity to familiarise themselves with our approach and to test our understanding of the likely impact. We are also, where possible, publishing draft legislation in advance of laying it.

The noble Lord, Lord Tunnicliffe, asked how the regulatory changes will be put in the public domain. The regulators are committed to a fully transparent process for fixing deficiencies in EU technical standards. The FCA has already issued its first consultation on this. The regulators are required to publish all the instruments in which they will make regulatory changes to ensure that they are brought to the public’s attention. In practice, they will do so by publishing them on their website.

The noble Lord also asked whether there was any requirement for the regulators to report on how they are exercising these powers. All regulatory deficiency fixes will need to be approved by the Treasury. I accept the point he made about the circumstances and tests, and whether there was an impact on the Exchequer, but the EU withdrawal Act requires an annual report on the exercise of the powers under the Act. The regulators will provide this on their use of the deficiency-fixing power and on their post-exit responsibility for technical standards. Parliament will be able to scrutinise and question the regulators on the use of these powers through the Select Committee system, as it does now across a range of regulatory functions.

[Lord Tunnicliffe]

I do not know whether the Minister feels that he has answered the question, but does the Treasury have a supervisory responsibility other than through or in relation to the two reasons he just outlined?

[Lord Bates]

I have an answer to that and it will be ready in just a couple of minutes. It was on how the powers will be used.

The noble Lord also asked how regulators would co-ordinate with EU regulators after exit. This statutory instrument does not deal with the co-operation arrangements between the UK and EEA regulators. However, if the UK leaves the EU without a deal, the UK will fall outside the EU’s legislative framework for supervisory co-operation. The EU has confirmed that the UK will be treated as any other non-EEA country in this scenario. Common legislation will no longer be the basis for co-operation between UK and EEA regulators, but the UK’s firm intention is to maintain the current high level of co-operation that we have with EEA authorities. UK statutory powers have this under the FSMA. As some of the world’s most important regulators, the Bank of England and the FCA are well-established co-operation partners with non-EEA regulators.

The noble Lord asked what would happen to the statutory instrument in the event of a deal. These regulations will come into force on the day after they are made. This will allow regulators to prepare for exit day by making these changes. However, if we reach an agreement on the implementation period, for the duration of that period the UK will remain subject to EU law, including binding technical standards. It will also generally not be necessary to fix deficiencies in regulators’ rules until the end of the implementation period. The withdrawal agreement Bill will include provision to delay, amend or revoke SIs made under the powers of the EU withdrawal Act.

On the supervisory point the noble Lord asked about, the regulators may make an instrument to fix deficiencies using the powers delegated by this statutory instrument and an EU exit instrument only with the approval of the Treasury. In this case the Treasury can approve the EU exit instrument only if it is satisfied that the instrument makes appropriate provision to fix deficiencies arising from the UK’s withdrawal from the EU—in other words, that the EU exit instrument is not doing anything which could not appropriately be done by the Treasury using its own powers under Section 8 of the EU withdrawal Act. Similarly, the regulators may make an instrument to exercise any powers to make technical standards transferred to them by other SIs made under the 2018 Act only if the instrument is approved by the Treasury. For standards instruments, the Treasury may refuse to approve a standard instrument only if the regulators believe it would affect public funds or the instrument would prejudice international negotiations.

On the point which was made about resources—clearly we are placing a heavy responsibility on the regulators—the Treasury is confident that the financial services regulators are making adequate preparations ahead of 2019 and have an appropriate level of resources to manage their new responsibilities. We have worked extremely closely with the regulators in preparing this legislation. The current business plans of the FCA and PRA set out their priorities in preparing for EU exit and their plans for ensuring operational readiness. The regulators have considerable experience in this area. This means that the responsibilities of EU bodies can be reassigned effectively and efficiently, providing firms and their customers with confidence after exit. The FCA has published its first consultation on the changes it proposes to make using these powers.

The noble Lord asked about the sunset clause. Under Section 8 of the EU withdrawal Act, no government department would be able to make any regulations after 11 pm on 29 March 2021—that is, two years after exit day. Under regulation 3(3) of these regulations, Section 8(8) also applies to the regulators, so they will not be able to make any EU exit instruments to fix deficiencies after this date. This relates to a question which I dealt with in my previous remark. However, in supervisory situations—I have said this—regulators may make an instrument to fix deficiencies using the powers delegated by this SI only with the approval of the Treasury.

