Small Business, Enterprise and Employment Bill

Baroness Drake Excerpts

Monday 26th January 2015 Grand Committee

[Baroness Drake (Lab)]

My Lords, I support Amendment 68ZY. My noble friend Lady Hollis has been tenacious in seeking to achieve fairness for a section of the workforce that is excluded from the national insurance system.

As my noble friend explained, this group of workers is caught by the rules whereby someone has to earn, in a single job, an amount above the lower earnings limit—£5,700 a year—to come into the national insurance system, although they do not have to pay national insurance contributions until they earn more than £7,500 in a single job. If, however, they have two or more short-hours jobs—mini-jobs—all of which pay below £5,700 but which may involve them working, say, 30 hours a week, they cannot add the wages of those jobs together to get above the lower earnings threshold and into the national insurance system. The amendment is simple. It proposes lowering the earnings threshold for entering the national insurance system to allow many more of the growing number of workers on mini-jobs and non-guaranteed hours to get into the national insurance system.

In the past, it was thought that perhaps 50,000 people, mostly women, were affected, as they sought to get an income by putting together a series of mini-jobs. But the scale of the problem is now far greater because of the increase in the use of zero-hours and minimum guaranteed hours contracts in the economy, which can deliver little or no wages in some weeks if little or no work is offered. Workers may need several casualised jobs to get an income but then find that not one of them pays above the £5,700 entry level for the NI system.

According to the ONS’s Annual Business Survey in January 2014, there were some 2.7 million zero-hours contracts, of which 1.4 million provided work to people and 1.3 million did not. The 2011 Workplace Employment Relations Study revealed that 23% of workplaces with 100 or more employees used zero-hours contracts. My noble friend has provided far more detail on the growing evidence available but it is clear that the number who find themselves excluded from the national insurance system will increase.

A modem welfare system has to be inclusive and responsive to the realities of the contemporary labour market. Over the years, Parliament has recognised the unfairness of locking certain groups of people out of the national insurance system and has amended the rules accordingly. As my noble friend listed, mothers of children aged under 12, disabled people, carers, a grandparent caring for a child whose mother works, and the unemployed on JSA are credited into the national insurance system. It seems all the more unfair that there is a group of workers whose pattern of employment and earnings does not deliver wages in any one job sufficient to meet the entry point of £5,700 for the NI system and they cannot add their wages from their other jobs to get through the turnstile. A hundred pounds per week, which is below the lower earnings limit, equates to almost 16 hours on the national minimum wage, so a person with more than one such mini-job could be working a significant number of hours but still be excluded.

Universal credit is income-based so it will not provide a comprehensive solution to this problem. For example, if a single person is earning more than £4,000 a year in any job, they are above the level for universal credit so they do not get credited in. However, £4,000 is significantly below the lower earnings limit of £5,700 and if not one of their mini-jobs pays above this level, they still cannot get credited in. My noble friend gave us another example. If a partnered woman is working but has no single job paying wages that reach £5,700, and if her husband is in work and they have two children aged over 12 when his earnings float him off universal credit, the woman cannot get credited through to the national insurance system. The need to address the position of such women is made even more urgent because from April 2016 these women will no longer be able to gain state pension though their husbands, as the married women’s dependency pension will cease. They will be locked out either way you cut it. Yet the ONS report revealed that women make up a greater proportion of those on zero-hours contracts, and that people who report being on such contracts are more likely to be younger and, I presume, to be single.

The Secretary of State, Vincent Cable, and other employer bodies such as the EEF, the CBI and the IoD argue that zero or no guaranteed-hours contracts have a place in today’s labour market and that employers need flexibility in today’s global economy to manage the consequences of economic downturns. If that is the case, the issue of workers who accrue income across one or more contracts but cannot enter the NI system is here to stay. It means also that it is here to be addressed. The right of businesses to employee flexibility should not deprive workers of access to the national insurance benefits system—but that is exactly what it is doing and will do, unless the problem that my noble friend has so tenaciously and consistently articulated is addressed.

