Charter for Budget Responsibility and Welfare Cap

Debate between Pat McFadden and Alison Thewliss

Monday 10th January 2022 Commons Chamber

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

I begin by echoing the sentiments from Mr Speaker earlier following the death of my hon. Friend the Member for Birmingham, Erdington (Jack Dromey). I knew Jack for many years, from his time as deputy general secretary of what was then the Transport and General Workers’ Union, and later as a colleague and fellow west midlands MP. He was a tough negotiator, always determined and loquacious, but pragmatic enough to reach a deal and stick to it. We are still in shock at Jack’s sudden death on Friday. We will miss him greatly, and my sincere condolences go to my right hon. and learned Friend the Member for Camberwell and Peckham (Ms Harman) and their family.

On the motion, the Chancellor announced at the time of the Budget that he would bring this before the House. He made a big thing of it. At the time, we presumed that he would come along and display his credentials for fiscal probity. He probably thought that it was a clever move at the time, but it does not look so clever now. He has not even turned up for tonight’s debate. What happened? Where is he? When he was dishing out money, he was everywhere. We could not move for Instagram videos and pictures of his slippers or sliders, or whatever they are called. Now the crunch is coming, he is nowhere to be seen.

Was the Chancellor worried that if he turned up tonight he would be asked what he will do about the cost of living crisis facing the country? Is he avoiding the House because he has nothing to offer people facing rises in energy bills of hundreds of pounds a year? Why is it that he has done one of his disappearing acts again? He was not here last month when businesses were crying out for support as Christmas bookings were cancelled in their thousands, and he is not here again this month for what he once told us was a central plank of the Treasury’s strategy.

On the rules themselves, during the covid pandemic the Chancellor has had to borrow a great deal of money—approaching £400 billion extra. The pandemic was an emergency situation that required emergency measures. That is true in this country and around the world. Our fiscal rules, published at the time of our conference, take account of such emergency situations, because there is no point in having a set of fiscal rules that work only when times are good. Fiscal rules have to take account of all kinds of economic weather, and ours do exactly that. Crucially, our rules also allow for the investment plan needed for the transition to the lower carbon economy that we will need. The Government’s fiscal rules do neither of those things.

Indeed, when we look at what is happening in the economy right now and what families around the country face in the real world, we have to wonder what the point of this exercise is. Did the Chancellor really think that tabling this motion would take attention away from the fact that he is imposing the highest tax burden on the country for 70 years? The Tories have become a high-tax party because they are a low-growth party. They are asking the British people to stump up the cost of their economic record not for the one or two years of the pandemic but for the past 12 years. Projections from the Bank of England do not look any better, with forecasts for growth of about 1% in 2024. Does the Minister really think that, with this motion, people will not notice or remember that the Prime Minister and the Chancellor have driven a coach and horses through one of their central manifesto promises on tax with the forthcoming rise in national insurance? Is he trying to cover up for the fact that, as families face a cost of living crisis with steep rises in energy bills, he has no plan to help them?

The Minister may not have a plan, but Labour does, and it was set out yesterday by the shadow Chancellor, my hon. Friend the Member for Leeds West (Rachel Reeves). Our plan would offer every family £200 off bills this year. It would give a further £400 off bills for those with the lowest incomes. It would help the energy-intensive industries on which so many good jobs rely. It would be paid for, in part, by a windfall levy on the companies making the most money out of the huge spike in gas prices. It is fair, it would help the poorest most and it is fully costed. That is what people need right now—not a reheated political stunt thought up by George Osborne a decade ago.

We have to wonder what the conversation was when this was thought to be some great political idea. Did they sit around in the Treasury and say, “We’ve borrowed £400 billion. We’re putting taxes up to levels not seen since the 1950s. We’ve wasted billions on failed programmes and dodgy contracts. But let’s have a parliamentary vote to show that we are really fiscally disciplined”? It will not wash. People are seeing through it.

You do not have to take my word for it. Only today, the head of the National Audit Office drew attention to the level of waste that the Government are presiding over. He wrote that

“many of the interventions carried out by government are either not evaluated robustly or not evaluated at all. This means government…has little information in most policy areas on what difference is made by the billions of pounds being spent.”

He added that only 8% of major Government projects “had robust evaluation plans”. Perhaps that is not surprising when we have seen £3.5 billion-worth of contracts handed out to businesses run by contacts of the Conservative party, and—the Minister and I debated this last Wednesday night—£17 billion in extra costs for the taxpayer, which the Government casually legislated for last Wednesday night to pay for their own mistake in messing up public sector pensions reform.

Where is the Government’s commitment to transparency, value for money or proper procurement practices in their fiscal rules? Did they forget to include those bits? Where is the commitment to tackling the level of fraud that has been exposed in Government lending schemes? Where is the commitment to controlling the Prime Minister’s pet schemes? How much was spent on the Prime Minister’s idea of building a bridge between Scotland and Ireland before the project was abandoned? The Chancellor should have known, because the Prime Minister has got form. He could not even build a garden bridge over the River Thames, let alone a bridge across the Irish sea.

[Alison Thewliss (Glasgow Central) (SNP)]

I am always glad to hear that bridge mentioned, because I did a second-year geography project at high school that could have told the Prime Minister it was a terrible idea. Does the right hon. Gentleman agree that, given that was an infrastructure project for the people of Northern Ireland and Scotland, we should get the money that was committed to it?

Financial Services Bill (Eleventh sitting)

Debate between Pat McFadden and Alison Thewliss

Committee stage & Committee Debate: 11th sitting: House of Commons
Thursday 3rd December 2020 Public Bill Committees

[Mr McFadden]

I beg to move, That the clause be read a Second time.

This new clause is directed at reducing harm to heavily indebted people by clamping down on imposter or clone websites that might direct people away from legitimate avenues of advice without their knowledge. It was suggested to us by the charity StepChange, which reports a serious, large-scale and ongoing problem with imposter or clone sites posing either as StepChange itself or as another reputable charity and preying on vulnerable people in debt. In fact, StepChange estimates that as many as one in 10 people searching for the organisation online are inadvertently led to someone else.

This is not just one of the traditional issues of having time-consuming and frustrating discussions with web providers to get them to take some responsibility for what is on their platforms; it is also a matter of regulation. The new clause proposes to close a regulatory loophole: the activity of introducing an individual to a credit provider is regulated by the FCA, but the activity of introducing an individual to a debt advice or debt solution service is not. That loophole represents a gap in the picture, and the new clause seeks to close that gap by bringing lead generators for debt advice and debt solution services clearly within the FCA’s remit.

The new clause is, perhaps, about quality control. It would protect consumers from clone sites and from unscrupulous operators who would prey on their financial problems. I argue that that becomes all the more important in the context of clause 32 and the establishment of statutory debt repayment plans, because the gateway to them will be through seeking advice from reputable debt advice and debt solution services. It would be entirely with the grain of the Bill, and the Government’s policy intent, to ensure that that gateway is properly regulated by the FCA.

The Minister has been consistent in resisting every amendment and new clause over the past couple of weeks, and I appreciate that he has probably come armed with advice not to accept any amendments, even if they look okay, because there may be a drafting issue or something. However, if there is some reason in his folder why he cannot accept this new clause today or—hopefully this is not the case—if the optics of doing so, because it has been suggested by the Opposition, are somehow too difficult to contemplate, will he at least take the matter away and consider introducing a provision either on Report or at a further stage in the Bill’s passage?

It is very much in the interests of the statutory debt repayment plans, for which he feels—I credit him for this—a big degree of personal ownership, that this regulatory loophole is closed, and that we do what we can to prevent people seeking that kind of help from being led away by unscrupulous operators on the internet. Instead, we must ensure that they are channelled to reputable advice organisations and solution providers—be it StepChange or somewhere else.

[Alison Thewliss]

I rise to support the new clause. It is typical of the eagle-eyed way that the right hon. Gentleman has approached this Bill that he found this particular loophole. I am not sure which of his pots he thinks the Government might think it falls into, but it is a sensible, minor change. The Government would do well to take it on now or bring it back at a later stage. We want to protect people who have fallen into that situation in every way we can. We all know that there are vultures on the internet who want to cut a share of that and exploit people. The new clause is a sensible and reasonable way of addressing that and I commend it to the Minister.