I hope my responses have gone some way to addressing the points and concerns raised by noble Lords in the course of this debate. As I said, this is the first of many debates on these issues, but this first statutory instrument is crucial and I commend it to the Committee.

Motion agreed.

Building Societies Legislation (Amendment) (EU Exit) Regulations 2018

Lord Bates Excerpts

Wednesday 17th October 2018 Grand Committee

Moved by

[Lord Bates]

That the Grand Committee do consider the Building Societies Legislation (Amendment) (EU Exit) Regulations 2018.

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, following the UK’s decision to leave the EU after the referendum, the Treasury has undertaken a significant amount of work with respect to withdrawal negotiations and in preparing a range of potential outcomes for these negotiations. The best outcome is for the UK to leave with a deal and we have put forward a serious and credible proposal for the future relationship. While we remain confident that agreement will be reached this autumn, in the meantime we must and will continue to work preparing ourselves for no deal.

As the department responsible for financial services, HM Treasury has been conducting particularly intensive work to ensure that there continues to be a functioning legislative and regulatory regime for financial services in the event that the UK leaves the EU without a deal or an implementation period. An essential part of that work is using powers delegated to Ministers under the European Union (Withdrawal) Act to fix deficiencies in applicable EU law that would be transferred directly on to the UK statute book at the point of exit.

The Building Societies Act 1986 and related legislation contains various technical provisions governing how building societies must act. This includes setting out requirements relating to the UK’s membership of the EEA. For instance, one provision ensures that loans secured on UK land and loans secured on EEA land are treated equally. The concept of a loan secured on land is used when defining who counts as a building society member in legislation and calculating a building society’s lending limit—a legal requirement which makes sure that the building societies focus on their core business of mortgage lending.

Other parts of the legislation ensure that EEA bodies and UK companies are treated in the same way regarding transfers of business from a building society to a commercial company. However, in a no-deal scenario the UK would be outside the EEA and outside the EU’s legal supervisory financial framework. The legislation therefore needs to be updated to reflect that, and to ensure that the provisions work properly in that scenario.

The original legislation treats members of the EEA differently from third countries in certain respects. Given that that will no longer be appropriate after exit day, this SI will amend the Building Societies Act 1986 and related legislation to treat EEA countries similarly to other third-party countries after exit day. To take an example, I have already set out that this SI will amend the original legislation to ensure that in future new mortgages on properties in non-EEA states and EEA states are treated the same after exit day. Note that the instrument maintains the pre-exit legal treatment of mortgages on properties in EEA states, providing contractual continuity for building society members who have an existing mortgage on a property in an EEA state. Building societies will have to take this treatment into account in calculating lending limits and defining building society members.

The original legislation also allows building societies to transfer business to and from companies and mutuals in EEA states but not those in countries outside the EEA. This SI will amend the legislation so that such transfers are no longer allowed, equalising the treatment of EEA firms with those in other third countries. The SI also replaces several references to EU directives with equivalent references to the Prudential Regulatory Authority’s rulebook and ensures that the current relationship between the UK and the Channel Islands, the Isle of Man and Gibraltar is maintained. There may be some cost to businesses linked to the restriction on the ability of building societies to lend on properties in the EEA, although since building societies do the overwhelming majority of their lending in the UK we believe this would be minimal.

In summary, the Government believe the proposed legislation is necessary to ensure that the legislation governing building societies functions appropriately if the UK leaves the EU without a deal or implementation period. I hope the Committee will join me in supporting these regulations, which I commend to the Committee.

[Lord Wrigglesworth (LD)]

I am grateful to the Minister for managing to get through the presentation of this SI to us. He might think of going into juggling at some stage. I want to raise a number of very important issues that affect millions of our fellow citizens. There is no more self-evident part of the financial services industry that impacts on so many people than the building societies. I will therefore return to the discussion we had a few moments ago about impact assessments.

Once again, we have no impact assessment of how this will affect those societies. I refer to the millions of people involved, but they are not all people with mortgages. There are also people saving in building societies and they want to know what the impact of all this will be on their savings. What will be the impact on the balance sheets, profitability and liquidity of building societies? Their resources may be at risk as a result of changes of this sort being made. The importance of the impact assessment for this SI is tremendous; it cannot be exaggerated.

