Oral Answers to Questions
Rob Marris Excerpts(8 years, 9 months ago)
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Mr Osborne
The idea that the US Treasury Secretary, the head of the International Monetary Fund and, indeed, the Governor of the Central Bank of China dance to a British tune is, I am afraid, fanciful. Governors of central banks and the Finance Ministers of the G20 are saying the same thing as every major independent economic institution: that a British exit would cause an immediate economic shock and have longer economic costs. I totally understand why many of the people advocating exit want to do so, but, to be frank, they accept that there would be a short-term and potentially long-term economic cost. We should have that on the table, which is why the Treasury is going to produce its analysis.
Rob Marris (Wolverhampton South West) (Lab)
Despite the recent gulag debacle, does the Chancellor agree that UK membership of the European Union should make it easier to clamp down on immoral tax avoidance by multinational companies?
Mr Osborne
I know that Russia Today is the favoured channel of the Labour leadership, but this is Treasury questions. We are raising with the European Union—this is another example of where being part of a bigger club helps—the possibility of getting a pan-European agreement for country-by-country public reporting so that we can see what multinational companies are paying in different countries. Of course, our ability to achieve that is amplified by being part of the EU.
draft Employment Allowance (Excluded Companies) regulations 2016
Employment Allowance (Increase of Maximum Amount) Regulations 2016
draft social security (Contributions) (Limits and Thresholds amendments and national insurance funds payments) regulations 2016
Rob Marris Excerpts(8 years, 9 months ago)
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Rob Marris (Wolverhampton South West) (Lab)
It is a pleasure to appear before you again, Mr Wilson. You seem to be getting a taste for matters financial. Looking around the room, the under-representation of women on this Committee is rather disappointing. In the Opposition’s defence, two of our Back Benchers who were not able to come are women, but there is a bit of a problem on the Government Benches.
When the employment allowance was introduced in 2014, the Chancellor of the Exchequer said in a letter to small and medium-sized enterprises:
“Small businesses are the lifeblood of the economy and I want to make it easier for you to succeed and grow.”
Labour totally supports that. We may not always support the instruments employed by the Chancellor of the Exchequer, but we certainly support that goal. In the same letter, the Chancellor of the Exchequer estimated:
“The Employment Allowance will benefit 1.25 million employers next year”—
—he was referring to 2015. Today, the Financial Secretary says that, after the enactment of the regulations on excluded companies, he estimates the figure will be about 1 million. The figures are similar—a lot of businesses gaining a lot of benefit—but there are some problems with how it has been working out.
In May 2015, Her Majesty’s Revenue and Customs itself published a kind of impact assessment: “Awareness and impact of the Employment Allowance— Research with small employers”, HMRC research report 368. One of the key findings, listed on page 4 of the report, is that
“(69%) eligible businesses with fewer than 50 employees had claimed Employment Allowance at the time of this research (November 2014).”
November 2014 was fairly shortly after this came up, but take-up was not great then. The research also found that
“Non-claimants were more likely to be micro businesses (<5 employees).”
Again, that is a bit of a problem, because we hope to nurture microbusinesses and boost employment by encouraging them, through tax reliefs and other measures, to take on an additional employee or part-time employee.
On the credit side, the findings of the November 2014 impact document included a statement that
“Awareness of Employment Allowance is high amongst both claimants and non-claimants.”
I find it slightly strange that awareness was high among non-claimants, but the report delineates some reasons for that. Furthermore, take-up appears to have gone up: HMRC statistics for April to October 2014 show a 68% take-up rate.
In paragraph 7.1 of the explanatory memorandum for the regulations before us, the take-up rate is estimated to be 89%, which is a considerable improvement in a year and a half. However, one has to look also at the efficacy of the measure, or the lack thereof. No one is quite sure of the number, but there seem to be about 1,200 tax reliefs, and a National Audit Office report found that HMRC was keeping tabs on the efficacy or otherwise of fewer than 300 of them. Regarding the efficacy of the employment allowance in increasing employment, laudable though the goal is, there are some question marks over whether it has altered behaviour as much as its proponents and we would have wished.
On page 28 of the impact report is a table showing the behaviour of employers—the claimants—with regard to investment that would have happened without employment allowance: 20% of employers would have engaged in it anyway, whether or not the allowance existed; 2% would have done some of what they did, but had been able to do more, which is encouraging; and 6% would not have engaged in the activity but for the availability of employment allowance. In terms of taking on additional staff, however, according to table 6.3 on page 29 of the report, the net effect on investment in staff as a percentage of claimants was 6%, but 3% of respondents who were claimants had taken on additional members of staff because of the measure. There are questions to be answered, and the report concludes:
“While take up has been successful and awareness of the scheme is high, it has had relatively little impact on employment.”
As I am sure the Minister remembers vividly, he himself said when the measure was debated in the Public Bill Committee that
“there is a particular problem with including the new clause—assessing how many jobs are created as a result of the allowance, because of the inherent complexity in that matter.”––[Official Report, National Insurance Contributions Public Bill Committee, 21 November 2013; c. 58.]
That was before the measures that we are amending today came into effect. Even then assessment was difficult, but two and a half years later there is still a huge problem measuring whether this tax measure has much of the intended effect on behaviour.
The measure is expensive. The Office for Budget Responsibility certified the figures in a table on the summer Budget 2015 indicating that for the current tax year the employment allowance tax relief would cost the Government £630 million of forgone revenue. That figure stays in the £600 millions through to 2020 in those projections. That is quite a lot of money, even for the Revenue, which deals with very big sums.
Perhaps the Minister can reassure me on this, but employment allowance seems to be a bit of a blunt instrument, because while it has a disproportionate effect—or one hopes it does—on microbusinesses, it will remain available to all businesses of whatever size, unless they are the ones excluded under the regulations I am about to discuss.
I understand that HMRC carried out a technical consultation on director-only companies and the excluded companies regulations before us that ran from 26 November 2015 to 3 January 2016. The Minister may correct me, but I am not aware that HMRC has published a summary of responses to that consultation. I hope he can tell me that I am wrong and that such a summary has been published. There is reference to that consultation in paragraph 8.1 of the explanatory memorandum to the regulations:
“Some stakeholders raised concerns that the measure may be vulnerable to avoidance behaviour”.
I may be misreading this, and the Minister can reassure me if that is the case, but looking at the measure it seems as if a self-employed person who is a company, as it were—the regulations are to do with businesses that are director-only and have one employee—could easily drive a coach and horses through the regulations and avoid their effect by signing up a spouse as a director. That is not uncommon for, say, a plumber who wants to have her husband on the books and maybe even claim the personal allowance, which has now gone up a lot, so there is quite an attraction to do so. We would then have two directors—two employees—off to the races and claiming employment allowance. I may be wrong, but it seems that a spouse—it would not have to be a spouse, obviously—could be on the books as a director or a nominal employee, which would be a body swerve right around the regulations. If those companies were technically limited liability companies, they would no longer be excluded from receiving employment allowance. I seek some reassurance from the Minister on that.
Finally, I turn to the social security measures. I understand the annual uprating and so on, but perhaps the Minister can reassure me. There appears at the bottom of the scale to be some fiscal drag, as I think it is called. While the top end has been uprated in line with the CPI—although in the period concerned, I believe the CPI was in fact negative—the bottom end has not, so the value of money has changed but those paying more would be affected.
I hope the Minister can explain this technical point to me, because I may be misunderstanding it. When taken together, paragraphs 7.6 and 7.7 of the explanatory memorandum—I appreciate it is not the same as the regulations themselves, but many of us find explanatory memorandums helpful—appear to me to indicate that an employer who employs an apprentice will not have to pay employers’ national insurance contributions whatever the apprentice’s earnings level, provided the apprentice is under 25. That is no bad thing, as long as one has an adequate definition within HMRC rules of an apprentice. I think we already do, because of the minimum wage legislation and so on, but perhaps the Minister could, for my benefit, clarify whether the regulations will let employers off the hook, so to speak, for NICs for employees under 25 who are apprentices.
Mr Gauke
I am grateful for hon. Members’ remarks on the regulations. I will pick up some of the points raised, particularly by the hon. Member for Wolverhampton South West. On the broader issues to do with the efficacy of the employment allowance, the hon. Gentleman talked about take-up. The most recent take-up statistics released in October last year show 1.17 million employers benefiting from the allowance. Around 680,000 employers—48% of all employers—have been lifted out of employer national insurance contributions altogether since the employment allowance was introduced in 2014-15. A further 90,000 employers are expected to be taken out of NICs when the employment allowance rises to £3,000 as a consequence of one of the regulations before us. It is worth pointing out that over 90% of the benefit of the allowance goes to small businesses with fewer than 50 employees.
In terms of what employers do with the employment allowance, that is a matter for them. The hon. Gentleman was right to refer to the debate that those of us who were around at the time had in respect of the primary legislation. The Government were careful not to put a specific number on this, because it depends on how people make use of the sums involved. Ultimately, it is up to employers as to how they use the allowance. We have not set targets for the number of jobs that we expect to be created. According to research by the Federation of Small Businesses, 29% of small businesses will use the employment allowance to boost staff wages; 28% will employ additional staff; and 24% will invest in resources. This is not attributable to one policy, but we are in the position where we have record levels of employment in this country. A measure that reduces the tax liability for businesses, particularly smaller business, plays a role in ensuring that we have a climate in which job creation is encouraged, and it has helped contribute to record levels of employment.
On the cost of the employment allowance, it is forecast to cost the Government approximately £1.4 billion in 2015-16 in tax revenue forgone, and 98% of that tax revenue is to the benefit of small and medium-sized businesses or employers employing fewer than 250 people. On the value for money assessment, the Government will internally review the employment allowance on various criteria, such as take-up levels, to determine the overall value for money of the policy. As a part of this process, we will speak to interested parties to gauge their views of the allowance and to ascertain ways in which their members are using it. However, at this point, we are encouraged by the wide take-up of the employment allowance; it is helping feed through into an environment that is good for employment and good for our constituents. I am sure it is not the intention of the hon. Member for Wolverhampton South West, but I hope that no one who reads his contributions would jump to the conclusion that the official Opposition are looking to abandon the employment allowance in order to save funds to use for other purposes, because that would be damaging for the many smaller businesses in this country that have done so much to ensure that we have such high levels of employment.
Rob Marris
I started my remarks with a quote from the Chancellor of the Exchequer, with which I agree, on support for small business. However, when dealing with revenue and revenue forgone, we must bear in mind the question of opportunity cost. In round terms, the figures that I have show that it is costing £560 million a year; the Minister talked about £1.4 billion. Either way, it is a lot of money. One has to consider whether such revenue support to encourage businesses to grow, a concept that we support, could be better spent by the Revenue in other ways. For that, one needs to measure. It is a question of how one allocates that money, not of support for business.
Mr Gauke
I note the hon. Gentleman’s remarks, which will no doubt be studied closely, probably by someone in Conservative Campaign Headquarters.
The hon. Gentleman and others have raised concern that the single director provisions could be avoided. We do not accept that avoidance behaviour will be as widespread as has sometimes been suggested. There are anti-avoidance provisions in the original legislation, and the proposed measures strike the right balance between maximising yield for HMRC, on the one hand, and ensuring that tax changes do not affect genuine businesses and charities that create employment, on the other hand. The anti-avoidance provision in the National Insurance Contributions Act 2014 provides that employers who would qualify for the employment allowance only by virtue of avoidance arrangements are disqualified. To be entitled to the allowance, companies with a single director cannot simply pay a second employee £10 to requalify. Rather, the regulations will mean that they must pay the second employee enough to accrue a secondary class 1 national insurance contributions liability, which is currently more than £156 a week.
The relief for apprentices under the age of 25 will be simple for employers to claim by inputting information in their payroll software. HMRC published guidance on 2 February 2016 on gov.uk to let employers know how to apply the relief and which evidence they are required to hold to ensure that it has been properly applied. That will include a record of the framework or standard being followed, which has also been publicised via HMRC’s employer bulletin. Ahead of the next tax year, HMRC will work with the Department for Business, Innovation and Skills to circulate the guidance further.
The purpose of the measure in relation to apprentices under the age of 25 is to provide support to businesses, which is helpful in improving the skills of the workforce in the UK. It is right that we use the national insurance contributions system to encourage employers that are undertaking expenditure in that area. The measure will be welcomed by employers, and it will help to achieve very ambitious targets in ensuring that far more people undertake apprenticeships in this country than in the past. We have seen dramatic progress in recent years, and we wish that to continue. The measure on apprentices under the age of 25 is part of that process.
I hope those points are helpful, and I commend the regulations to the Committee.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Employment Allowance (Excluded Companies) Regulations 2016.
Employment Allowance (Increase of Maximum Amount) Regulations 2016
Resolved,
That the Committee has considered the Employment Allowance (Increase of Maximum Amount) Regulations 2016 (S.I., 2016, No. 63).—(Mr Gauke.)
draft Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016
Resolved,
That the Committee has considered the draft Social Security (Contributions) (Limits and Thresholds Amendments and National Insurance Funds Payments) Regulations 2016.—(Mr Gauke.)
Bank of England and Financial Services Bill [ Lords ] (Fifth sitting)
Rob Marris Excerpts(8 years, 9 months ago)
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The Chair
For the convenience of the Committee, and with its leave, I propose that we group clauses 26 to 37 and allow remarks on all of them under the clause 26 stand part debate. Is that acceptable to the Committee?
Rob Marris (Wolverhampton South West) (Lab)
I have to say, Chair, that taking all those clauses in one group sounds rather cumbersome. I have a series of packages of comments and questions on the different clauses. I do not mean to cause difficulty, Sir, but taking them all as one group might do so. Might we take some of the pensions provisions together, for example?
The Chair
If the Committee wishes, I am happy to take all the clauses individually. I propose that we take clause 26 on its own, and then perhaps clauses 27 to 37 as a group.
Harriett Baldwin
It is a delight to be back here, again on a sunny Tuesday, to continue our scrutiny of the Bill under your chairmanship, Mr Brady.
The Government have fundamentally reformed consumer credit regulation, transferring responsibility from the Office of Fair Trading to the Financial Conduct Authority with effect from 1 April 2014. Clause 26 supports the effective operation of the FCA’s regime through minor amendments to the Financial Services and Markets Act 2000 in relation to the regulation of consumer credit. It is a technical clause and concerns the application of provisions relating to the enforceability of credit agreements. It makes it clear that when a person acting on behalf of a lender can lawfully undertake the relevant credit-related regulated activity in relation to the agreement, either by administering the agreement in relation to section 26A(4), or by taking steps to procure the payment of debts under it in relation to section 26A(5), they are also able to enforce the agreement.
Rob Marris
It is a pleasure to be here with you again, Mr Brady. I thank the Minister for her explanation—that is great.
Question put and agreed to.
Clause 26 accordingly ordered to stand part of the Bill.
The Chair
We now come to clauses 27 to 37. I suggest that we allow all of them to be commented upon as a group.
Clause 27
Enforceability of credit agreements made through unauthorised persons
Question proposed, That the clause stand part of the Bill.
Rob Marris
I congratulate the Minister on that fluent marathon. I fear that I shall less fluent, but in my defence I do not have quite the same resources behind me as the Minister, and of course I may not have her skill. I warn her that I shall be asking some questions. I hope that her officials will be able to help her and the Committee with the answers.
Clause 27(2), which inserts new section 27(1ZA) in the Financial Services and Markets Act 2000, appears to be a “see no evil, hear no evil” provision. I hope the Minister can reassure me. It says,
“this section does not apply to a regulated credit agreement or a regulated consumer hire agreement unless the provider knows before the agreement is made that the third party had some involvement in the making of the agreement or matters preparatory to its making.”
What has bedevilled legislators, regulators and those providing advice, whether in finance, the law or accountancy, is knowing when to inquire whether there is something else in the picture, to put it rather vaguely—for example, in conveyancing, whether those acting for the vendor of a house need to inquire whether there is someone besides the vendor living in the house, who would potentially have rights under the Law of Property (Amendment) Act 1926. I confess that it is 25 years since I did conveyancing, so that Act may have changed, but that is the general flavour—it is about when, as a professional, one has to make inquiries. New subsection (1ZA) is a great get-out for an adviser or a company entering into a regulated credit agreement, enabling them to say, “Well, I didn’t know.” On occasion, that is not good enough. One ought to inquire.
This is an example of my ignorance, I freely confess, but while I understand that the Financial Services Consumer Panel has said that these amendments are entirely technical—that was mentioned in the Lords by my noble Friend Lord Davies—it does not seem to me to be entirely technical and I cannot quite see why clause 27 is in the Bill. Will the Minister explain?
Clause 28 is headed “Transformer vehicles”. It reminds me of those kids’ toys—are they still around? The Minister is smiling in her usual sunny way, so I think they are still around; they were a little after my time, I have to say. I understand from the debate in the Lords that the Delegated Powers and Regulatory Reform Committee was consulted on the aspect of these changes dealing with hybrid instruments. New section 284A(6)(c) of the 2000 Act will
“authorise the FCA or the PRA to require the Council of Lloyd’s to exercise functions on its behalf (including functions conferred otherwise than by the regulations)”.
Under new subsection (11):
“If a statutory instrument containing regulations under this section would, apart from this subsection, be treated as a hybrid instrument for the purposes of the Standing Orders of either House of Parliament, it is to proceed in that House as if it were not a hybrid instrument.”
As I understand it, the hybrid instrument procedure is there to protect certain private interests. It appears that new section 284A will bypass that procedure—it is very clear, very up front—but that raises a question in my mind about whether, for convenience, the Government are proposing an end-run around protections for private instruments.
That is the least of my worries about clause 28, though. Transformer vehicles, as I understand it, are used for packaging or bundling. Section 284A(2)(b) refers to
“fully funding A’s exposure to that risk by issuing investments where the repayment rights of the investors are subordinated to A’s obligations to B in respect of the risk.”
In lay terms—I stress: lay terms—it is reinsurance; it is laying off the risk. Bookies do it all the time, akin to what sometimes goes on in the City. However, the bundling or packaging of debts, which I understand is what the transformer vehicles enable to be done, was precisely one of the major drivers of the meltdown of the US sub-prime market in 2007-08. To quote my friend and helpful adviser, Professor Alastair Hudson, “The investors then got the return generated by the mortgages. They then brought credit default swaps to provide insurance against the mortgage borrowers failing to make their repayments, or they bought credit default swaps to bet that those borrowers would fail to make those payments.” Ain’t capitalism great? You can have it both ways. In horse-racing, it is an each-way bet, but with an each-way bet in capitalism it is the punter who always seems to lose and the financial company that just about always seems to gain.
Those special-purpose vehicles were created, as I understand it, to bundle up and package sub-prime mortgages—SPVs were not just used for that, but it is perhaps the most notorious example—so that they were off the banks’ books and on somebody else’s books. Then, when things go wrong—as they did—the rest of us pick up the tab. That is the moral hazard. Transformer vehicles and proposed new subsection 284A of the 2000 Act appear to facilitate and encourage that kind of behaviour.
I hope that the Minister will be able to reassure me. It is possible that I have misunderstood what the new section will do and what transformer vehicles do, and that my fear about the risks involved is unfounded. I am not necessarily expecting her to do that now. I hope that she will catch your eye, Mr Brady, and reply to these points after my own marathon, which I have to tell the Committee has only just started.
The third thing that this clause highlights, and I use this as an example for the Government, is the complexity and overlapping nature of our legislation, which makes it difficult for anyone to understand. For example, new section 284A is a mere insertion. Later in our consideration of the Bill, we have all kinds of insertions: new clause 1 deals with a new section 333T; new clause 7 deals with a new section 137FBB; and, from memory, we have somewhere else the insertion of new paragraph (3GA) in a regulation. No wonder people cannot understand our financial regulations and legislation, when Tolley’s now runs to—what?—1,500 pages and we have amendment after amendment on top of scores of previous amendments. Will the Minister say whether the Government have any plans to simplify and/or consolidate the 2000 Act? It is getting incredibly complicated and further complication increases the chances of non-compliance, whether inadvertent or deliberate, because people can use the defence, “I didn’t understand what was in there.”
Turning to the pensions matters, I will take clauses 29 to 31 together. On pensions guidance, I hope that the Minister can say how far down the chain of advice to individuals the Government propose to go. Labour Members want an advice service that helps people to make informed decisions. There is a role for the state in either doing or facilitating that, and we are pleased that the Government recognise that, but we now have protection being built into the Bill for those who are considering selling on their existing annuity in a secondary market. That is set out in clause 29, which would amend section 333A of the 2000 Act. Subsection (2)(b) would insert a reference to
“guidance given for the purpose of helping an individual who has a relevant interest in relation to a relevant annuity to make decisions in connection with transferring or otherwise dealing with the right to payments under that annuity.”
As I understand it, that is principally to do with secondary markets for annuities. Paragraph 152 of the explanatory notes sets out that this would help by giving advice to annuity holders who are
“considering selling the income from their annuities to a third party on the secondary market”.
