Black Friday: Financial Products

Pat McFadden Excerpts

Tuesday 23rd November 2021 Westminster Hall

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Robertson, and I begin by endorsing the remarks you made at the beginning of the debate. I attended the funeral mass this morning for Sir David Amess, and you are absolutely right that he is a colleague who will be greatly missed right across the House.

I thank my hon. Friend the Member for Walthamstow (Stella Creasy) for securing this debate. I also thank our youngest member, who has attended the debate and been as good as gold throughout; we will see how we get on for the next 20 minutes.

My hon. Friend has been a formidable campaigner for consumer rights and against high debt charges, particularly for those on modest incomes. We are focused this afternoon on the buy now, pay later sector, which has grown hugely in recent years. The Government consultation on the issue says that the use of that payment mechanism tripled last year, and that during the pandemic more than one in 10 consumers paid for goods in this way. We have heard other numbers in the debate that suggest that the true figure may be even higher. Whatever the exact figure is, I think we can all agree that the sector is growing fast.

During the pandemic and the lockdowns, we saw an accelerated trend towards online shopping, and indeed online everything else, which helped to spur the growth of buy now, pay later products. As for the overall financial impact of the pandemic, it is really a tale of two Britains. For those in good work, who were still being paid full pay, the impact was often the ability to save more money. Right across the country, and across the rest of the developed world, bank deposits increased markedly for that reason. People were still earning, but much normal spending was curtailed, so they had more money to save.

That is the story of one Britain, but there is another Britain in which earnings were cut as work was lost, and where incomes declined and debt grew. For many people in that group, their costs increased because they were stuck at home with the heating on, their food bills went up because children were off school, and they could not earn what they had earned before. Those were families who had never had much disposable income in the first place, and who were often struggling with and juggling significant amounts of debt. Many of those people fell between different Government help schemes and were left under huge financial pressure. It is really important to understand that while overall savings grew, that was not true for everyone, and for many people debt grew instead.

However buy now, pay later products are marketed, they are another form of consumer debt, pure and simple. The explosive growth in this type of debt in recent years, and the risks identified in the report that Chris Woolard wrote last year, mean that it is right that these products are properly regulated. That is in the interests of consumers, who have a right to know exactly how the products work and what the potential penalties for non-payment will be. Otherwise, regulation will fall behind innovation in the market and become hopelessly out of date.

The business model for buy now, pay later is a merchant fee for each purchase. The growth model is that more goods will be sold because payments can be spread over a period of time. Interest is not normally charged on the staggered payments, but that is not the end of the story, because the companies also raise revenue through late payment fees or penalties when consumers fail to meet payments. For some buy now, pay later providers, those late payment fees and penalties are a significant proportion of their overall revenue. We must remember that, in the end, this is a debt like any other, which attracts penalties if it is not paid in accordance with the agreed timescale.

Chris Woolard’s review concluded that the buy now, pay later market

“poses potential harms to consumers and needs to be brought within regulation to both protect consumers and ensure it is sustainable.”

To their credit, the Government acted fast at first, taking an initial power last March during proceedings on the Financial Services Act 2021. Then, after a long period, Ministers issued the consultation on detailed regulations only last month. That consultation is still open and does not close until January. Why was there a delay of seven months or so between the initial legislation and the publication of the consultation? Why is the tone of that consultation quite unenthusiastic about regulating, seeking to minimise the scope of the regulation? It gives the appearance that the Government have been dragged into this. This is a fast-growing market. New accounts are being opened every day, and there is no reason to delay. This delay will mean that significant time has elapsed between the initial decision and the Government’s approval of the Woolard report and introduction of the regulations.

My hon. Friend the Member for Walthamstow has spoken about the potential for the next few weeks to result in significantly more consumer debt, with both Black Friday and Christmas approaching. I endorse what she said: nobody here wants to dampen anyone’s enthusiasm for a bargain—although I caution people to check whether it really is a bargain—and of course, we want everyone to enjoy the festive season. In my house, it is pretty big business. We have lights on the inside, we have lights on the outside and, whether I like it or not, we have an awful lot of Michael Bublé. But it is no secret that the festive season can be an expensive time for people and that, for some, December spending can result in a January hangover. That makes this debate both timely and important.

Innovations such as buy now, pay later were not envisaged when the Consumer Credit Act 1974 was passed, and that is why this gap must be filled. When it comes to updating the regulation system, the Government need to act and get on with it. What might the new regulations cover? The slightly reluctantly worded consultation gave some clues, but there are obvious areas, and I want to name a few. The first is information to the borrower. Does the borrower understand that this is a debt, and that they may be subject to penalty charges and increased costs if payments are not kept up? As we have heard, that is often not made clear.

What is to stop consumers setting up multiple buy now, pay later products with multiple companies? How will one know about the other? Does the consumer’s bank know about the other products? What if the consumer is already heavily indebted to their bank? That featured in the Woolard review, which implied that about one in 10 buy now, pay later account holders might already be quite significantly indebted to their bank.

What should the rules be on advertising and promotion? As the Minister knows, the weakness of the FCA’s financial promotion rules has already been a factor in the case of London Capital & Finance, which we debated in relation to other legislation recently. How will the regulations ensure that advertisements and promotions convey sufficient information about the nature of the credit agreement being entered into and the risk of incurring debt and penalties? Will consumers be told, for example, that non-payment could result in their debt being transferred to a debt collection agency? That is quite important, and might give people pause for thought when they take out such a product. Also, how do we treat consumers who get into difficulty? Right now, there is a mix of late payment fees and the use of debt collection agencies. Will the regulator codify that properly, given the proportion of revenues that some companies are raising from that activity?

Finally, returning to the timescale, can the Minister ensure that once the consultation closes, there will be no further delays and the FCA will be able to act as soon as possible, whatever the outcomes of that consultation? Given that the Woolard review reported near the beginning of this year, we certainly do not want to roll all the way through next year with no regulation in place. This is a very fast-growing new form of consumer debt. Regulation has not kept up: it must do so, or else it will ossify and become out of date. Time has already been lost this year, and I will close by urging the Minister—I know he wants to help on this issue—to get on with it, so that in relation to these products, consumers have the protection and information that they have a right to expect.

Money Laundering and Terrorist Financing (Amendment) (No. 3) (High-Risk Countries) Regulations 2021

Pat McFadden Excerpts

Monday 22nd November 2021 General Committees

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

It is a pleasure to have your chairing our proceedings, Ms Elliott. I thank the Minister for her explanation.

We debate these money laundering regulations quite regularly—as FATF changes its list, countries are added and removed. This particular statutory instrument removes Botswana and Mauritius from the list of high-risk countries, but adds Turkey, Jordan and Mali, which are now classed as high-risk countries that require extra due diligence.

As the Minister said, those changes are based on periodic FATF reports. I refer to the Treasury’s own response to the FATF report, which states in paragraph 1.6:

“Whilst the UK achieved a high rating, the FATF assessed the UK’s supervision regime to be only moderately effective. Specifically, it found that there were significant weaknesses in the risk-based approach to supervision among all the UK AML/CTF supervisors, with the exception of the Gambling Commission.”

