Financial Services and Markets Bill

Lord Eatwell Excerpts

Committee stage
Tuesday 21st March 2023 Grand Committee

[The Archbishop of Canterbury]

Going back to the fiscal event, a lot of the pension funds almost went bust. We learned a lesson from that, quite rightly, and I think it is a lesson that will be kept.

The ring-fence and the SMCR have been important for encouraging—not solving—improved standards and culture in the banking sector and for protecting the public from bearing the brunt of future banking failures. We cannot forget the lessons learned with such pain for so many outside the banking sector, who had no idea what goes on in banking but found that life suddenly just did not work any more.

I hope that the Government take a further look, certainly through the consultation, at the lessons of the last few weeks, and that the ring-fence is strengthened, not weakened, and improved. I agree with the noble Baroness, Lady Noakes, about both the ring-fence and the SMCR. Both are cumbersome and need rethinking, but not abolishing.

When asked why he had changed his mind, John Maynard Keynes—apocryphally, I think—replied:

“When the facts change, I change my mind. What do you do, sir?”


Given that the facts have changed over the last few weeks, the Government need to ask themselves whether they are going to change their minds and think harder about adequate protection for the basic financial structures that protect the weakest in our society.

[Lord Eatwell (Lab)]

My Lords, these three amendments project a peculiar background, which is an issue that this Committee debated in an earlier session—that of accountability. The first amendment of the noble Baroness, Lady Kramer, Amendment 216, is too detailed for primary legislation. On the other hand, I sympathise entirely with the noble Baroness’s goals. In a principles-based system, I would have expected these goals to be expressed in the principles and achieved by the rule-making regulator but, given the lack of accountability with which the Government seem so comfortable—I was impressed by the noble Baroness’s argument on Amendment 216—we cannot be confident that changes will be made at the necessary points. There is no vehicle for Parliament to ensure or inspect the rule-making of the regulators.

I think Amendment 216 is necessary because the Government are so weak on accountability. If we had strong accountability, whereby we could hold the rule-makers to account—both positively, in the sense that you are doing something that you should not be, and negatively, in the sense that you are not doing something that you should be—amendments such as this would not be necessary. Amendment 216 is necessary in the way so carefully described by the noble Baroness, Lady Kramer, simply because of the lack of accountability in the system.

This also applies to the other two amendments in this group. The noble Baroness, Lady Noakes, powerfully pointed out that, because of the peculiar circumstances in which it took place, the resolution of SVB UK required a relaxation of the ring-fence. I am entirely sympathetic with the goals of these amendments, which address the overall structure of the industry and therefore the overall risk appetite of this country for banking and financial services. That is what the ring-fence and the senior managers and certification regime are about.

The “but” is the important case highlighted by the noble Baroness, Lady Noakes, where some modification was necessary. If we had proper accountability, this could come to Parliament, which could then examine this example of relaxation to discuss whether it is appropriate to extend it to other banks, so that there is this mythical level playing field in the competitive relationships between them.

I am enormously sympathetic to the goals of these amendments: to the first because it is a practical issue of excessive risk-taking by insurance companies and, as we have seen, pension funds; and to the other two because they refer to the structure of risk which Parliament has decided is appropriate in this country’s financial services industry. It should not be modified wilfully—I am thinking of the marriage ceremony—and without due consideration of the consequences. Therefore, the Government would once again be well advised to reconsider the issue of accountability, which they have brushed away so casually, because it would provide the flexibility for Parliament to be involved in changing the risk appetite of the country as a whole.

[Viscount Trenchard (Con)]

My Lords, I again declare my interest as a director of two investment companies, as stated in the register. I will speak about all three amendments.

In Amendment 216 the noble Baroness, Lady Kramer, seeks to prevent a matching adjustment being applied to a portfolio of assets with a Standard & Poor’s rating of BBB or less. Does this mean a portfolio of assets comprising at least one holding of BBB paper, or a portfolio consisting exclusively of holdings rated BBB or worse? Either way, I welcome the Government’s proposal to remove the disproportionately severe treatment of assets with a credit rating of BBB or below, which will reduce the incentives for insurers to sell BBB assets in a market downturn. These reforms would encourage insurers to revise their investment strategies and risk appetites for investing in sub-investment grade assets, increasing funds available for investment in beneficial infrastructure projects, for example.

In any case—here I agree with the noble Lord, Lord Eatwell—is this attempt to constrain the powers of the PRA not too specific, and the kind of very precise regulation that we want to get out of primary legislation so that we can give discretion on this kind of thing to the regulators? I therefore cannot support this amendment.

I tremble in my shoes to disagree with the good intentions expressed by the noble Baroness, Lady Kramer, the noble Lord, Lord Tunnicliffe, and the most reverend Primate the Archbishop of Canterbury in seeking, in their Amendments 241C and 241D, to make it very difficult to weaken the ring-fencing provisions or change the senior managers and certification regime. It is clear that she and her co-signatories are among those who believe that the introduction of ring-fencing has reduced the risks to which bank customers’ deposits are exposed and that it is therefore important to make it very difficult to weaken the ring-fencing regulations in any way.

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

My Lords, I will speak first to Amendment 216, which pertains to the Government’s announced reforms to Solvency II, made possible through the Bill’s revocation of retained EU law.