In that context, I also want to return to the question of this being time-limited under EU legislation, which could have a direct bearing on the impact it will have on people—a point made by the noble Lord—and the fact that it will fall away two years after exit. When will our exit take place? Here we are, with the Cabinet not knowing on this very day where it is going and whether there will be a deal, discussing alternatives that will impact upon very many people. What impact will a no-deal scenario have on when this statutory instrument comes into effect? What will happen with the transitional period? Will we leave on the date forecast? It raises profound questions that will affect the livelihoods, savings and mortgages of millions of our fellow citizens. This is just one example of where the Government have a tremendous responsibility to make things as clear as possible to building society customers. I hope that the Minister will address the issue of the impact of this when he responds.

Can the Minister also say something about the impact of this SI, if it is agreed to, on the members of buildings societies who will no longer necessarily be able to become members if they borrow overseas? As I understand it, the position is that as soon as they get a mortgage with a building society, they become members of it; in the future, under this statutory instrument, that may or may not be the case. What position will those people be in? It has been well understood that membership of a building society comes with being a customer in that way. It would be helpful if the Minister could make it clear whether people can, and will, become members of building societies if they do business in that way in the future.

What will be the position of people if they wish to borrow money from building societies to buy overseas? A lot of people might be contemplating buying a property in France, Italy or somewhere else in Europe. Will they be able to borrow from a building society and what will the status of their mortgage be? What happens from the building society’s point of view if the customer defaults on an overseas property? If the building society cannot regain the property and set it against the debt, that will have an impact on its financial position. Can the Minister tell us how many of these loans there are, whether they can be rolled over and what the impact on building societies will be if these changes take place? How will their business be affected in the future?

If any changes are to be introduced—this is the same question as on the previous SI—can we have an assurance from the Minister that the building societies will be consulted? I assume from his previous remarks that they will be as a matter of course. But clearly, like so many other institutions in the country, they are wondering what the devil is going to happen in the coming months. If they at least know that they will be consulted if changes are taking place, I think they will be consoled to a certain extent. Because so many people—people with very modest means, in many instances—could be involved if these changes take place to their detriment, I hope that the Minister will be able to respond to these questions and that the Government will be able to reassure us that that will not be the case.

[Lord Tunnicliffe (Lab)]

My Lords, I join the noble Lord, Lord Wrigglesworth, in his comments on an impact assessment. I have to admit that rather than knowing that there is not one, I could not find it—but that may be a lack of skill on my part. I hope that the Minister’s answers may cover my concerns. On a lighter note, can the Minister confirm that paragraphs 7.1 to 7.8 of the Explanatory Memorandum are identical to the same paragraphs for the previous instrument? From my reading, they are. Will it be standard procedure for all Treasury SIs to have identical paragraphs 7.1 to 7.8? If they are to be identical, it will save an awful lot of time in reading them if I know that to be true.

An impact assessment would have been useful because it tends to use plainer language. It would have been particularly useful in this case because I took an entirely different view of this instrument from that of the noble Lord, Lord Wrigglesworth. I did not put much effort into it because it seemed pretty benign and reasonably consequential. I did not see the risks, so perhaps I may ask the questions that the noble Lord asked—but rather more bluntly. What will happen if there is a deal, as this document’s commencement date is the exit date? Will it therefore still be alive or be deleted? Will all contracts in force on exit date between a building society and its members be secure thereafter? If they are entered into before exit date, will they continue in force after it? My reading was that they would, but it is an absolutely key point that they should. If you have foreign property as a result of a loan from a building society, is your security in the relationship and all that sort of stuff unchanged by this instrument? Does it refer only to new loans or not?

My reading of the instrument was that it would not have an immediate impact on a building society’s balance sheet, because the composition of that balance sheet would be unchanged by it. The instrument starts to impact on the balance sheet only as new contracts are commenced, which will then have different weightings and so on. Will all UK consumer protections stay in place, so that consumers will in no way have less protection as a result of the instrument?

[Lord Bates]

I thank noble Lords for their questions. Perhaps I may make one top-line comment at the outset, in order to assist. We are effectively seeking here to ensure that there is absolutely no change in the situation of the building societies in relation to their members and mortgages. The whole purpose behind this provision is to bring onshore that legislation which currently operates while we are members of the European Union, and to ensure that there is no break in or interruption to that work.