Today, the Minister mentioned beneficiaries of annuities, which is slightly different from annuitants selling on their annuity or contemplating doing so. How far do the Government propose to go with this? Will the beneficiaries of beneficiaries be able to access Pension Wise? Will the prospective beneficiaries of beneficiaries be able to do so? Will the prospective beneficiaries of annuitants be able to contact Pension Wise? There is a question about how far this coverage goes. When an annuitant sells their annuity on a secondary market and puts the proceeds into another instrument to provide for their pension in place of the original annuity, will Pension Wise, either before or after such a sale, advise the annuitant on that other vehicle into which the annuitant proposes to place, or is considering placing, the fruits of their sale on the secondary market?
I turn now to the report produced by the Work and Pensions Committee. I appreciate that the matter comes under the Department for Work and Pensions rather than the Treasury but, if the Committee will bear with me, I hope I can clarify that it is very germane to what we are discussing. That report was published on 19 October 2015 as House of Commons paper 371, entitled “Pension freedom guidance and advice”. The Government’s response to this report was published on 17 December. Good Government responses tend to go through the report line by line. This response by the Government to the Select Committee report is pretty comprehensive, and it goes through each recommendation suggested by the Committee.
The Financial Secretary gave evidence to the Work and Pensions Committee when it was working on that report, and she indicated that certain performance figures would be put on the Government website—in fact, she may have said that they had already been put on the website. I see her nodding. I have to say that if they are on the site, they are very well hidden. I looked at the Pension Wise website today and I could not find that kind of back-up statistic—not individual statistics, but figures such as the 2.2 million users to which, I think, the Minister referred earlier. Nor could I find the figures on the performance website—I did a search on both “Pension Wise” and “work and pensions”. I hope that the Minister is able to say what has happened to those performance figures.
Harriett Baldwin
I will try to keep my response in order, Mr Brady, but forgive me if I occasionally slip out of order. The hon. Member for Wolverhampton South West started by asking about clause 27, which he described as “see no evil”. I want to reassure him that the change addresses an issue that arises as a result of the transfer of the regulation of consumer credit from the Office of Fair Trading to the Financial Conduct Authority and the consequent application of the Financial Services and Markets Act 2000 to the consumer credit market. The issue addressed by the clause, whether relating to a chain or third party, arises particularly in the context of consumer credit and the activity of credit broking.
We are confident that the change to section 27 of the Financial Services and Markets Act addresses the issue with regard to consumer credit, ensuring that the section is more proportionate on consumer credit firms, without unduly affecting the protections available to consumers in the market. That is in line with our broader policy intent for the consumer credit market, where the reforms that the Government have made balance the need to provide strong consumer protections with ensuring that the burdens placed on a diverse market that includes thousands of small businesses is proportionate. I reassure the hon. Member for Wolverhampton South West that firms remain under a regulatory duty, imposed by the FCA, to take reasonable steps to satisfy themselves that the firms that they deal with are authorised, where that is appropriate. The clause strikes the right balance between protecting consumers and placing a proportionate burden on firms that are lending to consumers.
We share with the hon. Gentleman an aspiration to simplify some of the legislation. I very much welcome his words of support for my dream goal in this post, which is to simplify and reduce some of the complexity not only of this regulation but of the FCA’s own rulebook, which has become quite a significant barrier to entry to sensible organisations that may want to move into, for example, the debt advice space. I welcome his support for any progress I am able to make to simplify some of that.
Clause 27 simply narrows the circumstances in which a credit agreement or a consumer hire agreement is unenforceable. I think that the hon. Gentleman will welcome that. Both he and the hon. Member for East Lothian mentioned transformer vehicles, which are not those fun toys that appeal to consumers but something completely different that, I assure Members, are not for the consumer market. Only sophisticated or institutional investors will be permitted to invest in insurance-linked vehicles.
From a policy perspective, it is important that London have the ability to establish insurance special purpose vehicles. London is the largest insurance market in Europe and is a centre for specialist insurance activity. Whether we like it or not, all Members face risks in their lives—indeed, all businesses face a range of risks. Insurance is a way to bring that risk down to a manageable level. London should be able to compete and innovate in new forms of risk mitigation. If London is able to offer a full range of innovative solutions, insurance entities will continue to come to London to meet their risk mitigation needs. I heartily hope that all Committee members support that.
Insurance-linked securities use a range of specialist skills and services to arrange the deals, including underwriting, risk modelling, brokerage, legal and capital market expertise. Nevertheless, Members are right to express concerns about the transparency and manageability of the risks, as well as about the importance of their being arranged by regulated entities, so it is important that I set out that insurance-linked securities business will be prudently regulated in the UK.
All special purpose vehicles will require Prudential Regulation Authority authorisation. All the wording in terms of the contracts must be clear and robust, and importantly risks cannot be bundled together in the way that the hon. Member for East Lothian feared. We require all special purpose vehicles to be fully funded to cover the full extent of the risk they take on, so we are not talking about the kind of very leveraged structures that he rightly said were so instrumental in the last financial crash.
I have said that only sophisticated or institutional investors will be permitted to invest in the vehicles. Of course, if they are arranged prudently—when someone is able to manage their risks prudently—those transactions will contribute to financial stability. They increase the capacity of the reinsurance markets. They provide investments that are not correlated with the economic cycle, and therefore they provide investors with good diversification characteristics. I hope that I have reassured hon. Members of the importance of clarifying the rules on transformer vehicles, but I sense that the hon. Gentleman has a further question on the issue.
Rob Marris
I am somewhat reassured by what the Minister has said. However, I would caution her about her remarks about innovation and the attractiveness of London, because I sat—either in this room or Committee Room 10—on the Finance Bill Committee when her predecessor, Ed Balls, was saying the same thing in 2006 and saying, “We are grateful that London is now the financial capital of the world, over New York, because we don’t have the millstone of Sarbanes-Oxley.” Look where that ended. Therefore, yes to innovation, and yes to London being the major financial centre in Europe, if not the world, but I urge the Government to be careful that we do not go round the same crazy merry-go-round that my Government let us go round in the past.
Harriett Baldwin
The hon. Gentleman and I agree on the importance of making sure that we try to strike the right balance. We must ensure that the UK retains the ability to innovate. I am sure that none of us would want to see that ability being reduced, but it should do that within the boundaries of sensible and prudent regulation, so that we do not commit the alternative policy error, which would be to throw up our hands in horror at the kinds of innovations that have happened and so harm consumers by not allowing that kind of innovation. It would harm jobs in the UK if such innovation were not allowed to happen here. I welcome hiss questions—he is absolutely right to ask them—but I hope that I have convinced him that, in this instance, we have got the balance right and that these are simply useful instruments that will be well regulated and certainly available only to sophisticated institutional investors.
Although there are no Government proposals to consolidate the Financial Services and Markets Act at the moment, consolidated versions—for the ease of reference of members of the Committee and members of the public who are following our discussions with such avid interest—are available on commercial databases, such as LEXIS, and the Government statute law database—legislation.gov.uk—is working to make up-to-date Acts of Parliament available free of charge on a consolidated basis to everybody.
I will move on to the questions that were asked about Pension Wise and pension guidance, and the important steps that we are taking to bring pension freedoms to those who are no longer required to buy an annuity but to extend them to people who have bought an annuity and who may decide in retrospect that it was not the right thing for them. We are promoting a secondary market in those pension freedoms.
To be clear, regarding the rules on beneficiaries—I am thinking of a situation where a spouse remains a beneficiary and there is a remaining annuity after the death of the primary annuitant—there might need to be the ability to provide Pension Wise guidance and other support to people in that circumstance. The exact characteristics of who is entitled to use the service will be set out in regulation in due course, as will the definition of a “relevant interest” and what a relevant annuity is.
Rob Marris
I am grateful. The statistics might be available on the website, but although I am an averagely competent user of websites I could not find them. They are therefore not readily available.
Harriett Baldwin
We have made huge strides with the gov.uk website, which is a lot clearer and simpler than it used to be, but let me be the first to agree with the hon. Gentleman that such things can always be made clearer. I have put on the record the most recent example of management information available, which is that 2.2 million people have clicked on the website, with more than 50,000 people having some sort of face-to-face interaction. Also, in the summer Budget last year we extended the ability of people from 50 onwards to use the face-to-face service.
Harriett Baldwin
The website is well used. The feedback on face-to-face interactions has also been positive.
Harriett Baldwin
Clearly, it is regrettable that although we often pass regulations in this House—this is a very regulated area—people still choose to prey on the vulnerable, particularly older people, and do things that are illegal and completely against the regulations. We ought to combine regulation with informing people about the regulations and when they should have their antennae twigged to the fact that something might not be a good idea.
The hon. Member for Wolverhampton South West raised a range of important points about auto-enrolment, the reports in The Times today and master trusts. I can let him into a little secret on that: the Government will bring in legislation on master trusts and on the points he raised as soon as practically possible. We had considered bringing it in as part of this piece of legislation, but we felt that since the Bill had gone through the House of Lords it would be very late on in the legislative process to introduce something as extensive as that. That was my judgment, and I hope that he will support me on that. However, we aspire to find very soon the first appropriate vehicle that could be scrutinised by both Chambers to bring in the regulations relating to master trusts and auto-enrolment.
Rob Marris
I thank the Minister very much for that swift response to my plea. It is perhaps one of my first successes, and now she has indeed set my pulse racing.
Harriett Baldwin
No comment, Mr Brady, on that. I am making sure that I cover all the points that were raised by members of the Committee. I am shocked—deeply shocked—that the hon. Member for Wolverhampton South West is not aware that the Royal Mint is in Cardiff and that it continues to produce all our coins. Indeed, Wales plays a very important role in the issuance of our currency. It does not play a role at the moment in the production of bank notes. Obviously, that lapsed when the last issuing bank in Wales was taken over by either HSBC or Lloyds—I cannot remember which—and got subsumed into that bank, and the bank lost this ability at that point.
To answer the hon. Gentleman’s other questions about clause 31 and the reason for subsection (7), this provision is included in order to confirm that the amendments to the Financial Services and Markets Act 2000 (Appointed Representatives) Regulations 2001—a very catchy title—can be subject to further amendment by the Treasury if it comes to revise those regulations. That is to say that the fact that this secondary legislation is amended in the Bill does not narrow the scope of the Treasury’s powers in the Financial Services and Markets Act. I hope that that is as clear as day for the hon. Gentleman. I would also like to clarify that the amendments set out in clause 31 are intended to remove any doubt on this question by making it clear that financial advisers who are appointed representatives of authorised firms are eligible to advise on the conversion or transfer of safeguarded benefits.
The hon. Gentleman also asked some extensive questions about what the definition of a bank in insolvency should be. The wider fact is that here we are establishing a gateway for the transfer of what might be extremely sensitive material—non-public information about the financial health of a particular bank—into the Treasury to ensure that the Treasury can fulfil its important public role of understanding where or when there might be a risk to public funds. That is what we are trying to establish here. It is right to probe the word “insolvency”, because what we are really talking about is a bank in trouble. “In trouble” is a rather difficult phrase to define in legislation, but I think we both know it when we see it.
I was also asked whether the Treasury can request information in advance of a bank failing. The answer to that is clearly yes. The only condition would be that the Treasury considers the information to be material to the Bank’s assessment of the likelihood of a bank, building society, credit union or investment firm failing. This assessment would be done in advance. It influences the resolution plan that the Bank adopts in preparation for a possible failure of the institution in future.
I think that I have now touched on all the points that were raised about this section. I hope that I have satisfied hon. Members of the wisdom of these clauses and that they will join me in supporting their inclusion in the Bill.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
John Mann
This is a most excellent new clause, which I hope my hon. Friend the Member for Leeds East and I will be able to use against those who may be doing illegal money lending in sports in the Leeds area. It prompts an interesting question, because the powers on claims handlers—the other side of consumer protection—are not vested in the Treasury. We would not expect them to be. They are vested in the Ministry of Justice, but here we see a power grab by the Treasury. We have the Chancellor versus the Justice Secretary, with the two battling for power. I appreciate that that may cause some concern and divided loyalty. It is essential, in supporting this new clause, that I give my wholehearted support to the Chancellor in his power grab. The Treasury, not the Ministry of Justice, is the best place for powers such as this to be vested in.
Should the Bill become law, I hope that the Minister will go back to the Treasury team and look at other powers that have been grabbed by the Ministry of Justice under previous Governments and used appallingly badly in protecting the people, from my experience—the coalminers’ compensation claim scandal being the prime, but certainly not the only, example. Let us have the Treasury take on those who fleece our constituents out of money, with the full might of the Chancellor, strongly supported by his party’s Back Benches—he is even more strongly supported on some matters these days by the Labour Benches. On this occasion, he has my entire endorsement in his battle against the Justice Secretary.
Rob Marris
What a pleasure it is to follow my hon. Friend. It is an historic moment when he is fully backing the Chancellor of the Exchequer.
My hon. Friend talks about power grabs, but I must say that I do not think it is just the Ministry of Justice involved in this area; it is the Department for Communities and Local Government and the Department for Business, Innovation and Skills as well, with which this overlaps. The fact that this is a cross-cutting area is perhaps another reason why it would be logical for the Treasury to have these powers.
Labour Members welcome the stability of funding. I am grateful to John Ludlow, who works in the office of my hon. Friend the Member for Makerfield (Yvonne Fovargue), for giving me some background information, of which I was not fully aware, on the lack of stable funding for the inelegantly named illegal money lending teams. There is one such team based just down the road from me in Birmingham. They work in England and Wales and have a relationship with trading standards, as has been mentioned—hence my reference to the DCLG. I understand that since 2004, when the teams were established, more than 26,000 victims of illegal money lending have been helped, with £62 million of illegal debt written off and 300 loan sharks prosecuted.
I say indirectly to the Ministry of Justice and to the Chancellor of the Exchequer that some of this stuff is rather simpler than is made out, in terms of the relationship with trading standards. Under section 21 of the Theft Act 1968, blackmail is a common-law criminal offence when someone makes “unwarranted demand” for money “with menaces”. The Minister quite properly referred to illegal moneylenders as loan sharks; that is the vernacular, which we all understand. As a description, “loan shark” highlights rather better what almost always goes on: behind illegal money lending is a pattern of people saying, “If you don’t pay up, you’ll suffer a physical injury.” Those are the menaces.
The 1968 Act is an elegantly worded piece of legislation. Section 16 of that Act, which is sadly now gone, is on obtaining pecuniary advantage by deception. Section 1 of the Act, which still obtains, has a wonderful definition of theft. It was a great piece of legislation in terms of its wording. New clause 1 is not quite so elegant. It refers in proposed new section 333T(1) to
“the amount of the Treasury’s illegal money lending costs.”
That is a bit inelegant, because what it means is the amount of the Treasury’s anti-illegal money lending costs. The Treasury has costs associated with illegal money lending, but I hope it does not have any illegal money lending costs. The new clause is inelegantly worded but, to be fair, we know what it means and we have had a helpful explanation from the Minister.
Harriett Baldwin
I beg to move, That the clause be read a Second time.
Government new clause 7 places a duty on the Financial Conduct Authority to limit early exit charges, which act as a deterrent to people accessing their pensions early under the new pension freedoms, thus fulfilling a commitment that the Chancellor of the Exchequer made recently.
The Government introduced the pension freedoms in April 2015 because we believe that people who have worked hard and saved their entire life should be free to spend their retirement savings as they want. At that time, the Government wanted to ensure that everyone who was eligible could access their pension flexibly under the new freedoms, and they therefore strengthened the statutory right of members in defined contribution schemes so that people could, in all cases, transfer their pension savings from one scheme to another.
Following the introduction of the freedoms, it became increasingly clear that other barriers, including early exit charges and long transfer times, were preventing some people from using them. Evidence gathered for the Government by the FCA has shown a small but nevertheless significant cohort in contract-based schemes for whom early exit charges pose a barrier to their use of the freedoms. Some 670,000 people in FCA-regulated schemes face an exit charge, and for 66,000 of them—one in 10—the charge would exceed 10% of the value of their pension pot. In some cases, the charges could be high enough to make it uneconomical for an individual to access their pension flexibly, while in others the presence of an early exit charge could act to discourage individuals from accessing their pension, when that might be the best thing to do in their circumstances. It is therefore clear that the Government’s objective of ensuring that everyone who is eligible is able to access their pension savings flexibly is not being met, and that action is needed to ensure that all consumers are able to make use of the freedoms.
To ensure that the cap benefits current consumers who are eligible to use the freedoms now, the Government will ensure that any cap applies equally to existing arrangements and to those entered into in the future. The Government have not taken the decision to pursue legislation with retrospective effect lightly, and we recognise industry concerns about interference with existing contractual agreements. We have already made it clear that market value reductions should not be subject to the cap on early exit charges. However, in the Government’s view it is unfair that a significant minority of individuals have been deterred from accessing their pensions flexibly because of contractual terms they entered into long before the freedoms were introduced. Indeed, some providers have conceded that industry practices have moved on, and that the introduction of the pension freedoms means that the charges pose a much more significant barrier now than when they were first agreed. Fairness is not determined solely by reference to whether it was acceptable to include a term in a pension contract many decades ago; it should also be assessed in light of the reforms and changes in market practice over time.
In the context of the new pension freedoms, it is unfair that some individuals are being deterred from accessing their pensions flexibly because of terms in contracts from before the pension freedoms were introduced. Those people would not have been in a position to make an informed decision about potential early exit charges when they signed up, and that is why we have introduced the clause, to limit the charges and remove the deterrent.
In giving the FCA, as the relevant regulator, the flexibility to determine the precise level of the cap, we are ensuring that fairness is built into the setting of any cap. The FCA is best placed to determine how best to apply any cap, to ensure that early exit charges are not a deterrent to individuals using the freedoms. The new clause will provide consumers in contract-based pension schemes with genuine protection when exercising the pension freedoms, by ensuring that they are not deterred by early exit charges. Alongside that measure, which will apply to FCA-regulated pension schemes, the Department for Work and Pensions and the Pensions Regulator will work to ensure that any relevant concerns are appropriately addressed for trust-based schemes. We will ensure that all pension scheme members are protected against excessive early exit fees, regardless of the type of pension scheme they are in. I commend the new clause to the Committee.
Rob Marris
I am glad that the Chancellor has come on board fully. The Prime Minister did so yesterday; he came on board with Labour’s manifesto commitments on the European Union—good for him. The 2015 Labour manifesto said:
“We will reform the pensions market so that pension providers put savers first, and protect consumers from retirement rip-offs. We support greater flexibility for those drawing down their pension pots, but there must be proper guidance for people to avoid mis-selling.”
We have already discussed pension guidance and the welcome amendments on Pension Wise.
I have several issues to raise with the Minister. Paragraph 2.16 of the Government’s response to the consultation document on pension transfers and early exit charges referred to “further cost-benefit analysis” from the FCA
“in relation to the appropriate level of any cap.”
Can the Minister tell me—my research has not extended this far—whether the FCA has done that research? I gather from her remarks that it has not yet done so, but I may have misunderstood her. If it has done it, when was it done and published? If it has not, when does she anticipate that it will be done?
Can the Minister say something—again, I may have missed this in her remarks—about what she anticipates the level of the cap will be? She referred to the shocking 10% charges that some people have unfortunately been asked for on requesting a transfer. A press release from a couple of weeks ago referred to speeding up the process and to things being done “quickly and accurately”. I do not see any reference in new clause 7 to the timescale, although there is a reference to the cap, so I hope the Minister can elucidate that.
The bigger issue—again, this may be my reading of new clause 7—is that the Government seem to be conflating two things in the wording of the new clause. The Minister’s remarks did not reassure me about that. The first is the penalty for moving. One of the reasons why I signed up to Equitable Life years ago—what a great deal that was—is that it had what was then called an open-market option, which was unusual in defined purchase schemes at that time. It was attractive because it meant that decades down the road I would have the option of buying an annuity from a provider other than Equitable Life. It was not the only provider to offer such a scheme, but it was unusual; it was in the minority. That was back in the ’80s, when I was a very young man. Some schemes had a ban on moving—that has effectively been statutorily overridden—and others had penalties.
The other thing, which I fear that the Government have conflated with the first in their wording—perhaps the Minister can reassure me about this—is what in the trade used to be called an actuarial reduction. In other words, if the normal retirement age for the pension scheme is 65, as it is in the House of Commons scheme, to which many hon. Members have signed up, but someone takes it at 60—above the statutory age of 55; it used to be 50—in round terms they take a 50% reduction in the annual pension. Keeping it simple, instead of getting £10,000 a year from the age of 65, they get £5,000 a year from the age of 60 because they are getting it for an extra five years. It is not exactly 50%, but as a rule of thumb it is about 5% a year for taking it early, so if someone takes it at 55 they lose 50% of their pension. That is not, to most people’s minds, a penalty. Because people get the dosh for longer, they get a smaller annual amount. We could have a debate about whether 5% a year is mathematically accurate, with life expectancy and so on, but in terms of the principle and the concept that people lose pension because they have started to take it below the normal retirement age there is that actuarial reduction.
Bank of England and Financial Services Bill [ Lords ] (Third sitting)
Rob Marris Excerpts(8 years, 10 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Rob Marris (Wolverhampton South West) (Lab)
I beg to move amendment 37, in clause 18, page 16, line 12, leave out paragraph (a) and insert—
“(a) publish any notice under subsection (1) within one month of giving such a notice, and”.