It is argued that such zero-hours contracts are required to meet a short-term need of employers but the persistency of zero-hours contracts is evidenced by the Chartered Institute of Personnel and Development, whose findings indicate that of the workers affected, 65% have been on such contracts for two or more years, 40% for five or more years and 20% for 10 or more. The employer’s need may be short term but the employee’s contractual position can be long-term and bring a long-term lock-out from the national insurance system. The Government’s ban on exclusivity clauses in zero-hours contracts allows people to work for more than one employer but will not provide a definitive solution to the problem. The freedom to have several contracts does not provide entry into the national insurance system if none of them produces a wage above £5,700.

My noble friend Lady Hollis has faced varied rebuttals from the Government on her proposed solutions: that it is not reasonable to try to share employer’s NI across mini-jobs; that the women will still not want to pay class 1 contributions; that there are only a few of them; that their situation is temporary; that they have time to make up missing years; that universal credit will solve it and that, if all else fails, there is pension credit. That persistent rebuttal is becoming increasingly hollow, though, since both the Secretary of State and business itself confirm that there is an integral need for these minimum and no-guaranteed-hours contracts as a functioning part of a modern labour market, so we need to find a solution.

I repeat: over the years, Parliament has recognised the unfairness of locking certain groups out of the NI system, including the state pension, and has amended the rules accordingly. As my noble friend has advised, it has rightly accepted that those who are unemployed and in receipt of benefits such as JSA, have no employer and do not pay national insurance are in the national insurance system. Those who are lucky enough to get a single job earning £6,000 or £7,000 do not pay national insurance contributions but are also in the system. Lowering the lower earnings entry point to allow many more of the growing number of those on mini-jobs and no-guaranteed-hours contracts to enter the national insurance system has the merit of simplicity and is the fair thing to do.

[Lord Young of Norwood Green]

My Lords, after that forensic double examination, I cannot help reflecting that I am glad I am not responding. I support the amendment because it raises a significant issue. I also want to add the point that here are a Government who say that the best thing we can do is to encourage people to get into work, and I think that that is right; people who are locked out of the employment market, for whatever reason, face a real challenge. So these are people who are determined to work, which is what the Government want them to do, and determined to make a contribution not only for themselves but for their families, yet they are being penalised. The case being made is a valid one. We recognise by the nature of the contributions that this is quite a complex issue, so I look forward to the Minister’s response.

Pension Schemes Bill

Baroness Drake Excerpts

Monday 12th January 2015 Lords Chamber

[Baroness Drake (Lab)]

My Lords, this amendment sets out a duty on the Financial Conduct Authority to protect savers accessing their pension savings during the actual decision-making and purchasing process, as distinct from a duty to protect savers receiving guidance from designated guidance providers. In particular, the amendment sets out that the FCA should require pension providers to take active, not just passive, steps to check that people are made aware of the factors that will impact their decision.

I will begin by highlighting the problem that drives this amendment. Steve Webb, the Pensions Minister, commented at the end of the Public Bill Committee sessions:

“To be clear, if we thought everything was fine in the world of retirement income choices the FCA would not be doing a thematic review of annuity sales practices or a retirement income market study … those studies are being undertaken because we are aware that there have been problems in this market. We are prepared to introduce further measures, if that is what the studies suggest”.—[Official Report, Commons, Pensions Schemes Bill Committee, 4/11/14; col. 309.]

I believe that that is exactly what those two studies suggest. Since the Bill arrived in this House the FCA has in fact delivered its two reports: the thematic review of annuity sales practices and the interim report on the retirement income market study. Perhaps I may capture the essence of what it reported.

The review found that annuity sales practices were contributing to consumers not shopping around, buying the wrong type of annuity or missing out on a potentially higher income. The consumers’ tendency to buy from their existing pension provider weakens competition. The FCA identified the non-adherence by providers to the ABI’s own retirement choices code. In fact, the ABI urged the FCA to replace its code with regulation because it recognises that with the new freedoms more needs to be done.