It is not anticipated that this SI will have any impact on savers or mortgage holders. On the question of the impact on balance sheets, which the noble Lord, Lord Tunnicliffe, asked, the SI will have no direct effect on either side’s balance sheets on day one. However, EU exit could more broadly impact on both sides’ businesses, in which case we could see changes reflected in balance sheets over time—but of course that depends on a number of factors, including the nature of a future relationship and future deal.

With regard to the wider impact on savers, the Government published a series of technical notices explaining what the consequences of a no-deal exit would be for most UK-based customers. We stated clearly that UK-based customers would not be affected. Where customers will be affected, firms including building societies will be expected to communicate that at the appropriate time. I stress again that building societies overwhelmingly deal with lending against properties and savers based in the UK, and that the provisions in relation to the treatment of property and land on which mortgages are granted in non-EEA states and EEA states are to ensure that there is consistency of treatment in future so that differences and problems will not arise.

[Lord Wrigglesworth]

I wonder whether the Minister will therefore explain why the memorandum says:

“There will be some costs for businesses linked to the restriction on the ability of building societies to lend on properties in the EEA. This is because loans secured on properties in the EEA post-exit will no longer count towards the calculation of the building societies’ lending limit (which requires that 75% of a building society’s assets are secured on residential property)”.


Another paragraph says that,

“the legislation allows building societies to transfer business to and from companies and mutuals in EEA States, but not countries outside the EEA. This SI will amend the legislation to no longer allow these transfers”.

So we are in a different situation again. Taking out a mortgage with a building society on property in the EEA will no longer automatically mean becoming a member of that society, which I have referred to as a slightly separate point. There are specific references to changes that will take place under this SI, and those could have an impact both on members and on the societies.

[Lord Bates]

I would counter that by saying that the majority of those changes are going to relate to the building societies themselves that have been cited in terms of the treatment of those provisions. I will come back to that in just a second, if I may, after dealing with another point that the noble Lord raised about members borrowing overseas and members’ rights. All current building society members will retain their membership and associated rights. Loan terms are not affected. If people wish to borrow from the building society for an overseas property, they will not automatically become members. This is the current situation with all non-EEA countries, but it will be extended to EEA countries as the EEA will become a third country. Paragraphs 7.1 to 7.8 are the same in both these Explanatory Memorandums and will be very similar for all the SIs in this group.

The noble Lord asked what the impact of the SI on building societies would be and how the Government were mitigating it. The SI will act to prevent building societies diversifying too far into EEA-based mortgage lending in future, should they wish to. However, the vast majority of building societies conduct all their lending in the UK and show no interest in lending overseas. Mortgages currently owned by building societies in EEA states such as Spain will not be affected by this SI as the provision applies to new mortgages only. However, the SI may make building societies which have previously given mortgages on properties in Spain unwilling to remortgage such properties. In that case there is no reason why the individuals concerned would be unable to remortgage with another bank.

The noble Lord, Lord Tunnicliffe, asked what will happen to the SI if there is a deal. These regulations will not come into force on exit day if there is an implementation period, as we expect. If we reach an agreement on the implementation period, for the duration of that period the UK will remain subject to EU law. Building societies can continue to operate in the same way as they do now. The noble Lord asked what will happen to all contracts on exit day. This SI does nothing to affect existing building society contracts. On exit day all contracts between a building society and its customers, including mortgage contracts, will remain unchanged.

The noble Lords, Lord Wrigglesworth and Lord Tunnicliffe, asked whether UK consumer protection would remain in place. This SI does not remove any existing protections for building society customers. Financial services compensation varies depending on the financial services in question. Generally, FSCS protection for customers in the UK will not change. Further details on the changes to FSCS protection will be set out by the regulators over the autumn.

I hope that I have been helpful in responding to the questions raised by noble Lords in this debate. I commend these regulations to the Committee.

Motion agreed.

Official Development Assistance

Lord Bates Excerpts

Tuesday 16th October 2018 Lords Chamber

[Lord Collins of Highbury]

To ask Her Majesty’s Government, further to their response to the report by the House of Commons International Development Committee, Definition and Administration of the ODA, (HC 1556) published on 13 September, what steps the departments which administer official development assistance will take to address the concerns raised by the committee.