The Government are reforming Solvency II, the rules for prudential regulation of the insurance industry currently set by the EU, to reflect the UK insurance market’s unique features. These reforms will provide incentives for insurers to increase investment in long-term productive assets by more than £100 billion. They will also benefit consumers by increasing insurers’ ability to provide a broader range of more affordable products.

The Government have committed to make changes to the matching adjustment, an accounting mechanism whereby insurers can match their long-term liabilities with long-term assets and hold less money to pay out claims. These reforms will incentivise firms to invest significantly more in long-term productive assets such as infrastructure. This investment will support growth across the UK and the Government’s climate change objectives.

The noble Baroness’s amendment would instead result in a stricter treatment for some assets than under current rules. I reassure noble Lords that the Government’s reforms to Solvency II strike a careful balance between boosting growth across the economy and maintaining high standards of policyholder protection. Insurers will still be required to hold extra capital to safeguard against unexpected shocks, they will still have to adhere to high standards of risk management, and they will still be subject to comprehensive supervision from the PRA, our world-class independent regulator.

The noble Baroness, Lady Kramer, asked whether we would replicate the Canadian Government’s position with regard to pensions and insurance firms in this context. She referred to statements in the Budget about pension funds—although I think they were focused more on defined contribution pension funds than defined benefit pension funds. I do not know the detail of the specific Canadian regime, but the reforms proposed here do not pose risks to financial stability. As I said, each insurer must still hold enough capital to survive a 1-in-200-year shock over one year. Insurers will still have to adhere to the high standards of risk management. The Government and the PRA have announced a series of additional supervisory measures that the PRA will take forward to ensure that policyholders remain protected. For example, the PRA will now require insurers to take part in regular stress-testing exercises.

[Lord Eatwell (Lab)]

May I comment on the issue of stress tests, which the Minister also raised during Questions this afternoon? You can stress test only risks that you know are there. It depends on the underlying model that you create to examine in your stress tests. Thus stress tests did not pick up the LDI problem at all because it was not there in the models that were used. In financial services, risks appear in entirely unexpected places, and relying on stress tests is, and has been demonstrated to be, a very weak answer. She should reconsider her reliance on this argument.

[Baroness Bennett of Manor Castle (GP)]

Since it is related, I also question the readiness for a 1-in-200-year shock. We have seen very similar kinds of mathematical approaches, if you like, taken to issues such as flood risk and other climate risks, and they have been found to be very ineffective in dealing with problems. They only increase the failure to understand risks.

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[Lord Sharkey (LD)]

My Lords, I will speak briefly to the amendments in the names of the noble Lords, Lord Bridges and Lord Forsyth. I agree with the analysis by the noble Lord, Lord Forsyth, of the dangers of having Parliament bypassed in the creation of a CBDC, but I will mention two things to which he may not have given enough weight.

The danger crystallises in the possibility of the disintermediation of the retail banking system, which would have incalculable consequences. Given the difficulties people have in dealing with their own banks at the moment, imagine the difficulty of trying to deal with the Bank of England about your personal account when things go wrong or you do not understand what things are doing. Given banks’ habit nowadays of closing people’s accounts without notice or reason, I wonder whether the Bank of England would take the same view if it had that power.

Like the noble Lord, Lord Forsyth, I would prefer any such creation—although I am not sure that I want one—to be via an Act of Parliament rather than regulation. However, regulation is tempting because I notice that proposed new subsection (3) of the amendment tabled by the noble Lord, Lord Bridges, finds a way of amending secondary legislation. With a bit of luck, we will deal with my amendment tomorrow, which does exactly the same thing in exactly the same kind of words but with broader application.

It is dangerous in the extreme to have Parliament excluded on the central bank digital currency, as the Government clearly intend at the moment. We ought to be very careful about that. When it comes to Report, where we need to think about what amendments we press, I would be very tempted to suggest to the noble Lord, Lord Forsyth, that he presses his amendment.

[Lord Eatwell (Lab)]

My Lords, I will make two general comments about these amendments—first, on Amendment 218 in the name of the noble Lord, Lord Holmes.

When I was chairman of the Jersey Financial Services Commission and therefore the regulator in Jersey, I was continually lobbied about the issue of digital identification simply because of the high cost of repetitive KYC investigations that institutions had to go through. It seems that the possibility of having a system of digital identification which would be generally acceptable and generally accepted within financial services would significantly reduce the costs of KYC and would provide a much sounder foundation for the credibility and respectability of the individuals attempting to transact within financial services. So this is broadly a good idea. It is very complicated, as I discovered when I tried to introduce it in Jersey, and it raises very important privacy issues, but, none the less, this is the way that the world is going and we need to think this through extremely carefully. It could be of great benefit to the whole KYC problem.

With respect to digital currencies, the one comment I will make is to remind the Committee of the debate that we had about the decline in the acceptance of cash and the fact that a significant number of people in our country are being deprived of money, since cash no longer works as money—it is no longer generally acceptable in discharge of a debt, which is the definition of money. Therefore, there will be a responsibility for the state to provide a digital form of money, because digital payment, as the noble Baroness, Lady Noakes, argued strongly at the time, will become the standard form of payment and cash is basically going to disappear —apart, perhaps, from the Tooth Fairy.