The Chair
With this it will be convenient to discuss amendment 38, in clause 18, page 16, line 14, after “before”, insert
“and make a statement to both Houses of”
Rob Marris
It is a ray of sunshine to be serving under your chairmanship on this bright day, Mr Brady. Amendments 37 and 38 are straightforward, and I am sure that the Government will accept them, so perhaps we can move on to debate the clause. Proposed new section 1JA(1) gives the Treasury the power to give directions to the Financial Conduct Authority. The rest of the new section deals with how that power shall be exercised at least once in each Parliament, and with the publication of those directions. Our straightforward amendments would tidy that up.
One must recognise that there is a balancing act between the FCA’s independence and the need for public accountability, refracted through the Treasury. That is always difficult, and we accept that, but there is a bit of a problem with the Financial Conduct Authority. Immediately after Second Reading a couple of weeks ago, there was a debate for more than two hours in which I think it would be fair to say that Members from both sides of the House expressed grave concerns about some of the actions or inaction of the Financial Conduct Authority. It is purportedly independent of the Government and the Bank of England, but there is so much cosy overlap.
We have Dr Bailey, who now seems to have all kinds of hats. I stand to be corrected, but I think he is the deputy governor for prudential regulation and has been the chief executive officer of the Prudential Regulation Authority since April 2013. He is therefore also a member of the Bank’s board of directors, the PRA board and the Financial Policy Committee, and now he is going to the Financial Conduct Authority. There are questions not about that gentleman’s integrity, but about perceived conflicts of interests and so on. There is someone on the FCA board, Jane Platt—she also joined in April 2013—who is the chief executive of National Savings and Investments. Sir Brian Pomeroy, CBE, joined the FSA board in November 2009. I think that he may still be on the FCA website.
The FSA was abolished because it was, shall we say, pretty useless. Private Eye, correctly in my mind, used to characterise it as the Fundamentally Supine Authority. If we look at the prosecutions, or the lack thereof, and the steps taken by the FSA after the crash in 2008, or the lack thereof, it did not exactly cover itself in glory as an institution. I make no comments on the individuals within it; I am referring to the institution. The Government recognised that, and therefore we had the Financial Conduct Authority.
It is all a bit cosy. The noun of this Committee thus far seems to be groupthink. That refers to the risk that those who have a cosy relationship will start to be blinkered in the way in which they exercise their regulatory functions. The FSA has been characterised by Professor Alastair Hudson, whom I thank for his assistance in tackling what is quite a technical Bill. He said, “The FSA previously began to think of itself as being in partnership with the financial institutions which it was supposed to regulate.” I think he had a point. So, I suspect, did the Government, which is why we now have the FCA, not the FSA.
However, there is still a big question mark over the FCA’s relationship with the Government, which is to do with how independent it is. The Minister has previously told the House that the FCA’s decision to abandon its investigation into the culture of banking, which had not actually started, had nothing to do with the Treasury. That, of course, touches on questions of groupthink, blinkered thinking and so on. I do not impugn her for saying that, but looking at it from the perspective of Labour Members, that is a surprising situation. It is relevant to what we are discussing, because of course proposed new section 1JA, to be inserted by clause 18, talks about the Treasury giving directions to the FCA in certain circumstances.
The FCA, in its business plan for 2015-16—the year we are in—said that it would do a culture review:
“In 2015/16 we will conduct a new thematic review on whether culture change programmes in retail and wholesale banks are driving the right behaviour, in particular focusing on remuneration, appraisal and promotion decisions of middle management, as well as how concerns are reported and acted on.”
It would have been very useful to have had the fruits of that culture review before us when debating the Bill.
Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)
Is the hon. Gentleman aware that there are quite a number of studies that indicate that approximately 70% of major organisational failures can be attributed primarily to cultural problems?
Rob Marris
I was not aware of that statistic, but it does not entirely surprise me. I thank the hon. Gentleman for that.
We have the chair of the FCA’s foreword to its business plan for 2015-16—as I said, the current year. That is John Griffith-Jones, who by the way worked at KPMG from 1975 to 2012; we all know that KPMG has questions to answer about what it was doing in relation to the financial institutions in the lead-up to the meltdown in 2008. I was talking about cosiness; he comes from KPMG, and he said in that foreword:
“In our last Risk Outlook we identified the seven most important forward-looking areas of focus in our view. We do the same again this year. Unsurprisingly, given the long-term nature of these risks and the underlying drivers, the list is largely unchanged. Poor culture and controls continue to concern us, notwithstanding the efforts being made by firms to improve both.”
So there he is, in his foreword to the business plan, less than 12 months ago, stressing again the concerns about “poor culture and controls”. The FCA said in the business plan that would investigate the culture of banking and financial institutions and then, in a whiff of smoke, it was gone—no investigation whatsoever. The Minister says that is nothing to do with the Treasury, but I hope she will recognise that the Opposition are a little concerned about the relationship between the Treasury and the FCA. We are concerned about how much control and direction the Treasury can give the FCA.
The FCA is constitutionally a creature of statute, hence the Bill and previous legislation, but in everyday terms it is somewhat a creature of the Treasury. It would be helpful if, when addressing clause 18 and the minor amendments 37 and 38, the Minister said a little more about the current relationship between Her Majesty’s Government, refracted through the Treasury, and the FCA, and what she foresees that future relationship being in the changed landscape that the Bill introduces.
Harriett Baldwin
Clause 18 is effectively about remit letters, which I think is why the hon. Gentleman took the opportunity to bring a lot of fairly extraneous issues into discussion. I will respond to some of them in the course of my remarks.
It is important that regulation takes account of both the implications of the economic environment for the regulators and of the regulators’ own impact on that economic environment. I am sure all members of the Committee agree with that. That is reflected in the statutory remits of the regulators. For example, both regulators have a duty to have regard to the desirability of sustainable economic growth in the medium or long term. The objectives of both regulators recognise the importance of effective competition, and I trust that members of the Committee do not wish to raise any controversy or have any criticism about that.
Clearly, therefore, both regulators need to understand how the Government’s economic policy may affect their work. I want to be absolutely clear that the recommendations in the letters that the Government will be able to send to the regulators will indicate the Government’s economic policy. They will be recommendations and will not be binding. They will certainly not be what the hon. Gentleman termed “direction”. They will not compromise, modify or override the regulators’ statutory objectives in any way, nor, importantly, will they relate to individual firms or cases.
The hon. Gentleman raised one of his favourite topics: the fact that the FCA had a bank culture review in its business plan for the year ahead. Despite my assurances to him in the Chamber that the first the Treasury heard of that was when it was covered in the media over the new year, he does not seem convinced by what we have said. We have replied to numerous written questions with the same response, and I repeat it for his benefit today.
The FCA is clearly operationally independent. It took an operationally independent decision to change what it is going to focus on over the coming year, and that decision was made completely separately from the Government.
Rob Marris
I take what the hon. Lady says. Is she comfortable that that was the right decision for the FCA to take? It was made by a body that is so incompetent that it could not even monitor the share dealings of its own staff.
Harriett Baldwin
The hon. Gentleman cannot have it both ways. If he thinks that I should have no operational interference in whether the FCA does a cultural review study, obviously I should not have any operational interference in whether it reinstates the study. That is the situation in which operational independence results. Where the Government have a role is through sending these non-binding remit letters and through the power to appoint the chief executive and the board. The hon. Gentleman has described the history of the predecessor organisation, the FSA, and obviously we had to abolish that organisation—that is the power of the Government of the day. His party’s Front Benchers have a range of different and fairly eccentric ideas about the independence of the Bank of England, which are on the public record. I will not entertain the Committee by talking about them.
Harriett Baldwin
The hon. Gentleman is serving in the team of a shadow Chancellor who wants to end the independence of the Bank of England.
Harriett Baldwin
I think we can all agree that that would be a fascinating study to read, but I will not get involved in directing the FCA to change its business plan. That would be interfering with the operational independence of the FCA, which I am sure Opposition Members do not want me to do.
Rob Marris
I thank the hon. Lady for being so generous in giving way. Actually, I never said anything about not interfering in operational matters. She rightly says that, in theory, the Government could abolish the FCA. This clause does not cover a directive to the FCA; it talks about a recommendation. A recommendation from the Treasury, a body that could abolish the FCA, is something akin, in everyday parlance, to a directive. Pursuant to proposed new section 1JA(1)(b) of the Financial Services and Markets Act 2000, such recommendations could be on “how to advance” one or more of its operational directives.
Harriett Baldwin
I have outlined some of the things that the Government put in their remit letter, which is not binding on the organisation but provides important context for what the Government, elected by the British people, want to focus on.
Let me now turn to the amendments. Amendment 37 would require the Treasury to publish the recommendations it makes to the FCA within one month, and amendment 38 would require the notice laid before Parliament to be accompanied by a statement to each House. The amendments raise the important issue of transparency, which is at the heart of the Government’s proposals for these remit letters. The remit letters themselves form an important element of transparency, and they provide a transparent and formal means of conveying Government economic policy to the regulators, so it is an important part of the provision that the Treasury must publish its recommendations and lay a copy before both Houses of Parliament.
These probing amendments have been useful to confirm how the process will work. I assure members of the Committee that I cannot foresee any circumstances in which the notification for either regulator would not be published and laid before Parliament within a month. I am happy to commit the Government to that practice. I am not going quite as far as accepting the hon. Gentleman’s amendment, but I am happy to commit the Government on the record to that practice. I hope my assurance will be sufficient.
We need to retain flexibility about the best way of informing the House. For example, the updated recommendations might be issued as part of the Budget statement. In that case, it would be more appropriate and efficient for the House to be informed of the new recommendations in the Budget speech, as has happened when the FPC remit letter is updated at that time.
The hon. Gentleman raised a few other points, and it might be helpful if I respond to them. Without criticising Mr Andrew Bailey in any way, the hon. Gentleman did imply that he thought he was doing too much. However, I can assure the hon. Gentleman that Mr Bailey will stop being the chief executive of the PRA on the day he moves over to be chief executive of the FCA. The hon. Gentleman referred to conflicts. I hope that he is not alluding to any specific conflict of interest, because that would be inappropriate in terms of impugning Mr Bailey’s integrity.
The hon. Gentleman mentioned a “cosy” relationship. There were a lot of allegations relating to the fact that many individuals involved have worked with, and have experience of, other organisations. However, that is where the operational independence, structure and framework of statutory duties and responsibilities, as set out by Parliament, is so important. FSMA, for example, made it clear that the terms of all appointments have to ensure that the appointee cannot be directed by the Treasury or any other person, including the Bank.
When we make appointments, we consider the appointee’s current and previous background—of course we do —including any material conflicts. In our view, it would be entirely appropriate for people who are appointed to these important functions to have extensive experience of a relevant institution. Therefore, I do not think that the hon. Gentleman is right to talk about “cosiness”; he ought to be saying how important it is to have experience and wisdom in the statutory framework that we are discussing.
Without more ado, I hope that my points on the amendment and the clause have been sufficient to satisfy the hon. Gentleman. I am very grateful for his probing amendments. I hope I have been able to address the concerns and that the clause may stand part of the Bill.
Rob Marris
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 18 ordered to stand part of the Bill.
Clause 19
Diversity
Question proposed, That the clause stand part of the Bill.
Harriett Baldwin
The clause shows how valuable it can be for Ministers to have their Bill start in the House of Lords, given that we often find that we benefit from their insights as the Bill proceeds through the other place, particularly on subjects on which their lordships have so much wisdom.
The clause amends the general regulatory principles that apply to both the Financial Conduct Authority and the Prudential Regulation Authority. That is a direct way of ensuring that the regulators fully consider the differences between types of business, including—importantly—mutual institutions, across the breadth of work that they undertake, when it is appropriate to do so. The clause makes it clear that both regulators must take into account the differences between the varying forms of business organisation adopted by firms, including —importantly—mutual societies, where appropriate whenever they are discharging their general functions.
I hope that introducing the clause, which puts consideration of mutuality and other types of business organisation into the regulators’ guiding principles, provides reassurance that the Government strongly support a diverse financial services sector and the part that mutuals play in achieving that. We are building on previous action that the Government have taken to support the sector, including: carving out the building societies from the Independent Commission on Banking ring-fencing regulations; increasing the maximum interest rates that credit unions may charge on loans from 2% to 3% a month; spending £38 million in the credit union sector through the Department for Work and Pensions credit union expansion project; and ensuring that universal credit and pensions payments may be paid into a credit union account.
Moreover, Government support for the Mutuals’ Deferred Shares Act 2015, which received Royal Assent in March 2015, underlined our commitment to fostering growth and competition in the sector by seeking to address mutual insurers’ inability to access external capital without the need to demutualise.
Clause 19 provides a further step to ensure that regulators fully consider the particular issues that relate to mutual institutions and other forms of business across all their work. It highlights the role of mutual financial institutions in the UK’s evolving financial services marketplace and ensures that, where appropriate, the specific challenges that the mutuals sector faces are taken into consideration when the regulators are discharging their general objectives.
Rob Marris
We on the Labour Benches—I do not know about colleagues in the Scottish National party—welcome clause 19. I say that as someone who first joined a credit union more than 40 years ago. Diversity is important in the financial sector, as in many sectors. The parallel that some of us may remember from our schooldays is crop rotation, for which we need ecological diversity. If we go for monoculture with crops, it is seriously bad news if a pest comes, because our one and only crop is gone.
There is a parallel with financial institutions. By and large, the mutuals sector, including building societies, fared better than mainstream, privately owned banks in the crisis. Where there were problems, in particular, was with some former building societies that had demutualised. I say that as someone who voted against demutualisation for at least three building societies. Two of those were the Staffordshire and the Cheltenham & Gloucester. We lost both of those, but we won with the Nationwide building society—it is still a mutual, and I still have an account there. It is a very big mutual—a very big financial institution. At the other end of the spectrum are institutions such as the Wolverhampton credit union—I am not sure what it is called now, because it keeps changing its name—of which I have been a member for many years. Compared with the Nationwide building society, it is a very small institution, but that is part of diversity.
I am pleased that this Government and their predecessor, the coalition Government, have embraced diversity. The Minister mentioned some of the things that have been done: the £38 million for credit unions and the £2 million. I salute the work that the coalition Government did, and that I hope this Government will continue to do, in relation to the mutuals sector. For example, the previous Government supported disclosure of lending data by the main high street banks to understand patterns of lending across the UK. There has been the lowering of barriers to entry to the financial services market to help to increase competition—challenger banks and so on. I do not think that the Minister mentioned the good work on schools-based financial literacy programmes, which were brought in. That is not directly about mutuals, but it has to do with that concept of a broader view to financial services than simply the high street banks.
A few more things need to be done, and if you will indulge me briefly, Mr Brady, I will mention one or two of them. I am indebted to the Community Investment Coalition for some of these suggestions. A review of existing affordable financial tools would assist, as would supporting and encouraging FinTech innovation, which the Government are starting to do—it is likely to be a growing sector—but it needs to be done in a way that will also benefit people on lower incomes. Also needed is a clear direction to economic regulators—something we discussed in our debate on the previous clause—to ensure that the financial services market provides easily understandable and appropriate products. There is a constant battle there, because products keep mutating and so on. Broadening and strengthening the existing voluntary framework for disclosure of lending data would take further what the Government have already done.
It would be useful to have stressed by the Government—practising some of their recommendations to the FCA, not directions—the value and importance of community finance. They need to ensure some competition and diversity in the financial services sector, which should benefit all communities if it works properly. A review of community finance provision across the UK would be very helpful to identify where there are strong and sustainable community finance providers, but also where there are gaps in provision. Again, that would be carrying on the work of the previous Government, which this Government, in their nine months, have carried on with clause 19 on diversity.
The final suggestion is about trying, inasmuch as Government can, and they have a role to play—the Minister mentioned the £38 million for the credit union sector given by the previous Government—to scale up the community finance sector. For example, there could be assistance with investment in IT infrastructure—not the FinTech stuff, just IT infrastructure for the community finance sector. Computers are still quite expensive, let alone programming and so on. If the Government could assist with that, with their push towards diversity, as exemplified in the clause, that would be very helpful.
Harriett Baldwin
I fear that the harmony in the Committee might diminish with clause 20, which introduces schedule 4, making provisions to extend the senior managers and certification regime across the financial services industry to all authorised firms, replacing the discredited approved persons regime.
Before setting out the reasoning for that, it is worth outlining the history and development of the senior managers and certification regime. Currently, individuals who work in the financial services industry are regulated through the approved persons regime. Under that regime, authorised financial services firms may not employ a person to perform “controlled functions”, by which is meant functions specified by the Prudential Regulation Authority or the Financial Conduct Authority in their rules, unless that person has been approved by the appropriate regulator following an application by the firm concerned.
The financial crisis in 2007-08 and more recent events have highlighted concerns about the performance and behaviour of many of the individuals working in the financial services industry. It is clear that the approved persons regime has not been a successful way of regulating individuals working in the industry.
As the Parliamentary Commission on Banking Standards argued, the regime is too broad and insufficiently focused on senior management. In fact, it called it a “complex and confused mess”. Specifically, the commission criticised the approved persons regime for being mostly
“an initial gateway to taking up a post, rather than serving as a system through which the regulators can ensure the continuing exercise of individual responsibility at the most senior levels within banks”.
In addition, the commission noted that there was a lack of clarity around the responsibilities of individuals at the senior level, and that institutions did not take enough responsibility for the fitness and propriety of their own staff at more junior levels. It is clear, therefore, that the approved persons regime is not fit for purpose. It is being replaced from March by the senior manager and certification regime for firms in the banking sector.
This regime requires the regulatory pre-approval of individuals at the top of the firm, along with statements of responsibility setting out the areas of the firm’s business for which they are responsible. It also requires certification for other key individuals upon hiring, and thereafter annually.
This new regime represents a significant strengthening of personal accountability among the top senior management in firms. It will improve corporate governance, thereby advancing the safety and soundness of regulated firms. It also provides a more effective and proportionate means to raise the standards of conduct of key staff more broadly, supported by robust enforcement powers for the regulators.
It is important to recognise, however, that the activities of firms outside the banking sector can pose significant risks to market integrity or to good outcomes for consumers, and the Parliamentary Commission on Banking Standards expected that the deficiencies of the approved persons regime would not be confined to the banking sector.
Consequently, the Government have decided to extend the senior managers and certification regime to all authorised financial services firms in all sectors of the financial services industry. This action is also supported by the recommendations of the fair and effective markets review, which argued that misconduct in fixed-income currency and commodity markets had not been limited to banks. Indeed, the review noted that extending the senior managers and certification regime would emphasise the personal responsibility of individuals working in all firms to observe proper standards of market conduct.
The application of the senior managers and certification regime to all authorised financial services firms will bring in a stronger, more comprehensive regime across the financial services industry. It will enable the effective and efficient regulation of groups with a variety of financial services firms within them, and it will support a level playing field for competition. Therefore, extending the senior managers and certification regime to all authorised firms is covered by clause 20.
Rob Marris
Mr Brady, I seek your guidance. We on the Labour Benches have no problem with a schedule 4 being added to the Bill, which is what clause 20 would do—we are therefore content with clause 20. However, regarding the exact content of schedule 4 and the attendant linked debates, we wish to have an opportunity —in a moment—to put our views, after the stand part debate on clause 20, I would suggest.
The Chair
I can reassure you, Mr Marris, that there will be an opportunity subsequently to do exactly that.
Rob Marris
Not on clause 20 itself, no.
Question put and agreed to.
Clause 20 accordingly ordered to stand part of the Bill.
Schedule 4
Extension of relevant authorised persons regime to all authorised persons
Rob Marris
I beg to move amendment 33, in schedule 4, page 58, line 2, leave out paragraph 18.
The Chair
With this, it will be convenient to discuss the following:
That the schedule be the Fourth schedule to the Bill.
Clauses 21 to 23 stand part.
Amendment 34, in clause 24, page 19, leave out lines 29 to 34.
Amendment 31, in clause 24, page 19, line 34, at end insert “and insert new subsections (6), (7) and (8)—
‘(6) Where the authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.
(7) If the FCA satisfies itself that a person (P), who is a senior manager in relation to a relevant authorised person, is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).
(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) if P satisfies the FCA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).””
Amendment 35, in clause 24, page 20, leave out lines 1 to 6.
Amendment 32, in clause 24, page 20, line 6, at end insert
“and insert new subsections (6), (7) and (8)—
‘(6) Where the PRA-authorised person mentioned in subsection (5) is a relevant authorised person, as defined under section 71A of the Financial Services and Markets Act 2000, subsection (5)(d) does not apply and subsections (7) and (8) do apply.
(7) If the PRA satisfies itself that a person (P) who is a senior manager in relation to a relevant PRA-authorised person is guilty of misconduct by virtue of subsection (5)(a)-(c), then P shall be guilty of misconduct, subject only to subsection (8).