[John Glen]

I take this issue very seriously. I recognise the work of StepChange and I note the letter from Marlene Shiels, chief executive officer of the Capital Credit Union and her support for this. She makes a significant contribution to the Financial Inclusion Policy Forum that I chaired just last week.

The Government are taking strong steps to ensure that lead generators do not cause consumer harm.  As the right hon. Member for Wolverhampton South East said, lead generators identify consumers in problem debt and refer them to debt advice firms and to insolvency practitioners. That can help consumers access appropriate debt solutions and support their recovery on to a stable financial footing. However, I readily recognise the risk that unscrupulous lead generators could act contrary to their clients’ interests. To mitigate that risk, debt advice firms and insolvency practitioners are already required to ensure that any lead generators they use are compliant with applicable rules to prevent consumer harm in the market.  

Under Financial Conduct Authority rules, that includes ensuring that lead generators do not imitate charities or deliver unregulated debt advice, and that they are transparent with clients about their commercial interests. As such, the FCA, as the regulator of debt advice firms—and the Insolvency Service, as oversight regulator of insolvency practitioners—already influences lead generators’ impacts on consumers.

New clause 5 would not materially improve the FCA’s influence over lead generators. Its scope would be incomplete, applying only in respect of lead generators’ referrals to debt advice firms, not to insolvency practitioners. The Government have already issued a call for evidence on whether changes are needed to the regulatory framework for the insolvency profession and will publish a response next year. In the light of our recognition that the matter needs a focus and that work is being done on a response, I ask the right hon. Gentleman to withdraw the motion.

Financial Services Bill (Ninth sitting)

Debate between Pat McFadden and Alison Thewliss

Committee stage & Committee Debate: 9th sitting: House of Commons
Tuesday 1st December 2020 Public Bill Committees

[Mr McFadden]

The clause before us increases the penalty for insider dealing, and I do not think any Opposition members of the Committee will have a problem with that. The obvious point to make is that sentencing is effective only if there is a reasonable chance that someone will get caught, and if there is a proper and effective system of enforcement of the rules, as well as an overall regulatory system that properly polices such activity.

The Financial Times reported last year that the FCA had prosecuted only eight cases of insider dealing, securing just 12 convictions over a five-year period between 2013 and 2018. There is a big contrast between the prosecutions and the investigations, because the same newspaper, reporting on the figures ending in March this year, said that there were a relatively high number of ongoing investigations—more than 600. However, only 15 resulted in financial penalties or fines.

There are few prosecutions and few fines. Why does the Minister think so few of those 600-plus investigations lead to any kind of punishment? Can we conclude that, after all, there is little insider dealing and only a handful of people do it? Alternatively, would the conclusion be that there are flaws in the investigatory process or, perhaps, resource issues that make it difficult to pursue a case to an unquestionable conclusion?

We should acknowledge that the regulator’s task is difficult, because the people doing insider dealing will be clever, and will take every step they can to cover their tracks. For example, they might not trade in their own name. They might trade in a relative’s name. They might set up a company to trade, and register it either here or somewhere else, which would make the paper trail all the more difficult for the regulator to follow. They might try all sorts of things to blow the regulator off the scent.

There is no problem with increasing the sentence from seven to 10 years, but it strikes me the relevant provisions of the Bill might be too narrow in scope for the problem that we are dealing with. It would be a big mistake to think that approving the clause is job done on insider dealing, and we can tick the box, thinking it will make a big difference. The low rate of prosecutions suggests that there is a need for a much deeper look under the bonnet.

Does the Minister accept that general premise, and will he undertake to carry out that deeper look? Will he make sure that the increased sentences are matched by the resources that the regulators need and, probably more importantly, by other changes in their powers or the regulatory system or the legal basis? That will ensure that more cases are brought to some sort of action at the end and that we do not carry on with such a huge contrast between the number of investigations launched and the small number resulting in a fine or prosecution.

[Alison Thewliss]

I want to come in briefly, on the back of what the right hon. Member for Wolverhampton South East has said. What analysis have the Government done on whether the increase will be any more of a deterrent than the current seven-year maximum? I note that that is a maximum, and relatively speaking not a huge amount of time, given the severity of some of the crimes that may have been committed. What is the average sentence handed out at the moment? Is it closer to seven years, or is it closer to a couple of years and just a slap on the wrists?

As the right hon. Gentleman mentioned, few cases get to that stage anyway. To help increase the number of people who are prosecuted, what additional resourcing will be put into the policing of financial crime? It is clearly an area that needs significant expertise. If we are going to catch people who are looking to circumvent the system, we need to have people at least as good on the other side of the balance sheet to make sure that they are catching up with them. What recruitment schemes are being put in place to attract the kind of people who will be able to investigate, prosecute and see processes through to the end, to make sure that there is a proper deterrent and people feel that they are going to get caught, fined and locked away? There needs to be sufficient expertise to make sure that that really does happen.

Financial Services Bill (Tenth sitting)

Debate between Pat McFadden and Alison Thewliss

Committee stage & Committee Debate: 10th sitting: House of Commons
Tuesday 1st December 2020 Public Bill Committees

[Alison Thewliss]

I rise to support new clause 25, which appears in my name and that of my hon. Friend the Member for Aberdeen South. I also want to speak in favour of new clause 12, because what it asks for would be quite useful.

Our new clause on the debt respite scheme review asks for the Government to take a wider look at the impact of debt and the effects of changes on debt held by households, individuals with protected characteristics and small companies, as defined by the Companies Act 2006. The Government should do so across different parts of the United Kingdom, because there may well be differential impacts in different parts of the country in terms of support schemes and what is happening on the ground. It is important to look at the matter in this wider context. It looks to the very complexity of people and their businesses, and how they organise their finances and their debt.

I will start by giving an example involving some of my constituents. They are a couple who live in socially rented accommodation. He is a taxi driver and she is a wedding and events planner. Covid has hit them incredibly hard because he cannot go out and earn the same way that he could. He was able to access some Government support, but she was not. She did not have a premises or a shopfront, but just a small unit where her wedding kit was kept. She has not been able to access any Government support at all. She was told to go on to universal credit, but the people at the Department for Work and Pensions did not understand what she did in her business and how that support ought to have worked for her, and she feared she would have to give up her business altogether.

The point of raising this example is the decision she made in the circumstances. She looked at the debts that she had and the bills she had to pay, and decided that the most pressing and dangerous debt was her credit card. She paid down the credit card because she knew if she did not paid that, the consequences would be financially much greater. However, when she went to the Glasgow Housing Association and said she was having trouble paying her rent, they said “Well, how did you pay your credit card?”. She said, “I think you’re not going to evict me.” That was her gamble and her choice.

My constituent thought that there would be some way of managing her housing debt better than her credit card debt. That was the decision she took. It might not be the decision she would have taken had she had financial advice, but she was looking at the different balances and debts, as well as looking to the months ahead and not knowing whether her business would be able to get up running. She was not able to access any Government grants for business support, and it was a difficult time for her husband as a taxi driver as well.

Families and businesses are often one and the same. My constituents are two individuals but also a business and a family together, and their debts are all wrapped up together. That is why I am asking the Government to look at these different things in a holistic way. She is a woman and she is disabled, so she would fall into that characteristic as well. She is doing a brilliant job trying to run her business and balance things, but it is important that the Government understand all these intersecting things that are going on for people right across the UK.

The hon. Member for Walthamstow talked about some people being able to pay back their debt. There is evidence to suggest that because some people have been able to keep working and have less outgoings—because in many cases there is nothing much to do and to spend money on—they have been able to pay back their debt and make quite a dent in it, or to put money towards a mortgage or other things. However, some are very much unable to do so. There is evidence of a growing division between those who have been able to keep working, and those who have had no support and are not able to work. It would be useful for the Government to do a wee bit more work on that and on how it affects people.

The Minister talked about Government debts and debt to Government Departments. I want to reflect a wee bit on how the Department for Work and Pensions often treats debts. I have constituents who are struggling to pay back overpayments of tax credits to the DWP, to the point where it is making it difficult for them to put food on the table or pay their other bills because so much is being wheeched off at the start and they have very little income coming in.

I have another constituent who had issues with HMRC wanting additional money. Again, they went through all his finances and started taking money back. He was fairly well off, having worked in a sector that was reasonably well paid, but HMRC was going through his finances pretty much the point where it was questioning whether he should be giving his children money for their school dinners. These are the kind of outgoings that are being questioned, and that makes it incredibly difficult for people to plan for the future.