The issues of digital currency and digital identification are both hugely important for our future and, as the noble Lord, Lord Forsyth, argued—I agree with him most strongly—they require very careful parliamentary consideration.

[Lord Tunnicliffe (Lab)]

My Lords, on the digital pound, we support the Bank of England’s work exploring the potential benefits of a safe and stable central bank digital currency, but the Government’s overall approach to crypto remains unclear.

With the collapse of FTX, it is clear that crypto can pose a real threat to normal people in the real economy and therefore may pose a systemic risk in future. The approach HMT has taken to the digital pound is a welcome contrast to this Administration’s eagerness to lean into a crypto Wild West in the recent past. We need to get serious about attracting innovative fintech companies to the UK by safely harnessing the potential of new technologies. How will the Government do this?

On the amendments in general, the issue of accountability has come up once again. The concept of using primary legislation to have a check on these ideas is clearly practical and therefore very attractive, but it will have problems. If the Government would only embrace our concerns about accountability and come forward with a proper and comprehensive accountability structure, perhaps we would be able to develop a more sophisticated approach than the rather raw power of primary legislation. However, as a fallback it is very attractive.

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[Lord Holmes of Richmond (Con)]

My Lords, I will speak to Amendment 238 in my name. Does my noble friend the Minister agree that “know your customer” and anti-money laundering—KYC and AML—are not working optimally? There is a plethora of examples that we could look at; I will not do so. The simple truth is that they are not fit for purpose and are not achieving their aims. They are not providing the environment that we would want to conduct our financial services in. Does my noble friend the Minister not agree, therefore, that it is high time we had a thorough review of the regulations to put in place a system that works and is inclusive, efficient and effective?

If we look at some of the practical elements, to put it in terms, is it not time that we stopped messing about with gas bills? That takes us to an amendment in a previous group on digital ID, which would go far in resolving many of the issues around KYC and AML. Does my noble friend the Minister not agree? The difficulties that we have heard about and which many members of the Committee may have experienced in all areas of the financial services landscape could be effectively resolved if we resolved the current situation with KYC and AML. It is resolvable; when she comes to respond, my noble friend the Minister could simply say, “I will resolve it”.

[Lord Eatwell (Lab)]

My Lords, on the point made by the noble Lord, Lord Holmes, surely these regulations are derived from the Financial Action Task Force. We would usurp international agreements if we modified our regulations in a way that was outwith the positions established by the FATF.

[Baroness Noakes (Con)]

I completely accept that we need to comply with the Financial Action Task Force regulations but, as we discovered the other day when we were discussing PEPs, the regulations we have in the UK have in some instances gone beyond what is actually required by the Financial Action Task Force. The issue with the KYC regulations is one of immense bureaucracy and great irritation for people to no particular end. It is worth looking again at whether the way we have drafted our regulations, to the extent they go beyond what we are required to do, has in turn led to more problems for individuals.

I am sure we have all had problems but I will share one with the Committee. My husband had a very small investment—way below the level at which it would have to be declared as one of my interests in your Lordships’ House—and there was periodic updating of the know your client regulations. Because of the way that firm’s forms were comprised, it refused to accept my noble friend Lady Neville-Rolfe’s signature attesting that the document was a fair copy, because she could not tick a particular box on the form. It was completely ludicrous.

That permeates the way many financial service institutions have come to apply these rules in practice. They have become highly bureaucratic, operated by people who probably have no common sense and possibly not even a brain. To go back to the regulations and see what is absolutely required and then follow it on through the FCA seems a really important thing.

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[Lord Eatwell (Lab)]

My Lords, I support the amendment from my noble friend Lord Leong. I was a bit shocked to discover that factoring companies are not regulated through the FCA. My discovery of this through my noble friend’s initiative reinforces my view, which he very clearly expressed, that this is the business equivalent for SMEs of payday loans in the consumer retail sector. Given the importance of small and medium-sized enterprises to the growth of the UK economy, which he quite rightly pointed out, one of the most important elements of public policy is to ensure that they receive the best, most appropriate and well-regulated financial services, which provide them with a firm financial platform on which to grow. I hope that the Minister takes this amendment away and has a serious think about it, because this is a serious gap in the regulatory framework.

[Lord Sharkey (LD)]

I rise briefly to support this amendment. It was with some surprise that we also discovered that this sector is unregulated, but we entirely understand how important it is to the small business community. In that respect, it is hard to see why it is not regulated and why it should not be regulated. It is hard to see how any Government could resist the force of the noble Lord’s amendment—but we may see a demonstration of that in a moment or two.

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[Baroness Bennett of Manor Castle (GP)]

My Lords, I thank the noble Lord, Lord Tunnicliffe, for introducing this amendment. I have chosen to address simply the green infrastructure parts, and at this time of the evening I shall park the high-growth debate in the interests of not sidelining the main issue.