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, the Government welcome the committee’s report. We agree and partially agree with many of its recommendations and are committed to maximising impact from the aid budget. External scrutiny helps improve how we spend aid. Several across-government oversight mechanisms exist, and departments are committed to improving transparency and raising the quality and coherence of UK aid.

[Lord Collins of Highbury (Lab)]

I thank the Minister for his response, and if he were the Secretary of State, I would have great confidence in what he said, but he is not. What we have—I make no apology for raising this again—is a Secretary of State who does not appear to be so committed. Of course, the committee recommended that we continue with the internationally accepted definition of ODA through the DAC mechanism. In their response to the committee, the Government say, “Yes, we agree. We will continue to work on a consensus basis”—yet they add a “but”—“but only if the DAC agrees with our modernisation of ODA”. Surely that sends the wrong message. Does the noble Lord agree that we should be sticking with what the IDC says, and to the definition of ODA which is internationally accepted?

[Lord Bates]

We of course achieved the 0.7% commitment, which was reiterated by the Secretary of State. As a former aid worker herself, she is absolutely committed to this, but absolutely committed to ensuring that we also get value for money. There is so much need in our world that we cannot afford to waste one penny of the amount available. It is also true to say that the rules which govern what is scored as development assistance are set by the OECD committee, which works on a consensus basis. Consistently, many members raise issues about what they would like improved in terms of the definition. We raised vigorously last year the response to the hurricanes in the Caribbean, and we continue to do that. We will continue to work for reform, but we are absolutely committed to improving value for money, and to the 0.7%, which is a matter of law. It was mentioned in the manifesto; the Prime Minister signed up to it; and the Secretary of State signed up to it.

[The Earl of Sandwich (CB)]

My Lords, does the Minister agree with the committee’s recommendation on the middle-income countries, and whether they should be eligible for ODA? Are the Government reconsidering those middle-income countries—in particular, India, which has a substantial minority of poor?

[Lord Bates]

It does indeed. Of the 750 million people in extreme poverty today in the world, 215 million —the greatest proportion—are found in India as a middle-income country. It is right that we work with countries across a range of issues to ensure that we tackle poverty. Of course, one of the DAC elements that we commit to and achieve—as well as being one of the few to achieve the 0.7% target—is the target to spend 0.15% to 0.2% in least developed countries. Again, that is a record of which we should all be proud.

[Baroness Jenkin of Kennington (Con)]

My Lords, the Department for International Development is, quite rightly, respected and admired for its work throughout the world—both developing and developed—and most especially for its humanitarian work. Will my noble friend update the House on what is happening to the Rohingya refugees, many of whom have had to leave their homes and are currently ending up in Bangladesh?

[Lord Bates]

I am grateful for the opportunity to do that. My noble friend Lord Ahmad and I had the opportunity to brief interested Peers on the situation there. How we operate there demonstrates what is great about this country. Not only are we at the forefront in delivering aid in cash terms—at £129 million, one of the largest commitments of any country—but we are also leading the charge with our diplomatic and security efforts at the UN Security Council and the UN Human Rights Commission. It is that spectrum of reach which makes our aid so effective.

[Lord Watts (Lab)]

My Lords, is it not the case that we need to do far more on population control? We are giving aid to many places where women have no access to birth control. We need to do far more if we are going to deal with this major world problem.

[Lord Bates]

That is very true. Because of population growth, Africa needs an extra 18 million jobs a year just to stand still. We have been at the forefront of the work of the UN Population Fund to ensure that women have access to safe methods of family planning and contraception. This work is much respected and will continue to play a major part in our aid programme.

[Baroness Sheehan (LD)]

My Lords, financial flows to developing countries, other than ODA, have increased over the last few decades. Does the Minister agree that, while these very welcome developments improve the financial landscape in which ODA operates, they make it even more important that ODA, which focuses resources relentlessly on the poorest in the world, is not undermined or redefined unilaterally by the Secretary of State for International Development?

[Lord Bates]

I think I covered that. It is not undermined in any way. This Government’s record has shown the importance which we place on it. Looking at just one critical statistic, the cost of filling the gap to achieve the sustainable development goals—which the noble Baroness and I have often debated and totally support— is $2.4 trillion per year. Total global aid flows are $150 billion. We have to find ways for the money which we give through development assistance to be increasingly catalytic of further private sector investment which can help us bridge that gap and fulfil our commitment to the world’s poor.