Financial Services Bill

Lord Sikka Excerpts

Report stage
Wednesday 24th March 2021 Lords Chamber

[Baroness Noakes (Con)]

My Lords, this is the first time that I have spoken on the Bill on Report and I draw the attention of the House to my interests as set out in the register—in particular, shares that I hold in listed financial services companies.

I have considerable sympathy for the amendment because the financial regulators are not very accountable. At the moment, there are set-piece appearances before the Treasury Select Committee in the other place and occasional appearances before committees of your Lordships’ House but these do not amount to a systematic and comprehensive examination. The Government often rely on the fact that annual reports are laid before Parliament but the annual reports of regulators get no more attention paid to them than the annual reports of companies. With rare exceptions, they provide few insights of value. By their very nature, annual reports accentuate the positive and shy away from the negative.

The problem of the accountability of regulators is not confined to financial services regulators. I could say much the same about Ofcom, Ofgem and other regulators, but we cannot solve the problems of the world in this Bill. The accountability of the PRA and the FCA is covered in the future regulatory framework, the consultation that has recently been completed. We discussed this a little on our first day in Committee and I hope that my noble friend the Minister will provide some information on the next steps when he responds to the amendment. The consultation closed over a month ago and the Treasury must have some idea on what it will be doing next and when.

If the outcome of that review, so far as accountability is concerned, is a well-developed form of parliamentary scrutiny, either jointly between both Houses of Parliament or within each House, the need for an independent review clause such as that contained in Amendment 2 would recede. Parliamentary committees can look at issues in depth but only if they are properly focused and well resourced. On that basis, the noble Baroness, Lady Bowles of Berkhamsted, might want to await the legislation implementing the outcome of that review rather than tackle the issue in this legislation, because action could be set in a broader, more holistic context regarding how the regulators will operate overall in due course.

If the noble Baroness, Lady Bowles, wishes to pursue her amendment—I thought I heard her say that it was more of a probing amendment for today—it would be wise to look again at its drafting because it calls for one review covering four regulators, but they are all different in what they do and how they do it. I am not convinced that there would be sufficient focus if one review tried to cover all the regulators—the two major ones and the two smaller units with regulatory responsibilities, one in the Bank of England and the other being the Payment Systems Regulator in the FCA.

In addition, I, like the ABI, wonder whether a review every two or three years is too frequent for the kind of in-depth review that the noble Baroness, Lady Bowles, has in mind. A rolling series of reviews, perhaps carried out over five years but concentrating on individual regulators, would provide more information of value to those seeking to hold them to account. However, the noble Baroness, Lady Bowles, has the right ideas in the amendment, although it may not be right for this Bill.

[Lord Sikka (Lab) [V]]

My Lords, it is a great pleasure to support Amendment 2. Throughout the earlier stages of the Bill, a number of noble Lords have drawn attention to the failures of financial regulators. Essentially, it was argued that they are captured by the finance industry and therefore advance its interests. They are too slow to protect people from malpractices. Over the years, numerous financial products have been fraudulently sold, including pensions, endowment mortgages, precipice bonds, split capital investment trusts, interest rate swaps, payment protection insurance and much more. The names of the products change from the aforementioned to mini-bonds and supply chain finance, but the basic problems are still the same and the regulators have failed to secure positive change in the culture of financial services enterprises.

During debates, Ministers have emphasised the tax contribution of the finance industry but have been silent on the costs imposed by that industry on society. Scholarly research shows that between 1995 and 2015 the oversized and scandal-ridden finance industry made a negative contribution of £4,500 billion to the UK economy, equivalent to around £67,500 for every woman, man and child in the UK. Of the £4,500 billion, £2,700 billion is accounted for by misallocation, whereby resources, skills and investments are diverted away from productive non-financial activities to the financial sector. The other £1,800 billion arises from the 2007-08 banking crisis that ushered in never-ending austerity. The economy and most people are yet to recover from that. That £4,500 billion is a massive cost and we simply cannot afford it. The status quo is not tenable and it is too expensive. The cost of the financial curse for the UK cannot be reduced by carrying on the regulatory business as usual, which is what the Government seemed to indicate in Committee.

Our regulators need to be effective and proactive but they seem to neglect their duty to the people. This is well documented in the reports on London Capital & Finance and the Connaught Income Fund. The FCA knew that mini-bonds were a problem but was slow to act at London Capital & Finance, and the same pattern has now been repeated at Blackmore Bond. The FCA does not welcome public scrutiny. Just look at the excuses it concocted to conceal the report on frauds at HBOS. The saga is still not resolved and same goes for frauds at RBS.

It is well documented that thousands of people are trapped in the £3.7 billion collapse of Woodford Investment Management. The Woodford Equity Income Fund was first authorised by the FCA in 2014. In 2015, the FCA was informed about the fund’s precarious existence as it was investing excessively in unlisted securities that affected its liquidity, but the FCA ignored the information until at least 2017.