The idea of a review is useful here, because the evidence we have of other measures the Government have tried to take to encourage green investment is perhaps mixed—that is the charitable description. I refer to a survey published this month by Pensions for Purpose, which looked at the first wave of obligatory reporting of the scheme introduced in October 2021 based on the Task Force on Climate-Related Financial Disclosures being done by the larger occupational pension schemes and authorised master trusts. That study found that this introduction by the Government was having very limited effects and that it was, to a large degree, being treated as a tick-box exercise. Where it was having an impact on investments, it was not driving towards green investment but rather to a portfolio decarbonisation—a stepping away from things rather than into the kinds of investments we need. This is something we are also seeing implicitly, in that the pension regulator is about to launch a publicity campaign for pension trustees, stressing the need to look at ESG responsibilities, particularly around climate issues—that has been its responsibility since 2019. It is clearly thought necessary to have a publicity campaign about this.

We really need to see steps forward and to see things joined up here. I am reminded of a debate last week with the same Minister, when we finally finalised the UK Infrastructure Bank Bill, which, of course, is looking at another source of investment going into green. I am very encouraged by the Government’s decision to include nature-based solutions there, which is obviously a cross-reference to our need to see much more private investment in nature-based solutions as well. Dare I say it, it would be nice to see some circular economy as well—if I can just put that in there.

On the idea of a review, we desperately need to see money going into green infrastructure. All the evidence we have says that is simply not happening. I also note that the Government need to create the frameworks in other areas of policy to make this happen. I was sitting here, thinking of when I was in this very same Room a few weeks ago with the Energy Bill. One of the things that could be a very good target for investment would be that if we are to get community energy schemes up and down the land—if we get delivery of the widely-backed Local Electricity Bill, as it is in the other place—that would be a great area to see pension funds investing in and supporting. I was at an event this morning debating social value and the importance of that in procurement.

We need to tie all these things together. All these things are running off at different angles, but we are still not creating an environment where people who are putting money into their pensions, seeking to invest in their own future, will have a liveable future for that pension to pay out in.

[Lord Eatwell (Lab)]

My Lords, it is obvious that the issue of pension funds investing in equities and longer-term growth prospects was highlighted by the LDI crisis in the autumn. I hope that, when the Government come to consider the consequences of that crisis, they will look at the letter that your Lordships’ Industry and Regulators Committee sent to Andrew Griffith MP, the Economic Secretary to the Treasury, setting out the reasons it saw for the peculiar financial structures that led to the LDI crisis and the lack of long-term investment in equities and growth stocks by British pension funds. They traced this to the accounting regulations that are imposed on British pension funds—particularly the way in which liabilities are assessed—and noted that, since those regulations were introduced maybe 15 years ago, there has been a dramatic reduction in the investment by British pension funds in long-term equity assets and a focus mostly on rather low-yielding government securities instead.

The LDI scandal was produced by the development of a peculiar financial device using repos, which were then used to make some investment in equities. There is clearly a fundamental problem in the regulation of British pension funds, which has both reduced the returns on their investment and limited the sort of investments they might be able to make in growth assets to their benefit and that of the economy as a whole. There needs to be a major review on the regulation of pension funds, both to make them more secure—to avoid them resorting to very unstable financial constructions to try to increase their returns—and for the overall benefit of the economy.

[Lord Sharkey (LD)]

My Lords, I agree with everything that the noble Lord, Lord Eatwell, has said. We are happy to support this amendment. I simply have two questions and one observation about it.

The amendment says that we must include “green infrastructure”. Is there a practical, generally agreed working definition of what that actually means? I also notice that, in carrying out the review, the Treasury must consult a list of organisations. The final group of organisations is “relevant financial services stakeholders”. Is the intention also to include professional advisers? They would be a vital addition; perhaps that should be made explicit as we go forward.

My observation is that proposed new subsection (3)(c), which talks about

“establishing frameworks to enable DB pension funds to invest in firms and infrastructure alongside the British Business Bank”,

is an extremely good idea. We should make sure that this happens as soon as we can.

Budget Statement

Lord Eatwell Excerpts

Thursday 16th March 2023 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, I am sure the whole House is grateful to the noble Baroness, Lady Penn, for introducing this important debate. We all look forward with interest and, as a professional economist myself, some excitement to the maiden speech of the noble Baroness, Lady Moyo.

The Minister who delivered this Spring Budget in another place bears the title of the Chancellor of the Exchequer, but this title does not adequately reflect Mr Hunt’s role. His real title should be the Minister for mitigating disastrous Tory economic policies. He is “The Mitigator”, a role that becomes ever more important as every parliamentary Session brings forth yet a further Conservative economic blunder.

We all recall Mr Hunt’s noble labours in reversing the appalling damage done to Britain by the Truss/Kwarteng economic regime—damage that still resonates in every mortgage holder’s higher current and/or future monthly interest payments. Now, in this Budget, he is reversing the damaging decision taken by Conservative Chancellor George Osborne in 2012 when he first cut the pension lifetime allowance and then cut it again in 2014—and it was cut again in 2016. The result, as Mr Hunt made clear, has been damaging not just for the NHS but for the availability of skilled, experienced professional expertise throughout the British economy. But, being a good Tory, even The Mitigator could not resist doing his own little bit of wasteful spending. Instead of a balanced increase in the LTA, he abolished it altogether, thus handing up to £1 billion to the wealthiest. The champagne corks were popping in the City. When she sums up, will the Minister tell us the Treasury’s full estimate of the cost of this excessive giveaway, including the cost of consequential losses in inheritance tax revenues?