As to the FCA retirement income market study, that was initially focused on how to get competition working more effectively for consumers; but following the Budget the emphasis was shifted towards looking at how market conditions might evolve from the advent of the reforms in April 2015. Its interim report suggests that consumers will be poorly placed to drive effective competition; that the retirement income market is not working well; and that the introduction of greater choice and potentially more complex products will reduce consumer confidence and weaken the competitive pressures on providers to offer good value.

Even after repeated analysis of these issues by the Treasury, the FSA, the FCA and others over a period of six years, and just three months away from the introduction of major reforms to the UK pensions framework in April 2015, too many consumers are still being failed by their providers. As my noble friend commented, the FCA research confirmed the well known biases that savers reveal that make them so vulnerable to being sold products that do not best meet their needs, and that the choices consumers make are strongly influenced by how options are presented to them. Martin Wheatley, the FCA CEO, said in a recent interview—published just this weekend—that the timescale to deliver the new freedoms and design suitable products was challenging; providers have been struggling to complete proper due diligence testing on their products.

Turning to the savers, the new freedoms bring with them an even greater onus on individuals to make an active decision about what to do with their pension pot. It is very important, therefore, that consumers are well placed to make decisions that are in their interests. We know the challenges to achieving this: provider behaviour; product design and complexity; savers’ behavioural biases; and financial capability. The noble Baroness, Lady Greengross, is president of the International Longevity Centre, whose new report on making the system fit for purpose reveals the extent of the limited knowledge of savers about relevant products and services, despite the new freedoms being just three months away.

The guidance guarantee is a key policy measure for helping people to navigate the complex retirement options arena from April 2015. I know that there are people working very hard to make its delivery a success. I certainly want it to be successful, as it will provide a very important service to savers. In support of that guaranteed guidance the FCA has confirmed that it will expect providers to check whether a customer has used the guidance service and encourage them to do so if not. It has also recommended that the pensions guidance service incorporates tools to support consumer decision-making. This provides a first line of defence against consumer detriment. The provision of guidance is extremely important, but what the customer does with the guidance also matters. The success of guidance can be achieved only by the whole industry working together. Some people will choose not to take the guidance even if encouraged by their provider.

The Government are very dependent on market behaviour to ensure the success of the new freedoms. Beyond guidance, the saver has to move into the process of making a decision and selecting or purchasing a retirement income route. It is what happens at that stage—the exchange between the consumer and the provider—that is causing so much anxiety.

This amendment is directed at that exchange between the provider and the consumer and puts a duty on the FCA to secure an appropriate degree of protection for the consumer at that stage. That is what is popularly referred to as the second line of defence, to mitigate the risk that savers make detrimental and irreversible choices. After the pension provider has asked the customer whether they have accessed guidance, it should be required to make active interventions, not just the current passive and paper-based disclosures. The FCA reports show that these are clearly failing savers, particularly where they buy a product from their existing provider through inertia, rather than making an active choice. The FCA should require pension providers to take active steps to make people aware of factors passively referred to in the literature and key facts documentation, by asking key questions of the consumer to highlight such matters as the potential impact of health, income tax, dependants, longevity, investment risk and income needs through retirement. That will highlight factors whose impact can lead to poor choices if overlooked.

The FCA analysis, as my noble friend said, revealed that the take-up of enhanced annuities because of health factors by those who remained with their existing pension provider was just 5%, while for those who shopped around the take-up was 50%. That is strong evidence that consumers need an active prompt to consider factors that have a bearing on their incomes in retirement. It is all the more important because decisions on pension savings can be irreversible. This Bill and the Taxation of Pensions Act create unprecedented options for retirees, so the passive approach is no longer sufficient.

The FCA is expected to publish its final market study report in early 2015. It is consulting on certain proposals, as my noble friend detailed, and it will continue to monitor the market. However, this is a reactive approach, waiting to see what problems emerge, and the amendment is underpinned by the belief that prevention is preferable to later cure. With around 400,000 consumers expected to access the new pension freedoms in 2015, yet another review may be required without the additional protections proposed in the amendment, to discover why thousands of pension savers did not make good decisions or get good value for money.