The other aspect of Government debt that I will pick up on is the vast cost of people’s immigration status in this country. I have constituents who put their and their children’s leave to remain applications or citizenship applications on credit cards. That is a vastly expensive way to try to pay for status in this country. If they do not do that, they will not have all the freedoms that the rest of us enjoy, so they take that difficult choice of paying an absolute fortune for citizenship. Some of that was down to their child wanting to go on a school trip with their classmates, so they had to pay for citizenship and a passport for that child so that they can go on a school trip with their school pals. That is a horrible choice for families to have to make, but that is the expense of the immigration system and the impact that it has on the debts of many people who have a protected characteristic. The Government need to be aware of what the different parts of Government are doing in that regard.

The last point I will make on that is about people who have no recourse to public funds who end up going into huge debt, either on their housing or bills or other things. For many of my constituents, it is people who are out working every hour that they can, but because they have no recourse to public funds, they do not get the social security support that their next-door neighbour would get. Again, those protected characteristics come into play here. It is worth the Government looking at what they are doing to force people into debt, to force them into difficulties and to force them into situations that make it difficult to live a normal life and deal with the debt that the Government are causing through the costs of the DWP, Home Office and HMRC systems.

Lastly, I will speak to new clause 12. It is important that we look specifically, as the hon. Member for Edinburgh West (Christine Jardine) asks for, at the impact of covid- 19 on the debt respite scheme. It is important that the Government understand exactly what has happened to those people who I mentioned at the start, who do not have any income coming in, who have not been eligible for support schemes and who cannot work, perhaps because they or a member of their family are shielding, and plan for future pandemics and shocks in a similar way. While I think an awful lot of work was done on the public health aspects of pandemics, very little—nothing really—was done on the economic impact on households and individuals and on how people can get themselves back out of this.

It is worth considering the long-lasting effect of having or being affected by covid and on the impact on people’s ability to work in the future if they or a family member have had long covid, for example. That will completely change a family’s financial circumstances in a way that they could not possibly have anticipated. It may force that family into debt, and a long-term debt at that. It is worthwhile the Government doing a bit of extra work, as new clause 12 pretty much gets at, to see what the impact of that is, because we will need to understand that going forward. We should not be pushing people into a circumstance that they cannot easily get out of. The Government need to understand that better and to do some further the work on that, so I very much support new clause 12 and what it asks for.

[Mr McFadden]

I should begin by acknowledging that the Minister has put an awful lot of work into the debt respite scheme. He has encouraged it, consulted the sector widely and really tried to get it right. As I said at the beginning, the Opposition support it. It is a valuable addition and a source of help for people in debt.

The new clauses call for a review of the scheme at some point in different ways, which is the right thing to do with a new scheme. It makes sense to look at how it works and see if any changes need to be made to it. We have already had a debate about whether 60 days or 120 days is the best timescale, and a review could consider that sort of thing. Of course, there is also the covid impact, which new clause 12(2) specifically references. Covid will have an impact on household finances. We had an exchange in Treasury questions an hour or two ago about corporate debt and small business debt. I therefore do not think that the new clauses on review are in any way a threat to the basic integrity of the scheme. They simply ask for a look back at the scheme after a year or so of operation.

I could give the Committee a long and enthusiastic speech about the merits of the third way, but I suspect I will fall foul of your instructions about scope, Mr Davies. I award the prize for word of the day to my friend the hon. Member for Glasgow Central who has given Hansard the challenge of spelling “wheeched”, which I can roughly translate as forcibly or speedily removed. I think we would agree on that definition, but I look forward to seeing how that appears in our record.

Financial Services Bill (Seventh sitting)

Debate between Pat McFadden and Alison Thewliss

Committee stage & Committee Debate: 7th sitting: House of Commons
Thursday 26th November 2020 Public Bill Committees

[Mr McFadden]

However, I thought it better to take these next few clauses together and raise those points with him in this way.

[Alison Thewliss]

I want to ask a quick question about what is perhaps neither synthetic nor ghostly LIBOR, but zombie LIBOR, because it seems to be lurching on and not quite dead.

I am curious about the monitoring of whether these critical benchmarks are becoming unrepresentative, how that practically would work and at which stage that happens. I also note that there is an obligation under clauses 13 to 16 to bring things to the attention of the public and the supervised entities, but no such requirement to bring them to the attention of Parliament. Will the Minister reflect on whether it would be useful to us as parliamentarians to hear about those things? We cannot necessarily be expected to monitor things on the FCA website as members of the public, and those things might be something that parliamentarians might usefully want to find out.

Financial Services Bill (Eighth sitting)

Debate between Pat McFadden and Alison Thewliss

Committee stage & Committee Debate: 8th sitting: House of Commons
Thursday 26th November 2020 Public Bill Committees

[Mr McFadden]

My hon. Friend is absolutely right.  In fairness, I do not think that the UK system on money laundering and financial crime is perfect—we have our own issues, which we have debated before and will debate later in our consideration of the Bill—but these findings should be taken seriously, particularly as we are creating a new situation. In the past, both the UK and Gibraltar were part of the EU and we operated under the single market rules, including those on financial services. I do not know whether what we are creating is unique—I will ask the Minister about uniqueness—but it is certainly a new concept: a mini-single market in financial services between two territories.

What is the Minister’s response to the report’s findings? In particular, given that protection from financial crime has been written into the Bill through the Government’s two-year review process, what contact has there been between the Treasury, the relevant regulators and the financial institutions in Gibraltar since the report was published a year ago? What actions do the authorities propose to take? I certainly believe that the Gibraltar authorities will want to act in good faith and try to uphold proper standards, but some of the report’s findings are concerning.

Another issue raised last week was the difference in corporation tax between Gibraltar and the UK: Gibraltar’s main corporation tax rate of 10% is significantly lower than our own. The Minister from Gibraltar said in his evidence, with some charm, that corporation tax would not be a factor in location—that, if anything, quality of life was more important. I have no doubt that the quality of life in Gibraltar is very good; looking out on a slightly gloomy London autumn afternoon, I have no doubt that the weather and climate is a big attraction, too. I am sure that he was right about that, but it is a big tax difference. He also pointed out—again, quite fairly—that the corporation tax differential predates our departure from the EU and has been in place for some time. However, this is a new situation, with a new, specially designed market access regime for Gibraltar being enshrined in UK law. Has the Treasury made any assessment of the likelihood of corporate relocations from the UK to Gibraltar as a result of the new measures under discussion?

I also ask the Minister about the condition, which I have described as interesting, about relationships with other territories with significant financial services markets. Why has it been written into schedule 6 as something that the Government should consider in their biennial review? Is it considered that this mini-single market will create some sort of vulnerability in those other relationships? Why is it thought possible that the arrangement might affect our relationships with other territories?

Finally, how unique and specific to the Gibraltar situation is the new regime? Could it conceivably be extended to other territories such as Jersey and the other Channel Islands? As the Minister will know, some Crown dependencies have been accused of being tax havens or of being susceptible to money laundering. Is it possible that such a regime could, in effect, be used to extend the reach of UK regulators to territories other than Gibraltar? This is a very big topic that has been debated quite a lot over recent years. I suppose I am asking about the Treasury’s thinking, rather than just about the Bill: might the arrangement with Gibraltar be a model for the treatment of other Crown dependencies or overseas territories, or should we view it as specific and purely a consequence of Gibraltar having to leave the European Union? I would be grateful if the Minister considered and responded to some of those points.

[Alison Thewliss (Glasgow Central) (SNP)]

It is a pleasure to see you in the Chair, Dr Huq. I just have a few quick questions, mainly coming from the evidence we heard last week. During the fourth sitting, at column 125, the Minister, Albert Isola, said that the Bill is akin to enabling legislation, and that other things would need to be worked through in relation to other aspects of the financial services that are currently dealt with. If the Minister could clarify what would happen about those other areas, that would be useful.

Secondly, perhaps the Minister could give further assurances about access to the Financial Ombudsman Service. It is important that consumers here should have adequate protections in the new arrangements, and that those should be made clear. That is the kind of scenario that would not be found out until a consumer needed to make a complaint. Something would have to go wrong for it to be addressed, and I would not want to be such a consumer, feeling in those circumstances that I did not have recourse to the protection that I would have had if I had chosen an insurance policy not based in Gibraltar. It would be useful to hear about that.