These blunders are perhaps not the most serious that Mr Hunt has had to contend with. Contrary to the Minister’s rosy scenario, in the first half of 2010 the policies of Chancellor Alistair Darling had resulted in the economy growing at an annual rate of 3%, and the economy was set on the path of sustained recovery from the global financial crisis. In June, the newly elected Conservative Chancellor killed that recovery stone dead. Austerity cut demand, inflicted damage on social services, education and the health service and, by generating an aura of all-pervading economic pessimism, led to cuts in investment and growth in the private sector too. The next time a school or hospital is closed because the roof is unsafe or necessary equipment is lacking, remember Austerity George. It is no wonder that Mr Hunt is so keen to project his personal optimism.

Mr Hunt is also struggling with the consequences of the next huge Tory economic disaster: Brexit. I am well aware that Brexit was not just about the economy, and we can argue about the role of sovereignty in all aspects of our national life and whether there was a price worth paying. But, as an economic policy, Brexit has seriously damaged the country’s economic health. Noble Lords will recall that, after three years of austerity and with a general election on the horizon, economic conditions were eased by Mr Osborne and in 2013 business investment began a significant recovery. Then Brexit dealt business investment to blow from which it has not recovered to this very day. Having grown steadily as a share of GDP from 2013 to 2016, following the Brexit vote business investment fell year on year. Even with the incentive of the superdeduction in place, it is back to the austerity-induced levels of the end of 2012. As the Office for National Statistics has pointed out, the UK has the lowest average private sector investment as a percentage of GDP of any G7 nation. How ironic to hear Mr Sunak congratulating the people of Northern Ireland so enthusiastically on the extraordinary and unique economic advantages they will enjoy as members of the UK market and the EU single market. Perhaps the Minister will tell us when she sums up why what Mr Sunak declares to be so good for Northern Ireland is not good for England, Wales or Scotland.

The Mitigator, Mr Hunt, has correctly identified his task as reversing this sad tale of Tory low investment and consequential low productivity. With the end of the superdeduction cutting business support by £10 billion a year, he has introduced full expensing, which will increase business support by £9 billion. So, while incentives are not up, they are down by only £1 billion a year. Unfortunately, the new incentives are scheduled to last for only three years. As the IFS commented,

“the fact that this change is temporary and only announced now is most definitely not welcome. Today’s announcement is just the latest in a long line of changes and temporary tweaks. There’s no stability, no certainty, and no sense of a wider plan”.

Contrary to what the Minister said about the burden on companies falling, this April sees an increase in corporation tax of around £14 billion a year. When she sums up, will the Minister confirm that, as a result of this Budget, British business is now worse off by a total of around £15 billion a year? There will be no champagne corks in the boardrooms of British industry.

The other flagship scheme, the 12 new investment zones, will be good news for the successful zones but bad news for everywhere else. Long experience demonstrates that such schemes shift investment around the country without any significant impact on the overall figures. They simply shift the deckchairs. Against the new £15 billion burden on industry, the extra £1.8 billion help to

“cutting-edge companies who … are turning Britain into a science superpower”,—[Official Report, Commons, 15/03/23; col 840.]

to quote the Chancellor, welcome as it is, sounds distinctly underpowered.

Creative superpowers are built on a firm foundation of high-quality education and skills, yet where are the measures in this Budget to foster the high-wage, high-skills economy Mr Hunt seeks? What has he done to mitigate the disaster of Tory education policies? School spending per pupil in England fell an average of 9% in real terms between 2009 and 2019. According again to the Institute for Fiscal Studies, the Tory squeeze on educational resource is

“without precedent in post-war UK history”.

The result is that England is today one of the very few OECD countries where the young have worse literacy and numeracy skills than 55 to 65 year-olds. The Government have also cut adult education by half. Against this, the impact of the announced midlife MOTs and returnerships are drops in the ocean. Is it any wonder that this country has such a skills shortage?

However, instead of focusing on skills, The Mitigator focuses on numbers by providing a package of measures aimed at increasing labour market participation. The OBR costs this package at £7.1 billion. It estimates the increase in labour force participation as a result to be 110,000 people: that is, £65,000 for each extra person joining the labour force. At the same time, the OBR forecasts that trend unemployment will rise by more than 130,000. All this is in a labour force of 35 million. There is not much mitigation there. Of course, the investment in childcare is to be heartily welcomed. However, when she sums up, I would be grateful if the Minister would comment on the Sutton Trust’s estimate that, given the way in which the scheme is designed, 80% of the poorest families will be unable to access the childcare they need. Is the Sutton Trust right? In the medium term, once some of the restrictions built into Mr Hunt’s scheme have been removed, the provision of high-quality childcare will indeed herald a welcome advance in British society, extending opportunity, particularly to women, and providing greater security for poor families that need both partners in work in order to get by.

Falling real incomes define today’s economy and falling living standards blight today’s society. As the OBR notes, the 5.7% fall in real household disposable income over the next two financial years will be the largest two-year fall since records began. Even five years hence, in fiscal 2027-28, the OBR states that living standards will still be lower than pre-pandemic levels. This dismal outcome is of course due primarily to the increase in the price of energy and other tradeable goods, but is made even worse by the freezing of tax thresholds by Chancellor Sunak. The Sunak freeze ensures an extra £500 in tax for basic rate taxpayers in 2023-24 and an extra £1,000 in tax for higher-rate taxpayers—and yet more in subsequent years. Once again, matters would be worse if Mr Hunt had not mitigated the costs with the extension of the energy support measures and the commitment to increase social security benefits in April by the rate of inflation.