The amendment would introduce a general duty on the FCA and allow protections in time for April 2015, but it would not prevent the Government setting such other further requirements as they considered appropriate in the light of how the retirement market evolved. As the noble Baroness, Lady Greengross, stated when moving her amendment, consumer advocates, industry groups, providers and members of the Work and Pensions Committee have all expressed concerns that, without a second line of defence, mis-selling and poor decisions remain a key risk.

[Lord McKenzie of Luton (Lab)]

My Lords, I support the amendment and have added my name to it. As we have heard, it is about placing a duty on the FCA to set regulations for pension providers to deliver adequate protection for consumers—the second line of defence. However, having heard the contributions of my noble friends Lord Bradley and Lady Drake, I find myself with nothing further to say. I could go through some partial repetition but I think that, in the circumstances, I will desist.

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[Lord Bradley]

I am grateful for that clarification as, I am sure, is the whole Committee. In moving Amendment 44A I shall speak also to Amendments 47 and 48.

At this Committee stage, we have tabled amendments on all the recommendations of the Delegated Powers Committee. The Government will either accept the recommendations of that committee or put on record why they do not believe that the delegated power in question requires the affirmative procedure. That is what our amendments in this group do. The Delegated Powers Committee recommended that the power in Clause 48(3) be subject to the affirmative procedure as the power contained in it is, to quote from the report, “very significant”, not only in the context of Clause 48 but for the purpose of Chapter 2 of Part 4 as a whole. That is a very fair summary. The power enables the Secretary of State to provide for exceptions from the need to seek independent advice, which is central to ensuring that someone in a defined benefits scheme, for instance, is adequately informed of the risks and rewards of transferring out in order to access their pensions.

The power in Clause 48(7) is equally fundamental, giving as it does the Secretary of State the power to define what counts as “appropriate independent advice”. Our amendment is designed to probe exactly what would be meant by “appropriate independent advice”. Will the scheme trustees or managers be required to assess the appropriateness of the advice received—that in the circumstances of the particular scheme member the recommendation is the right one and transferring out will not harm their chances of having a good requirement income? The alternative is that the scheme trustees or managers will have to check that the advice received by the scheme member comes from someone appropriate who is regulated by the FCA. Our amendment gives the Government the chance to clarify that point. The difference in responsibility and cost is obviously significant.

I acknowledge that the Minister has already been kind enough to write to me, for which I am grateful, and the Government’s response to the Delegated Powers Committee has made it clear that the definition of “appropriate independent advice” will be through a regulation that is subject to the affirmative procedure, although as a consequence not directly part of the primary legislation in this Bill. None the less, it would be very helpful if the Minister could put on record the likely content of the regulation and give as many details as he is able to about it so that it addresses the issues I have raised in the amendments.

Can the Minister also give the Committee an update on the likely timing of that regulation? The response to the Delegated Powers Committee on 6 January says that it is likely to be “in the new year”. Given that it also says that it has to be in place by April, we are safe to assume that the new year does not mean January 2016. However, it would be helpful if the Minister could say when that regulation is likely to be laid so that there can be proper scrutiny of it. I beg to move.

[Baroness Drake]

My Lords, I had not intended to speak on this amendment but I should like to support my noble friend in his probing. As a pension trustee, I deal with these requests for transfers for a cash equivalent value from DB to DC schemes. I think I dealt with two this morning. As someone with a fiduciary duty—when I see the scale of what can be transferred—they keep me awake at night. What I had to sign off this morning made me think that I should take the opportunity to reinforce my noble friend’s concern.

I am sure that demand for these transfers is already rising in anticipation of the new freedoms that will flow from April 2015. I am concerned. We have already seen problems such as pensions liberation. We can talk about the FCA and the regulated industry, but what unregulated charlatans and scoundrels are waiting in the wings to encourage people to transfer their funds and access their freedoms? As someone who has been a trustee for about 27 years—dreadful I know—I have seen the personal pensions problem, the cash accounts transfer values and the pension liberation scams. I have watched these things from the perspective of a trustee. I have a real fear that this is a car crash waiting to happen unless it is properly regulated.