My first question to the Minister is, what has been done since the Treasury accepted that there were significant weaknesses in our approach? The same document states:

“For the accountancy and legal sectors, weaknesses in supervision and sanctions are a significant issue which the UK has put steps in place to address.”

I would be grateful if the Minister could update us on that. It matters for a number of reasons. The UK has a particular responsibility with regard to money laundering and terrorist financing because of the size of our financial services sector. It is a big advantage for the country to have a financial services sector with such global reach, but that means that it can be attractive to those who make their money through illicit means as well as legitimate ones.

Since we debated the last such statutory instrument some months ago, we have had the publication of the Pandora papers. They set out a familiar story of the UK and its overseas territories—one or two of which are mentioned in the list we are debating—being used as a vehicle for hiding finance and concealing ownership. I would like the Minister to tell us where we are on some of the promised measures on that. For example, where is the registration of overseas entities Bill, which has been promised for years? In fact, 10 December marks the fourth birthday of the promise of that legislation. Where is it? Where is the reform to empower Companies House to do more checks on who the owners and directors of companies actually are? Where is the implementation of the recommendations in the Intelligence and Security Committee’s Russia report? What do the Government propose to do to ensure that donations to political parties are not the proceeds of kleptocracy?

Talking of individual countries, why is Russia not on the list we are discussing? Is it really the Government’s position that Turkey and Jordan, to take two random examples, are places that require extra due diligence for financial investments, but Russia is not? Similarly, in recent months there has been major change in Afghanistan, but it is not on the list. Why not? What assessment have the Government made of the risk of terrorist financing as a result of the Taliban takeover of Afghanistan? I would be grateful for a response to those questions.

Obviously, we will not oppose this statutory instrument, but it would be absurd to think that all we need to do is mirror the FATF list to have adequate defences on anti-money laundering. It is crucial for our financial system that we act to expose the nature of hidden asset ownership and empower Companies House and others to crack down on illicit finance. Right now, those promises are not being put into practice.

--- Later in debate ---

[Mr McFadden]

The Minister’s closing statement, in a sense, sums up the problem. Yes, this list does keep us in line with the FATF list; nobody is disputing that. My point is that that is not enough. We should be capable of exercising our own judgments.

The Minister says, on Afghanistan, that FATF is looking at it, so we will wait until it looks at it. Surely this country, with a financial sector of such a size and a Treasury as powerful as the one she is a Minister in, is capable of exercising its own judgment about the financial risks in other countries? We took a major decision a few years ago that was all about sovereignty, and here we are franchising out our judgment on high-risk countries to another body and saying that until they come up with a verdict, we will not add any country to this list.

The same goes for Russia. Is the Minister really telling us that the Treasury and the Government do not judge Russia to be as big a risk as the countries on this list? That seems to me to be a judgment that is franchising out our capacity to act on these important issues to another body, in a way that the Government have spent five years telling us they do not want to do any more. My plea to the Minister is to have the confidence to exercise some of her own judgments on such things, because the very size of our financial sector means that we must be far less passive than that.

I am afraid it is not enough to say, on the registration of overseas entities Bill, that I will just have to ask another Department. The lack of urgency is not good enough given the risks posed in these repeated releases of papers. Similarly, the Minister is right that plans have been announced—over and over again—to reform Companies House, but they have not been implemented in a way that would empower that body to be a guardian of propriety, rather than simply a library of data.

The statutory instrument will go through, there is no question about that, but I would say to the Minister that we need a lot more urgency if we are to not just keep up with the FATF list but set an example around the world on how to tackle money laundering and terrorist financing. We should be taking enough pride in our country to want to set an example, rather than simply coming back here every few months to say that we have kept up with the FATF list.

Question put and agreed to.

Critical Benchmarks (References and Administrators’ Liability) Bill [Lords]

Pat McFadden Excerpts

2nd reading
Thursday 18th November 2021 Commons Chamber

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

The programme motion we approved a short time ago allocated up to six hours for this process. As I look around the Chamber, Madam Deputy Speaker, I feel that span of time may prove adequate for our purposes today, but one cannot be sure.

I am grateful to the Minister for his explanation of the Bill and for the briefing he arranged prior to today’s debate. I am also grateful to the FCA for the briefing on the Bill that I requested a week or so ago.

As the Minister said, we all know the background to the desire to move away from LIBOR as a benchmark for financial contracts. A decade or so ago, a scandal of LIBOR manipulation was uncovered, whereby traders who submitted estimates of borrowing rates were manipulating the submissions for the benefit of the institutions they worked for, and indeed for themselves and the accounts they managed. That left financial markets subject to corruption for private gain.

Not surprisingly, in the wake of that there were inquiries, including a major cross-party one in this House on which I served. It opened the door to wider cultural issues in banking about risk and reward, and asked the question: for whose benefit exactly were those institutions being run? It also provided the spectacle of the chief executives of some of the banks, some of the highest paid people in the world, claiming, one after another, that they did not know what was going on in their organisations until they first learned about it through the newspapers.

In the wake of all that, regulators around the world agreed to move away from a benchmark based on supposed expert judgments, to benchmarks based on actual trades. However, that move away from LIBOR has been more difficult than first thought, because of the volume and the endurance of the contracts involved. As the Minister mentioned, it is thought that there are some $300 trillion-worth of contracts based on that benchmark. Some of those will not be transferred to new benchmarks by the deadline set at the end of this year, and that is where the Bill comes in.

Clause 1 seeks to ensure continuity between LIBOR and its successor for contracts which have not managed to move to a new benchmark by the end of the year. There was an exchange during the Minister’s speech, between him and the SNP spokesperson, the hon. Member for Glenrothes (Peter Grant), where the question was asked: how much are we talking about here? In the debates in the other place on the Bill, the figure of about £450 billion was, I believe, mentioned as the worth of such outstanding contracts. If that estimate is correct, then there are still very substantial contracts that could be affected by the switch.

The Bill empowers the FCA to produce a new benchmark, to be called synthetic LIBOR, which, as the Minister said, will be regarded as LIBOR for the purposes of the contracts involved. That will run alongside the Bank of England’s new benchmark, called SONIA—sterling overnight index average. If SONIA is the daughter of LIBOR, then synthetic LIBOR can be regarded as the ghost of LIBOR. The Bill sees the two walking together, travelling side by side.

In both the public debates on the Bill and at briefings from the FCA, it has been estimated that, in terms of what it would mean as an actual interest rate, synthetic LIBOR will be about 12 basis points higher than actual LIBOR now. My first question for the Minister, therefore, is why should synthetic LIBOR be set at 12 basis points higher than actual LIBOR and what will that mean for the contracts involved?

[Bob Stewart]

Forgive me for intervening yet again, but, for the normal person, does synthetic LIBOR and 12 basis points mean a 12% increase on what he or she might pay?

[Mr McFadden]

No, it does not mean that. It means just over one-tenth of 1%, as there are 100 basis points in 1%.