(8) But P is not guilty of misconduct by virtue of subsections (5)(a)-(c) and (7) if P satisfies the PRA that P had taken such steps as a person in P’s position could reasonably be expected to take to avoid the contravention occurring (or continuing).”
Clause 24 stand part.
Rob Marris
The lead amendment in this group, amendment 33, stands in my name and that of my hon. Friend the Member for Leeds East. Unless the Government accepts this amendment—I hope they do—we will seek your permission to divide the Committee, Mr Brady.
I thought that I would start with this group with what may be some of the less contentious material; the contentious material is likely to focus on schedule 4 and particularly on clause 24, the reverse burden of proof, and so on. Starting with the perhaps more straightforward stuff—that does not mean that we should all be friends and agree on this—it would help if the Minister could provide clarification regarding clause 21(3)(a), which states that the Treasury may
“confer functions on the FCA”
by regulations. What kind of “functions” do the Government have in mind that the Treasury might confer?
Much more important and perhaps more contentious is clause 21(3), which says:
“Regulations under subsection (2)”—
that is, made by the Treasury if it so chooses—
“may…modify, exclude or apply (with or without modifications) any primary or subordinate legislation (including any provision of, or made under, this Act).”
So clause 21(3)(b) gives the Treasury regulatory power to modify, exclude or apply primary legislation, as well as other powers. I am uneasy about that as a constitutional way forward. No doubt, the Minister will tell me that that has been done by Governments when I served as a Back Bencher, the previous coalition Government and so on, but I still think that, on a constitutional basis and particularly on something as important as the financial stability of our economy, an explanation from the Minister of why the Government are seeking powers under the Bill by regulation to be able to amend primary legislation would be helpful.
Overall, clause 21, “Rules about controlled functions: power to make transitional provision”, seems fairly sensible. Examples of controlled functions include being a director of a regulated firm, overseeing the firm’s systems and controls, being responsible for compliance with rules and so on. One would expect a Government to ensure that there were proper rules about such controlled functions. However, there is that concern about regulations making primary legislation.
Clause 22 deals with the administration of the senior managers regime, part of the senior managers and certification regime which, as hon. Members know, I prefer to call SMACR, or “smacker”, because it suggests what may on occasions metaphorically need doing to those involved in financial services who step out of line. The clause makes a number of changes to the senior managers regime, and perhaps, because these have been wisely grouped together, that will come out in the wash during the debate on reverse burden of proof.
Clause 23, “Rules of conduct”, is not so controversial, I suspect, but there is a question mark for me. I draw the Committee’s attention to subsection (3)(c) which omits section 64B(5) of the Financial Services and Markets Act 2000. I stand to be corrected, but as I understand it, section 64B(5) imposes a duty to report when a manager or senior person knows or suspects that someone in their firm or organisation has failed to comply with conduct rules, and clause 23 is about rules of conduct. If the rules of conduct clause in the Bill omits what appears to be a strong and central provision of previous legislation, that is prima facie extraordinary. If a duty to report actual or suspected wrongdoing is to be removed, I scratch my head. Perhaps the Minister can reassure me and the Committee either that I have misunderstood what the soon-to-be-omitted section 64B(5) does, or that, although that subsection does what I think it does, other provisions are being brought in that strengthen or are at least equivalent to that provision of the 2000 Act.
Rob Marris
I wonder whether the Minister has a chance now or in a moment to deal with a concern I expressed about clause 23(3)(c), which is to omit section 64B(5) of the Financial Services and Markets Act 2000, about the duty to report wrongdoing and so on.
Harriett Baldwin
I fully intend to address that. The hon. Gentleman will have to bear with me, I am afraid. I am getting a little confused with all my different subsections, as he did in his remarks. I will, however, be addressing that.
On the hon. Gentleman’s earlier question about why we did not simply implement the reverse burden of proof, allow time for it to bed down and see how it worked, my colleague in the other place, Lord Bridges, has pointed out that evidence had already started to emerge that unhelpful effects were becoming apparent as firms prepared for its introduction. We were losing the essence of the purpose of the regime, which is to ensure that everyone knows and understands their responsibilities and what they are for. We therefore felt that there was no need to wait before making the changes.
Clause 23 also removes a provision that requires firms to report all known or suspected breaches of rules of conduct to the regulators. That requirement is unnecessary, because the regulators can use their existing powers to require firms to notify them of matters that they want to know about. The provision, which requires notification of all suspected, as well as confirmed, breaches of rules of conducts, is unnecessary because it goes much further than the principles we want to operate. It would be unnecessarily onerous for firms and regulators.
As the hon. Gentleman can imagine, such a provision could effectively force firms to work out a point at which the possible indications of a breach of rules of conduct might amount to a genuine suspicion. Firms would need systems to ensure that the information is captured and transmitted to the regulators, and having been notified of a suspicion, the regulators would have to decide whether to investigate and, if appropriate, consider what action to take. In many cases there would be nothing more than suspicion, so no action would be taken, but meanwhile the regulators would have to consider and prioritise all notifications received. That would be bound to limit their ability to respond appropriately in real cases, thereby imposing costs and burdens on the regulators and using up their time. Similarly, it can be argued that the suspicious activity reports used in the money laundering regime generate many false positives.
The Government thought hard about the provision and decided that removing the requirement would help to ensure that the regulatory system can work proportionately, without putting potentially costly burdens on firms that are disproportionate to any regulatory gain. Regulators will continue to be able to require firms to notify them of matters that they want to know about. The provisions introduced by the 2013 Act as section 64C of the 2000 Act remain. The requirement that firms must report disciplinary action that they take against employees will therefore remain in force. I hope that reassures the hon. Gentleman.
Amendments 31 and 32 would reinstate the reverse burden of proof for banking sector firms—the banks, building societies, credit unions and systemically important investment firms regulated by the PRA. Amendment 33 would allow the definition of the “relevant authorised persons” to remain in the Financial Services and Markets Act, which would be needed for amendments 31 and 32 to work as intended. Amendments 34 and 35 would apply the reverse burden of proof to all authorised persons across the entire industry. I will address the specific problems that each amendment would cause.
It is important that the Committee understands that the reverse burden of proof is simply not necessary to embed senior manager accountability in the senior managers and certification regime. The Parliamentary Commission on Banking Standards clearly established that the approved persons regime was wholly inadequate. We believe that the senior managers and certification regime clarifies the responsibilities of individual senior managers, which is something that any effective regulatory regime must deliver. Moreover, it will deter senior managers from taking a reckless or negligent approach to managing their responsibilities in the first place. I know that the whole Committee will agree with that. The duty of responsibility is a powerful incentive that encourages senior managers to take effective action to prevent such failings.
I have already set out how the new regime will deliver a step change in senior manager accountability. Regulators and firms will have the necessary clarity about who is responsible for what, and there will be no wriggling off the hook. Senior managers will need to take full ownership of their respective areas of responsibility. Each bank will have to submit to the regulators a responsibilities map, which will set out how responsibility for the business of the firm as a whole is allocated and minimise the risk of any responsibilities falling through the cracks between different senior managers.
The new regime places tough obligations on senior managers to act responsibly, and imposes stringent penalties if they fail to do so. For example, under the duty, a senior manager can be found guilty of misconduct by the regulator if a breach of regulation occurs in the area of the firm’s business for which they are responsible and they did not take reasonable steps to avoid the contravention. It does not matter whether they were aware of the regulatory breach. As in the example that the hon. Gentleman raised earlier, ignorance is not a defence. What matters is whether they took reasonable steps to prevent the breach. If they did not, they are guilty of misconduct. They will not be able to avoid liability simply because the email trail has gone cold.
Removing the reverse burden of proof does not change the penalties that can be applied. If found guilty of misconduct under the statutory duty of responsibility, a senior manager will face an unlimited fine or prohibition from working in the industry. As the chief executive officer of the Prudential Regulation Authority, Andrew Bailey, said, introducing the statutory duty of responsibility instead of the reverse burden of proof
“makes little difference to the substance to the new regime…This change is one of process”.
The Government are rolling out the senior managers regime to all authorised firms, including the fixed-income currency and commodities market. In the light of that extension of the regime, we must consider whether it is appropriate to apply the reverse burden of proof to every single firm in the financial services regulated sector, given how rigorous the regime is.
I sense you are getting slightly restless, Mr Brady, but I am nearing the end of my remarks. Amendments 34 and 35 would apply the reverse burden of proof to all authorised persons, the vast majority of which are small firms. It would be simply disproportionate to apply it to senior managers in all of those firms. I have spoken about the overly legalistic approach. We think it could lead to a perverse outcome, leaving senior managers in the largest firms less exposed to legal risk under the reverse burden of proof than those in small firms.
I have spoken at length about the clauses and set out why I strongly disagree with the Opposition’s amendments. I hope I have convinced everyone of the merits of my argument. I ask the Committee to oppose the amendments and accept the clauses.
Ordered, That the debate be now adjourned.—(Sarah Newton.)
Bank of England and Financial Services Bill [ Lords ] (Fourth sitting)
Rob Marris Excerpts(8 years, 10 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Economic Secretary to the Treasury (Harriett Baldwin)
Mr Wilson, it is good of you to come along this afternoon to hear the conclusion of my speech. I reassure the Committee that, having had lunch, I have been able to recollect a couple of other small points that I wanted to mention to the hon. Member for Wolverhampton South West. Earlier, he raised the question of the powers in clause 21, and I said that the Delegated Powers and Regulatory Reform Committee expressed no concerns about those powers. In fact, I can go further and reassure him that the Committee actually thought that the original provision tabled by the Government, which provided for use of the negative resolution procedure, was not ideal, and it recommended the affirmative resolution procedure—that is in the Bill today. The amendment was made after discussion with the Delegated Powers and Regulatory Reform Committee, which I hope reassures him. The Committee was not concerned about the powers.
Before lunch, we were talking about how important it is that this country has a strong and effective regulatory framework. With these clauses we are talking about the importance of conduct and the signals that we, as regulators and parliamentarians, send out about the importance of conduct and responsibility. We have achieved that with the introduction of the senior managers and certification regime across the financial services industry, together with the duty of responsibility. Opposition Members should bear in mind the wise words of Lord Turnbull in the other place, He was a member of the Parliamentary Commission on Banking Standards, and he said of the burden of proof in the original proposal:
“I signed up to its proposal, but I believe that the proposal now in the Bill is superior. Many philosophers have said, ‘Second thoughts are often best’… This is a time to follow that dictum. In this case, second thoughts are best. I hope that the House will reach the same conclusion as I have put forward and not support the amendment.”—[Official Report, House of Lords, 15 December 2015; Vol. 767, c. 2028.]
I agree with those wise words, and I therefore commend these clauses and request that they stand part of the Bill.
Rob Marris (Wolverhampton South West) (Lab)
It is a pleasure to be here with you, Mr Wilson.
I have listened to the Minister’s patient explanation, which has not convinced me. I therefore seek a Division on amendment 33. I appreciate that, to state the obvious, were the amendment for some strange reason not to pass, my other amendments would not proceed because they are consequential upon it—it is up to the SNP to decide on the other amendments.
Question put, That the amendment be made.
Protection of the EU’s Financial Interests
Rob Marris Excerpts(8 years, 10 months ago)
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Rob Marris (Wolverhampton South West) (Lab)
It is a pleasure to appear before you, Sir Edward; I do not think that I have had the pleasure before. I have a brief question for the Financial Secretary to the Treasury. I understood him to say that 0.2% of EU spending was thought to be subject to fraud. Have the UK Government made an assessment of the level of fraud and irregularities, which can be different, relating to the UK’s share of that EU expenditure?
Mr Gauke
I thank the hon. Gentleman for his question. It is 0.02% that is identified as being fraud. I think that a slightly larger number is suspected of and looked at as being fraud, but when it comes down to it, only 0.02% is established as being fraud.
In terms of the UK comparison, it can be difficult to make exact comparisons. All managing authorities across the UK have in place robust anti-fraud measures. Those include fraud risk assessments, mandatory checks on payments, fraud awareness training and regular referrals to OLAF where suspected fraud arises. We also support OLAF through the work of the designated UK anti-fraud co-ordinator, AFCOS, which is based in the City of London Police alongside Action Fraud. AFCOS continues to engage actively with OLAF and other member states to investigate and bring criminal proceedings against perpetrators of EU fraud. It would also be fair to say, looking at the ECA’s assessment of member states, that it samples member states’ activities; it is not intended to be a thorough audit of each and every member state to produce those numbers, so there is not a specific UK error rate on fraud, just as there is not for financial management errors.
Mr Gauke
In terms of UK infringement of state aid rules, the mandate of the relevant audit authorities for structural funds in the UK includes checks on compliance with state aid rules. The UK project reference here is not identified by the ECA, so it is not possible to comment on the nature of the errors. However, if my hon. Friend’s concern is about ensuring that state aid rules are properly enforced, I say to him that we will continue to push the Commission to focus on the areas of greatest error, and we think that that would be beneficial in ensuring that the EU state aid regime works as effectively for Europe as it can.
Rob Marris
I have a question for the Minister of State. In her explanatory memorandum dated 10 December, Baroness Verma, the Under-Secretary of State, Department for International Development, pointed out that the European development fund is the European Union’s main development co-operation instrument and that the total budget for it in 2014 was £34.5 billion. She also said that about 15% of that came from the United Kingdom. I say “about 15%”, because in paragraph 2 she says it was 14.68% and in paragraph 21, on page 391 of the bundle, she says it was 14.82%—it is about 15%. The Minister of State referred to 11% of DFID’s budget being spent via the European Union. Could he say briefly what the process is for deciding the percentage of DFID’s budget that is spent via the European Union?
Mr Swayne
The fact that 11% of our overseas development aid goes via the European Union is not inconsistent with the fact that 15% of what the European Union spends is accounted for by us. I am not quite sure how that works out mathematically, but I am confident that it is true. The issue of how much is spent—how much comes from us—is an assessment of our share of the European budget. My understanding is that that works on the same basis—[Interruption.] The seventh cavalry has arrived. The ratio of UK funds to the EDF is determined by our gross national income at the beginning of the period. Well, there it is.
Mr Swayne
The hon. Gentleman refers to the fact that he has experienced these Committees over a number of years. I wonder if it has occurred to him that there is at least a possibility that this might be the last such feast he has to attend, depending, of course, on a democratic process somewhat down the road. Nevertheless, with respect to the substantive issue he raises, I am certainly alive to that concern. I came to this role with a whole series of prejudices that have largely been dispelled in respect of the quality of aid delivered by the EU institutions.
Mr Swayne
There are other priorities.
Given that we spend 11% of our official development aid through the EU institutions, it is important that they reflect our priorities, including that of concentrating on the poorest, rather than on those groups mentioned by the hon. Member for Luton North. I am confident that we have been moving the European Union much more significantly in that direction. I am also satisfied with the progress of the reform programme, certainly in respect of gender—I think we have scored highly on moving the goalposts towards where we want to be.
Rob Marris
I have a few minutes of remarks, Sir Edward, but I know that you wish to make progress.
Rob Marris
Please do not tempt me. I congratulate the Financial Secretary to the Treasury. The European Commission report came out on 31 July and he signed off the explanatory memorandum for Parliament on 24 August—during the holiday period. Clearly his family never get their holiday though, and I urge him to change that. Similarly, the Minister in the House of Lords, Baroness Verma, promptly signed off her explanatory memorandum on the European foreign aid report from the Court of Auditors on 10 December, and here we are having a fairly prompt debate.
The explanatory notes, as ever, are helpful—the Financial Secretary knows my penchant for reading explanatory notes carefully. Paragraph 2 refers us to the report:
“The report summarises and evaluates measures taken by the Commission and Member States to counter fraud and irregularities against EU spending in 2014.”
That is a major area of concern, as my hon. Friend the Member for Luton North mentioned. Page 2 of the document from the European Parliament refers to the amount of fraud, saying
“the Commission estimates that tax fraud in all its forms amounts to EUR 1 000 billion in the EU, or EUR 2 000 per European citizen.”
That is a huge amount of tax fraud.
The reports deal with the monitoring and auditing to see that there is not fraud—not only tax fraud, but fraud and irregularities in other spending. The Commission report on page 21 of the bundle refers to measures already taken and to AFCOS, to which the Financial Secretary to the Treasury referred earlier. It also refers to
“a draft directive on the fight against fraud by means of criminal law, proposed in July 2012,”
and goes on to refer to
“a draft regulation on the establishment of a European Public Prosecutor’s Office (EPPO), proposed in July 2013.”
The EPPO would be established under article 86 of the treaty on the functioning of the European Union. I hope that one of the Ministers present—I imagine the Financial Secretary to the Treasury—will be able to indicate what progress is being made on that draft directive and that draft regulation. With the passage of time, I hope that there has been progress.
There is a huge problem with fraud and irregularities, not just in terms of tax. What is meant by irregularities? Just as my father used to say—I do not know why he used this example—all St Bernards are dogs, but not all dogs are St Bernards, so all fraud is an irregularity, but not all irregularity is fraud. An irregularity can occur when a beneficiary is not in compliance with the EU rules, which could be down to a genuine mistake.
Kelvin Hopkins
Should we accept that the term “irregularities” is merely a euphemism for fraud and that we should use the term “fraud” when we mean it?
Rob Marris
That is not my understanding of how the term “irregularities” is used in Euro-speak. It could be that there is non-compliance with the rules, but the reason for that non-compliance is not fraud but, for example, laziness, misunderstanding and so on. It does not necessarily have what us lawyers would call the mens rea for fraud.
Kelvin Hopkins
It is perhaps the same as the difference between tax avoidance and tax evasion.
Rob Marris
That is perhaps not the greatest of parallels, but I understand where my hon. Friend is coming from. Of course, tax avoidance is not illegal, but tax evasion is. Nevertheless, some tax avoidance—by, for example, Google—raises serious questions that my hon. Friend and I would agree on.
There is a great deal of difficulty with the error rates, some of which, again, will be driven by fraud and some by non-fraudulent irregularity. Take, for example, funds for jobs and growth on page 382 of the bundle. The hon. Member for Wimbledon talked about chapter 3, but, as lawyers often do, I went to the back to get to the juicy bits. The explanatory memorandum dated 9 December that was submitted by HM Treasury refers to chapter five of the European Court of Auditors annual report. That chapter is on funding for jobs and growth, for which research and innovation accounts for 60% of spending. At paragraph 16, the explanatory memorandum states:
“The estimated error rate for this area of expenditure is 5.6%, an increase on 4.6% for the 2013 budget.”
It refers to the European regional development fund and the cohesion fund. It states in paragraph 20, on page 383 of the bundle:
“The overall estimated error rate is 5.7%, an increase on 5.3% for 2013.”
The bête noire, of course, is the common agricultural policy and the common fisheries policy. Paragraph 26 states:
“The ECA estimates that the overall error rate for this area of expenditure stands at 3.6%, the same as in the 2013 budget.”
There are considerable concerns about error rates. A company trading in Britain, for example, with an error rate of 3.6% in its accounts would be open to serious questions about whether it knew what it was doing. The situation is more difficult with the number of member states in the European Union and the number of disbursements that they make to the hundreds of thousands of individuals and organisations in the European Union, but that is quite a large error rate.
In paragraph 4 of the Financial Secretary’s helpful explanatory notes, he refers to
“the various initiatives taken by the Commission in 2014 to counter fraud affecting the EU budget”.
If you will forgive me, Sir Edward, I will, because I have questions on these points, read out quite a long quote from paragraph 4. It concerns a series of 10 different areas and, with your indulgence, it will be simpler if I just read those out. They will then be on the record in Hansard. The areas are:
“negotiations between the European Parliament and the Council on the proposed Directive on the protection of the EU’s financial interests by means of criminal law; ongoing negotiations concerning the proposal to set up a European Public Prosecutors’ Office”—
I referred to that earlier—
“a Commission proposal to partially revise the Financial Regulation to align it with the revised public procurement Directive; the 2014 Communication on fighting corruption in the EU; negotiations relating to four delegated and four implementing Regulations on the reporting of irregularities; actions concerning anti-fraud policy in customs; measures taken to fight against VAT fraud; negotiations to include anti-fraud provisions in international agreements; the entry into force of new public procurement rules; a Directive on protection against currency counterfeiting; and progress on the implementation of the CAFS and Hercule and Pericles Programmes.”
For those hon. Members who have temporarily forgotten, Pericles is a European Union exchange, assistance and training programme for the protection of the euro against counterfeiting, so it is not directly of interest to the United Kingdom, but is indirectly; and Hercule is the European Union programme to promote activities related to the protection of EU financial interests, which is very much of interest to the United Kingdom. I therefore hope that the Financial Secretary, either today or perhaps later in writing, can give me and the rest of the Committee an indication of what is happening as regards those 10 items of anti-fraud policy at European Union level, helpfully delineated in the Minister’s explanatory notes, and of how the European Union, in co-operation with the United Kingdom, is getting on in those areas.
The explanatory notes, at paragraph 7, say:
“The Commission considers that Member States have, in general, adequately implemented the recommendations in its 2013 report, for example, the designation of an AFCOS”.
I hope that the Financial Secretary can say a little more about what is going on in that regard.