Two adjectives go with advice: “independent” and “appropriate”. Independence is easy to define, in a way, because it has a regulatory definition. What is really important is what is appropriate. As a trustee I would want to know what the Government think is the appropriateness of the advice people have received when they make applications to the schemes of which I am a trustee for such a transfer.

I read the response to my noble friend Lord Bradley on the Delegated Powers and Regulatory Reform Committee’s report and my reading of that letter is that the Government are on the case. That would be great, and if they are I want to say positive things and encourage the Minister to deal with this robustly, because it is a car crash waiting to happen. It is not just a matter of the big defined benefit pots. If you are on quite a modest income and are lucky enough to have a DB scheme, then even if your pension is going to be about £4,000 a year that will translate into a really big pot of cash—a pot of cash such as you may not have seen before—leaving you quite vulnerable. I can see from the letter to my noble friend Lord Bradley that the Government are on the case. I urge them to stay on the case.

[Lord Newby]

My Lords, these amendments give expression to the recommendations of the Delegated Powers and Regulatory Reform Committee concerning Clause 48. Amendments 47 and 48 make the regulations under subsections (3) and (7) subject to the affirmative procedure. Amendment 44A narrows the power taken in Clause 48(7) in such a way that regulations could not be made setting out the nature of appropriate advice but would instead focus on the characteristics of an appropriate person. As the noble Baroness has just pointed out, my colleague Steve Webb, the Minister for Pensions, wrote to the noble Baroness, Lady Thomas, chair of the Delegated Powers and Regulatory Reform Committee, acknowledging the committee’s concerns, providing a commitment to address them as far as we can and explaining why we were unable to accept the committee’s exact recommendations. The letter details alternative ways in which we will be able to address the concerns of the committee and the House. As Amendments 47 and 48 implement the committee’s recommendations, the government response is along similar lines to the letter, which can be found in the Library.

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[Lord Bradley]

My Lords, having listened to the Government’s amendments, I am tempted to say that this one is minor and technical and hope it will slip through on the back of that. However, it is not. On the first day in Committee, our first amendment on decumulation was an attempt to ensure that the Government did not lose focus on ensuring that all pension savers obtain a good deal when they look to turn their pension pot into a retirement income. In that instance, we wanted to protect savers from being defaulted into an annuity without a recommendation from an independent broker.

This amendment asks the Government not to lose sight of progress that has been made in getting a better deal for pension savers, despite the sweeping changes enabling freedom of flexibility in accessing pensions that will come into force this April. The cap that has been introduced on charges for work-based pension schemes of 0.75% a year has no equivalent in draw-down products, but from April a great many more savers—perhaps an estimated 320,000—will be using these products to get a retirement income. They should be protected from unfair charges. I repeat: they should be protected from unfair charges. It is welcome that NEST, the National Employment Savings Trust, has launched a consultation on draw-down products and how to ensure that middle and low-income earners have suitable and good-value products available to them. As the consultation rightly says:

“The solutions we as an industry develop over the next few years could determine the lives of millions of people in old age. We absolutely cannot afford to fail consumers … Leaving their retirements to chance is not an option”.

We have been clear throughout that welcoming the Budget freedoms is predicated on good solutions being available for savers in those income brackets, which we hope will happen. A good first step would be to remove the possibility of savers being open to what may be termed rip-off charges. This should apply in the decumulation stage as well as the accumulation stage, because a rip-off charge is a rip-off charge, wherever a consumer finds themselves at the end of it.

What is the evidence that this may happen in the decumulation stage for draw-down products? We already know that charges can be varied and opaque. The report from Which?, The Future of Retirement Income, points out:

“Even for a simple fund structure from a low-cost provider, the annual management charge might be 1% plus an administration fee of £250 per annum, which would cover the cost of income payments and income level reviews, for example. A more common total cost is about 2% p.a. which is similar to that for an investment-backed annuity. Worryingly, we came across cases where the charges for a SIPP package and advice were 4%-4.5%”.