Twelve basis points, or just over a tenth of 1%, might not sound like a huge margin, but when we are talking about contracts worth up to £450 billion, small differences in rates can add up to a lot of money. To illustrate that, let us consider the position of mortgage holders. There are an estimated 200,000 mortgages based on LIBOR. My next question to the Minister is why have those mortgages not moved away from LIBOR in the years since the regulator encouraged contracts to do so? What has left them stuck on LIBOR before the approaching deadline of the end of the year? Will the move to synthetic LIBOR mean that these mortgages will pay rates of 12 basis points higher than if the move had not taken place?

The FCA published a Q&A on these matters earlier this week, which stated that

“there may be a small increase in your mortgage payment in January 2022 compared with your mortgage payment in December 2021.”

It looks as though a payment rise is on the way for those 200,000 mortgages. That, of course, comes alongside a very live debate in the Monetary Policy Committee about changes to the Bank rate. Does the Minister think that those who hold mortgages based on LIBOR, which, in the buy-to-let sector, means about one in 20 mortgages—that is not an insignificant proportion—realise that that change, which was flagged by the FCA the other day, is coming as a result of the Bill? Have the Treasury or the FCA estimated what the total cost of that might be to UK mortgage holders?

That brings us to the potential for legal action over the changes envisaged in the Bill. That is the difference between this proposal and what the Minister referred to as changes in the Bank rate, because this change is being brought about through legislative action whereas Bank rate changes are as a result of a decision by the Monetary Policy Committee. The question of legal action arises because if contracting parties have agreed a contract on the basis of one benchmark, might they take legal action if the move to a new benchmark ends up costing them more?

As I understand it, proposed new article 23FA(6) in clause 1 attempts to close off the possibility of legal action as a result of a contract moving from LIBOR to synthetic LIBOR—the ghost of LIBOR—which, in this example, would close the door on any potential legal action from disgruntled mortgage holders. I would be grateful if the Minister confirmed that that is the correct interpretation of proposed new article 23FA(6). To make this matter even more complex, proposed new article 23FA(7) in clause 1 leaves open the possibility of legal action, as long as the basis for it is not action taken under clause 1 of this Bill—that is, it is not simply the move from LIBOR to another benchmark authorised by the FCA. Again, I would be grateful if the Minister confirmed that my understanding of that is correct.

In the equivalent American legislation—LIBOR is used all around the world—there is what is known as a safe harbour provision: a mechanism to prevent contracting parties from engaging in legal action as a result of these changes. Will the Minister explain why the Government rejected that option for the UK? What is the difference between the restrictions in proposed new article 23FA(6) in clause 1 and the safe harbour legislation that has been put on the statute book in the United States?

Clause 2 also deals with legal action. It insulates from legal action the administrators of benchmarks, who in this case will work on behalf of the FCA, who, in turn, will work on behalf from Parliament, assuming that the Bill is passed. We can see the logic of insulating a public agency from legal action if it is carrying out a duty that stems directly from legislation, but the same clause states that it does not remove liability entirely—for example, over the exercise of discretion or timing of the publication of a benchmark. Will the Minister explain to the House, under clause 2, just how insulated from legal action are the FCA and the administrators that are authorised as a result of the Bill?

Underlying all that is the question of why we need this legislation at all. Around a year ago, the Minister and I spent many a happy hour debating the Financial Services Act, both on the Floor of the House and in Committee. That Act, as we will both fondly remember, authorised the publication of the alternative benchmarks in the first place, so why, after our spending all those happy hours putting that Act through Parliament, have the Government concluded that they have to return with further legislation? What was it about the Financial Services Act that left the picture incomplete? How do we know that this is the last piece of the jigsaw and that the Treasury will not have to come back a third time to fill in other potential gaps?

There is also the important issue of the timescale or longevity of these measures. They are being sold by the Government as a transitionary process—a bridge from LIBOR to a world without LIBOR—but, as long as they are in place, we have SONIA, LIBOR’s replacement, operating alongside the ghost of LIBOR in the form of synthetic LIBOR. Is all this just kicking the can down the road or do the Government really have an exit plan for these tough legacy contracts? If they have not been able to move these contracts away from LIBOR now, when, for years, the regulators have been flagging that they should do so, why does the Minister think that they will move away from the ghost of LIBOR?

It is now almost a decade since the original scandal of LIBOR rate manipulation was uncovered. The Financial Services Act, which gives rise to the powers that we are debating, talked about a transitional period of up to 10 years while this new alternative benchmark might run alongside others that have succeeded LIBOR, so it is conceivable that it could take the best part of 20 years to go from the uncovering of the original scandal to the final move away from LIBOR. What is the likelihood that the Minister, who has been very long-serving in his post, or his successor will have to come back to the House with more legislation on this matter because, even after all that length of time, it is not enough to wind down all the contracts that we are talking about?

We will not oppose the Bill today because we understand that continuity of contracts is in the public interest, but it is not clear to us how temporary a regime this is. I would be very grateful if the Minister could respond on exactly why this legislation was needed in the first place and how long it may last, and to the other questions that I have put to him this afternoon.

Critical Benchmarks (References and Administrators’ Liability) Bill [Lords]

Pat McFadden Excerpts

Committee stage & 3rd reading
Thursday 18th November 2021 Commons Chamber

The Bill’s provisions allow for an orderly wind-down of LIBOR and, in doing so, ensure the protection of consumers and the integrity of UK markets. I therefore recommend that clauses 1 to 4 stand part of the Bill.

[Mr McFadden]

I am grateful to the Minister and have a few questions for him, all of which relate to clause 1. The methodology for calculating synthetic LIBOR is the five-year average picked by the FCA. Were other possible methods considered? What impact would they have had on the interest rate?

Secondly, the Minister referred to the rate bouncing around: on one day it could be less than real LIBOR and on another day it could be more. I believe that the FCA has used the figure of 12 basis points. For clarity, is that a fixed-term difference going forward, or will synthetic LIBOR vary on a daily basis, just as real LIBOR can?

On Second Reading, we talked about mortgages. However, as the Minister rightly said, a far greater sum of money based on LIBOR is in the derivative markets. What estimate have the Government made of the Bill’s impact on those markets?

Paragraph 6 of new article 23FA, which we have touched on a few times, tries to limit or define the scope of legal action taken as a result of the move from LIBOR to synthetic LIBOR. How might that influence any attempt at judicial review? How confident is the Minister that someone could not try a judicial review of this attempt to close down the option of legal actions taken as a result of a Government-mandated move in financial benchmarks?

The Minister referred to the discussion of fall-back provisions on page 3 of the Bill. For clarity, does this mean that some contracts will not transfer to synthetic LIBOR but will transfer to something else, depending on whether there is a fall-back provision in the contract? If there is a fall-back provision and it is not synthetic LIBOR, what will it be? If there is a fall-back provision that could have a different rate from synthetic LIBOR, how will contracting parties decide which one to use? Will the fall-back rate, if such a thing is specified in a contract, automatically take precedence over synthetic LIBOR, or might there be room for argument about which alternative rate to use?

Finally, there is the question of timescale and how long this will last. The Minister talks about encouraging remaining contracts to move off what will now be synthetic LIBOR. Indeed he said that, if we have to, we could pass further legislation. Is there anything more that can be done, other than encouragement, or are contracts not moving away from LIBOR because it is a better rate and, ultimately, what people care about is the interest rate they pay? I wonder how temporary this will be. Are we kicking this can down the road with nothing other than encouragement for a group of contracts that have stubbornly stuck to LIBOR despite all the regulator’s enthusiasm? Is there anything between the Minister’s encouragement and future legislation that might change this situation?