The explanatory notes also say, at paragraph 14:
“The use of false or falsified documentation or declarations remained the most common type of fraud.”
The Financial Secretary will remember the debate that we had in Westminster Hall on 14 January regarding VAT fraud on online purchases. Online retail purchases in the United Kingdom have gone up by two thirds since 2010. It is a growing area and will continue to grow as an area of retail sales. One hopes that there will not be a commensurate growth in fraud, but that is of great concern.
The note from the European Parliament—this is on page 2—states:
“Two directives were also adopted in 2013, one on the common system of VAT concerning an optional and temporary application of the reverse charge mechanism in relation to supplies of certain goods and services susceptible to fraud, the other concerning a quick reaction mechanism against VAT fraud”.
Will the Financial Secretary indicate, first, what a reverse charge mechanism is in relation to supplies of certain goods and services susceptible to fraud, because I do not know, and, secondly, what is being done about it? Clearly the European Parliament thinks it is a problem, and so do the member states, because a directive was adopted in 2013, more than two years ago—perhaps three years ago.
The second directive is a quick reaction mechanism against VAT fraud. Will the Financial Secretary enlighten us on what the European Union and, indeed, the United Kingdom are doing about a quick reaction to VAT fraud? As he will remember, considerable concern was expressed in the Westminster Hall debate of 14 January on both sides of the House about VAT fraud in online retail. VAT fraud does not only happen in online retail, but online retail is perhaps more susceptible to VAT fraud, as it is more difficult to address. As I have indicated, online retail is a growing area of commercial activity, and it is very big in this country.
Paragraph 22 of the Financial Secretary’s helpful explanatory notes refers to four specific recommendations contained in the report from the Commission on financial interests:
“urging Member States to use their AFCOS to its full potential; encouraging Member States to put in place effective measures to tackle conflicts of interest; asking specific Member States to strengthen their detection and/or reporting of fraud against the EU budget; and inviting Member States to inform the Commission of measures taken to fight customs fraud.”
Can he indicate, either today or later in writing to members of the Committee, what is happening in each of those four areas in terms of both the United Kingdom and the European Union? The report has indicated that something should be happening in each of those areas.
The European Parliament report—this is on page 4 —states:
“Particular attention should also be paid to the development of mechanisms for prevention, early detection and customs transit monitoring”.
Can the Financial Secretary enlighten the Committee on what customs transit monitoring is? I suspect, perhaps wrongly, that it could be related to VAT fraud, which is of considerable concern on both sides of the House.
Paragraph 36 of the Financial Secretary’s helpful explanatory notes—he has repeated this today—states:
“The Government believes that the best way to reduce the level of irregularities and fraud is through a more preventative approach, such as greater simplification of the systems and regulations.”
I agree that simplification is desirable—he and I have discussed it many times over the years—but I draw his attention to paragraph 14 of his own explanatory notes, which I read out earlier, regarding the use of false and falsified documentation or declarations. Some of that might be addressed through simplification, but if false documents, et cetera, are the most common type of fraud, as he indicates in paragraph 14, I suggest that simplification, as per paragraph 36, although welcome, is not necessarily the best way to address false documentation. I hope he can enlighten the Committee as to what Her Majesty’s Government propose to do about false documentation.
Kelvin Hopkins
It is interesting to sit on one of these Committees for possibly the 19th time. I have debated in almost all of them, if not in every one. I was a permanent member when there was fixed membership of such Standing Committees, and for several years I have taken part in debate on the issue we are considering, as a member of the European Scrutiny Committee.
It is amazing that no one has said how unacceptable and astonishing it is that for 21 consecutive years the European Court of Auditors has failed to sign off the European Union budget. If the National Audit Office could not sign off the budget of a Government Department for 21 years, and up to 4.4% of the Department’s funding had gone missing through fraud or irregularities, there would be a scandal.
We should raise our concerns again. We cannot just roll over and say, “Oh, well, it’s the European Union. What do you expect?” We should say it is not right. People’s money is involved—that is particularly an issue for substantial net contributors, of which we are one. We should not accept fraud or corruption, especially when, as I suspect, it happens in particular countries, and is less likely to happen in the United Kingdom and some of the better regulated countries. Perhaps I am claiming too much, but I suspect that certain countries and budgets in particular are involved.
I remember, going back years, a report of a beef subsidy being paid to a resident of a tower block in Turin. I suspect that there were not too many beef cattle in his tower block flat. I hope that these more extreme cases have been dealt with; nevertheless, there are clearly still things taking place that should not be. I hope that the British Government will take issue with the European Union over the matter in the strongest terms, once again. As the International Development Minister said, this sitting may well be the last of its kind. Who knows? I would certainly vote for that—not, I may say, with all my Opposition colleagues. Some of us, however, do take that sensible view, as I would describe it.
The level of corruption is ridiculous. Because of my concern, I made a serious suggestion in previous Parliaments that I want to repeat now. Let us consider, setting aside aid that goes to countries outside the European Union, fiscal transfers between members of the European Union. They could be made to member states’ Governments, so that there would be a net contribution to the budget of Latvia, for example. I know that there is a substantial net contribution to Latvia, and that a high proportion of its gross domestic product comes from European Union transfers.
If the transfers were done on the basis of GDP per head, so that those with the lowest level of GDP per head received the most net transfers, and those with the highest made the biggest contributions, but it was done to and through Governments, I think we would overcome much of the problem. The Governments of those member states would have the job of sorting out how the money would be spent—whether they would subsidise agriculture or industry, or simply reduce taxes. Whatever they did, it would be their choice, and they would do it democratically through their own Governments.
That would be seen as fair because rich countries would be contributing assistance to poorer countries on a proportional basis.
Rob Marris
My hon. Friend raises the intriguing prospect of a European Union Barnett formula, such as we already have, of course, in the United Kingdom. Perhaps I may take him back a bit, to his reference to fraud of more than 4%, and contrast that with what I understood from the Minister. Perhaps this is a comparison between apples and oranges, but the Financial Secretary mentioned 0.02%. There is a big discrepancy between those two figures. From where did my hon. Friend get his figure—or are we talking about two different measurements?
Kelvin Hopkins
I took my figure of 4.4% from the Minister at the beginning, but I notice that the table on page 37—or 21; there are two figures—suggests that the actual amount involved is €500 million, as opposed to 4.4% of the budget, which would be much more. Nevertheless, substantial fraud is still going on, and substantial sums of money are still going missing inappropriately and sometimes corruptly, so we ought to take it seriously.
My suggestion for simplification is that even if we stay in the European Union, the budget should be allocated simply on a proportionate basis according to GDP per head, so that the fiscal transfers are from rich to poor and the countries themselves decide democratically how they allocate that budget. We would have the same privilege as well if we were in that position. If they want to subsidise their agriculture, they can; if they do not, they should not.
I was in Lithuania a couple of years ago with the European Scrutiny Committee. Lithuania used to be self-sufficient in food, but it is now being paid not to grow food, so thousands of acres in Lithuania are left fallow because the European Union does not want it producing too much food. That is nonsense. Lithuania ought to be able to decide for itself what it spends its income on. If it wants to stay self-sufficient in food, that is a sensible thing to do.
As I said, I put this particular suggestion in more than one previous Parliament, and the response—not to me personally, but in European documentation—suggested that people did not like it. The reason was clearly that it would weaken the glue holding the EU together, because there would be no European common agricultural policy—or fisheries policy; it would be very sensible to get rid of that. Instead, each country would get a fiscal transfer, or pay out a fiscal transfer, and expenditure would be decided democratically within member states.
That would make the European Union a very different place. If we must have a European Union with large fiscal transfers, it would be a much more sensible way to do it, and we would avoid all the problems with fraud. If there is fraud within countries, it would be their problem to sort it out. If they did not sort out their own fraud, it would in a sense be their problem, and it would be the problem of the democratic electors of those countries to ensure that their Governments did the right thing. Anyway, those are my thoughts. I think it is ridiculous that we have a vast amount of fraud every year, year after year.
I have one final question to the Minister. There is a table on page 129 showing the evolution of budgets and payments from 2010 to 2014. Interestingly, in the last four years, the payments made have been larger than the final voted budget in each case. The last time the payment was less was in 2010. Also, the amount spent on the budget increased substantially between 2010 and 2013, by 21% over those three years, which is way beyond inflation. Last year, because there was such pressure and such concern, it decreased, but payments made were still higher than the final voted budget.
Even over those four years, there is still a 17% increase in budget expenditure, at a time when we are supposed to be more concerned about reducing spending in the European Union. Can the Minister comment on that? He might be able to explain it simply to me as a problem that is not serious, but it looks serious in the table, given the calculations that I have suggested.
Tax Avoidance and Multinational Companies
Rob Marris Excerpts(8 years, 10 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Roger Mullin
I thank the hon. Gentleman for his intervention, because I must admit I was not aware that only 65 staff were involved in transfer pricing. That seems to me to be remarkably few, given the challenges they face. I would welcome anything that can be done to strengthen their numbers.
Times have changed. Back in the 1970s, it was never envisaged that huge multinational corporations could quickly arise as a result of operating in the world of the internet. The tax system, which has been built up over many years—as the hon. Member for Warrington South (David Mowat) mentioned, part of it dates from the 1920s or thereabouts—is singularly unable to deal with some of the types of international corporations, such as Facebook and Google, that there are today.
The world has changed fast in other regards. I am old enough to remember being able to go into a café and just ask for a coffee.
Roger Mullin
I am. Nowadays, I am delighted to say that I know about cappuccinos and other things.
Roger Mullin
Yes, throughout my constituency. There is wonderful cappuccino in Cowdenbeath, I have to say. The likes of Starbucks were not present years ago. The internationalisation of what seem to be simple products is a comparatively new phenomenon.
We must not lose sight of the fact that many more traditional players, not merely internet companies, are engaging in practices that may be legal, but create major challenges internationally. If I were to ask in a local pub quiz, which of course I rarely go to—
Roger Mullin
Quite. If I were to ask, “What is the biggest charity in the world?”, many people would say the Gates Foundation, which The Economist has estimated is worth about $37 billion. Few would say that the answer is, as The Economist pointed out a few years ago, the Stichting INGKA Foundation—a charitable body whose aims include
“the advancement of architecture and interior design”.
This charitable foundation owns INGKA Holding, which owns the IKEA group.
That set-up, which is admittedly much more complex than I have just described, operates and moves money across territories such as the Netherlands, Luxembourg, Switzerland and so on. The money is not even tracked within that foundation. The IKEA trademark is owned by another private company, Inter IKEA Systems. Just to operate IKEA’s stores, of which there are approximately 290 in the world, the charity has to make substantial yearly payments. Eventually, the trail is thought to lead back to the owning family. When there is such complexity—and it is even more complex than I have summarised—we can see the kind of international challenge there is. That is why I believe the current tax regimes to be ill-equipped to cope and why we need fundamental reform.
Let me give a glimpse of another tactic that is used—the offshoring of companies. There are approximately 19,000 businesses registered at a single address in the Cayman Islands. That must be a pretty big hoose, as we would say in Scotland.
Roger Mullin
Yes, full of IKEA furniture.
It has been claimed by Oxfam, although I have not checked this out, that 98 of the FTSE 100 companies have subsidiaries in tax havens. There is a wider ethical question to address. This is not merely about how international corporations may evade UK tax. Some countries are much more vulnerable than the UK. There are considerable concerns, as the hon. Member for Foyle (Mark Durkan) said, in the developing world. Some 30% of Africa’s wealth is held offshore. Research by the International Monetary Fund has found that developing countries lose $200 billion a year to tax avoidance—more than they get in all forms of foreign aid.
The UK needs to take a lead. Hopefully we will see that when the Prime Minister hosts the anti-corruption summit in May 2016, because the UK remains at the centre of a global network.
Bank of England and Financial Services Bill [Lords]
Rob Marris Excerpts(8 years, 10 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Mr Alan Mak (Havant) (Con)
I am pleased to speak in support of this important Bill, which delivers a new settlement for the financial services sector—a vital sector of the UK economy—by strengthening the Bank of England and the regulatory regime governing individuals working in the sector. In particular, the Bill deserves support because it puts the Bank of England at the centre of a new regulatory system that will give it new powers, more responsibilities and better procedures. It will also strengthen the Bank’s governance, transparency and accountability and increase the accountability of staff working in our important financial services sector.
When the idea of a Bank of England first emerged after William and Mary came to the throne in 1688, the public finances were in disarray, the system of money and credit was weak and our financial markets were on the verge of collapse. Things were not much better 320 years later, however, under a Labour Government, who oversaw a banking system that had become too concentrated, took too many risks, and acted against taxpayers’ interests. It was under the discredited tripartite system that people such as Fred Goodwin were allowed to receive huge bonuses while running their banks into the ground.
Today our financial services sector is much stronger, and it requires the up-to-date effective governance and regulation that the Bill proposes. According to TheCityUK trade body, the financial services sector employs 7% of the UK workforce—two-thirds of whom are outside London—and accounts for 12% of our GDP. It is absolutely right that this Bill should support a growing and moral financial services sector.
I support clause 1, which will make the deputy governor for markets and banking a member of the Bank of England’s court. Following the expansion of the Bank’s responsibilities through the Financial Services Act 2012, a fourth deputy governor, with responsibility for markets and banking, was appointed and given responsibility for reshaping the Bank’s balance sheet. This important role, currently filled by Dame Minouche Shafik, does not have statutory membership of the court. Clause 1 will rectify that situation and ensure equal status for the fourth deputy governor. It will also give the Government the necessary flexibility to update the membership of the court, the Financial Policy Committee, the MPC and the new Prudential Regulation Committee. This will ensure flexibility to meet future need, and that the court is fit for purpose.
When the Bank opened for business in 1694 in temporary accommodation in the Mercers Hall in Cheapside, it had a staff of 17 clerks and two gatekeepers. Today its personnel is much wider, and none are more important than the members of the court. That is why I welcome the reforms in clause 1. It will update the powers of the court and increase its flexibility to ensure that new expertise is added when necessary. These are practical powers and they deserve the support of the entire House. I also welcome the reforms to the Oversight Committee, the Financial Policy Committee and the Monetary Policy Committee that my right hon. Friend the Member for Chichester (Mr Tyrie), who is no longer in his place, articulately outlined.
A key element of the Bill is the transformation of the Prudential Regulatory Authority into the Prudential Regulation Committee. As Members will know, the PRA is responsible for the supervision of around 1,700 banks, building societies, credit unions and major investment firms. The transition will result in the PRA, a subsidiary of the Bank of England, becoming the PRC, a committee of the Bank. This will ensure that it is fully integrated into the Bank’s work while retaining its operational independence. This measure deserves the support of all hon. Members—[Interruption.]—including those on the Opposition Front Bench. This will continue the process of building a unified institution, which will allow the new authority to focus more closely on its policy work, rather than thinking about back-office issues such as IT procurement.
Rob Marris (Wolverhampton South West) (Lab)
Is there anything in the Bill that the hon. Gentleman does not like?
Mr Mak
I am sure that the hon. Gentleman will agree that the proposals support the Governor’s “one mission, one bank” strategy, which entails supervision being conducted in a more effective and efficient way, as befits an institution of our modern global economy. The new arrangements come with important safeguards. For example, the statutory objectives of the PRA will remain undiminished; the name and the brand will remain unchanged; and its reputation for tough regulation will remain undimmed.
On financial services, the Minister mentioned earlier that one of the least attractive elements of Labour’s financial crisis was that no one at the top of the main financial services institutions faced formal punishment from the regulators or the courts. There appeared to be no link between the actions of those at the top and the fate of the institutions that they led. One of the FCA’s reports stated that
“individual accountability was often unclear or confused”.
The Bill strengthens and clarifies the individual accountability of those working in our systemically important financial services sector. I also believe that these reforms will embed a new culture within the sector, rather than simply reshaping the legal and regulatory framework.
Before I entered this House, I had the privilege of working with TheCityUK and a number of others working in the financial services sector on writing a report entitled the “Next Generation Vision for Financial Services”. It asked that our financial services sector be a part of society, not apart from society. I am pleased that the reforms set out in this Bill, in the clauses that I mentioned, will help our sector to get closer to the vision we articulated.
I particularly welcome the extension of the senior managers certification regime to all regulated firms, not just to deposit takers. The expansion of the regime to all financial services firms and all staff will enhance the culture of personal responsibility for senior managers, while, we hope, increasing the accountability of other staff who work in our financial services sector. It will also ensure that as the sector expands the regulation and the laws governing its operation increase to match the scope and size of the industry. Many firms beyond the banking sector, from investment firms and insurers to those involved in the so-called “shadow banking” sector, can pose a threat to financial stability, and it is therefore right to include them in this new regime.
In conclusion, the growth of the financial services sector, in both size and complexity, the globalisation of our economy and Labour’s financial crisis mean that the governance, functions and powers of the Bank of England need to be updated. So, too, does the regime that governs the individuals who work within our financial services sector. This Bill achieves both goals, ensuring a Bank of England that is fit for purpose: an effective central bank in a growing 21st century economy sitting at the heart of the world’s most successful financial services industry. The Bill deserves the support of the whole House.
Rob Marris (Wolverhampton South West) (Lab)
It is a pleasure to follow a fellow black country MP—my almost near neighbour, the hon. Member for Dudley South (Mike Wood).
I will be brief, as I have been exhorted to be. The Opposition welcome the improvements made to the Bill in the other place. We also welcome the Government’s preparedness to listen. There are some good things in the Bill. We give a partial welcome to the change allowing the National Audit Office to do investigations into value for money, although it is a pity that it will not be allowed to look at whether the Bank of England’s goals were achieved—not at whether there should have been goals, because that is not the NAO’s role, but at whether the Bank’s goals were achieved. That should be part of the NAO’s remit.
We welcome the extension of the scope of the senior managers and certification regime. We broadly welcome the changes on the enforceability of credit agreements and the regulation of what are called “transformer vehicles”, which are devices for risk mitigation—a kind of reinsurance. We very much welcome the extension of the Pension Wise guidance service, and the Bank of England’s increased duty to provide information to the Treasury is also welcome. We also welcome banks being authorised to issue notes in Scotland and Northern Ireland if their sister banks operate there.
Keith Vaz (Leicester East) (Lab)
Would my hon. Friend also welcome something for which some of us have been campaigning for the last 24 years? Twenty-four years ago, the Bank of Credit and Commerce International —the sixth-largest private bank in the world—closed and the Bingham report was commissioned to look at the supervision of the Bank of England and at its powers. However, one part of the report has not been published over the last 24 years—the confidential second part. Does my hon. Friend think it should now be published?
Rob Marris
I agree with my right hon. Friend. Many of his constituents in Leicester, and mine in Wolverhampton, were adversely affected by BCCI’s collapse, and unless we publish that material, we will not learn from it.
There have been considerable problems. As the right hon. Member for Chichester (Mr Tyrie), the Chair of the Treasury Committee, put it at the Report stage of the Financial Services (Banking Reform) Bill in 2013 in this very Chamber:
“The crisis of standards and trust in banking—and it is a crisis—is multi-faceted, and so are the necessary remedies…In a nutshell, boards were negligent and the system of regulation was found seriously wanting the first time it was tested.”—[Official Report, 8 July 2013; Vol. 566, c. 76.]
That was absolutely right. Sadly, that is still the situation now. There have been too few prosecutions. It bemuses me, as a lawyer, why the authorities cannot use section 16 of the Theft Act 1968, on obtaining pecuniary advantage by deception, rather than going off on jaunts unsuccessfully looking at conspiracy charges, which are much more difficult to prove.
There has been a series of post-2008 crash infractions by banking institutions. Since 2013, the new Financial Conduct Authority, which replaced the old Financial Services Authority, has dished out fines to firms large and small totalling almost £3 billion. That includes big fines to Barclays, Lloyds, RBS and HSBC. Banks such as Standard Chartered have been paying big fines in the States. That is for wrongdoing that took place after the crash in 2008, so some of these people simply do not learn. Today, according to the BBC, Barclays and Credit Suisse have been fined a total of $154 million by US regulators for their American dark pool trading operations. Those may have begun before 2008, but the wrongdoing continued until well after, so these people sometimes do not learn.
There are problems with the Bill. The test should be whether regulation will lead to better or worse compliance. Quite a lot of today’s debate has been about the reverse burden of proof, and that is important, but we want a strict regime to encourage compliance. However, that is not going to happen if we get rid of the reverse burden of proof. The question is, will this change make prosecutions easier or harder? It will make them harder. Will it make compliance more or less likely? My hunch is that abolishing the reverse burden of proof will make it less likely, but we do not know, because the Government are rushing to get this change made before the SM&CR comes in on 7 March—it is a good acronym, but I would pronounce it “smacker”, because that is what we should have.
We have had some indecision by the Chancellor of the Exchequer over the years. Back in July 2013, in the Government response to the report by the Parliamentary Commission on Banking Standards—this is still on the Government website—he said:
“Cultural reform in the banking sector marks the next step in the government’s plan to move the whole sector from rescue to recovery and ensure that UK banks demonstrate the highest standards, and are able to support business and drive economic growth.”