The problem is that mitigation is not enough when, as the Resolution Foundation pointed out this morning, the Budget leaves many government departments facing 10% real-terms cuts; it is not enough when living standards decline; and it is not enough for the Chancellor to be focused solely on mitigating the mess left by all his Conservative predecessors—with the notable exception of Nadhim Zahawi, who, perhaps fortunately, did nothing.

The chairman of Legal & General commented last week that Britain is a

“low-productivity, low-growth, low-wage economy fraught by political infighting and that has to change”.

He added:

“We need a massive step-up in investment in the UK”.


He was right. He could have added that low growth equals high taxes, even as public services deteriorate.

What was totally absent from the Budget was a medium-term strategy to turn Britain around that did not focus just on tax and spend but embodied fundamental institutional reform to link invention to innovation to investment in the skills and technology of the future. Without that institutional commitment, we will not see the investment in growth that Britain desperately needs. That is what is happening in the United States, but it is not happening here. As the clean technology race between the US, the EU and China hots up, the lack of any substantive UK response is chilling.

The result of 12 years of economic mismanagement has been stagnating productivity, the worst post-pandemic growth in the G7, higher taxes drained from a population suffering record falls in living standards and a shrinking labour force squeezed by the high cost of going to work and by long-term sickness unmitigated by an increasingly desperate NHS. However, accessing his inner Monty Python, Mr Hunt claimed this morning that he is setting out a long-term plan to make us

“one of the most prosperous countries in Europe”.

Always look on the bright side of life.

As a long-serving Conservative Health Secretary, Mr Hunt is accustomed to managing decline with an optimistic smile, always looking out for opportunities to mitigate the pain wherever he can. But mere mitigation is not what Britain needs. Britain is in a hole, and Mr Hunt can claim credit only for having slowed down the digging.

Financial Services and Markets Bill

Lord Eatwell Excerpts

Committee stage
Tuesday 7th March 2023 Grand Committee

[Baroness Penn (Con)]

My Lords, we were addressing the question of when alternative service provision is put in place and the accessibility of that service provision.

I have addressed the point made by the right reverend Prelate the Bishop of St Albans about connectivity. He also made a point about customers needing, for example, a smartphone to make payments or access online banking. The FCA has stated that it expects payment service providers to offer solutions that work for all groups of people. It encourages all firms to consider the impact of their solutions for customers. The regulators’ guidance recognises that not all customers will have mobile phones or a reliable signal and that viable alternatives should be provided in these situations.

All service providers, including banks and building societies, are bound under the Equality Act to make reasonable adjustments where necessary. Many of them support access to digital services through initiatives to distribute devices, teach skills, or facilitate support networks.

As my noble friend Lord Holmes highlighted, moving towards digital can create opportunities for accessibility but it can also create barriers. It is important that we embrace these technological changes in ways that reduce those barriers, so his point about ensuring that interfaces, including ATMs and point-of-sale terminals, are accessible is really important.

[Lord Eatwell (Lab)]

Would the Minister indulge me for a moment? I have been intrigued by her discussion of the role of digitisation. I refer to Amendment 184, tabled by my noble friend Lord Tunnicliffe, on the duty to collect data on cash acceptance.

When teaching monetary economics, the first thing that you ask students to understand is, “What is money?” Money is something that is generally accepted in discharge of a debt. That is the definition of money. The issue of cash acceptance is therefore vital as society develops in the way that the noble Baroness, Lady Noakes, outlined so clearly. What will happen is that, for the section of society who rely on cash—several million people—their cash will no longer be money. It will no longer be generally acceptable in payment of a debt. In those circumstances, the digital instrument will be crucial. However, if the digital instrument is issued only by companies, namely banks, to those who are customers of the banks, who have some basic criterion, it is surely the responsibility of the state to issue a digital instrument that is available to all citizens.

That being the case, to get to that stage, we need to know how cash is generally accepted. Therefore, the amendment, which contains a duty to collect data on cash acceptance, is vital for the development of future policy with respect to cash and digital instruments. The Minister rejected the amendment by saying that it is not the FCA’s responsibility. Can she tell me which department of government has this responsibility to collect data on cash acceptance?

[Baroness Penn (Con)]

My Lords, there are a number of ways to tackle the issues that the noble Lord referred to. There are various statistics around payment methods used by consumers in the UK; I quoted some at the start of my speech. The Government have not mandated service providers to accept certain forms of payment; that is not the approach we intend to take to ensure that people continue to have access to cash or money. I have said that, in supporting businesses’ access to deposit services, that will support people’s ability to use their cash as a form of payment.

The noble Lord also raised the question of a digital form of money. That is a question that the Government have looked at very carefully. We launched what I think was a joint consultation between the Government and the regulators, looking in more detail at the question of a central government digital currency and how to take forward that work, as well as considering questions such as those from the noble Baroness, Lady Fox, about privacy issues in a world of having a digital form of money versus having cash as a form of money.