[Peter Grant]

I will not detain the House by repeating my comments on Second Reading. I am grateful to the Minister for his answers to a number of my questions, but one question he did not pick up, and on which I hope he can give some assurance, is what happens if something goes badly wrong with people’s mortgages. The small percentage of people who have mortgages covered by this legislation—although it could potentially be quite a big number of people—are now, through no fault of their own, quite literally staking their home on our getting this right. Although I appreciate that the Minister will not commit to a specific compensation scheme just now, will he at least give an assurance that the Government have not closed the door on that possibility should unforeseen circumstances lead to it being necessary?

I am also looking for clarity on the precise circumstances in which the administrator does or does not have immunity from legal action. The Minister has said the administrator is covered if it does something the law says it has to do, and it will not be covered if it does something it has chosen to do in a particular way. Does the administrator have discretion on the precise methodology it uses to calculate synthetic LIBOR, and can it exercise its judgment on the numbers it puts into the model? If the administrator has such discretion, nobody needs to sue it for using a synthetic LIBOR model; they can just sue it because of how it has carried out the calculation.

Given the nature of contracts of the value that the right hon. Member for Wolverhampton South East (Mr McFadden) mentioned, a slight change in the published rate can mean a lot of money. Every time the published rate is arguably a wee bit higher or a wee bit lower than somebody else thinks it might have been, one party will win and be quite happy, and the other party will lose and will potentially have a strong motivation to resort to legal action. Are administrators adequately covered against being sued simply because they have published a figure that says the current synthetic LIBOR rate is 1.2% rather than 1.25%? Are there grounds on which they might be sued because those 0.05 percentage points of difference in the published synthetic LIBOR rate either make or lose quite a lot of money?

[John Glen]

It is a pleasure to serve under your chairmanship, Mr Evans.

The right hon. Member for Wolverhampton South East (Mr McFadden) and the hon. Member for Glenrothes (Peter Grant) have raised a number of questions arising from what I said. The Government are clear that we support this transition away from LIBOR by providing additional legal certainty for contracts relying on LIBOR past the end of this year. The provisions of the Bill are vital to using the synthetic rate in an orderly winding down of LIBOR, and they provide protection to consumers and the integrity of UK markets, but there are four or five elements that I will address now.

The hon. Member for Glenrothes mentioned compensation, and we do not anticipate that being an issue. As with all matters, the Treasury keeps things under review. We will continue to monitor what happens as a consequence of this methodology.

Both the right hon. Member for Wolverhampton South East and the hon. Member for Glenrothes mentioned legal action, and it is possible that judicial review could be raised against the FCA on the synthetic methodology it is prescribing for ICE. We think that would be extremely unlikely, given that there has been an active exercise of listening to representations on designing a methodology that has broad credibility. That is fundamental to the integrity of the process. There has been no attempt to develop a methodology in isolation or separate from the consultation with the market.

The right hon. Member for Wolverhampton South East asked about both the future timetable and what will happen with contracts that have fall-back clauses overridden by the effect of this legislation. This Bill provides certainty where a fall-back provision is triggered by a benchmark ceasing to be published or made available. Neither the designation of a benchmark under article 23A of the BMR nor the imposition of a synthetic methodology would trigger the operation of the fall-back provision. Where a contractual arrangement has a fall-back provision that is triggered by other means, this Bill does not affect or override the operation of that clause. For example, it will not override a fall-back triggered by an assessment of unrepresentativeness or a prohibition on the use of the benchmark, provided that the circumstances in which the fall-back was triggered are met.

[Mr McFadden]

In layman’s terms, does that mean that a fall-back provision trumps synthetic LIBOR? That is what I am trying to get at. If there is a fall-back provision—some alternative already written into the contract—will these synthetic LIBOR continuity provisions not kick in?

[John Glen]

What we are saying is that the fall-back provisions, if they are without reference to LIBOR, would still apply. Where LIBOR is the reference, we are trying to ensure this synthetic methodology would not trigger that fall-back provision on the argument that it is distinct from the LIBOR provision in the contract. Essentially, we are trying to establish that the synthetic LIBOR methodology is synonymous with and continuous from the previous LIBOR rate, as set by the panel, but it does not intrude on the contractual issues around the fall-back on another basis. That goes back to our provisions dealing with the continuity of LIBOR rate setting through this new methodology—anything else is not the Government’s intention.

The right hon. Member for Wolverhampton South East reasonably probes me about the future timetable, and whether the provision of “moral persuasion” from the Financial Conduct Authority and warnings would be sufficient. We will keep these matters under review. What we are anticipating, and what we have seen, is a rapid and increasing move away from reference to LIBOR, and we expect that that will continue right up to the end of the year. We will look at what is required on an ongoing basis, but we think that it is quite likely that there may not be need for further legislative intervention. However, we reserve the right at a future point to legislate as needed. What we would do, as the FCA is doing, is encourage people to transition away from LIBOR.

I was also asked about the rate difference. It is possible that when the methodology of LIBOR changes from relying on panel bank contributions to using this synthetic methodology, there could be a small change in the rate of interest that borrowers with contracts that reference LIBOR will pay. I mentioned on Second Reading that we expect the synthetic LIBOR to replicate the economic outcomes achieved under the panel bank rate. Obviously, that was the intention throughout. It is difficult to say exactly what the synthetic rate will be when it replaces LIBOR. In the medium term, we would expect it to be matched to the existing LIBOR rate, but smoothed to reduce day-to-day changes.

Today’s LIBOR rate is at historic lows, and it is worth noting that the rate can fluctuate significantly. For example, if we look at the three-month LIBOR on GBP, we see that it has varied from 0.28% in September 2017 to 0.92% at the end of December 2019, and it is now 0.11%. We have seen a lot of volatility in the past few weeks because of speculation about what is happening with interest rates. So there have been some days during the past months when the synthetic methodology would have produced a lower rate than panel bank LIBOR and others when it would have produced a slightly higher one. Therefore, it is not possible to fully account for what would actually happen. I hope that that addresses the points that have been raised in Committee.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clauses 2 to 4 ordered to stand part of the Bill.

The Deputy Speaker resumed the Chair.

Bill reported, without amendment.

Third Reading

Oral Answers to Questions

Pat McFadden Excerpts

Tuesday 2nd November 2021 Commons Chamber

[Rishi Sunak]

I can assure my hon. Friend that, whether through the levelling up fund, the community ownership fund or the community renewal fund, this Government have ambitions to level up across the entire United Kingdom. With regard to the local government funding he asks about, last week’s spending review set out £1.6 billion over the year of additional cash grant, the precise allocation of which will be set out in due course by my right hon. Friend the Secretary of State for Levelling Up, Housing and Communities in the local government finance settlement.