Lastly, it would be helpful to have any further clarity that the Minister can give about what would happen to UK businesses and customers if market access were suddenly withdrawn, and where that would leave consumers in the UK. Would they be left without policies and protection? What would happen as a reaction to that, should market access be withdrawn for a period of time? Would it mean that businesses would dry up, withdraw their UK services and go somewhere else, or does the Minister envisage other scenarios happening in that case? I appreciate that it is a scenario that he would want to avoid at all costs, but it could well arise, and I want to ask what state the Government’s preparations for such a scenario are in.

Financial Services Bill (Fifth sitting)

Debate between Pat McFadden and Alison Thewliss

Committee stage
Tuesday 24th November 2020 Public Bill Committees

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

I beg to move amendment 19, in clause 1, page 2, line 21, at end insert—

“(7A) The Secretary of State must, within three years of this Act being passed, prepare, publish and lay before Parliament a report on the impact of the amendments to the Capital Requirements Regulation made by this section and Schedule 1 to this Act.

(7B) The report must assess the impact on—

(a) financial stability;

(b) competitiveness; and

(c) consumer risk.”

This amendment would ensure that, where departures from current capital requirements take place, the Government carries out a review of the impact on competitiveness and consumer risk.

Thank you for your chairmanship today, Mr Davies. With your indulgence, I would like to explain to the Minister broadly the approach we are going to take with these amendments. A number will be about reviewing, producing reports, parliamentary accountability and so on. Another number get into the accountability framework for the regulators and that “have regard to” list, and we will want to explore that quite deeply. Then there will be another set around the later parts of the Bill, relating to the savings provisions, the debt scheme and so on. That might help the Minister and the Committee to understand broadly where we are coming from when we move these amendments.

This first amendment, amendment 19 to clause 1, is in the first of those groups. Clause 1 exempts certain categories of investment firms from the requirements of the capital requirements regulation. This amendment explores what the effect of that might be and not only our right to know that effect, but our obligation to understand it. The reason we tabled this amendment is that capital, or the lack of it, was at the heart of the financial crisis. The banks that keeled over were over-leveraged and behaved as though a rainy day would never come. In fact, it is estimated that when the financial crisis hit, Royal Bank of Scotland, which was one of the biggest banks in the world at the time, was leveraged to a degree of about 50:1, so they had very little cushion of resilience for when more troubled times came.

The Basel II rules, which were in place at the time, failed to stop either the collapse or the public’s having to step in—through taxpayers and Governments around the world—to bail out the sector. Last week, when we were taking oral evidence on the Bill, I quoted Paul Volcker, the former Chairman of the Federal Reserve, who gave evidence in this House about a senior banker who had told him that his bank did not need any capital at all, that money could always be borrowed on the wholesale markets and that the banks could operate without capital. The crash proved that not to be true. The banks need capital. They need a cushion. That is not just their insurance policy, it is ours—it is the public’s insurance policy too.

Following the crash, the world’s regulators, whether in the United States, the UK or the European Union, set out to solve the problem of “too big to fail”, which has been characterised as privatising the profits and nationalising the risks, and developed a new set of capital requirements for banks and financial institutions. It was designed to make them more resistant to downturns. Those rules, on a global level, are set out in the Basel III process, now revised to the Basel 3.1 process, in the CRR and in the actions of national regulators. That is important, because the Basel rules should not be regarded as a maximum when it comes to the safety of our financial institutions. They should be regarded as a floor.

Most banks and regulators will say that today they hold significantly more capital against their loan books and that they are better equipped to handle a downturn or economic shock than they were 12 years ago. That is broadly true. Banks are better capitalised now than they were. However, they do not all like that situation, in truth. They will also say—I am sure that some banks tell the Minister and the regulators—that if only they did not have to hold so much capital they could lend more. They may well be saying that more loudly during the covid situation, when, as we see light at the end of the tunnel, we want to get the economy moving again. The smaller banks and new entrants will complain about being held to the same capital rules as larger and more established institutions. They will argue that that is a barrier to market entry and that it acts to reinforce the oligopoly in the UK where there are four or five major high street institutions, which it is difficult for new entrants to compete against. Other institutions will complain of being held to the same rules as deposit-taking institutions, which is part of the exemptions in clause 1, arguing that the character of their business is different.

Clause 1, as I have said, equips the regulator to respond to some of those points. We are not only onshoring, as it were, the capital requirements regulation, we are making provision, through the clause and other subsequent clauses, for the regulators to depart from it. Of course, departure from a common rulebook is a consequence of Brexit. Indeed, some might argue that it is the whole point. The clause allows it, and it is important that the Committee understands that the amendment would not prevent it. Neither does it seek to relitigate the referendum or to prevent the common rulebook to which we have subscribed for many years from ever being changed. That is not what the Opposition are saying. We are saying that, Brexit or not, and inside the EU or not, capital requirements still matter and they are there for a reason.

I would argue that for the UK the need for financial resilience is even greater than it is for most economies. We are a medium-sized economy with a huge financial sector. The consequences of that sector getting into deep trouble are potentially all the greater for our economy than for some others. Having a big financial sector is in many ways a great strength, of course. It brings employment, tax revenue and investment to the country, but it is a risk when it gets into trouble, as we found out in our recent history.

The other thing that we learned during the crash was how interconnected the system was. With so many institutions lending to and trading with one another, when one falls over the consequences for the whole system can be catastrophic. That old saying “The thigh bone’s connected to the knee bone” was certainly true during the financial crash, as it is of our interlocked and interdependent financial system.  We therefore have a duty, at the very least, to be vigilant about capital requirements. They are, as I said, the public’s insurance policy against having to bear the costs of another crash or steep financial crisis. The changes that have been made since 2007 and 2008 through the CRR, the Basel rules and other steps are, as yet, untested. Yes, the regulators do conduct stress tests and scenarios about what would happen if employment rose to this level or GDP fell to that level, but these are inevitably not quite real-world exercises. They are as real as war games compared to the real thing.

All the amendment does is ask for a report from the Treasury after three years of the new regime. That report should cover the impact of any departure from the current capital requirements in three areas: financial stability, that is to say the overall health of the system, because we learned how interconnected it all was; competitiveness, which is built into the regulator’s aims in the Bill and is bound to be the argument for any changes to the capital requirement rules; and, importantly, consumer risk. If we are only thinking about the competitiveness of our financial institutions and not considering consumer risk, we have not learned from the financial crisis. That is the other side of the scales. We can make the system ultra-competitive by asking institutions to hold hardly any capital but that exposes the consumers and public to greater economic risk. That last point is crucial.

To recap, the amendment does not attempt to freeze the situation forever as it is now. It does not stop clause 1 doing what the Government want it to do. It does ask for a report on the consequences and broader issue of divergence from capital rules, should the regulator allow greater divergence in the future. We should not allow this regime to be set up and then opened up to all the banking and industry lobbying that is likely to take place without making sure we have a means of understanding the consequences of that. Given the importance of this sector for the UK economy, we should be careful of these consequences. By enshrining these in a report from the Treasury, we can ensure that Parliament and the public see the consequences of divergence. That is the purpose of amendment 19.

[Alison Thewliss (Glasgow Central) (SNP)]

It is a pleasure to see you in the Chair, Mr Davies. I rise to support the amendment. I think it is perfectly sensible that we make assessments and ensure that the changes the Government are putting in place are worth while and valid and that we keep a close eye on them, because of the very risks that the Labour Front-Bench spokesman set out. We cannot predict the future, but we can assess how things are going and make sure that neither consumers nor businesses are at risk. I support that very much and do not have much to add to his comprehensive speech.

--- Later in debate ---

[Mr McFadden]

I just have a couple of questions for the Minister. He described the rationale behind the clause, but can he tell us how many firms we are talking about? How many of the non-deposit-taking investment firms are likely to be exempt from the capital requirements regulations under the terms of the clause?

What is the Minister’s response to the point that my hon. Friend the Member for Wallasey and I have been trying to make about interconnectedness? He has advanced a reason as to why such investment firms should be treated differently, but how will the regulators cope with the interconnectedness of the system if companies are treated differently in that way?

[Alison Thewliss]

My concerns very much lie around the interconnectedness, because the system will be only as strong as the weakest part within it. If the weakest parts start to pull down everything else and make everything else unravel, we have a real problem on our hands.