I understand the importance of having a picture and the data that allows us to understand what is going on. I do not think that the data is necessarily the gap here; it is about how you provide for the ongoing use of cash in a society where rapid changes are being made. Our approach to that has been through legislating in this Bill on access to cash withdrawal and deposit facilities.

I was just talking about the importance of the accessibility of payment interfaces, including ATMs and point-of-sale terminals. I am pleased that UK Finance and the RNIB have developed accessibility guidelines for touch screen chip and PIN devices, as well as an approved list of accessible card terminals. The Government’s disability and access ambassador for banking, Kathryn Townsend, also encourages a consistent consumer experience and engagement with deaf advocacy groups.

Financial Services and Markets Bill

Lord Eatwell Excerpts

Committee stage
Wednesday 1st March 2023 Grand Committee

[Lord Roborough (Con)]

The Bill introduces secondary objectives unrelated to the core objectives. Should that unlimited liability also be extended to these? Will the regulator be determining acceptable travel policies for business? Which financial markets are priorities for growth and competitiveness? What will be the enforcement process if individuals or companies disregard these? How can the regulated have confidence in the application of these objectives without some kind of body of precedent and rapid appeals process? The regulators themselves will benefit from a clear body of case precedents when making decisions. I urge the Minister to give serious consideration to the importance of rapid and practical accountability of the regulator for its actions to those it regulates, if London is to remain a financial hub where the global community wants to base its investments, businesses and careers.

[Lord Eatwell (Lab)]

My Lords, I regret that I was not able to take part at Second Reading as I was working in the United States. I hope I have the indulgence of the Committee to make some comments on this set of amendments. As someone who has chaired a major regulator, I found the representation of the principles and approach to regulation as “vague” a rather chilling remark.

What we have seen with the amendments of the noble Lord, Lilley, and those who have supported them, is an attempt significantly to change the entire philosophy on which the regulatory system has so successfully developed in this country. That philosophy has been based on principles-based regulations. Those principles are not vague, as has been asserted; they are determined by Parliament. The rules have then been developed on the basis of serving an industry which is dynamic and continuously changing, unlike the building industry, many of whose practices have not changed since Tudor England.

The fact that the regulatory system can adapt to a rapidly changing industry has been a source of considerable strength within our regulatory system. If we are to introduce an entirely different legal approach, that has to be argued out. There should be a Green Paper, a White Paper and a proper Bill saying that the regulatory approach in this country is going to be fundamentally changed. That is what I fear: the amendments of the noble Lord, Lord Lilley, would effectively introduce a wedge of change that would fit very uncomfortably with the current structure.

On the other hand, I support the amendments proposed by the noble Lord, Lord Bridges, and particularly commend the remarks of the noble Lords, Lord Hill and Lord Forsyth. They argued that although this new accountability device—this new entity—would deal with, let us say, the technical side of regulatory issues, we still need a parliamentary committee to deal with the political side because regulation is both highly technical and has an essential political core. That is why we need both components. Therefore, I strongly support the amendments of the noble Lord, Lord Bridges, and the views put forward by the noble Lords, Lord Hill and Lord Forsyth, on the need for the dual structure to ensure a proper level of both technical and political accountability.

[Lord Tyrie (Non-Afl)]

First, I declare my interest as in the register. I am deeply concerned about this second set of amendments; they could have a profound impact on and consequences for the SMR, the ombudsman’s service and the RDC in particular, and I shall go through each in turn. I strongly agree with what has just been said about the nature of regulation and the risks of moving at such pace to a wholly different approach, bearing in mind for how many decades this system has been in place and has become understood and accepted—at some cost, by the way, and, therefore, changing it is itself something whose costs we need to bear in mind.

On the question of predictability, consistency and unintended consequences, in response to an earlier amendment I cited abuse of cryptocurrency technology, which might be made more difficult for the regulator to adapt to if it has to show that what it has done was predictable on the basis of existing law. That could be spread betting or, to take a topical example of 15 years ago, asset-backed securities. I am extremely nervous about including this without substantial consultation, which should be preceded by a detailed explanation of what is intended. We have not had any of that, and it is certainly not suitable to be put in this Bill.

Although I have not said very much so far on the Bill, I fear I will speak at some length on these three areas, which in my view are crucial to providing fairness and making sure that we are better prepared for the next financial crash that will inevitably come.

As I read Amendment 169, it would create a defence before the Upper Tribunal, and possibly a complete defence if a person could show that they had acted reasonably and in good faith. That might sound quite reasonable in itself—more apple pie—but a defence of reasonableness and good faith would mean that if an individual did not know about a problem, he could not be held responsible for it. That would be goodbye to the SMR, at least, as an effective regulatory tool. It strikes me as likely to reintroduce all the gateways to unacceptable risk and risk taking that the SMR was designed to expunge.