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

I wish the Chancellor and my hon. Friend the Member for Ealing, Southall (Mr Sharma) a very happy Diwali. As well as all the tax rises on income and business that the Chancellor has announced in the past six months, buried in the Budget Red Book is a plan for a stealth tax on the self-employed of £1.7 billion over the next few years. After the past 18 months, in which many self-employed people have had no help at all, and when they are already being hit with the other tax rises he has announced, why are the self-employed now being hit with this extra tax rise, which he did not even mention in his Budget speech last week?

[Rishi Sunak]

There were no extra taxes for the self-employed in last week’s Budget; the right hon. Gentleman may be referring to a timing difference that was reflected in the Budget scorecard of previously announced policies. With regard to the self-employed, he should take a moment to reflect on the fact that this Government provided almost £30 billion of support to millions of self-employed people throughout the crisis, and I am very glad that we did so.

Levelling-up Agenda

Pat McFadden Excerpts

Wednesday 15th September 2021 Westminster Hall

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Thank you for your chairmanship today, Mr Robertson. I thank my hon. Friend the Member for Barnsley Central (Dan Jarvis) for tabling this debate. As he said, he comes to this issue not just from the perspective of a local MP but also as the Mayor of South Yorkshire. He spoke eloquently about the challenges facing his area, which are shared by many areas across the country.

I do not propose to use the time available to go over the familiar ground of what area has been allocated what fund. Those issues have been well aired and the disparities are there for everyone to see. Instead, I want to look at the wider picture and to begin by asking the Minister to define levelling up. What do the Government mean by it? Can she define it in clear and simple terms?

There is a long history to efforts and attempts to tackle regional inequality. In the Government that I served, we launched the new deal for communities. My own constituency received £53 million from this for the All Saints and Blakenhall area, more than twice what the whole city has received under its recent towns fund bid, more than a decade on. We had Sure Start, the Building Schools for the Future programme, rising investment in the NHS, falling waiting times and major cuts in child poverty.

We introduced tax credits to help lower paid working people. We did not cut their incomes by £20 a week, as the Government will do next month, a cut that will affect 12,000 families in my constituency and millions of families across the country. We had regional development agencies covering the whole of England. These were abolished by the coalition Government and replaced by local enterprise partnerships, which we were told would lead to regeneration through private sector-led boards. Who ever hears about LEPs now? How did they become the poor, unloved children of the Conservative Government, created and then ignored by Ministers? What is the Government’s problem with the LEPs they created? Is their crime being too local?

Levelling up has to be considered alongside what local areas have lost over the past decade: billions of pounds cut from local authority budgets; 773 libraries closed in England; 750 youth centres closed; 1,300 children’s centres closed; and school funding per pupil cut by 9% over the past decade, the biggest fall in 40 years, a direct attack on the opportunities and life chances of the very young people who need education the most. There is no greater leveller up than education. It is more powerful than any new road, building or bus lane. It is the platform upon which barriers are torn away. It is the weapon through which glass ceilings are broken. And on this most fundamental of issues, opportunity has been taken away and not enhanced, so before we talk about levelling up, we need to ask: who did the levelling down? The Government would like the public to believe that they have been in power for only two years, but that is not the case; they have been in power for 11 years.

What of levelling up itself? We welcome every new pound of investment and every new job created. We want every part of the country to succeed. We want the best possible opportunities for people, no matter where they live or the circumstances into which they were born. But that will not be achieved by pots of capital expenditure alone. Even when it comes to the money, the new levelling-up fund replaces a local growth fund that was actually worth more, and half of its budget this year is taken from the towns fund. It is the reannouncement of the same money over and over again.

Then there is the basic concept itself, and this is the heart of it. A true levelling-up agenda would focus on people, not just capital expenditure. Unless we help people to succeed—help them to deal with the costs that they face, for example in relation to childcare and the early years, and enable them to make the most of their talent through properly funded, excellent schools and great second-chance education later in life—true levelling up will not happen. We will have some extra infrastructure spending, but that is what it will be.

Let us take the verdict of the Government’s own Industrial Strategy Council, issued shortly before it was abolished by Ministers. It said that

“the proposed approach appears over-reliant on infrastructure spending and the continued use of centrally controlled funding pots thinly spread across a range of initiatives. Evidence, historical and international, suggests this is unlikely to be a recipe for success. Sustained local growth needs to be rooted in local strategies, covering not only infrastructure but skills, sectors, education and culture. These strategies need to be locally designed and focussed”.

The truth is that the Government do not want this to be locally led. They want it to be centralised, controlled by Ministers and given out solely at their discretion—the subject of Friday visits in high-vis jackets. They are not talking about skills and education, because those things are not tangible enough for press releases and election leaflets. They want physical projects that they can point to.

We read today that the agenda may even be used as an instrument of political control inside the Conservative party. Reports suggest that the Government Whips have threatened to withhold funding from Conservative MPs’ constituencies as a mechanism for stamping out potential dissent on the Government Back Benches. The Chief Whip is alleged to have said, “My pen hovered over your name,” to one potential rebel. Why should MPs’ constituents lose out because their MPs had the temerity to exercise their own judgment or the gall to stand up for what they believed in? Public money should not be used in that way. Whips have always tried to get MPs to vote the party line. That is their job. But the allocation of public funds should not come into it. That shows the inherent flaws in trying to do this in such a centralised way.

The challenge for the Government is clear: define what levelling up is; ensure that the definition includes people as well as bricks and mortar; and have a genuine local voice in how this is done, rather than the centralised approach that has been adopted so far. If Ministers do that, we might make some progress, but if they continue on the current path, the danger is that the verdict of their Industrial Strategy Council is what comes to pass.

Draft Capital Requirements Regulation (amendment) regulations 2021

Pat McFadden Excerpts

Wednesday 15th September 2021 General Committees

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Thank you for chairing the sitting, Mrs Murray.

Just before I came here, I saw media reports that there is a Government reshuffle under way. There is an old Glasgow phrase referring to job insecurity. It talks about somebody’s jacket hanging on a shoogly nail. I genuinely hope that the Minister’s jacket is not hanging on a shoogly nail, and wish him well in whatever transpires over the rest of the day.

The statutory instrument before us, as the Minister explained, is the legislative child of section 3 of the Financial Services Act, which we debated in the House last year. Under that Act, powers under certain EU directives were onshored to be allocated to UK-based regulators. Some of those powers related to the capital requirements regulation, which was the EU’s instrument for implementing the Basel standards agreed in the wake of the financial crash of 2007 and 2008.

Those Basel standards are important, because they required financial institutions to hold particular levels of capital buffer; stick to, at the very least, a minimum overall leverage requirement below which they could not fall; and have particular liquidity requirements. All that was designed to avoid a repeat of the financial crisis, when globally and systemically important banks were found to be holding too little capital, and to be overstretched when it came to leverage, and therefore to be unable to fund themselves when the crisis came.

That scenario left Governments and taxpayers—not only in this country, but in the United States, Ireland and a number of European countries—in the invidious position of having to bail out banks deemed too big to fail. The Basel rules were designed to avoid a repeat of that situation, make financial institutions more resilient and get taxpayers off the hook of bailing those institutions out, or to put it another way, and perhaps more bluntly, to deal with the problem of privatising the profits and nationalising the risks.