My questions are about the monitoring of risk within the system that is being established. How can the Minister be certain that the risks are being closely monitored by the regulators, that the regulators understand the business that smaller firms are doing in their part of the market, and that the activities that those smaller firms are engaged in does not pose a risk to everything else? There is definitely cause for them to be monitored in order to have an eye kept on them, and to ensure that their activities do not cause wider risk. If attention is not being given to them, how can we ensure that their activities are above board and are not causing further risks anywhere else within the system?

How will the monitoring be scrutinised more widely by Parliament and others? The Treasury Committee gets the opportunity to question the regulators, but getting down to such a level of detail is not necessarily something that we would do. How does the Minister envisage Parliament having a role in that scrutiny in order to ensure that, should something happen or go wrong, we find out about it timeously rather than when it is too late to have any impact and when the whole thing has tumbled down?

--- Later in debate ---

[Mr McFadden]

I have just one question. The Minister mentioned country-by-country reporting, which we may come to at other points in the debate. Could he help the Committee by telling us what is covered in the country-by-country reporting? There is an ongoing and very live debate about what we expect multinationals to cover in country-by-country reporting in order to avoid tax arbitrage or transfers between countries that do not stand up to scrutiny. What are the things covered by country-by-country reporting in schedule 1?

[Alison Thewliss]

I just want to ask the Minister about the additional responsibilities in the schedule. When we took evidence last week, Sheldon Mills said:

“We can always do with more resources”.––[Official Report, Financial Services Public Bill Committee, 17 November 2020; c. 9, Q12.]

What further discussions has the Minister had about ensuring that the PRA and FCA are adequately resourced for these additional responsibilities? It is an awful lot of extra work. We are moving an awful lot of work over to them while they have covid and Brexit to look at too. I just wondered whether there had been any further detail about what additional resources might be available or required in the months and years ahead.

--- Later in debate ---

[Mr McFadden]

My hon. Friend is absolutely right. Joining the dots is exactly what we should do. Of course, she is right that individual investment firms will make their own decisions on these things, perhaps sometimes pressed by pension fund members, consumer groups or trustees in some ways. We applaud firms that do that, but how much more powerful would it be if that was a goal of the regulators, set out in our own financial services legislation? It would be more powerful, because the UK has this huge financial sector, which has around it this cluster of expertise, which we refer to a lot—legal and accountancy firms and all the rest—and because our own domestic commitments can bend the power of that sector towards the net zero goals.

The amendment goes with the grain of what more and more firms and people in this sector are talking about. By including this change, we can take all the fine-sounding commitments on corporate websites and put them at the heart of our regulatory mission. It can mark out the UK financial services regulation as having a new post-Brexit mission. If asked what we want the UK financial services sector to do in this post-Brexit world—we debated divergence and capital rules and all the rest earlier—what would be a better answer than making sure that the power of this is bent towards us achieving net zero, and in so doing encouraging financial sectors elsewhere in the world to go down the same path?

Finance will play a huge role in whether or not we meet the target. I do not propose, Mr Davies, to go through what the Committee on Climate Change has said that we need to do to reach the target in great detail, because we would be here all day, but I want to give the Committee an idea of a few headings that will require enormous investment.

If we are going to achieve the target, we will need a quadrupling of the supply of low carbon electricity. We have done well on low carbon electricity in the UK, in the last 20 years or so. We have vastly expanded the provision of renewables that go into the grid, but even after doing well we need to quadruple that if we are going to meet the target.

We will need a complete automotive transition, from internal combustion engines to electric or other zero emission vehicles. Just a few days ago, the Prime Minister himself announced a new, more advanced target for the phasing out of internal combustion engines.

There will need to be a huge programme of investment in buildings and heating. Whether that is through heat pumps or hydrogen boilers, there will need to be a huge programme of retrofitting equipment to millions of houses throughout the UK.

There will need to be a large programme of afforestation, because remember this is net zero. It will not be that we never have emissions, but we will have net zero. One of the main vehicles, if you like, in absorbing the emissions that we are still responsible for is afforestation, so we will need a huge programme.

We will need changes in farming and food production. We have the return of our old friend, carbon capture and storage. That takes me back, because a decade ago, when I was sitting where the Minister is now, we were announcing carbon capture and storage. It was announced again last week. There might be Members here who are quite new to Parliament, such as my hon. Friend the Member for Erith and Thamesmead, the hon. Member for Hertford and Stortford and maybe others who were elected in 2019. I look forward to them coming back in 10 years’ time and debating a Bill where new carbon capture and storage has been announced. Maybe we will even have achieved it by then, who knows?

[Alison Thewliss]

Members may indeed remember carbon capture and storage well, because we were promised a huge project in Peterhead, ahead of the indy ref, which has not yet emerged.

[Mr McFadden]

The hon. Lady is quite young, so she might be here in 10 years’ time—

[Alison Thewliss]

I hope not!

[Mr McFadden]

Perhaps it is not her ambition to be here in 10 years’ time. Carbon capture and storage is back. There are more things that we will have to do, but all of those headings will need finance, capital and investment. That will not all come from the state. It has got to be a combination of public and private investment, if the country is serious about this goal.

This is not an ordinary piece of legislation or A. N. Other Bill that we want to tack on to the regulatory framework. It is an overarching piece of legislation that will inform investment patterns and work production in a whole range of areas. It is one of the most significant pieces of legislation in this country since the end of the war. Perhaps we do not always realise that, but it really is, if one thinks about the list that I have gone through.

All of those things will take finance. It seems to me not odd to add this to the regulatory framework, but very odd that it has not been added already, particularly because the Government have made so much of the country being an international leader in the area, including asking the former Governor of the Bank of England, Mark Carney, to play a leading role. We absolutely welcome that.

[Mr McFadden]

The hon. Gentleman is right and he goes for pot 3 in terms of my reasons. I repeat: the problem about pot 3 is that the reason not to accept an amendment is that it concedes that it is absolutely heartless to do so. He is absolutely right. The Government have said that they want the UK to be a leading player and they appointed Mark Carney, who is a champion of green gilts, I believe. I was pleased to hear the Chancellor’s announcement, because green gilts have been issued by other countries in the past year or two. They have often been oversubscribed, which shows an investor appetite for products geared to that end.

Let me put the point back to the hon. Gentleman. If there are new financial innovations, such as green gilts, that Governments can issue to finance the list of things I mentioned from the Climate Change Committee and if there is investor appetite, as there seems to be, for the limited number of green gilts that have already been issued, why on earth would we not put at the heart of the regulator’s mission that they should have regard to these goals and use them as a guiding principle, particularly as we are going into a post-Brexit world where we will be asked on many fronts what we are for now given that we have left an existing framework? It is particularly appropriate to add this proposal to the Bill. This will require investment and it cannot all be done by the state. It will require innovation in finance. We have mentioned green gilts but other kinds of saving products, investment products, bonds, loans and all sorts of instruments will all have to be geared to the necessary changes to meet the net zero target.

The final reason for the proposal is to stress the ambition of the target. Any one of the things that I read out would require a lot of ambition and a lot of investment. It is pretty hard to see how this can all be achieved if it is not an explicit goal of financial regulation.

To recap, the amendment seeks to make these changes in the least possible contentious way. We have not added a syllable or comma to anything that the Government have not already legislated for. All we are asking for is that the Government signal that they are taking their own legislation seriously by adding the net zero commitment, which the House has already legislated for, to the mission of the financial regulators. That seems to be a most uncontroversial and reasonable thing we can do in the post-Brexit financial regulatory framework.

[Alison Thewliss]

I support Labour amendments 22 and 24 and wish to speak to amendments 39 and 42 in my name and those of my hon. Friends.

I agree very much with the right hon. Member for Wolverhampton South East. Our amendments are trying to help the Government out. That is unusual but, in the spirit of cross-party consensus and doing things together to save the environment, that is perhaps how we should proceed. On 9 November, the Chancellor said that he wanted to lead the world in the use of technology and green finance. Unfortunately, the Bill somehow missed the boat. It is unfortunate that the Chancellor’s statement came just before the Minister made his Second Reading speech because the Bill would be the place to start with this ambition.

Financial Services Bill (Sixth sitting)

Debate between Pat McFadden and Alison Thewliss

Committee stage & Committee Debate: 5th sitting & Committee Debate: 5th sitting: House of Commons & Committee Debate: 6th sitting: House of Commons
Tuesday 24th November 2020 Public Bill Committees

[Mr McFadden]

My hon. Friend is absolutely right. The point I am making in moving the amendment is that, although there are arguments to be made about enforcement and minimum wage inspectorates and so on, there is another side to the issue: the considerations for investors in these companies and the role of regulators. That is what the amendment is about.