However, if the Bill is passed unchanged, it will take us backwards.
If we look at what the FCA is doing, it appears to have had pressure put on it. In its business plan for 2015-16—for this very year—its chair, John Griffith-Jones, said:
“In our last Risk Outlook we identified the seven most important forward-looking areas of focus in our view…Poor culture and controls continue to concern us, notwithstanding the efforts being made by firms to improve both.”
He wanted to look at the culture in the banking sector and the financial services sector, but that now appears to have gone out the window.
On the reverse burden of proof, I say with all due respect that, as far as I know—I stand to be corrected—the chief executive-designate of the Financial Conduct Authority, Dr Bailey, is not a lawyer. However, he is pronouncing on legal matters. In a letter from Lord Bridges of Headley, a Parliamentary Secretary in the Cabinet Office, he is quoted as saying:
“The introduction of the ‘duty of responsibility’ in place of the ‘presumption’ makes little difference to the substance of the new regime. Once introduced, it will be for the regulators (rather than the senior manager) to prove that reasonable steps to prevent regulatory breaches were not taken. This change is one of process, not substance”.
I have to say to Dr Bailey that, as a lawyer, I profoundly disagree. I know what the burden of proof is in civil cases, and I know what the burden of proof is in criminal cases. I know what the concept of strict liability is, and I know what the reverse burden of proof is. The reverse burden of proof is not as bad as strict liability, and my hon. Friend the Member for Bishop Auckland (Helen Goodman) mentioned that. We have strict liability for things such as the Health and Safety at Work etc. Act 1974—one of the Acts under which I made my living before I entered this place.
We want the Government to tighten the regime, not loosen it, as this Bill will if passed unaltered. Some of the proponents of the Bill seem to think, or certainly did think, that regulation of banking was too tight before the crash in 2008. In March 2005, the Centre for Policy Studies published a report called “The Leviathan is still at large” in which it called for, among other things,
“an industry with responsible senior management, ensuring that consumer protection is provided through market forces and competitive brands jealous of their reputations, and where risk-taking is not viewed as dangerous but as commendable”.
It also recommended
“an industry where competition abroad and competitiveness at home are not hampered by the costs and burden of being regulated, or by the costs (and conflicts) of educating consumers, or of policing and prosecuting money-laundering and financial crime.”
Before I came to the House this evening, I looked up the definition of a phrase with which hon. Members will be well familiar, “the reverse ferret”, which is
“a sudden reversal in an organisation’s editorial line on a certain issue. Generally, this will involve no acknowledgement of the previous position.”
It came from Kelvin MacKenzie when he was at The Sun. Well, tonight we have a double reverse ferret; I do not know what that is called. The report by the Centre for Policy Studies, published in March 2005, before the world crash, had 10 authors; it was a co-operative effort. Two of those authors are now Treasury Ministers; they were not MPs at the time. One of them is the Economic Secretary to the Treasury, who has been addressing the House tonight, and the other is the Financial Secretary to the Treasury. Before 2005, they were saying, “Labour’s got regulation too tight”, while many of us on the Labour Benches were saying, “Labour’s got regulation too loose”. To my great sadness, I was right and my own Government were wrong, but this Government are making it worse. They tightened things up with the reverse burden of proof, and so on, in 2013, and two years later, before it came into force, untested, they said it was to be done away with under this Bill. That is a double reverse ferret, and it is not acceptable.
Harriett Baldwin
I do worry about the hon. Lady sometimes, because she is again criticising the decisions of the independent Bank of England.
That is before we get to the Opposition’s other policies, such as bringing back secondary picketing, banning dividends, and nationalising businesses without compensation. Even Danny Blanchflower, the head of the independent review that the shadow Chancellor has set up to look at the remit of the Bank of England—
Harriett Baldwin
Danny is what he seems to like to go by. He said in a recent article for the New Statesman:
“We are in search of good ideas…the new Labour Party still doesn’t have many economic policies to speak of...The new Labour leaders are not economists and are going to have to learn fast.”
This debate shows that they have not learned anything.
While the SNP’s reasons for opposing the Bill’s Second Reading show some common ground with Labour’s, the SNP is at the other end of the spectrum in thinking that the Bill fails to provide sufficient independence from direct political interference for the Bank of England. They cannot both be right; indeed, they are both wrong. The Bill strikes the right balance on operational independence at the Bank of England and the FCA, and scrutiny by the people in the form of the Treasury Committee and the elected Government.
I will now address some of the points raised in the debate. I noticed that the hon. Member for Leeds East (Richard Burgon) did not point out that we now have the toughest rules on bankers’ pay of any major financial centre and that we have brought in new criminal offences in terms of financial crime, and that he did not welcome the fact that we are widening the duty of responsibility to the whole of the financial services sector. He asked one reasonable question, which was about the memorandum of understanding between the BOE and the NAO. He knows that I have written to the Governor and to the Comptroller and Auditor General, Sir Amyas Morse, and they will endeavour to try to publish the memorandum during the course of the Bill’s passage through the House.
My right hon. Friend the Member for Chichester, who made a superb, sweeping masterclass of a speech on the history of financial regulation, came up with some interesting suggestions about making PRA rulings public. Obviously that would involve some issues of commercial sensitivity in some of the things that it deals with. He said that he wanted to rename the court “the board of the Bank of England”. He pointed out, quite rightly, that the concept of “too big to fail” is still in the banking system, not least in that the Government continue to own large chunks of it. He mentioned the timetable, and emphasised competition, which is very important.
The hon. Member for East Lothian, in an erudite speech, pointed out that responsibility is what we need, and we believe that we are delivering it through the duty of responsibility. He rightly highlighted the importance of changing the culture. I like his analogy with the captain of the ship, and we believe that setting out the responsibilities of senior managers achieves that balance.
My right hon. Friend the Member for Cities of London and Westminster spoke up for his constituency. He mentioned a problem with interest rate swap claims running out of time, which I would like to take up with him on a separate occasion, if I may. I want to clarify that the power to appoint deputy governors is not the Governor’s alone; it is actually an appointment of the Queen, with the consent of the Chancellor.[Official Report, 4 February 2016, Vol. 605, c. 7MC.]
The hon. Member for Bassetlaw, who is not in his place, wants more transparency and competition. I gently point out to him—perhaps he will read this in Hansard—that the building society sector has welcomed the fact that the reverse burden of proof is no longer in the Bill.
My hon. Friend the Member for South West Devon made an excellent point about debt management, and I share his enthusiasm for free debt advice and organisations such as PayPlan, Christians Against Poverty, StepChange and, of course, Citizens Advice. I am keen to hear more detail from him about what more we can do to make sure that, as the FCA takes on responsibility for debt management, the fee structure works well for consumers.
The hon. Member for Carmarthen East and Dinefwr mentioned Welsh bank notes, which is an interesting idea, and proposed a sterling central bank. He will, of course, be aware that the North and South Wales Bank was bought by Midland Bank in 1908 and lost the ability to issue Welsh bank notes.
My hon. Friend the Member for Havant made a wide-ranging and supportive speech, but the hon. Member for Bishop Auckland and I are never going to see eye to eye on this Bill. On the sale of the Royal Bank of Scotland, how can she think that it is not in the wider interests of the economy for the Government not to own it? She is the one complaining about socialising losses, so she should be congratulating the Government on having started on the sale of RBS last August.
My hon. Friend the Member for Yeovil made a very good speech about competition and systemic risks. He is right that the investment firms and their systemic risk must be addressed by the regime. So far, eight investment firms have been identified as important in that regard.
The hon. Member for Kirkcaldy and Cowdenbeath made a very good speech about the importance of culture. We agree with him on that.
My hon. Friend the Member for Newark made a Nottinghamshire-based speech about the bellwether for the British economy. He made some excellent points. I reassure him that supervision and resolution will continue to be operationally separate under different deputy governors at the Bank of England. I also endorse his point about the regions. He will be pleased to know that Mr Andrew Bailey is, in fact, from Leicester, which is another important bellwether for the British economy. I was also glad to hear my hon. Friend make supportive comments about Pension Wise.
My hon. Friend the Member for Dudley South said how popular Pension Wise is in his area, and the hon. Member for Wolverhampton South West has clearly done his legal research.
In conclusion, the Bill brings National Audit Office scrutiny into the Bank of England for the first time. It protects its independence on decisions and extends a duty of responsibility, via the senior managers and certification regime, to change the culture of financial services firms. It brings extra help for consumers in the secondary annuity market and in capping exit charges, and ensures that the most vulnerable in society are protected from illegal loan sharks.
All those excellent measures will be lost if the Opposition have their way and tonight’s Second Reading is opposed. We cannot take irresponsible risks with financial regulation, which is what the Labour party wants to do. This is a good and sensible Bill, and I urge right hon. and hon. Members to back its Second Reading.
Question put, That the amendment be made.
Small Businesses: Tax Reporting
Rob Marris Excerpts(8 years, 10 months ago)
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Sammy Wilson
I am sure that the shadow Minister will make that point very effectively. We already know that there is a problem with communications other than those involving computers, so that is an important consideration when introducing a system in which people have to make contact four times a year.
Hannah Bardell (Livingston) (SNP)
It is a pleasure to serve under your chairmanship, Mr Hanson. I hope that hon. Members agree that we have seen a coming together across the political divides on a number of issues today. There are many shared views about the concerns that are out there.
I pay tribute to Paul Johnson, who created the petition, which, when I last looked before leaving the office today, had nearly 110,000 signatures. That is a sign of the strength of feeling to which hon. Members have referred. It is also important to pay tribute to the work of the Petitions Committee in ensuring that there are opportunities for the public to respond to and feed into Government policy. The hon. Member for Hertsmere (Oliver Dowden) mentioned the engagement on Twitter; the more we can open up our politics, the better.
It will not have escaped anyone’s notice that it is Burns night tonight and, for those hon. Members who did not know, Robert Burns worked in the Excise—
Hannah Bardell
Yes. What we have heard today is a call for the Government to reflect on the plans and on the pace of development. I am able to find a Robert Burns quote for every situation, and he once said:
“Dare to be honest and fear no labour.”
I commend those comments to the Government.
The contributions to the debate, across all political parties, have been insightful and thought-provoking, but while the Scottish National party supports digital transformation and recognises that it is absolutely key in all aspects of our society, we believe that it must be done in parallel with a simplification of tax policy. We feel that the Government’s lack of consideration about how the changes will work in practice flies in the face of the commitments they have made to simplify tax for small businesses. I believe that the Chancellor said that his “dream” was
“that people might actually understand the tax laws which they were being asked to comply with.”
Some time ago, the Government also said:
“We need to reduce the complexities in our tax system and the coalition is committed to delivering that goal.”
I hope, and assume, that the Government are still committed to that goal, but I think we have heard from hon. Members across the House today that people are not convinced about that.
I highlight again that a key concern across rural parts of Scotland and, I am sure, the rest of the UK, is weak digital infrastructure and connectivity. We appreciate that there has been significant investment by the UK Government, and we commend them for that. In Scotland we have also made a significant investment—£115 million, to be spent in the next year—against a challenging financial backdrop. The overarching issue for us is that we want small and medium-sized businesses to thrive and develop in rural parts of Scotland, but connectivity and infrastructure are not developing apace with that potential and with the proposed changes. Along with people from across the political divides, I urge the Minister and the Government to include that issue in the consultation and map out the weak areas of connectivity.
My hon. Friend the Member for Ross, Skye and Lochaber (Ian Blackford), who is not here today, recently highlighted a grave concern in his constituency. Thousands of houses and premises there lost connectivity over Christmas, which affected their businesses. If that were to happen regularly, one can only imagine how the changes might affect people. To give an example, a good friend of mine owns a bed and breakfast in the port town and fishing village of Mallaig. For some time he had a satellite on the side of his house—I do not know whether he still does—which provided mobile coverage to Rum, which is one of the Small Isles. There happened to be a storm one winter, and the satellite was knocked off. The whole island lost connectivity for a number of weeks. That is a small but important example of how connectivity is delivered in some of the rural parts of our United Kingdom and across the isles.
Many businesses and groups have argued that the proposals for digital accounts and quarterly reporting will make the requirements on small businesses more complex. The Federation of Small Businesses has condemned the UK Government’s failure to publish initial options for the form that the quarterly return will take, which has not been defined. A number of Members have mentioned that. The FSB has said:
“As such, the announcement runs completely contrary to evidence-based policy making, which only serves to undermine businesses’ confidence that Government is determined to tackle the administrative burdens of small business.”
Additional research has shown that on average, businesses pay £3,600 a year to comply with tax arrangements. The additional burden could have a significant impact.
The FSB has provided us with comments that its members made between 15 and 17 December last year in response to the proposals. One said that instead of making the lives of small business owners as simple as possible,
“HMRC should be pursuing the large businesses that do so very well out of not paying the taxes they are due!”
That is particularly resonant given the urgent question earlier today. Another member said:
“This is my worst nightmare come true. I am going to be spending more time filling out tax returns than actually running the business. I fear it may be the straw that breaks the camel’s back.”
An accountant said:
“I totally disagree with your comment that ‘it’s good for accountants’. As a professional accountant nagging those late clients to bring in their records and other information to beat the January deadline, having to do this now 4 times a year would be our worst nightmare come true. It would be January four times a year with no doubt penalties and interest for those that are late in filing the quarterly returns.”
I hope the Minister will take those comments on board and think carefully about them.
Many bodies have echoed the concern about the additional workload that the new reporting requirements will place on businesses. Chris Jones, the president of the Chartered Institute of Taxation, said of the quarterly reporting requirement that he was
“struggling to reconcile this with the announcement by the Chancellor…that the annual cost to business of tax administration will be reduced by £400m”.
Similarly, Anthony Thomas, chairman of the Low Incomes Tax Reform Group, has said:
“We gave a cautious welcome to the new digital tax accounts on the basis they might simplify matters for some low income taxpayers, although we remained very concerned that a significant proportion of the population, often the most vulnerable, remain digitally excluded.”
That applies for a number of reasons. People on lower incomes who start businesses, particularly women, may well be excluded and unable to navigate the new system. A number of Members have referred to the roll-out and cost of training and development. I hope the Minister will refer to how that will be done and assessed, because that is important.
Business for Scotland surveyed 278 of its members, and 92% of them felt that the changes would cost them significantly more and said that they already had enough to deal with. The majority are concerned about increased stress and fear that accountancy fees will be increased and that they will be constantly preparing for the next tax return. I appreciate that some of those fears may be allayed, but there is an issue of public perception, as we have heard today. It is about how the Government communicate and consult with business, which is key.
The SNP has significant concerns about HMRC’s ability to implement the changes in light of budget cuts and the closure of HMRC offices. It is predicted that many small businesses will need to seek advice on how to meet the extra requirements of quarterly reporting. James Hoare of PricewaterhouseCoopers has said:
“Digitising the relationship between business and HMRC is desirable and inevitable, but the scope and timescale of the proposed changes raise important questions, such as whether training and support will be provided for those less familiar with digital reporting.”
HMRC has had its budget cut. Its departmental expenditure limit will fall from £3.8 billion in 2016-17 to £3.1 billion in 2019-20, which is a cut of more than £700 million across three financial years.
We are all aware of the proposed closures and the devastating impact that they will have, particularly in Scotland, where offices are going to be centralised to the central belt in Edinburgh and Glasgow. Much has been said about how that will be a positive move, and it has been said that minimal numbers of jobs will be lost, but that is not what we are hearing on the ground, where there is a real fear that we will lose much of the expertise of offices and their staff, and that there will be an inability to collect tax efficiently.
The centralisation of offices has led to other issues being raised, include travel, particularly in my constituency of Livingston. One of the offices there was purpose-built for HMRC. It is not old or dilapidated in any way, and the local workforce have impressed on me the number of areas of expertise that they feel will be lost, and the real-terms cut in salary that will result from increased travel costs. Livingston, as most Members will know, is placed right between Edinburgh and Glasgow, and connectivity is very good. I cannot imagine what things will be like for those who are considered to within one hour’s travel.
The key themes are public and business confidence, and the development of broadband infrastructure and connectivity at pace. The burden must not fall largely on small businesses, because, as a number of Members have said, entrepreneurship and the people’s desire to start their own business may be reduced if the administrative burden is put on them. As we have heard, HMRC is already struggling to answer calls and deal with the current workload, so we need to understand the effect of the various changes and cuts coming down the line. In some respects, it seems like a perfect storm of service closures, reduced budgets and a greater burden on the service.
I hope the Minister and the Government will think carefully about all the issues that have been raised, and that they will extend the time for consultation and roll-out, as Members from all parties have asked for. Otherwise, there is significant fear, not only in the House but in small businesses across the country, that the burden will be greater for small businesses and damage could be done to them.
Rob Marris (Wolverhampton South West) (Lab)
It is a pleasure to appear before you again, Mr Hanson. I give my thanks to the Chartered Institute of Taxation and the Federation of Small Businesses in particular. I also thank the petitioners and those who tweeted in response to the petition.
Broadly, Labour welcomes greater digitalisation, but I think that the Minister—he is an honourable and painstaking Minister—has been a victim of some wooliness in this whole saga. Fears have been expressed that the Government are about to do things that the Government say that they are not in fact about to do. That is always a difficult thing for politicians, and we face that whatever our political party. We are well able to defend our views and those of our party, but it is more difficult to deal with people misunderstanding our views and then attacking those misunderstood positions. We have to go through a double process with them: first, we have to sort out what our position is and then we have to justify it.
The change is a question of timing, software and the assistance that will or will not be available. As I understand it—the Minister will be able to confirm this or say I have got it wrong—a lot of HMRC stuff is already done online: VAT is online; there is real-time information for PAYE returns; and company accounts are being submitted in what is called iXBRL. No doubt, the Minister will know what that stands for; I do not. There is also the digital tax account and the agent online self-service, which is not to be confused with the agent secret service and which is for such people as accountants to deal with HMRC regarding the tax affairs of their clients.
What the Government are doing—it is very understandable; it is happening all over society—is an attempt to externalise costs. That is what it is in economic terms. We see it all over the internet with the use of online services. Many Members will be familiar with this, but years ago people would go to a travel agent, and the travel agent bore the overheads. Now, people go online and book with an airline or a travel company, and they are bearing the overheads, because they are paying for their computer, the heating and lighting in their home and so on.
HMRC is externalising its own costs, which is understandable because HMRC is not a profit-making centre. If its costs of operation are lower, taxpayers benefit. However, we know from other examples that externalising costs does not always go smoothly. I will quote from paragraph 1.5 of the Chartered Institute of Taxation’s very helpful briefing:
“Making Tax Digital is a huge project that is going to bring in fundamental changes to the tax system and how both taxpayers and their agents interact with it. It has the potential to create a simpler, more workable tax system if it is developed and implemented in the right way but it must be managed carefully and in consultation with taxpayers, tax professionals and software developers alike.”
That sets the scene quite well in terms of what one ought to aim for in government, whatever one’s party: to have an inclusive process that runs smoothly and not too quickly. It is not clear that the other online initiatives in HMRC have gone so well. The CIOT states:
“There is evidence that past changes in reporting obligations have led to an increase in compliance costs for businesses, and that HMRC tend to under-estimate these costs.”
In the spending review, HMRC tells us that the measure will save businesses £400 million a year, which would be very welcome, particularly for small businesses. I hope the Minister will clarify that, because I keep hearing about the effects on small businesses. We absolutely focus on that, about which more later, but I am not sure whether there is a de minimis or upper threshold. Perhaps the Minister will elucidate, because I keep reading, “This is an attack on small business; big business does not have to do this, and therefore it is unfair.” That might be the case, but at the moment it is not clear to me that, if the measure were brought in, it would not apply to big businesses; or, to get rid of the double negative, when this comes in, it will apply to big businesses. So we need to know who the policy will apply to.
We all know from the debate today that there is a big risk of increased costs for businesses, and that those increased costs are likely to fall to a greater extent on small and medium-sized enterprises, which do not have accounts departments. So, proportionately, the hit taken by smaller businesses, if this were to go wrong, would be much bigger because of the initial set-up costs. Even if there is free software from HMRC, it has to be installed on a computer, if the small business has one. There is increased staff time in preparing and checking all the records four times a year and a potential increase in the fees of agents, particularly accountants. Some small businesses might need to engage an accountant, whereas previously they might not have done so.
All that costs money, and if HMRC were to raise queries four times a year, in contradistinction to once a year, the likelihood is that those queries would not be a quarter as many or a quarter as complex and that, when a whole year’s worth of quarterly queries is added up, it would take more staff time and cost more for businesses, particularly, but not exclusively, for small businesses.
There is a question of timing. I understand there will be consultation this spring, so the hares are now running. We have a petition of 110,000 signatures. Organisations have considerable concerns, many of them expressed today, particularly on two aspects that are linked. There is the sanctions aspect and whether sanctions would be applied for failing to do a quarterly update. My hon. Friend the Member for Nottingham East (Chris Leslie) was right: we could use a multitude of words for this measure, but we must not use the word “return”. Returns are for taxing, winning elections and birthdays when we get happy ones. Generally, we do not say, “Happy tax returns.”
Rob Marris
Indeed.