As the Minister and I have often discussed in such debates, there is particular onus on the UK to have resilient institutions and good regulation in this sphere, because our banking and financial services sector is so large relative to the rest of our economy. That in many ways is a great strength, but it can be a vulnerability if the UK taxpayer is the ultimate backstop for the system.

My first question to the Minister, therefore, is about whether, in giving these powers to the PRA, there is any policy intent to reduce the capital requirements on institutions. Banks will not openly lobby to put greater risk in the system. Instead, when they come knocking on the Minister’s door, they talk about competitiveness and say, “Can we just have this change? It would make us more internationally competitive. We could lend a bit more if only we didn’t have to hold all this capital against our balance sheet.”

How alive is the Treasury to that kind of lobbying and how determined is the Treasury to resist it, particularly given the number of consultations going on in the financial sector, on all sorts of subjects, asking the sector what it would like to be changed in the wake of our withdrawal from the EU? Really, my question is about whether this is a purely technical transfer of administrative responsibility, or does it open the door to lower capital requirements and greater leverage, and therefore greater risk, for UK-regulated financial institutions?

The second issue in the regulations is clearing services and the recognition of overseas central counterparties, known as CCPs, by the Bank of England. Clearing is very important; it is a firebreak in the system when large transactions take place. It is very important for the UK financial services sector and allows huge volumes of transactions to take place in this country. A temporary agreement on clearing was reached with the EU in the absence of any wider equivalence recognition on financial services last year. This instrument allows the Treasury to extend the transitional period for recognition of overseas CCPs indefinitely, but one year at a time. The reason for that is explained in paragraph 7.11 of the explanatory notes, which say that

“because there are some CCPs, who submitted applications for recognition…that will likely be unable to receive equivalence and recognition under EMIR”—

the relevant directive—

“for a prolonged period”.

In other words, “We need to have this rollover because we can’t process the paperwork.”

That is the financial equivalent of Lord Frost’s announcement yesterday of the unilateral setting aside of border controls on incoming goods. What the Government are doing through this instrument, and a number of similar ones, is empowering themselves in legislation to carry on what went before even in the absence of mutual agreements in the other direction and in recognition that their institutions do not yet have the capacity to consider the individual applications and approvals that would be necessary to do this one clearing house at a time. In the absence of that capacity, we have this catch-all rollover of the status quo, because we are openly admitting that cannot process the paperwork. Can the Minister explain why this power for endless rollover has been deemed necessary? Why, five years after the referendum, does the UK not have the necessary systems in place? How often does he expect to see this annual extension power used?

As I said, this aspect of the statutory instrument is part of a pattern. I have stood in this room and similar rooms on this Corridor debating the same thing with regard to customs procedures, and we also saw it yesterday with regard to the clearance of goods. At what point did taking back control morph into not having controls at all, and not being able to consider applications? When will we ultimately get out of this holding pattern of the rollover of the status quo and actually put in place the controls that were envisaged five years ago when the country took this decision?

Money Laundering and Terrorist Financing (Amendment) (No. 2) (High-Risk Countries) Regulations 2021

Pat McFadden Excerpts

Monday 13th September 2021 General Committees

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

Thank you for your chairmanship today, Sir Graham.

I am grateful for the Minister’s explanation of the measure and of the criteria for including countries on the list, which is updated periodically and relies heavily on the work of the Financial Action Task Force. We shall not, of course, oppose this today because we believe that it is important to have the strongest anti-money laundering regime and to take the strongest measures possible. That is very much in the public interest. It is not easy, because regulators have to keep track of evolving practice among those who try to get round the law.

There is a particular duty on the UK to take the issue seriously given the size and global reach of our financial services sector. Anything that suggest slackness on our part—anything that involves UK institutions and anything where it appears that the regulators have taken their eye off the ball—is bad for public confidence in the UK’s financial services sector. Sadly, UK institutions have been named quite a lot in recent years in stories about illicit finance.

We see from the regulations that the picture changes over time, with some countries coming off the list and others being put on to it. For example, Ghana has been removed from the list, but Haiti, Malta, the Philippines and South Sudan have been added. Malta is an EU member state. One would hope that high standards of governance and supervision were in place. Can the Minister explain further why Malta has been added to the list?

More notably, Afghanistan is not on the list. Is that because the measure was drafted in July, before the Taliban takeover? If so, have the Government taken measures on money laundering and terrorist financing since the Taliban assumed control on 15 August? A brief look at the Government’s consolidated list of financial sanctions targets shows that there are 135 Afghans on it, a number of whom have assumed positions of significant power in the Afghan Government. Sirajuddin Haqqani, the new Afghan Government’s interior Minister, is on the UK consolidated sanctions list. He is also on the FBI’s most wanted list, because—according to Reuters—of his links to suicide attacks and al-Qaeda. There are others, too.

How do the Government intend to respond to the formation of the Afghan Government and money laundering and terrorist financing? We do not want to do things that hurt the Afghan people, but what will the Treasury, regulators and, indeed, the Government as a whole do to ensure that funds are not channelled to terrorist organisations as a result of the Taliban takeover?

--- Later in debate ---

[John Glen]

I am happy to address Members’ points.

It is the Government’s view that the amendment will ensure that UK legislation remains up to date and continues to protect the financial system from the threat by jurisdictions with inadequate money laundering and terrorist financing. The amendment enables the UK to remain in line with international standards on money laundering and terrorist financing, allowing it to continue to play its full part in the fight against economic crime. I agree with the right hon. Member for Wolverhampton South East and the hon. Member for Glenrothes about the need to retain high standards in our financial services regulation—the consistent duty I have put on our regulators in conversations with them, week in, week out.

The right hon. Member for Wolverhampton South East was absolutely right when he said that, because of the size and sophisticated nature of financial services in the United Kingdom, keeping to those high standards will always be an imperative for us. He asked me to comment on the listing of Malta and Afghanistan. At the June 2021 FATF plenary, FATF collectively agreed to include Malta on its list of jurisdictions under increased monitoring. As this is one of the FATF public lists that the UK list mirrors, Malta will be added to the UK’s list of high-risk third countries. The outstanding issues that Malta must address are outlined in FATF’s publicly available statement.

The hon. Member for Glenrothes made a point about this country’s past. FATF’s rules and processes are searching, rigorous and extensive. The British Government receive extensive lobbying on these matters but we defer to the rigour of the process, no matter how uncomfortable it might be given the strong relationships we might otherwise have. Part of today’s upgrading following the June decisions goes ahead of where the EU is on a number of these issues, and I am pleased that we are applying the highest standards.

The right hon. Member for Wolverhampton South East made a number of points about Afghanistan and the challenges that exist. Afghanistan is not currently identified on any of FATF’s public lists, but it is important to note that the money laundering regulations require enhanced due diligence in a range of situations that present a high risk of money laundering or terrorist financing, not just where a transaction or business relationship involves a country that is listed as high risk. When assessing whether there is a high risk of money laundering or terrorist financing, the regulated sector must take a number of factors into consideration, including geographical risk where countries have been identified by credible sources and alerts from supervisory and regulatory bodies.