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Moved by

[Lord Sikka]

7: Clause 22, page 28, line 23, at end insert—
“32B Gibraltar-based persons: reporting requirements(1) A Gibraltar-based person carrying on an activity approved under Schedule 2A, or which has permission by virtue of relevant Gibraltar provision to carry on an activity, in the United Kingdom must be registered under section 1046 of the Companies Act 2006.(2) A company of the type referred to in subsection (1) is to be regulated in respect of activities that it undertakes in the United Kingdom by a relevant person as defined by the Financial Services and Markets Act 2000.(3) A reference to a relevant Gibraltar provision is to be read with section 23 of the Financial Services Act 2021.”Member’s explanatory statement
This amendment would require any Gibraltar-based person carrying on activities in the UK to file their accounts at Companies House and to be regulated in the UK with regard to their UK activities.

[Lord Sikka (Lab) [V]]

My Lords, the right reverend Prelate the Bishop of St Albans sends his apologies. Due to unforeseen circumstances, he is unable to speak to Amendment 7. At very short notice, he has asked me to speak for him.

Amendment 7, in the name of the right reverend Prelate the Bishop of St Albans, the noble Baroness, Lady Bennett of Manor Castle, and myself, would require companies operating under the Gibraltar authorisation regime, or GAR, to be registered and to file their accounts in the UK at Companies House. It would also ensure that GAR companies are regulated in respect of their UK activities, in accordance with UK regulations.

I beg your Lordships’ indulgence. In order to minimise any disservice to the right reverend Prelate, my speech will be in two parts. First, I will relay what the right reverend Prelate would have said. Secondly, I will briefly add my own comments.

In the words of the right reverend Prelate the Bishop of St Albans: I have placed this amendment because I did not feel that my concerns about Gibraltar were adequately satisfied in Committee when I tabled a similar amendment. I will be frank: I got the impression that because Gibraltar was an associated territory, there was a reluctance to ensure that it could not be used by companies to reduce their tax obligations. I understand that the Gibraltar authorisation regime allows for continuity of the financial services that existed when we were a member of the EU. But this should not discount the fact that a single market in financial services is being created here. Gibraltar is not necessarily a serial, global tax haven. According to the Tax Justice Network, Gibraltar ranks 30th in the corporate tax haven index, whereas the UK is ranked 13th. In no way do I want this to be an attack on the territory of Gibraltar, particularly having highlighted that the UK is ranked as a worse tax haven.

This amendment attempts to speak to a specific UK-Gibraltar issue on tax avoidance. The current relationship allows a Gibraltar-based company to operate, conduct its business and receive what would be taxable income in the UK, but then to pay corporation tax in Gibraltar. There is a corporation tax disparity between the UK and Gibraltar. Our corporation tax is 19% whereas Gibraltar’s is 10%.

During his evidence session to the Commons Committee, the Minister from Gibraltar said that the corporation tax rate was not a factor in companies relocating to Gibraltar. No doubt the Mediterranean climate and lifestyle make it a very attractive place to reside, but I would not presume that the warm climate is responsible for 20% of the UK’s private insurance market being underwritten from Gibraltar, despite the territory holding not even 0.1% of the UK’s population.

Financial services are one of Gibraltar’s primary industries, hence the tabling of this amendment. One might assume that greater transparency would apply to the finance and other sectors, ideally through stricter and more thorough reporting standards between Gibraltar and the UK. It is common practice in many industries for transactions placed in the UK to be processed via servers in Gibraltar—a technicality that allows what is, in reality, taxable income in the UK to be taxed in Gibraltar.

Obtaining evidence on the cost of the system to the UK Treasury is difficult. However, we have reliable data for the online gaming and gambling sector. Research and private investigations have shown that some of the UK’s major gambling firms actually pay corporation tax in the UK of between 3% and 13% by either headquartering in Gibraltar or using subsidiaries based there. We know of this only because the size of these firms brought them under journalistic scrutiny. If these practices were well documented for one sector, it would be illogical if other sectors did not follow the same incentives. After all, the purpose of reducing corporation tax is only one major reason for relocation to Gibraltar.

This amendment does not deal with the issue of taxation. In fact, even if the Government adopted the amendment, these practices would still continue. It would ensure that companies operating under the GAR regime abide by the Companies Act 2006, which mandates foreign countries to register and file accounts at Companies House.

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[The Deputy Speaker (Lord Lexden) (Con)]

My Lords, I have received no requests to speak after the Minister, so I call the noble Lord, Lord Sikka, to conclude the debate on the right reverend Prelate’s amendment.

[Lord Sikka (Lab) [V]]

I thank all the contributors to this debate, which has been very informative and helpful. Given that roughly 25% of UK motor insurance is written from Gibraltar, it is clear that large amounts of profit made in the UK are being booked in Gibraltar and that the public purse here is being deprived of large amounts of tax revenue.

Of course, we might take the view that Gibraltar has been hit hard by Brexit and therefore deserves some support, but, as I pointed out, the beneficiaries of those profits are not necessarily people in Gibraltar but are actually corporations using Gibraltar to extract revenue from the UK. The ultimate destination of those profits is not really known because there is no transparency at all. Whether somebody is engaging in tax evasion or tax avoidance, the effect on the UK public purse is the same: the loss of revenue.

We still need greater transparency but at the moment, we do not have it. I hope that, when we have a public form of country-by-country reporting, perhaps that will provide some form of transparency, but at the moment the Government are not committed to that.

Nevertheless, I thank everybody for their contributions to the debate, and with the permission of the House and on behalf of the right reverend Prelate the Bishop of St Albans, I beg leave to withdraw this amendment.

Amendment 7 withdrawn.