I hope the Minister can elucidate whether the software will be free, as has been indicated in some of the material I have read. If it is to be free, or paid for by the individual, when will it be available? Perhaps it is available now; there is no sense in having the system and no software to deal with it.
Perhaps the Minister will correct me if I am wrong, but I understand there has as yet been no impact assessment, which seems to be a rather large lacuna in what hon. Members and outside organisations engaged in this matter agree—it does not mean it is right if we all agree, but the tendency increases—is a pretty big change and may presage bigger changes on a more widespread basis.
It would be helpful for business if HMRC went about saving money—externalising costs, being more efficient, whatever we want to call it—before cutting staff so much. To cut staff and introduce this new measure is a triumph of hope over experience when it comes to computerisation programmes, whether in government or in the private sector.
I have another question for the Minister on the vexed question—in spite of the agent online self-serve system—whether there will be synchronicity by April 2017. At that point, quarterly updates will have to be filed by businesses and agents will have access to all the information online—not just the information of their clients, but HMRC’s—and will interact with HMRC digitally, because otherwise there is a risk that businesses will file updates four times a year, but their agents will not be fully engaged in that process that has happened before, and that is a concern.
As for staffing, there are lots of different ways to count staff. When I have probed this, there has been a difference of opinion between HMRC and the Office for National Statistics. However, if we look at the broad trend, the ONS and HMRC agree that since April 2010, when the Conservative-led Government started, there was a cut of almost 20% in HMRC’s staff by April 2015, and there are more cuts in staff to come. On the centralisation of offices, for example, which has been adverted to, only 90% of staff will transfer to the centralised regional offices, according to HMRC’s own figures. So a greater loss of staff is likely. Loss of staff per se is not a bad thing if an organisation is running more efficiently, but it seems to me to put the cart before the horse to say we will lose staff at the same time or even before we bring in this online stuff. Again, it is a triumph of hope over experience.
Will the Minister tell us about the practicalities and exactly what data will be submitted? My hon. Friend the Member for Nottingham East referred to this key question. The Government are saying to businesses, “We want you to provide some information four times a year,” to put it at its most neutral. What information will be required four times a year? The likelihood is that businesses will no longer have a choice about how to keep their records, because, although they may retain that choice in theory, for practical purposes, they will have to keep that information in a way that is compatible with the HMRC model. That may be a good thing, but uniform models in business are always a little suspect, because they can crowd out innovation. So there is a question mark there in terms of that forced uniformity, unless HMRC, for example, comes out with two or three different sets of free software, which I doubt, but perhaps the Minister can tell us more about that.
If, as has been suggested in some of the material—again, perhaps the Minister will clarify—this is a system whereby we press a send button and all the information squirts out the computer, down the broadband, if we have broadband, to the HMRC server, that will leave HMRC with a whole lot more information, and the hon. Member for East Antrim (Sammy Wilson) quite reasonably asked what HMRC will do with that information. He has been around for even longer than I have—he is pulling a face, but I do not mean his age; as an hon. Member of this institution, he has been here longer than I have. So, as he knows, the likelihood is that with any splurge of data from businesses hitting the send button, because they have it in the format provided in the software or whatever, a lot of the information will never be looked at. Businesses will supply all that information, but it will not be looked at; it will only clog up HMRC and potentially the system. That might lead to a lower rate of compliance, and none of us wants that.
Furthermore, experience tells us that if people are submitting information four times a year, the likelihood—not the certainty—of errors creeping in goes up about fourfold. Again, that is not necessarily the case, because the system might be a simple one, understood by businesspeople who are simply running a business and not having to be an accountant on the side, so they might be clearer about what they are supplying and therefore less likely to make errors. To expect that, however, would again be a triumph of hope over experience. The greater likelihood is that, with quarterly updates, there will be a considerable increase in errors—if not fourfold, threefold.
Seema Kennedy
I understand the point that the hon. Gentleman is making, but although there might be an error in the input of records, surely if everything is done electronically, there will be fewer calculation errors at least, or so one would hope.
Rob Marris
I agree with the hon. Lady that that is the theory, but the fact is that input errors are likely to increase in number if more information is being inputted—not necessarily, but likely. She is absolutely right that that is the point at which errors, if there are any, will creep in—garbage in, garbage out, as the saying goes.
Another practicality mentioned today relates to remote areas. I hope that the Minister will say something about that, because I have seen some suggestion that things could be done on a smartphone. I am no techie, but the only ways in which I can see that being possible are on a phablet with a screen of about 7 inches in size, and there are not many of those around, or by people using their smartphone as a modem and submitting information over the mobile telephone network, rather than broadband cables. However, many remote areas do not have 4G, so in theory someone could be dumping the information through the smartphone, which is being used as a tether modem, although that seems unlikely because the speed will not be that great, so there is a problem.
Nevertheless, I support the general idea of getting stuff online to achieve greater efficiencies. We have to be careful about those who are unable to cope with the online stuff, for reasons of disability and so on, but contrary to what some Members have been saying, the Government—whether now, or in four years’ time when we in the Labour party are in government—must be careful about going along with everyone who will not engage online. Some people will not engage online even when they can, although it would be more efficient for them to do so and it is more expensive for the rest of us that they do not.
The way business is going—not every business, but an awful lot of them—if a small business does not engage online, the likelihood of it being successful decreases year by year, because of the digitalisation of the world. If an HMRC initiative encourages some small businesses to have more digitalisation than they would have done had the system not come in, that could be a good thing not only for them and how they run their businesses, but for how they interact with HMRC.
The hon. Member for South Ribble (Seema Kennedy) mentioned a hairdresser. A peripatetic hairdresser, for example, with his or her own car does not necessarily have to be online to run a successful hairdressing business. The way the world is going, however, that lack of a digital presence is likely to tell us against the hairdresser. Some hairdressers will now have an automated system to send a text message to tell the client, “Don’t forget, I’m coming round to give you a wash and shampoo tomorrow afternoon at 2.30.” That is fairly basic stuff, but it is using the digital to enhance business with fewer missed appointments and so on. That is how the world is going, so a nudge—to use one of the Government’s favourite words—from HMRC is not at all a bad thing, although we have to be sensitive about those who are unable to get online, for whatever reason, whether in terms of disability or their geographic presence, such as in a remote area.
We have all had our sob stories about running a small business. Years ago, I helped to run a small family business with a few employees, and later I worked for a large and successful firm with 1,000 employees. Before I first came to this place, I spent most of my working life in the private sector. The nudge then was to get computerised. In 1995, although I am not a techie, I was the first partner in my law firm to have a computer on my desk, because I kept saying, “The world’s getting more and more digital.” Now, 20 years later, except perhaps for reasons of disability, no lawyer in the land can be found without a computer on their desk. Any lawyer who did not have one 10 years ago probably went bust, because otherwise the job could not be done. Sometimes, we have to nudge things, and I nudged my partners on that.
Nevertheless, I suggest to the Government that any such nudge must be accompanied by simplification, as most recently referred to by the hon. Member for Livingston (Hannah Bardell). The Federation of Small Businesses states that, while it is “fully supportive” of HMRC’s “digital transformation”, it believes that that should be made “in parallel” with the simplification of tax policy. That is very important.
The Government, in their formal response to the petition, stated:
“Many taxpayers have told HMRC that they want more certainty over their tax bill”.
I can see that, although I am not sure that quarterly reporting will do it, because what bedevils business, small businesses in particular, is the complexity of the tax system.
The Minister and I have been talking about this on and off for about 10 years, so I appreciate that simplification is the holy grail. When the Chancellor was a shadow Treasury Minister, he used to bemoan the fact that under a Labour Government “Tolley’s Tax Guide” had gone up to 1,000 pages—but it is now in round terms 1,500 pages. As I have said before, however, I do not blame the Government or their predecessor coalition Government for that. Tax affairs are complex, because we have a lot of smart people in this country, who are innovative in financial services, and they find loopholes. Then the Government have to write a whole bunch of legislation to plug those loopholes, but that only keeps putting sticking plaster on sticking plaster.
For all the commendable efforts of John Whiting and the Office of Tax Simplification, the Government—true under Labour as well—have not engaged fully in tax simplification; it would be rough and ready and there would be less discretion and more apparent injustices, but there would be much more certainty, which the Government recognise all taxpayers, particularly small businesses, want.
The hon. Member for East Antrim referred to problems with computerisation. They are legion and there have been problems with the ancient online self-service system. Something that happened under the previous Labour Government and, incredibly, was made worse by the coalition Government was the single farm payment scheme for farmers. It was a disgrace under a Labour Government and that disgrace got worse under the coalition Government. Farmers were supposed to file their claims online for the single farm payment—its name has changed now, which is what all Governments do when they get into difficulties—in a so-called simplified system. What happened? The system collapsed for those who could not get into it. Farmers, because of the nature of their business—I think the hon. Member for High Peak (Andrew Bingham) referred to this—often live in remote places. They, too, might not even be able to use a phone as a tether modem because they do not have 4G.
The Opposition’s plea to the Minister is not to put the cart before the horse. The Government should get the system up and running before they start cutting back on the available assistance. I am not going into all the problems at HMRC, but they are legion, known about and much discussed. The Government are taking them on board and there has been a little improvement in recent months. That is long overdue, but it is good. The Minister should keep it up.
It is no secret that there are big problems in HMRC and the Government accept that, which is why HMRC is moving 3,000 more people to answer telephones and so on, but if the new system is not to involve quarterly tax returns—the Minister was commendably clear about that ex post facto, after hares started running and people started getting worried—there is a twofold problem. First—this was referred to by my hon. Friend the Member for Nottingham East—will quarterly updates be a precursor to quarterly tax returns and a kind of PAYE for the self-employed and small businesses? Secondly, will there be short-termism, which affects very large companies now and bedevils British manufacturing? Footsie companies have to make quarterly reports and so on to the stock exchange, but if this system comes in, it has the potential to drive SMEs towards short-termism, and generally there has been cross-party consensus that that has not been good for our economy. It might have been good for a few arbitrageurs and people like that, but it is not good overall.
To finish, I ask the Minister where he thinks we are going beyond quarterly updates, if at all. What the Government said in their response to the petition was either contradictory or a harbinger of where they want to take this:
“At the March 2015 Budget the government committed to transform the tax system by introducing simple, secure and personalised digital tax accounts, removing the need for annual tax returns.”
So that we are all clear, I will repeat that last bit again:
“removing the need for annual tax returns.”
If that is what the Government are talking about in secure and personalised digital tax accounts, is that what they have in mind for businesses—to remove the need for annual tax returns? That may be a coherent policy, but I am not aware that they have announced it and it would be the kind of very big change to which my hon. Friend the Member for Nottingham East referred. Will the Minister therefore say a little more about where he thinks the Government are, or are not, going with digitalisation?
Mr Gauke
The traditional annual tax return, we can get rid of. What I am saying is that, rather than starting largely from scratch and pulling all the information together, businesses that need to make adjustments at the end of the year will have already done much of that work. Now, as I say, the tax system remains an annual system, and one needs to be able to look at the year as a whole for things such as capital allowances. However, it is worth bearing it in mind that the capital expenditure of the vast majority—something like 98%—of businesses would fall within the annual investment allowance of £200,000, so that is not necessarily too much of an issue for them. However, I understand the point about work in progress.
The hon. Gentleman is absolutely right to make the point that there is still quite a lot to consult on. Sometimes, I fear that we are criticised both for rushing things, charging in and not listening and for things being a bit vague because we are still consulting on them, and there is a certain mutually exclusive element to those criticisms. However, the sense of direction is clear, and it is right that we consult on the details.
Rob Marris
May I gently tell the Minister that the problem, rightly or wrongly, is that it has not been clear to many observers what the Government have been consulting on?
Mr Gauke
I think the information has always been out there, but we are where we are, and I am grateful to have an opportunity to set out where we are consulting. If the hon. Gentleman likes, I can set out some of the communication that has already been done. There are issues we are consulting on, but I believe that the direction is absolutely right.
The hon. Member for Livingston (Hannah Bardell) asked about the cost of the proposal. The hon. Member for Wolverhampton South West (Rob Marris) asked about the cost to business and the publication of an impact assessment. As with any other tax measure, a detailed assessment of the impact on administrative burdens will be published alongside draft legislation, and that is expected to be in December 2016. That assessment will be informed by prior consultation of affected businesses. HMRC anticipates producing an initial draft impact assessment alongside the formal consultation process, which starts in the spring.
Mr Gauke
As I said a moment ago, we are looking at the issue of payments, which I appreciate is a potentially vexed one. We are not rushing into that. We are consulting on it, but it is not part of the proposal announced at the autumn statement. The new arrangement will provide more information. Indeed, one benefit is that it will give a better indication to businesses of what tax they owe when it is due. That will be an advantage to businesses, which I think they will appreciate. However, we have not made any decisions on payments.
The hon. Member for East Antrim (Sammy Wilson) and other hon. Members raised the subject of broadband. I will come back to the issue of people who cannot make use of digital, but I want to respond on broadband, as it is a key point. Through the Government’s £1.7 billion investment programme, we are on track to deliver superfast broadband to 95% of premises by 2017. The Prime Minister announced at the end of last year that we are looking to implement an updated broadband universal service obligation for those not covered by the superfast plans. Industry are also set to roll out 4G mobile connectivity to 98% of UK premises well ahead of the 2017 obligation, through Ofcom’s regulatory spectrum licensing conditions.
In every walk of life, people are embracing the digital revolution. From shopping for groceries to making a GP appointment online or paying invoices at any time of day or night, millions of us benefit from digital services daily. Businesses, too, are harnessing the opportunities of the digital age to transform fundamentally their operations and the services they provide, with customers reaping the benefits. It is only right that the Government keep pace with the world around us. That is why we are seeking to transform HMRC into one of the most digitally advanced tax administrations in the world. “Making tax digital” is at the heart of those plans. At the spending review, the Chancellor announced a £1.3 billion investment in HMRC to make that vision a reality. That will see the end of the annual tax return and, in its place, the introduction of simple, secure and personalised digital tax accounts for businesses and individuals.
Importantly, the changes will deliver what businesses and individuals have told us they need. In particular, many businesses have said they want more certainty about their tax bill and do not want to wait until the end of the year, or often longer, to find out how much they have to pay. Businesses have also said they want tax returns to be more integrated into the way they run their business, rather than something done separately and many months later. The use of digital tools—accounting software or smartphone apps—will, for the first time, create that desired integration.
Businesses will be able to see in their digital account what each update means for their tax position as the year goes by. That will also make it easier for businesses to understand how much tax they owe, giving them far more certainty about their tax position and helping them to budget, invest and grow. Beyond helping businesses to get their taxes right, making tax digital will also help them to improve and develop their business. Targeted guidance and alerts will make them aware of relevant entitlements and reliefs or wider Government services to support business growth.
Apart from the modernisation of business practices, there is another important prize that we cannot ignore. Each year, around £6.5 billion of tax goes unpaid because of mistakes made by small businesses when preparing and filling in their tax returns. These reforms will improve the quality of record-keeping, reducing the likelihood of mistakes and contributing £920 million in additional revenue to the Exchequer by 2020, then £600 million a year thereafter. The alternative would be to stick to a system where taxpayers take out 18-month-old records, stare at them for a while as they try to figure out what they were doing then and tentatively use them to fill in a lengthy HMRC form, or drop on to their accountant’s desk a large carrier bag of records—
Mr Gauke
—or, indeed, a shoe box, and bear the expense of having the accountant do the job. The taxpayer then pays their final tax bill on money made up to 21 months previously. It is a system designed for a world of paper and bookkeeping, in the literal sense, and it is not tenable in the 21st century.
I do not, however, underestimate the scale of changes that making tax digital represents for businesses and their agents, in particular the transition to digital record- keeping. I also make no apologies for the scale of our ambition. With the Government and local authorities investing £1.7 billion to bring superfast broadband to over 95% of the UK by 2017, these changes are possible. As I said, the Prime Minister has announced that we are looking to implement an updated broadband universal service obligation for those not covered by the superfast plans. Equally, I acknowledge the concerns raised about the pace of the reforms. Similar concerns were raised about online filing and real-time information. However, HMRC’s impressive track record in implementing those changes speaks for itself. Working with interested parties, we can match that success.
Some have suggested that the reforms should be introduced on a voluntary basis, rather than requiring businesses to make the change. A voluntary approach would cost the same but deliver only a fraction of the benefits for business and the Exchequer. In the current fiscal environment, without the additional revenue generated by closing the tax gap, we could not have provided the £1.3 billion investment required to transform services for all taxpayers.
Some have said that it is overly ambitious to rely on digital as the primary channel. The fact is that we are going with the grain of the way small businesses are already moving. The benefits of digitisation are readily accepted by the majority of small and medium-sized organisations. While there has been plenty of debate—a lot of it online—about the challenges, I am heartened see that many businesses and their agents are already forging ahead. Already, 2 million small and medium-sized businesses are using software for their payroll and VAT.
I am, however, equally focused on ensuring there is support for those who need it. The Government have already said they will ensure that free software products are available to businesses with the most straightforward tax affairs. Some—a very small minority—will be unable to adopt digital tools due to geography, personal disability or other circumstances. In those cases, help will be provided. There is no question of forcing those who genuinely cannot go digital to do so. We will consult with business and representative bodies to understand fully who cannot get online and what support they need, and we will ensure we provide alternatives, such as telephone filing.
We want the reforms to provide the maximum benefit for business and the UK. We are already talking to a wide range of businesses, agents, software developers and professional bodies, and a wide-ranging consultation exercise will start in the spring. We are introducing the reforms gradually and not phasing them in fully until 2020 because we know how important it is to give taxpayers time to adapt. We are using volunteers to stress-test new services, so that we can be confident the new services work before they are rolled out.
If we get this right, the benefits will be considerable. We will reduce burdens on business, reduce the tax gap and bring tax administration well and truly into the digital age. These important changes will boost economic growth, so I urge hon. Members to support our reforms to make tax digital.
VAT Evasion: Internet Retailers
Rob Marris Excerpts(8 years, 11 months ago)
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Rob Marris (Wolverhampton South West) (Lab)
It is a pleasure to appear before you for the first time, Mr Hanson. This has been an important and fairly short debate. The hon. Member for Daventry (Chris Heaton-Harris), whom I praise for securing the debate, indicated when seeking it that he thought an hour and a half would be enough because the issues are quite simple. The solutions are quite complex, but the issue we are ventilating today is clear. It is about fraud. It is not tax avoidance, it is tax evasion.
I thank the House of Commons Library and Retailers Against VAT Avoidance Schemes or RAVAS, which I met on 17 November last year. At the same time, I also met Neven Juretic, who is the director of Maikai Ltd and a constituent of the right hon. Member for Arundel and South Downs (Nick Herbert). Mr Juretic suffered considerable losses, as the right hon. Gentleman outlined today. I also met Paul Miloseski-Reid, the UK lead trading standards officer. I have to salute Mr Juretic for the immense amount of work he has done not only in successfully lobbying his excellent local MP, but in producing an excellent document that proposes a number of solutions, as well as outlining the scope of the problem that our country faces.
The sector is huge and growing. The House of Commons Library tells me that UK average weekly internet retail sales are £1.1 billion, or about £57 billion a year, and growing. That is more than 15% of all UK retail sales, and the figure has gone up by two thirds since 2010—it is growing massively. Many of the frauds involve small consignments, such as tablet computers or iPhones, and the number of small consignments arriving in the European Union from outside the EU has gone up from 30 million in 1999 to 115 million in 2013, the latest year for which I could get figures. No doubt the number will have gone up considerably since then.
According to HMRC’s preliminary estimate of the tax gap for 2014-15, 10.4% of it, or £13 billion, is VAT. No hon. Member is suggesting that a crackdown on internet retail sales fraud would recoup all of that amount, and not all VAT fraud in the United Kingdom is to do with internet retail sales, but it is a big and growing problem.
The European Union requirement on companies—and individuals, I think—to register is covered by the EU electronic commerce directive, which we adopted in 2002. That is going back 13 or 14 years, and given the pace of change it is likely to need revisiting. It certainly needs to be enforced. I am unclear about whether the provisions of the directive are being enforced in the United Kingdom, but that might be because of my misunderstanding of what it entails.
My understanding is that a non-EU person trading in the EU—the wording in legislation is a “non-established taxable person”—is required to register for VAT if making “taxable supplies” under the meaning of the principal VAT directive, regardless of whether trading is above the £82,000 threshold for registration required of a UK or EU company. Apparently, therefore—the Minister will correct me if I am wrong—legal persons from outside the EU are breaking that directive when goods are sold over the internet into the United Kingdom, yet there appears to be insufficient, if any, enforcement.
Mr Juretic proposed various solutions in his excellent report on billion-pound frauds. I am sure that the right hon. Member for Arundel and South Downs looked at those, and he has mentioned some of them. I am not sure that we need a specialist unit, but many of the solutions that Mr Juretic floated are worthy of discussion in some detail. I will not discuss them all today, but HMRC ought to be looking at them and at similar things. That gentleman has considerable experience, has the bit between his teeth and has done a huge amount of work.