There are at present various sanctions in place in relation to Afghanistan that include members of the Taliban. Targeted sanctions impose an asset freeze, including making directly or indirectly available funds or economic resources to or for the benefit of designated individuals or entities. Under the UN’s existing Afghanistan sanctions regime, 135 designated individuals are linked to the Taliban or the Haqqani network—which as Members will know is a UK-designated and proscribed organisation closely linked to the Taliban—and four Afghan Hawala businesses. Several other designated groups and individuals with links or possible links to the Taliban are also designated under the UN al-Qaeda/Daesh regime, UNSCR 1267.

As anti-money laundering and counter-terrorism financing supervisors, the Financial Conduct Authority and HMRC reminded obliged firms in their recent alerts about potential financial crime risks from Afghanistan and about their obligations to ensure that they appropriately monitor and assess transactions with Afghanistan to mitigate the risk of their firms being exploited for money laundering or terrorist financing purposes and to implement sanctions screening. Similarly, the Office of Financial Sanctions Implementation, which sits within the Treasury, issued an alert reminding businesses that UN sanctions are already in place against individuals and entities associated with the Taliban. The alert advised businesses to exercise caution given the changing environment and reminded them of the continued existing obligations to carry out customer due diligence and implement sanction screening.

FATF will continue to analyse countries at risk and will likely look at those matters during its next plenary, which I believe is in October. The United Kingdom will play an active part in that conversation.

[Mr McFadden]

If we were to think of a country at greatest risk of being used for terrorist financing, Afghanistan and its new Government would be high in our thoughts. The Minister tells the Committee that the list is based on FATF’s work. I understand that, but presumably the Government have the power to go beyond FATF and say, “We think Afghanistan should be on the list.” Is there anything to stop the Government adding Afghanistan to the list, according to their own timetable, before FATF looks at the issue again?

[John Glen]

The purpose of this statutory instrument is to update according to the last assessment. We would not want, as a response to immediate events and without analysis or rigour, to add additional countries. I have explained at some length the considerable sanctions regime against proscribed individuals and the upgrading of the advice on its obligations to the regulated sector from HMRC and the FCA. Other jurisdictions such as the EU are not even upgraded to the list that I hope the Committee will agree to today. We do not rule anything out in the future, but we believe that FATF is rigorous. Indeed, the UK experienced rigorous analysis in 2018. We stand by the assessment and will see what it will do in October.

The hon. Member for Glenrothes mentioned wider issues with Scottish limited partnerships. The registration numbers thereof have diminished significantly recently, but as this is a BEIS competence I hope he will not mind my writing to him on it. I hope that satisfies the Committee.

Question put and agreed to.

Covid-19: Household Debt

Pat McFadden Excerpts

Thursday 8th July 2021 Westminster Hall

[Mr Pat McFadden (Wolverhampton South East) (Lab) [V]]

Thank you for your chairmanship, Mr Bone. I begin by paying tribute to my hon. Friend the Member for Makerfield (Yvonne Fovargue) and the hon. Member for Blackpool North and Cleveleys (Paul Maynard) for tabling this debate. I also welcome the contributions from all the right hon. and hon. Members who have taken part.

As my hon. Friend the Member for Makerfield said at the start, any consideration of the pandemic’s impact on household finances and debt has to take into account not just the overall effects that we are hearing about, but the impact on particular income groups. In this case more than many others, averages and overall outcomes can conceal very different outcomes for different groups of people. For those on secure incomes who have continued to be paid their full salary—or most of it through furlough—long periods of lockdown and the inability to spend on travel, tourism and so on during the pandemic have resulted in rising levels of savings. We hear some big numbers from the Bank of England—up to £200 billion in the course of the pandemic. That of course has led to a big increase in bank deposits, not only in this country but in most developed countries.

However, behind the overall figures lies a tale of two cities—or perhaps this week, we should say “a game of two halves”. The biggest increases in savings have come for those who were better off in the first place and for retirees. Those on low incomes and the unemployed have seen savings decrease, and that is if they had any savings at all in the first place. For many people on low incomes who had nothing to spend on holidays or restaurants in the first place, the cost of essentials has gone up over the past year. Families have been spending more time at home. That has seen heating bills rise. There have been increased food bills from children spending long periods off school. And there have been other extra costs.

This morning’s report from the Institute for Fiscal Studies says that the proportion of low-income households in arrears with their bills rose from 15% to 22% in the early months of the pandemic. Among the self-employed, the rise was even more stark. The proportion of the self-employed falling behind on household bills rose from just 2%, at the start of the pandemic, to 13%. There was also a rise in this figure among some ethnic minority-led households, where often there is just one income earner.

The charity StepChange, which we have heard a lot about today, reports that 11 million people have built up debts of £25 billion during the pandemic and that 4.3 million are now behind on things such as council tax, rent and fuel. It reports a 40% increase in the number of people facing severe debt problems, and that half a million private renters are now in arrears—that is twice as many as before the first national lockdown—at a time when the ban on evictions has just come to an end. Combined, those effects have led to the campaigning organisation Generation Rent to fear that thousands of tenants could face eviction just as the country tries to emerge from the pandemic. The number of renters on universal credit has already doubled during the pandemic.

There has quite rightly been a focus on universal credit today. I acknowledge that the Government’s support has helped household incomes during the pandemic. The furlough scheme, grants for small businesses and the £20 a week uplift have all made a big difference until now, but as even the Prime Minister confirmed earlier this week, although restrictions will be lifted in the coming weeks, we cannot say the pandemic is over.

That is why six former Conservative Secretaries of State for Work and Pensions have taken the step of writing to their own Chancellor to say that the £20 a week universal credit uplift should not be withdrawn in September. Their letter says:

“A failure to act would mean not grasping this opportunity to invest in a future with more work and less poverty and would damage living standards, health and opportunities for some of the families that need our support most as we emerge from the pandemic.”

That is what the Chancellor’s own former colleagues are saying. Going ahead with this cut would mean a loss of £1,000 a year in income for 6 million of the lowest income households in the country.

On the radio this morning the Chancellor tried to justify the cut by referring to incentives to work. Leaving aside the callous implication that poverty has to be increased to persuade people to work, we have to remember that two in five universal credit claimants are already in work, and the proportion of in-work households dependent on universal credit is expected to rise over the course of this Parliament. It is a myth to portray universal credit as just an out-of-work benefit. It supports many people who are in work, too.

The regional impact of the proposed £20 a week cut is deeply uneven. In the region I represent in the west midlands, the cut is expected to hit one third of households. Similar proportions of households will be affected in Yorkshire and the north-east. How can the Government talk about levelling up when they are about to proceed with a cut in income that will hit the poorest hardest and will hit the north and the midlands hardest? Equality is not just about a few new buildings or a few pots for capital spending; it is about incomes and opportunities, too. It is not just about bricks and mortar; it is about families who are struggling to pay the bills.

Although some of the Government’s interventions have made a big difference overall, for some people the past year has meant debt increases and a big strain on household budgets. It would be grossly complacent of the Government or anyone else to look just at the overall figures and averages. The Government must get underneath these figures and consider the impact on those who have the lowest incomes. In particular, the Government should reconsider the cut of £20 a week that they plan to make for the 6 million poorest households in the country in just a few months’ time.