Autumn Statement 2022

Lord Eatwell Excerpts

Tuesday 29th November 2022 Lords Chamber

[Lord Eatwell (Lab)]

My Lords, over the past three months, the Government have subjected the British economy to two episodes of extreme foolishness. First came the Truss-Kwarteng episode, going for growth without a coherent strategy and throwing money at the wealthy. Unfortunately for Britain, the ideology and economic reality did not mix. As a result, all Britain is worse off and the poorest suffer most. Then came this Sunak-Hunt episode, described by financial market experts as a “massive overreaction”. This time, political intent was dressed up as technical economics. Again, there was no coherent growth strategy as taxes were raised to an all-time high and massive expenditure cuts in 2024 and 2025 were announced. Why would anyone invest in a Britain that the Chancellor tells us is heading for a recession, not just now but with massive cuts in 2024 and 2025 too? The result is that all Britain is worse off. The two episodes share these common characteristics: no coherent plan for growth and severe damage to the British economy for years to come—a continuation of 12 years of Tory economic incompetence.

In the first half of 2010, with Alistair Darling as Chancellor of the Exchequer, the economy was growing at an annual rate in excess of 3%. Following the May election, with George Osborne as Chancellor, growth came to a shuddering halt. Austerity was the new, destructive policy. Education and local authority support for economic development were severely cut, and the NHS was underfunded. School spending per pupil in England fell by an average of 9% in real terms between 2009 and 2019—before the pandemic—which, according to the Institute for Fiscal Studies, was

“without precedent in post-war UK history.”

The result? England today is one of only a few OECD countries where the young have worse literacy and numeracy skills than 55 to 65 year-olds. Perhaps the Government were trying to balance things up, as they also halved spending on adult education. Is it any wonder there is a skills shortage?

As we know, there are currently major labour shortages in many sectors of the economy. Well over a million British workers are “missing” from the labour force. A significant contribution to the shortage of labour arises from those untreated or waiting for treatment in an overstretched NHS.

Let us add to these “headwinds”, as the Chancellor calls them, the cost of Brexit—another Conservative policy. We do not need to argue over the OBR’s estimate of a permanent 4% loss of GDP, and hence 4% loss of tax revenue: the negative impact of Brexit can be seen all around us, whether in migrant labour shortages, markets lost, SMEs withdrawing from European markets, or the Paris stock exchange overtaking London. The Conservative mayor of Birmingham has now commented on the damage to the economy in his area.

It was not the war in Ukraine that caused the current economic crisis: the war revealed the underlying long-term weakness of the UK economy. That is why the OECD ranks only Russia as a worse economic performer than the UK.

Now, to bookend the Conservative years, austerity is back. Twelve years of policies which have been consistently damaging to the economy raise an important question: why are Conservative Chancellors so incompetent? I think the answer is clear in their rhetoric: the private sector is portrayed as the “wealth creator” that has to carry the burden of funding the public sector. In a speech in 2014, George Osborne referred to

“government as the enemy of business and wealth creation”.

Similarly, in his 2021 Budget speech, Mr Sunak declared:

“Government should have limits”


and that

“my goal is to reduce taxes.”—[Official Report, Commons, 27/10/21; col. 286.]

In the Autumn Statement, Jeremy Hunt maintained the anti-state rhetoric by asserting that

“high-tax economies damage enterprise and erode freedom.”

Tell that to the Scandinavians. The point about these statements is not that reducing the burden of taxation is a bad idea—we all want lower taxes. In appropriate circumstances, cutting taxes may be a very good idea, but underfunding the public sector sources of growth is a very bad one.

However, in the Conservative mindset, the public and private sectors are seen as separate entities competing for resources—what economic nonsense. The private sector depends on top-class research conducted in publicly funded universities, on efficient infrastructure, and on a well-educated, adaptable, healthy labour force. Austerity that cuts spending on schools, libraries, skill centres and Sure Start, and underfunds the NHS, damages the very core of British private enterprise.

The lessons of economic history are clear. When in the latter half of the 19th century Germany sought to compete with the industrial strength of Britain, it created industrial banks to ensure the flow of long-term funding to nascent German industry, and it created the Technische Hochschulen to provide the scientific and engineering expertise to drive German industrial competitiveness. In more recent times, all the important technological innovations in the iPhone were made in public sector institutions; it was the public sector that took the extreme risks associated with experimental new technologies. It was the genius of Steve Jobs to take those public sector ideas and mould them into the most commercially successful product of modern times.

In today’s fast-changing competitive world of artificial intelligence and bioengineering, high risk and high reward go hand in hand. That is why the rest of this century must be the era of an entrepreneurial state. We need new institutions to channel funds to the development of new high-tech products and to link our outstanding research with commercial innovation; a pro-business state that complements private industry; and a well thought through medium-term growth strategy.

In vain, I searched the Autumn Statement for such a strategy. The Chancellor’s speech ends with what I can only interpret as a joke. He said that

“you do not need to choose either a strong economy or good public services. With the Conservatives, and only with the Conservatives, you get both.”—[Official Report, Commons, 17/11/22; cols. 845-56.]

When the Resolution Foundation reports that:

“Almost three-in-five households in the most deprived areas are already cutting back on essentials such as food and fuel”,


and the Institute for Government declares that the Autumn Statement’s impact on public services will be a “poisoned inheritance”, the joke is on the British people.

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, I thank all noble Lords for their contributions to this debate. Given the range of expertise that has been contributed today, I will spend my time directly addressing as many noble Lords’ comments as possible.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[Lord Eatwell (Lab)]

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

[Baroness Penn (Con)]

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