Following Ms Levitt’s report, my hon. Friend the Member for Leicester West (Liz Kendall) wrote to all of boohoo’s main shareholders—the list reads like a “Who’s Who” of blue-chip City firms: it includes Jupiter, Fidelity, Invesco, BlackRock and Standard Life Aberdeen. None of those firms—with one notable exception, which I will come to—has taken meaningful action. They talk about engaging and following the situation closely, but only one has actually followed through. All the firms have on their websites very fine-sounding statements about ESG, corporate governance, social considerations, sustainability and so on—indeed, some have set themselves up as champions of those causes.

Let me come to the exception to the rule on that list: Standard Life Aberdeen. It has sold all its shares in boohoo and is clear about why. In a letter to my hon. Friend the Member for Leicester West, the Standard Life Aberdeen chairman Sir Douglas Flint says that the firm had been concerned about the supply chain for some time and that

“Our patience with the company’s responses on the issue had been diminishing during the last year. That patience evaporated this summer with the company’s response to the media allegations and that is why we took the decision to sell our remaining shareholding.”

Standard Life Aberdeen is run by serious people. It is a very reputable, important financial management firm and it has decided to act in accordance with its ESG principles and wants to uphold them. What the story shows is that too many companies do not and that often it is just words.

Our amendment seeks to put some regulatory force behind the upholding of these principles. Firms say that they want to uphold them, but, as the story shows, too often that is not the case—action is wished away with talk of engagement and monitoring the situation and all the rest of it. The amendment would make the regulator have to have regard to the exploitation of workers and make upholding high social and governance standards a hallmark of the UK financial services industry. In that way, we would not just depend on good people such as Sir Douglas Flint and on companies that are the exception to the rule; we would send a clear signal to the whole investment industry about the kind of response that we want to see. Otherwise, the fear must be that, although there will be plenty more warm words and mission statements, they will be of little comfort to someone working in an overheated factory and earning £3 or £4 an hour—about half the minimum wage—and that, when the story is exposed and the exploitation is no longer hidden, the investors in the company that is ultimately responsible will not do anything about it.

I ask the Minister to imagine the signal that such a regulatory duty could send. Not only would there be a minimum wage law, as there is now, but the UK’s supercharged, empowered regulators would have social and governance considerations at the heart of what they do.

We have had many debates about standards and what would happen in the UK after Brexit on this issue. Time and again, the Prime Minister has said that he does not want a race to the bottom: he wants the UK to uphold high international standards and there is absolutely no reason to think that our departure from the EU should be any threat to rights of work or any considerations like that. This amendment is a chance to prove that and put it at the heart of financial regulation.

The truth is that companies are much more likely to take such considerations seriously if their investors are tapping them on the shoulder and saying, “Why aren’t you doing that?” It is clear that Standard Life Aberdeen tried to do the right thing for a time with boohoo and eventually got so exasperated that it divested itself of its shares in the company. That is what we want to see more of from major investors and shareholders. It is not happening enough at the moment. The fine words on corporate websites are not matched enough by that kind of action.

Adding what is in the amendment to the regulators’ “have regard to” list and the accountability framework in the Bill would send a powerful signal about the character of post-Brexit financial services. That is why we have tabled it today.

[Alison Thewliss (Glasgow Central) (SNP)]

It is a pleasure to see you in the Chair, Dr Huq. I rise to support the amendments tabled by the Labour Front Bench. It is really important to hold financial services firms to account; the example of boohoo given by the right hon. Member for Wolverhampton South East is a perfect example. Standard Life Aberdeen really should not be the exception rather than the rule. All financial firms should take their duty seriously, look all the way through their supply chains and act responsibly. It is clear that if the carrot of “doing the right thing” is not working, we need further means to hold companies to account.

The amendment is one of those that make me ask myself, “Why wouldn’t the Government want to do this? Why wouldn’t the Government want to support these things? Whose interests do they serve if they do not want to put this in the Bill?” The Scottish National party feels strongly that, although ESG is not the end of the movement towards a fairer, more sustainable future, it is certainly a vital part. We support the growing trend in the private sector towards greater corporate responsibility. By taking a greater stake in the communities where they operate, firms can become partners for social progress.

I was struck by the evidence given by Fran Boait in the session last week. She said:

“The Bill sets the direction, and it needs to integrate the needs of the wider economy, social responsibility, the environment and thinking about how we set a direction that is different from the one that led to the global financial crash”.––[Official Report, Financial Services Public Bill Committee, 19 November 2020; c. 112.]

The amendments set a good example of that change in direction and responsibility, and of the strong message that the Government need to send out.

To an extent, we have been able to do that in Scotland. We have promoted social responsibility in corporate culture, not least through actions such as the Scottish business pledge. We welcome a wider framework, which would encompass the financial sector and encourage them to do their bit. The partnership between the Scottish Government and business is based on boosting productivity and competitiveness through fairness, equality, environmental action and sustainable employment. It is a commitment to fairness, with businesses signing up to mandatory elements of the Scottish business pledge such as paying the real living wage—not the pretend-y living wage that the Government like to promote: the real living wage, as set by the Living Wage Foundation—and closing the gender pay gap, which has slipped during covid and may well fall back.

--- Later in debate ---

[Mr McFadden]

I beg to move amendment 23, in clause 3, page 4, line 31, at end insert—

“(9A) The Treasury must, within six months of making any regulations under this section, prepare, publish and lay before Parliament a report setting out—

(a) the reasons for the revocation of the provisions of the Capital Requirements Regulations being made under the regulations;

(b) the Treasury’s assessment of the impact of the revocation on—

(i) consumers;

(ii) competitiveness;

(iii) the economy.”

This amendment is intended to ensure the Treasury reports to Parliament on the impact of divergence from CRR rules.

In debating this amendment and this clause, I am hoping the Minister will be able to explain the relationship between this clause and clause 1. Clause 1 specifies the certain type of investment firms to which CRR rules need not apply, and he was at pains to say that that was a specific, targeted approach, but clause 3 looks to range very widely on the Treasury’s powers to revoke aspects of the capital requirements regulation.

The list in clause 3(2), on page 2 of the Bill, has many different headings, including business lends such as mortgages, retail investments, equity exposures and so on. Without getting into the detail of the technicalities of the Basel rules, not all capital is treated as equal. A pound is not just a pound. It depends against which line of business it is weighted. For example, financial institutions will argue that mortgages pose a particular category of risk, probably quite low risk, compared with another line of business where they may be lending against business loans, commercial property or some other activity. The Basel rules do not judge all these activities equally and they apply what are known as risk weights to them.

The clause allows the Government pretty sweeping powers, as far as I can see, to depart from and to revoke aspects of the capital requirements regulation, against all these different types of business. I would be very interested for the Minister to set that out and clarify it.

Through this process, the capital ratios are allocated. Again, I draw the Committee’s attention to the important paragraph (m) at the bottom of page 3 of the Bill, the leverage ratio. That is described in the notes on clauses as the “backstop.” I hope that that term does not cause too much excitement in the Committee. Like all backstops, it is there in case the list from paragraph (a) to paragraph (l) does not prove sufficient.

This particular backstop of the leverage ratio casts aside all this stuff about risk ratings. It takes the whole lending book and the whole lending business, and says that a certain proportion of capital must be held against the whole thing. It is a bit of an insurance policy in case the risk ratings do not do the job. It is true that the risk ratings are where this is open to all kinds of lobbying, as people will say that one line of business is less risky than another.

At the core of this is a debate between regulators who must consider the safety and resilience of the system as a whole, and individuals who will argue that if only they did not have to hold all this capital, they could lend more, stimulate more economic activity, and so on. That is the debate that takes place. Without wanting to go over all the ground that we covered this morning, the amendment asks for a report on the degree to which the divergence—the leeway powers, as we might call them—will be used, and the Treasury’s assessment of the impact on the economy. As I said this morning, we believe it is important that such a report should consider the impact on consumers, because they do not want to be on the hook for decisions that allow capital levels to fall too much, thereby weakening the resilience of the financial institutions in question.