This issue, perhaps more than any other, points to the need to come out of this pandemic in a better position than when we went into it. We need to tackle inequalities, which, although not created by the experience of the last 18 months, have certainly been exposed by it. We have to be more ambitious than just trying to recreate what went before. If build back better means anything, it means tackling some of those problems and building something that really is better for the future. That is what we have to do, starting with household debt.

Draft Bank of England Act 1998 (Macro-Prudential Measures) (Amendment) Order 2021

Pat McFadden Excerpts

Tuesday 6th July 2021 General Committees

[Mr Pat McFadden (Wolverhampton South East) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Efford.

The regulations will potentially do two things. The first is to square the FPC’s powers with the changes made to the PRA’s powers in the Financial Services Act 2021, which the Minister and I spent many a happy hour debating—I think it was in this Room—about six months ago. That Act gave the PRA new powers, as a result of our departure from the EU, in relation to various macro-prudential measures, specifically the capital requirements regulation. The order gives the FPC the power to direct the PRA on matters relating to holding companies.

I have three questions for the Minister about the order. First, paragraph 8.1 of the explanatory memorandum states that

“This instrument does not relate to withdrawal from the European Union”,

but did the new powers given to the PRA, which the order relates to, not result from the onshoring of the EU capital requirements regulation? If what we are doing is squaring one set of regulations with something in the 2021 Act that arose from withdrawal, does that not also relate to our ongoing and seemingly never-ending process of onshoring EU regulation? That is my first question: is this part of the onshoring process or not?

The second thing the regulations do is to make changes in relation to the total exposure measure, or the overall leverage ratio, of financial companies. That is important, because it acts as what could be called a “backstop” over and above the various risk-weighted activities that are dealt with in the Basel rules. Of course, leverage, or the lack of overall capital, were at the heart of the financial crisis. Since then, the rules have been changed to make financial companies more resilient, decreasing the likelihood of the taxpayer being on the hook and having to bail out systemically important firms in the event of a future crisis. I want to ask the Minister about that overall leverage ratio. What difference will the SI make to the way that the overall leverage ratio will be dealt with? What is the effect of excluding the balances held by the Bank of England? Will that actually make any difference to the amount of capital that a bank is expected to hold in relation to its overall loan book?

My third and final question is more fundamental. Is the Government’s policy intention that financial institutions should be required to hold less capital now that we are outside the EU than if we had remained inside?

[John Glen]

As ever, I thank the right hon. Gentleman for his questions. He referenced the leverage framework, on which I will go into some detail in answering his second and third questions.

It is the Government’s view that this instrument is necessary to ensure that the existing macro-prudential tools that the FPC has continue to operate effectively in the light of the changes that we have made in that wider prudential regime. In so far as all those changes are consequential of decisions made five years ago, I suppose that there is a tangential link, but it is not a direct causal relationship.

The right hon. Gentleman also asked about the leverage framework. It may be helpful to the Committee if I set out that that leverage ratio is an indicator of a firm’s solvency relating to its capital resources and assets and, unlike the risk-weighted capital framework, a leverage ratio does not seek to estimate the relative riskiness of assets. The purpose of the leverage ratio requirement, alongside risk-weighted capital requirements, is to guard against the danger that the firm’s models or regulatory requirements fail to reflect the current riskiness of its assets. Currently, the leverage ratio framework requires that major banks and building societies satisfy a minimum tier 1 leverage ratio of 3.25% on a measure of exposures that excludes central bank reserves, along with various buffers that relate to those in the risk-weighted capital framework. Separately, the PRA also maintains a supervisory expectation that all firms maintain a minimum leverage ratio.

The FPC and PRA have undertaken a review of the UK leverage ratio framework in the light of the finalised international standards. The Bank published a consultation on the outcome of that review on 29 June and there are three main proposals incorporated in the FPC’s consultation.

The first is the level. The proposal is to keep the existing leverage ratio framework broadly unchanged for UK consolidated groups of major UK banks, apart from implementing the Basel 3.1 changes.

The second is around scope—to extend the framework to UK banks, building societies, investment firms with significant non-UK assets and, where relevant, certain holding companies, which reflects the importance that such firms have for the functioning of the UK financial market and that the Basel standards require the leverage ratio to be applied to internationally active banks. The PRA propose to extend the leverage ratio of firms with non-UK assets of at least £10 billion, which will capture the larger, non-ringfenced banks and international broker dealers, including Goldman Sachs, JP Morgan and Morgan Stanley.

The third element is the level of the application—the leverage ratio framework would generally be extended at the individual level, except where a relevant firm is subject to a requirement on the basis of its consolidated situation. The PRA would also have discretion to allow a sub-consolidated requirement, rather than an individual one, to be applied in certain circumstances.

The Bank believes that the extension of the leverage ratio framework to internationally active firms would only result in modest additional costs for firms, which reflects that, for many firms, their risk-weighted capital requirements remain more binding than their leverage ratio requirements, firms typically hold management buffers above their capital requirements or they are part of wider groups.

In addition, the PRA has proposed other less significant changes, which reflect updated Basel standards relating to the leverage exposure measure used for calculating the ratio, and reporting and disclosure requirements, aligning with the Basel III standards to ensure that the UK remains consistent with transparency requirements in other jurisdictions.

The review of the leverage ratio framework took place in the light of those revised Basel standards. They require the leverage ratio to be applied to internationally active banks and therefore the main change being proposed to the framework moves the UK closer to international standards.

If the consultation proposals are implemented, the FPC will argue that the UK leverage ratio framework would be equivalent to Basel standards on an outcomes basis—indeed, in some areas, super-equivalent. For example, the FPC requires the leverage ratio to be met with a higher quality of capital than the Basel framework and includes some buffers that are not mandated by Basel. However, the UK framework would potentially be sub-equivalent to Basel on a line-by-line basis, as, for instance, the FPC framework does not put restrictions on distribution —for example, the paying of dividends—if a firm breaches its leverage ratio requirements. It also has a lower leverage buffer for globally systemic important banks.

There has been little reaction to these measures at the moment, but we will continue to monitor that. These are obviously complex matters that the Treasury keeps under close review. The provisions essentially ensure that we have absolute alignment of the FPC’s responsibilities and discretions to the new environment that we passed in the 2021 Act.

I hope that addresses the questions that have been raised—I am happy to give way to the right hon. Gentleman if not.

[Mr McFadden]

I thank the Minister for that explanation. Does the instrument and what it does on excluding the Bank of England balances make any difference to what he has just outlined and what the leverage ratio is? I think the answer is no.

[John Glen]

No.

[Mr McFadden]

I want to press the Minister a bit on this. Does the Government have a view on these capital requirements that is any different outside the EU from when we were in the EU?

[John Glen]

I confirm to the right hon. Gentleman that we do not. Though we are outside the capital requirements regime of the EU, our objective is to align to the highest global standards—we will just do that in a way that reflects the nuances of our banking system. We will always maintain the highest possible standards. Indeed, our international reputation relies on it.

I hope that the Committee has found my observations helpful to some degree and will be able to support the order.

Question put and agreed to.