The National Audit Office, too, has looked at the issue in some depth—in about 2014, because it was covered in a report on HMRC’s 2012-13 accounts. I might be putting a gloss on what was said by the NAO, which can speak for itself, but my understanding of the report is that the NAO was not convinced that the steps taken by HMRC on online VAT retail fraud were sufficient. The report made some suggestions.
We need action from the Government. I have a considerable amount of time for the Minister: he is mild-mannered, clever and dogged, and he has had his brief for a long time. He can probably remember, as I do, discussing VAT carousel fraud in Finance Bill Committees about eight years ago, which was the fraud du jour. There was a huge amount of fraud, and Labour, in government, put through measures that were largely supported by the then Opposition party, which now forms the Government. The then Opposition certainly entirely supported the principle of cracking down on VAT fraud, because not only is it an attack on much-needed Government revenue, but it means that there is not a level playing field for businesses such as that of Mr Juretic.
VAT fraud puts people in the UK out of work. It is not a victimless crime that is only about money. It is about jobs, people’s lives and how we as a society trade. That is changing, so we need to make changes to trade honestly. Consumers in this country are not getting a fair deal in knowing what they are buying and from whom.
I have personal experience of the situation, with a company called LightInTheBox—not that it was fraudulent. I tried to buy a tablet computer from it. I understand that sometimes such goods come from overseas, even from outside the European Union, so I looked carefully during the transaction, but I was never told that the computer was coming from outside the European Union. I thought, “Great, a standard tablet computer,” but it took six weeks to arrive and had come from China. I also had a demand from the Post Office to pay approximately £50 in import duties—understandably, because the goods had come from outside the European Union, addressed to me. I got the money back from LightInTheBox, incidentally—an honourable company, which paid my money back and accepted the computer back.
Though I say it myself, I am an educated person and I am of average skill at using the computer, but I do not believe that I was told, when I made that purchase, that the tablet computer was coming from outside the European Union. That might have affected my purchase, because things take longer to arrive from outside the EU and there is the possibility of customs duties, which are quite properly payable on something imported into the EU. It is easy to get caught out. People who want to act honestly as consumers might quite unwittingly be aiding and abetting fraud. It is not about consumers saying, “Oh, I’ll have a bargain. I don’t care about VAT”, although I accept that some might be like that. Other consumers want to play it straight but are misled by websites.
The Government must take some responsibility, because they have been in office for nearly six years. This fraud undoubtedly existed before, so when my party was in government we could have done something about it, but it has gone up massively since then, commensurate with the increased number of online retail sales. None of us knows for sure how much fraud there is, but we know that it is going on. Its extent is a bit unclear, which is one reason why HMRC seems not to have taken the issue as seriously as it should. Had it done so, we would know a bit more.
There has been a series of parliamentary questions, written and during debates, going back almost two years to February 2014. In what I think was a debate in Westminster Hall—the Minister will know—judging from Hansard, my hon. Friend the Member for Cardiff West (Kevin Brennan) asked questions. Subsequently, my hon. Friend the Member for Chesterfield (Toby Perkins) and my hon. Friend the Member for Salford and Eccles (Rebecca Long Bailey), now a shadow Treasury Minister, asked written questions. In the Lords, Lord Lucas has asked questions. This is an ongoing concern of Members of both Houses, and the Government should move a little more quickly on it.
When I read, as the hon. Member for Daventry did, remarks that the newspapers attributed to Dame Lin Homer in the Public Accounts Committee yesterday that the Revenue had been investigating online trading VAT evasion since the spring of 2015, my heart was not filled with joy. Dame Lin has, to say the least, a mixed track record of success in public service. To be fair to her, other people had indicated that the Government were looking at the matter, including the Minister in the debate here almost two years ago. He said:
“HMRC is working to identify and address the main risks posed by commercial online operating models for routing goods into the UK.”—[Official Report, 26 February 2014; Vol. 576, c. 409W.]
It was good that HMRC was looking at it two years ago, but what has happened in the intervening period? The Minister will no doubt tell us, but for those of us not in HMRC—I suspect this is the case for the hon. Member for Daventry, though he can speak for himself—it is not entirely clear what has happened since the Minister said the risks were being investigated. That is troubling.
Lord Ashton said, I think last autumn, that this was being considered at a senior level, so the Government are aware of it and Members in both Houses have been pushing the Government, but we hear reports from Mr Juretic—Mr Miloseski-Reid also referred to this—about insufficient co-operation between HMRC and trading standards. That is taking place against a backdrop where in many parts of England, and I suspect Scotland as well, local authority income is dropping, yet trading standards comes under local authorities and for some of those authorities a strong trading standards department may appear to be a lower priority than, for example—and understandably—social care for the elderly. In that case, what gets the chop? Unless HMRC really seizes this problem, it is likely to get worse.
The Government have made a bit of movement in the draft Finance Bill 2016, which laudably has been published. I laud the Government for the number of consultations they carry out on possible changes to tax-related matters—there are probably dozens outstanding at the moment. The draft Bill has 88 clauses and clause 79 touches on this matter, though, as I understand it, it does only touch on it, because it deals only with data gathering. It is important to gather data to know who is selling what to whom and who is registered and so on, but while the Government, with all their resources, are probably more correct in their assessment of law than I am, I am not sure whether they have got it right on the law in relation to retailers such as Amazon.
It is easy to focus on Amazon. I am sure that it is not only Amazon that has questions to answer in this regard, but it is an enormous company with enormous sales in the United Kingdom, so some of us—I think the hon. Member for Daventry did to some extent—use it as a bit of shorthand for mass online retailers. That is fair enough, and he may well be right that they are watching us. Despite my reservations about reports of working conditions at Amazon, I do use it for internet purchases. I did not buy the said LightintheBox tablet through Amazon.
I, like I suspect many people, have registered my credit card details with Amazon. I have a username, password and so on with it—in fact, it is the only organisation with which I deal that I ask to remember my credit card details. When my credit card statements come, charges for purchases I have made are taken from my credit card account in the name of Amazon, through its different permutations, because Amazon has different legal entities in the European Union. It does not just say Amazon; it will also have some initials or a qualifier that shows which part of the Amazon empire it came from.
I am not a contract lawyer, but as a lawyer who knows a bit about contract law—I knock about on it—that says to me, as a consumer, that I am buying from Amazon. When I make a purchase, I do not give my credit card details to another company; I give them to Amazon. On the face of it, when I look at my credit card statement, I see the money is going to Amazon. Therefore, I have a contract with Amazon.
It is often but not always the case—Amazon also sells direct—that transparently, as part of the purchase process, that order is fulfilled by another company. I do not have a contract with that other company; I have a contract with Amazon. Amazon presumably has a contract—it certainly has an agreement—with that fulfilling company, which might be Bloggs Lighting Ltd or whatever, but my contract is with Amazon. If Amazon has a contract with me and, one surmises, with Bloggs Lighting, Her Majesty’s Government have, on VAT fraud and evasion, considerable leverage with Amazon to say, “You, as a legal entity”—or several legal entities as in Amazon’s case—“trading in the European Union are selling to UK consumers and the goods are delivered in the UK.” That is because I am buying from Amazon.
That is my understanding of contract law. The Minister may be able to dissuade me and tell me that I have misinterpreted it, but, if that is the case, we should take another look at the law. As I, as a consumer, am buying from Amazon, it should be dealing honestly with me and dealing legally with those companies from which it buys the goods that it sells on to me.
Amazon should therefore be susceptible to legislation in the United Kingdom as to how it conducts its business. That legislation should not simply be the data gathering in clause 79 of the draft Bill, although that would be helpful. The legislation should also be that Amazon must ensure that those companies from which it buys goods that it then sells on to UK consumers online are VAT registered if their turnover is above the UK threshold or if they fall under the other legal architecture for VAT registration. That is because one imagines that, often, those companies are doing quite a bit of business with Amazon—Bloggs Lighting may sell a lot of lighting stuff to consumers who go on to Amazon.co.uk. Therefore, morally or legally, I do not think Amazon can step back and say, “We are an intermediary.” The hon. Member for Daventry may know that, in the school playground in the west midlands, when the teacher says, “You did something,” they say, “It wor’ me, Miss,” which means, “I am not guilty; I did not do it.”
Chris Heaton-Harris
Is there not an incentive for Amazon and other e-retail marketplaces to sort this problem out? They earn their money from commission on the total price charged. While the market might have grown a bit, the cut that Amazon would receive from a £10 item would be better than the cut from £8 it might receive for a similar good that might have been sold in the way that I detailed in my speech.
Rob Marris
I certainly agree with the hon. Gentleman. To take that on one step, if someone were to buy an Apple iPhone through Amazon for, say, £500, which retails from Apple online at £600, and if the reason for the price difference is not a more efficient business model but VAT evasion, Amazon is at least morally complicit in that, because it gets a cut of a £500 sale that it would not have had if the consumer had gone direct to Apple. Therefore, in that example there is a moral risk to Amazon, and, I think, a legal risk, that it is benefiting financially from fraud, because it gets a cut of a sale that would not have been made had the fraud not existed. It needs to look closely at what it is doing.
The Minister said in a written answer on 26 February 2014:
“HMRC (in liaison with Trading Standards and other agencies) is undertaking intelligence driven investigations and projects to address concerns relating to the activities of online companies, including undervaluation of goods at import.”
That is very welcome, but it was two years ago that HMRC was undertaking those investigations and projects. I hope the Minister can tell us today that some of those investigations have at least made progress in the past two years. I realise that some of those investigations may have taken place and, in legal or criminal terms, led nowhere—that is the nature of investigations. We might find that there is smoke but no fire, as it were. In other cases, we might see smoke, investigate and find fire. Either way, I regard that as progress. If something looks a bit odd and we investigate it, we will sometimes find there is nothing illegal going on, and we will sometimes find there is something illegal going on. Will the Minister tell us how those investigations have proceeded and how many there have been?
The Minister also said in that written answer:
“Where the online trader is a non-EU company, HMRC has no jurisdiction.”—[Official Report, 26 February 2014; Vol. 576, c. 409W.]
I understand that, but two things occur to me. First, the 2002 EU electronic commerce directive should be enforced in the United Kingdom. Secondly, if HMRC has no jurisdiction over those non-EU companies, some but not all of which will be Chinese, HMRC should, as I have stressed, look at the companies over which it does have jurisdiction—for example, Amazon or eBay. Those are two of the major companies engaged in online retail sales in the United Kingdom, and those sales should be subject to UK jurisdiction. I understand all the difficulties of different legal jurisdictions, both within and without the European Union, but we need to get a grasp on this.
Simple data collection, as provided for in clause 79 of the draft Finance Bill 2016, is a step forward but is not sufficient. I hope the Minister will reassure us today that some of the investigations to which he referred two years ago have led somewhere and borne some fruit, and that HMRC will look seriously at the suggestions put forward by Mr Juretic in his report. If the Minister cannot enlighten us today as to which of those he thinks are worthy of a closer look, perhaps he could write to Members. I hope the Government will look closely at what legal powers it could take to address the Amazons of this world and of this jurisdiction.
The Financial Secretary to the Treasury (Mr David Gauke)
It is a great pleasure to serve under your chairmanship for the first time, Mr Hanson. It was not that long ago that you and I were debating tax matters in your long and distinguished period on the Labour Front Bench, as my shadow. I note that four of the five shadows I had in the previous Parliament are no longer serving on the Labour Front Bench. I hope the hon. Member for Wolverhampton South West (Rob Marris) will not see that as in any way ominous.
Mr David Hanson (in the Chair)
With due respect, I have had a release after 17 and a half years.
Mr Gauke
Yes, that is a very long sentence. I hope you are enjoying your new role, Mr Hanson.
I congratulate my hon. Friend the Member for Daventry (Chris Heaton-Harris) on securing this debate and setting out the case so well. I also congratulate my right hon. Friend the Member for Arundel and South Downs (Nick Herbert) on his passionate speech. He is correct to say that I have met Mr Juretic and listened carefully to the points he raised.
I will turn to specific points, but first I want to acknowledge the important work that Her Majesty’s Revenue and Customs is doing in collaboration with other agencies, both in the UK and internationally, to tackle tax evasion, which, as the hon. Member for Wolverhampton South West pointed out, is what we are talking about today. Tackling tax evasion in all its forms is a priority for HMRC. Last year, HMRC collected and protected a record £26 billion in revenues from compliance activities and secured more than 1,200 prosecutions using intelligence, sophisticated risking systems and smart data.
The phenomenal growth in online sales in recent years, which we have heard about this afternoon, has made many people’s day-to-day lives much easier but presents significant challenges for HMRC. That is because the supply chains are often very complex and involve a number of different entities. Suppliers can be located overseas and their records are not always available alongside the goods. All those factors combined make it much more difficult to spot where tax and duty have been paid.
To make things more complicated, HMRC is looking for frauds taking place in the midst of large volumes of legitimate trade. It is far from our, or HMRC’s, intentions to get in the way of legitimate trade, so HMRC is mindful of the need to target its activities proportionately. Nevertheless, this is a significant issue that we are determined to tackle. Building on its expertise in tackling evasion, HMRC has brought together specialists from across the Department and established in spring last year a taskforce to tackle the specific customs and VAT frauds that we have been talking about. That taskforce currently has more than 75 live investigations open into businesses or entities suspected of flouting the rules, and that figure is expected to grow to 150 before the end of the 2015-16 financial year.
Retailers Against VAT Abuse Schemes has highlighted about 500 businesses that it alleges are complicit in these frauds in some way. My hon. Friend the Member for Daventry drew attention to that list, and other hon. Members have referred to it. I assure the House that HMRC has examined the RAVAS list closely. For reasons of taxpayer confidentiality, I am not in a position to know, let alone say, what conclusions HMRC has reached in respect of each of the companies listed by RAVAS. However, it would only be fair for me to say that one cannot assume every company on the list is non-compliant.
At this point, I should touch on VAT registration numbers, which a number of hon. Members raised, including the hon. Member for Ross, Skye and Lochaber (Ian Blackford). Not all sellers are required to be VAT-registered. Overseas sellers that supply goods, located outside the UK, have no requirement to be registered for UK VAT. If they are compliant, in those circumstances, they would pay import VAT at the border. Of course, that would be a sticking tax, as they would not be entitled to reclaim that VAT. There are complications in this area, and the absence of a VAT number does not, in itself, suggest that a seller is breaking VAT law.
[Philip Davies in the Chair]
The issue is if sellers are claiming to be outside the UK and selling from outside it, but are in fact storing goods in a warehouse in the UK and dispatching them from the UK to a customer here. That changes the circumstances, but I want to be clear that the absence of a VAT number does not necessarily mean that fraudulent activity is occurring.
HMRC is working jointly with other Government agencies, including carrying out joint visits with trading standards and sharing intelligence with UK Border Force, to address risks across the entire supply chain to ensure that all sellers who sell online pay all the taxes that are due. To give hon. Members a flavour of that work, in an operation just before Christmas, HMRC and trading standards seized goods worth half a million pounds. As HMRC’s programme of activity continues, and both its operational intelligence and understanding of fraud improve, it expects to make more interceptions and seizures of illicit goods.
I should stress the point about illegitimate and legitimate trade. HMRC has the powers to seize or detain all goods in a warehouse, for example, but it also has to think about the potential impact of its actions, for instance, on the end consumer. If HMRC were seizing goods that subsequently turned out to be there legitimately, I suspect many of our constituents would want to raise concerns.
We recognise the concerns that have been raised by compliant businesses. Clearly, it is very important that non-compliant businesses should not be allowed to establish any unfair advantage over compliant businesses, as that would distort competitiveness. Again, that point was rightly made by a number of hon. Members. Tackling these frauds is just as much about maintaining a level playing field for business as it is about collecting the tax and duty that should be paid.
That operational work is the first strand of HMRC’s work to tackle these frauds. The second strand is engagement with the online platforms on which goods are sold.
Rob Marris
Before the Minister moves off the first strand—perhaps he is planning to address this point later—23 months ago he talked about the investigations that were going on. He tells us today that there are 75 live investigations. What he could tell us, which would not breach taxpayer confidentiality, is whether there have been any prosecutions—which would be in the public domain—in the last five years for this sort of fraud.
Mr Gauke
I will have to write to the hon. Gentleman with details on that. I am not in a position to give any numbers this afternoon, but I understand his point.
Turning to online platforms, I can tell hon. Members that a meeting with the top online platforms took place recently, at a very senior level, to explore the role that they can play in preventing such frauds. HMRC is proactively following that up to see how it can work with the platforms to tackle the fraud and better quantify the scale of that. However, having looked at the matter, HMRC’s view is that online platforms have no liability for unpaid VAT where the operator merely provides a marketplace for businesses to sell goods.
I know that this point was raised by my hon. Friend the Member for Daventry, and although I am loth to get too much into a legal argument, he mentioned the Kittel case. It is worth bearing in mind that the Kittel case applied in the context of MTIC—missing trader intra-Community—fraud, or carousel fraud, which the hon. Member for Wolverhampton South West and I debated some years ago. Irrespective of that issue, it is worth pointing out that the Kittel case has been used by HMRC in the context of withholding repayments of input tax to members of a supply chain. It is a civil case, not a criminal case, and in HMRC’s view, the important difference here is that all members of a supply chain in MTIC fraud have, at some point or other, title of the goods, enabling them to reclaim input tax. That is not the case when an online platform is involved in providing services relating to the sale. Therefore, HMRC does not believe that Kittel applies in these circumstances in the way that my hon. Friend suggests.
It is also worth pointing out that there are many parties involved in a transaction where this type of fraud may occur—for example, fulfilment houses, payment providers, freight forwarders and agents, and online marketplaces as well as online sellers. HMRC is not limiting anti-fraud work to marketplaces only, although it recognises that they play an important role and is prioritising its engagement with them in the coming weeks.
The third and final strand to tackling this issue is putting together an effective set of policies that can make this sort of fraud harder to perpetuate in the first place. As hon. Members will recognise, unilateral action is not going to solve the problem by itself, as there is an important international dimension to these frauds. They affect the revenues of other EU member states as well as the United Kingdom, and we are in close dialogue with them about how best to combine our efforts to tackle such frauds.
Rob Marris
Welcome to the Chair, Mr Davies. Would the Minister therefore say that in this respect, it would be advantageous to the United Kingdom to remain a member state of the European Union, because of that international dimension and the international action to which he referred?
Mr Gauke
I do not know whether that intervention was for my benefit or for the arrival of our new Chairman —Mr Davies, it is a great pleasure to see you in the Chair this afternoon.
The point I would make is that whether we are inside or outside the European Union, international co-operation is very much necessary in such cases. As an example of that, the customs aspects of these frauds—it needs to be emphasised that this is a customs as well as a VAT issue—are on the agenda for the meeting of the directors general of all EU customs services on 26 March. There is some evidence that the UK has been particularly targeted for these frauds because of our much greater take-up of online shopping. That will make it all the more important that we work closely with our international counterparts, for the benefit of the UK and more widely. HMRC already works closely with the European Commission and OLAF, the EU’s anti-fraud unit.
Of course, there is a lot more to be done, not least as online retailing gets ever more popular worldwide. All taxes are kept under review, and HMRC is considering whether there need to be policy changes or other changes to the rules that apply to online sales. However, for effective longer term solutions, we will need to continue our engagement with other EU member states, the Commission and the OECD, and I would like to assure hon. Members that that dialogue is already under way.
Our goal is simple: one where the customer continues to enjoy the benefits of being able to buy goods conveniently through an online platform, but where unscrupulous businesses cannot undermine, through fraudulent activity, businesses that do the right thing. Although there is still much work to be done, I hope that hon. Members will appreciate the strong and collaborative efforts that HMRC is making to tackle this issue.
Chris Heaton-Harris
It is a pleasure to serve under your chairmanship, Mr Davies, and I welcome you to the debate.
When I bid for time for this debate at the Backbench Business Committee, I was hoping to get 90 minutes sometime at the end of January so that I could secure the support of the former Chairman of the Public Accounts Committee, the right hon. Member for Barking (Dame Margaret Hodge). I served on that Committee with her for five years, and we had plenty of conversations about online marketplaces, how much tax they pay and how much tax they should pay—she was very interested in the issue.
Given that we had just 24 hours’ notice of the debate, I am pleased that we have the Minister, the shadow Minister and the SNP spokesman here. I am also pleased that my right hon. Friend the Member for Arundel and South Downs (Nick Herbert) was able to attend and talk about his constituent’s experiences.
Obviously, I was pleased to hear about the investigations and goods seizures that are going on, because my constituent would like to be assured that HMRC is not reacting slowly to a situation that is developing extremely quickly. More and more of these companies are being formed, and dormant companies that have already been registered are being activated and used in the way I described.
I am pleased that there have been high-level meetings with the top online marketplaces, and I would be fascinated to find out their reaction to the inquiries that are taking place.
Rob Marris
I do not seek to draw the hon. Gentleman on the timing, but perhaps he could say whether he understands why some Members, certainly on the Opposition Benches, feel a little frustrated—he may or may not express a similar view—about the apparent lack of urgency with which HMRC is dealing with this growing problem.