This is a “lessons learned” amendment. It is important that the debate about capital ratios does not take place altogether in the dark—that it is exposed to what my hon. Friend the Member for Erith and Thamesmead called the daylight of scrutiny—and that we do not hear just from financial trade bodies. If they all genuinely have no intention of lobbying for a less safe system, have no desire for a race to the bottom and want the highest possible global standards on regulation, they have absolutely nothing to fear from this amendment. It does no more than ensure that we have reports from the Treasury on what happens when these powers are passed to UK regulators, and what happens if the divergence that is facilitated in clause 3—in this long list on pages 2 and 3 of the Bill—takes place.

[Alison Thewliss]

I agree very much with what the right hon. Gentleman has said. It is important that we are kept up to date, in the absence of other scrutiny mechanisms. At the very least, within six months of Royal Assent, we should find out the impact of any revocations. The point was well made about consumers, because in many ways they are very far away from where this Bill is, and they may not see any issues that are coming up. It is important that we, as parliamentarians, are sighted on what those issues might be and have some degree of scrutiny over what happens with the regulations.

--- Later in debate ---

[Mr McFadden]

The Minister has given a pot 3 defence. I apologise for using that in-joke from this morning’s session; I am happy to explain it to you later, Dr Huq. A pot 3 defence means that it is already covered. It is my pleasure not to move the amendment.

Question put and agreed to.

Clause 5 accordingly ordered to stand part of the Bill.

Schedule 3

Prudential regulation of credit institutions etc

[Alison Thewliss]

I beg to move amendment 40, in schedule 3, page 79, line 25, after “activities” insert

“in the UK and internationally”.

This amendment would ensure the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active credit institutions and investment firms to be based or to carry on activities are considered both in terms of their UK and international activities before Part CRR rules are taken.

This is quite a modest amendment. The Bill is supposed to ensure that Scotland, the City and the rest of the UK remain internationally competitive but robustly regulated, as the sector and everyone beyond a few marketeer ideologues are looking for. The amendment seeks simply to ensure that the FCA has regard to the standing of the UK as a base for financial firms that operate internationally. It is a kind of reflection amendment. It is common sense. It is really a drafting amendment. There is not terribly much more to it.

--- Later in debate ---

[Alison Thewliss]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Mr McFadden]

I beg to move amendment 27, in schedule 3, page 80, line 8, at end insert—

“(7) The PRA must, at least once every five years, review the provisions of this section.

(8) The Treasury must lay before Parliament a report setting out—

(a) the outcomes of this review; and

(b) any changes the Treasury proposes to make as a result of this review.

(9) The Treasury may by regulations make any changes identified in subsection (8)(b).

(10) Regulations under subsection (9) may not be made unless a draft has been laid before and approved by a resolution of each House of Parliament.”

This amendment would ensure there is a review of the accountability framework for regulators once in each Parliament and give it a role in approving subsequent changes to the accountability framework.

This will be my last attempt. I have tried to get reviews after six months, one year and three years; this is the attempt at once in every Parliament. Of all the mild amendments, this has to be the mildest. Once in every Parliament, we are asking for the PRA to review the provisions of proposed new section 144C in schedule 3, and for the Treasury to lay before Parliament a report setting out the outcomes of that review and any changes that it proposes to make as a result. I really think it reasonable to expect that as a minimum, given the sensitivity and potential combustibility of the provisions, which is why we have tabled the amendment.

Financial Services Bill (Fourth sitting)

Debate between Pat McFadden and Alison Thewliss

Committee stage & Committee Debate: 4th sitting: House of Commons
Thursday 19th November 2020 Public Bill Committees

[Alison Thewliss]

Q I am just curious because you said that, for the regime to fully work for customers, situations such as this need to be clarified. I thought that you were asking for further detail or reassurance.

Hugh Savill: Not at the moment, no.

[Mr McFadden]

Q I had a further thought on the question of tax advantage. A quick search tells me that Gibraltar’s corporation tax level is 10%. There may be some caveats around that—it was a quick search—but if that is the case, that is quite a hefty advantage for a company, compared with the UK rate, is it not?

Hugh Savill: I am not aware of the corporation tax differences between the UK and Gibraltar, so, again, I am sorry but I will have to cover that in my reply later.

--- Later in debate ---

[Mr McFadden]

Okay. I will stop there and leave it to others.

[Alison Thewliss]

Q I would like to thank Finance Innovation Lab for the briefing, which was really quite interesting and a different approach. Pat has hoovered up some of the questions that I was going to ask, but is there anything else in particular that you would like to see in the Bill?

Jesse Griffiths: One of the main issues that we would have loved to have seen in the Bill—I recognise that it would be outside the scope to introduce it now—is a proportionate regulatory regime for mutual banks. One thing that is important, or one problem that is very evident in the UK financial sector, is its lack of diversity of institutions. Across Europe, co-operative banks have an average of more than 25% of assets, and in the UK they were not even legal until 2014. The mutual banking movement is now trying to establish that vital part of the system that would help to improve services for customers, improve competitiveness and bring important countercyclical and social and environmental benefits. That would have been nice, given that the Bill recognises that there is a need for a different regime for investment firms from banks, for example. There is a huge unmet need for a more proportionate regime for those institutions. That would be my wish list of what might have been in the Bill. Perhaps as part of the Bill discussions, we might get a commitment to consult on such a proportionate regime.

Of course, the other point to make here—to repeat some of the points we have made about social and environmental purpose and accountability—is that the main issues with the Bill are the things that are missing that could make it much more ambitious and set a much better precedent for financial sector regulation going forward.

Finally, one issue that is worrying to us is the danger of a return to framing the purpose of financial regulation as being about the competitiveness of the UK financial sector globally. That appears in a few places in the Government’s explanatory notes to the Bill. The key point is to make a distinction between competition, which is good, and competitiveness, which can be dangerous when applied as a principle for regulation. Framing regulation within that competitiveness framework is widely recognised as one of the main contributors to the global financial crisis. It was easy to make the case for relaxing regulation to make any particular financial sector more competitive compared with others, when actually I think what we want to establish, through the Bill and other actions, is that the UK financial sector will seek to set high standards and to be the leader in that, not to introduce a competitiveness framing that raises the risk of standards being lowered.

Fran Boait: I can build on that. I agree with a lot of what Jesse has said. For us, the overarching areas are accountability and seeing more that it in the Bill, the environmental, social and governance aspects, and the purpose. On that last point, while we understand the Bill is onshoring and tidying up, as I have said before, it sets the direction, and that strategy for the financial services sector has not been laid out by the Government. I think that is key because, as Jesse has mentioned, it is concerning to see competition and competitiveness in there—in the run-up to the crash, that was shorthand for deregulation—at the same time as handing a lot of power to regulators. Again, it is worth noting that the FCA chief executive said himself that they would prefer high standards to the idea of competition, so there is support for that. Making the direction clear is critical.

On a few specifics that have been left out, over the last few years Positive Money has been working on things such as access to cash and the need to protect people’s right of payment in different ways—I noted that there were a few questions on that—and thinking about financial inclusion. Thinking more about the financial services’ role in the wider UK economy is absolutely critical at this time, and there is not too much in the Bill in terms of the direction of that.

Financial Services Bill (First sitting)

Debate between Pat McFadden and Alison Thewliss

Committee stage & Committee Debate: 1st sitting: House of Commons
Tuesday 17th November 2020 Public Bill Committees

[Mr McFadden]

Thank you.

[Alison Thewliss (Glasgow Central) (SNP)]

Q I have a couple of questions, first to the FCA. Can you explain a wee bit more why you feel that you need a change in primary legislation in order to remove companies from your register?

Sheldon Mills: We have an obligation under FSMA such that all authorised firms will sit on our financial services register, and that allows a sense of public transparency as to who is authorised and what they are authorised to do. As the Committee may or may not know, we regulate tens of thousands of firms, upwards of 60,000 firms, so the register is quite large. The current rules allow firms that are authorised on the register to maintain their registration even though their activities are, in effect, dormant and they are not actually carrying out certain financial services. We need to give them rights to be heard in order to remove them from the register, and that takes time. Therefore, having a different regime, whereby we can give notice to firms that their removal might be pending unless they prove to us that they are active, is going to be a much more efficient and effective way of operating the register. This is important because harms are occasioned by the presence on the register of dorman firms. There is the activity of cloning, whereby firms use dormant names on the register to practise certain fraudulent and scam activity, which is a significant problem that we are seeking to tackle. We are committed, of course, to removing people from the register as swiftly as possible, but the provisions in the Bill will really help to accelerate that for us.

--- Later in debate ---

[Mr McFadden]

So no more cases of champagne? Thank you.

[Alison Thewliss]

Q Are there any further measures that you expected to see, or would have liked to see, in the Bill?

Simon Hills: Shall I go first and talk about the prudential regulation of banks? The Financial Services Bill achieves what it sets out to do: to implement a coherent version of Basel 3.1 in the UK. It is quite important to our members that we do Basel 3.1 the same in all the major financial centres in which firms operate. If a firm that is regulated by the UK operates in a different host country and the host country says, “That UK firm operating on our patch is supervised by the PRA and the PRA has introduced a watered-down version of Basel 3.1”, then they would add extra supervisory levels to bring it back up to the Basel 3.1 standard. That leads to a bifurcated approach with different regulatory standards in different countries, which makes life very difficult. A coherent approach, which is what the Bill seeks to achieve, is what we and our members want.

--- Later in debate ---

[Mr McFadden]

Q Have you already made these arguments to the Treasury only to be rebuffed, or is this the first chance you have had to make them because the Bill was published only a few weeks ago?

Paul Richards: These are points that law firms that work in the City are acutely aware of from their previous experience. The law firms have been looking at what needs to be done to ensure that there is continuity of contract and a safe harbour protection. Of course, I hope that the Treasury will take account of that, as your Committee will take account of it before reaching a final conclusion. We should do everything we can to minimise the risk of market disruption and litigation, within the context of the overriding point, which is that we do need to move away from LIBOR to risk-free rates. That is, of course, what we have done, with new issues in the bond markets and with the conversion of legacy contracts from LIBOR to SONIA. We have a tough legacy problem for the future, which needs to be dealt with. The Bill helps to deal with that.

[Alison Thewliss]

Q I have some follow-up questions. You mentioned how the FCA will determine these things. Do you feel that that needs to be set out quite explicitly in the Bill—how the FCA will make those determinations around benchmarking and LIBOR contracts?

Paul Richards: Sorry, I did not quite catch the last point.

Financial Services Bill (Second sitting)

Debate between Pat McFadden and Alison Thewliss

Committee stage & Committee Debate: 2nd sitting: House of Commons
Tuesday 17th November 2020 Public Bill Committees

[Mr McFadden]

Q Thanks. Can I slightly switch subjects now, to ask you about packaged retail investment and insurance-based products? The Bill removes the requirement for performance scenarios on PRIIPs. Could you just set out for us, in as simple terms as possible, what is wrong with these performance scenarios, and why there is a desire to remove them? If they are removed, what kind of information should be provided to consumers to help them make as informed an investment choice as people can?

Chris Cummings: Thank you for the question. You have touched on such an important issue for our industry. Through the consultation on PRIIPs we highlighted to EU policy makers and regulators, to our own Financial Conduct Authority and others, the dangers that we saw in the PRIIPs key information document, the PRIIPs KID. Because of how the methodology for PRIIPs was created—taking a rather avant-garde view of the calculation basis—it meant that we could have negative transaction costs. Somebody could trade in the market and it would not only not cost them any money; they could actually lose money by making a trade. That led to some perverse outcomes that were pro-cyclical in the presentation of the information they gave.

Let me give you an example by reflecting back on a new fund that has had just two or three years’ experience. Imagine if, over the course of its life, that fund had had a very strong performance; it had done very well over a three or four year period. Because of the pro-cyclicality of how it had to report performance scenarios—looking to the future—it would have to present a potential investor with scenarios that were entirely positive and that generated levels of return that nobody in the industry would seriously put in front of a retail investor to suggest that this was what they could actually get. They were being forced to do it because of the methodology—the calculation basis—which reflected only that, if you had a few good years of performance, your fund would continue to have good years of performance. Similarly, if your fund had had a few bad years of performance, all you could project was that that bad performance would just continue and continue. That was because of the calculation basis and the way that the rules were written.

As an industry, we kept drawing this issue to the attention of the policy-making community in order to say that, if nothing else, when it comes to disclosure and investment, we have managed to convey the central message that past performance is no guarantee of future performance. Please let us keep on reminding people that past performance is no guarantee of future performance. Sadly, that requirement was taken away. The new calculation basis was introduced, which led to the industry ultimately being forced by its regulator to produce this pro-cyclical—and deeply misleading, in our view—information.

We continued to lobby against the wider introduction of the PRIIPs KID, arguing first that it should not be introduced. Secondly, having lost that argument and seen that that it was introduced only to closed-ended funds, we argued that it should be kept there until the wider implications were seen and not extended into the world of undertakings for the collective investment in transferable securities, because of the scale of UCITS and how many millions of people across the UK and Europe rely on them.

We were genuinely heartened when the Treasury announced that, post Brexit, it would be undertaking a review of the PRIIPs KID. What we hope to see, actually, is a wider-scale review of disclosure, whereby we can start from a different position. Given the technologically advanced world that we are living in today—the greater use of mobile phones, applications and computers, and just understanding that people engage with financial services in a very different way—could we have a rounder discussion about how we can do the thing that we want to do as an industry? We want to have a more engaged client base and to help them understand the different funds that are available and the different risk profiles of those funds, so that they can invest with more confidence, and certainly with more clarity about likely outcomes, rather than having to give false performance scenarios that simply nobody trusted in the industry.

[Alison Thewliss (Glasgow Central) (SNP)]

Q I have a couple of questions on equivalence. Equivalence is a bit of a point in time. How far do you feel that the limits of equivalence could go? How much change would happen before that was withdrawn?

Chris Cummings: I think this is a “two ends of the telescope” question, if you pardon the analogy. We tend to think a lot about the UK changing rules and changing approaches, and there are one or two examples of that in the Bill—we have just mentioned PRIIPs KID. There always seems to be a sense that it would be the UK moving away from the central European view of regulation. Of course, that need not be the case. There are a number of regulatory reviews that are timetabled to be considered by the European Commission. There is the alternative investment fund managers directive. There is the review of PRIIPs and so on. Looking two or three years out, there are quite a few opportunities where, actually, the UK may stay still because the rules work in practice and it could be the European Commission that is drifting away from the central scenario that we are in today. That is perhaps almost inevitable, looking 10 years out; there are bound to be changes to the regulatory architecture and the regulatory regime, because the UK will need to modernise its approach to regulation, and not only here and across Europe, but more globally, every economy is thinking about growth-oriented policies as a result of the covid crisis.

That is why, for us, we approach the discussion around equivalence very much from a point of view of saying, “Okay, even if the words on the page change, how can we make sure that the bandwidth is agreed by all sides, so that minor degrees of divergence from equivalence are not the straw that breaks the camel’s back?” That is why I come back to the point I was making just a moment ago about having a regulator to regulate a dialogue—a set, established forum where the FCA and the Prudential Regulation Authority can meet the European Securities and Markets Authority and the European Central Bank and so on, in order that information can be shared, regulatory approaches can be discussed and data can be shared as well, on a “no suprises” policy, so that we can make sure that in the UK and Europe there is a commonality of view, or a commonality of outcome certainly, that is being laboured towards.

I am confident that that would make sure that any discussions on equivalence are structurally much more sound and that we remove the political overlay. Across the industry, there is a concern that equivalence could be used as a political process rather than a regulatory one, which perhaps does not really lead to an outcome that is in the interests of savers and investors.

Every time a new rule is introduced that is different in the European Union from the UK, that adds costs to the industry, because we have to navigate our way through two sets of rules, which might not contradict, but simply do not join up. There are different reporting deadlines for data and so on. That is why we would really like to make sure we move to an outcome-based approach, rather than to a prescriptive, words on the page, exact phraseology, which will simply prove a headache for all.

--- Later in debate ---

[Mr McFadden]

Thank you.

[Alison Thewliss]

Q You have talked about the importance of having clear and effective regulation, which all of us around the table can probably agree with. Have you any concerns about the transparency issues around the regulations, with the regulator taking on so much more of the responsibility?

Gurpreet Manku: I think that what will be important to see over the next year and in future is sufficient time for consultation, because that leads to further transparency. The documents that the FCA publishes are generally quite good and detailed, but I have seen some cases in recent years, and not just domestically, where there were very short windows to respond to quite technical consultations. Ensuring that there is sufficient time to review and digest any changes and to sit down and speak to the regulator about them will be helpful, and will also support the transparency objectives.