Our amendment would give the Secretary of State the power to address this. The report goes on to point out that the costs are not always clear to the consumer:

“There are also hidden costs, including bid-offer spreads, the cost of sub-funds within the main fund, platform charges etc. Where an actively managed fund is selected, there is a risk that high turnover (churning) would add significantly to the total cost due to the transaction costs involved”.

Remember, this is about a product that is likely to become a great deal more widespread from April. The report therefore recommends that the Government should consider the introduction of a charge cap on the DC decumulation market at the same time as this is made a requirement for auto-enrolment DC schemes.

No one can be quite sure how the market will develop after April, but if the Government do not want to put this in place now, accepting our amendment would give them the power to take action to prevent consumer detriment in a new market in an area that has not always served savers as well as it should. This seems to me to be a sensible step that will protect consumers and ensure that they are not subject to rip-off charges. In that spirit, I hope that the Government will accept this amendment.

[Baroness Drake]

My Lords, from April 2015, when people reach the age of 55, they will be able to access their defined contribution pension savings as they wish. That will essentially leave them with four choices: full withdrawal of cash, taxed at their marginal rate, less a 25% tax-free lump sum; some kind of income draw-down product, drawing down cash while leaving the remainder invested; taking uncrystallised funds pension lump sums; an annuity purchase; or any combination of the four.

We do not know how the market will evolve in light of the new unprecedented options for pension savers in terms of the retirement products that will be available and what their charges will be. However, we do know that the FCA thinks, first, that the new freedoms could weaken the competitive pressure on providers to offer good value, because people display even more inertia in the face of complexity; and, secondly, that providers have been struggling to complete proper due diligence testing on new products because of the tight timetable. We do not have clarity as to the Government’s thinking on the charges, quality standards and transparency requirements for retirement income products going forward.

Pension Schemes Bill

Baroness Drake Excerpts

Tuesday 16th December 2014 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I declare my interest as a trustee of Santander and Telefónica pension schemes and a board member of the Pensions Advisory Service and the Pension Quality Mark.

I am extremely concerned about the extent of the new pension freedoms and the speed of their introduction. I think that the Chancellor is rushing his fences. I have two real concerns: the behavioural impact of those freedoms and poor decision-making by the saver. I am now confused as to where the consensus on pensions policy now is. The rush to put the freedoms in place from April 2015 is dominating the debate, overshadowing consideration of their efficiency for the long term. I favour some more freedom, an increase in the trivial commutation level and reducing the proportion of the pension pot that has to be compulsorily annuitised, but the extent of the freedoms unleashed in these Bills will create new problems. There is now a complete separation of tax-advantaged pension saving from any requirement to secure an income stream in retirement. The effect of that decision will be profound.

The Treasury cited Australia and the US as examples where consumers have similar freedoms, but they both have problems. In Australia, few people buy an annuity. The leading accounting body, CPA Australia, found:

“Lump sum superannuation benefits are being treated as a windfall and being used to pay for the lifestyle that’s been lived now instead of being put aside to provide income in retirement”.

As my noble friend Lord Hutton comments, the Murray review into Australia’s financial system found that a quarter of people with a pension pot at age 55 had depleted it by age 70. The complexity is tipping people into cash, and the review now recommends a default back into annuities.

In the US, 51% of the workforce has some form of pension plan, mainly in 401(k) schemes. Thirty-five per cent of those who left jobs in 2013 cashed out their 401(k)s outright. The US Treasury this year said that it will offer a tax break for savers who buy annuities and allow pension schemes to offer long-term deferred annuities as a default. Both those nations are rowing in the opposite direction of the Bills. The Office for Budget Responsibility states that the tax consequences of the reforms are “highly uncertain” because no one knows how many people will spend substantial parts of their pot from next April.

Choice is now extended, but for many millions the biggest challenge remains building an adequate pension pot. The average annuity in 2013 was bought with a fund of just over £35,000; the median was £20,000. How will the reforms help the next generation of savers? The Pensions Minister and the DWP are to be complimented on the rollout of auto-enrolment, but on the default contribution rate of 8% a median earner’s pension pot will still be very modest.

The employer pension contribution had been expected to increase over time, but the new freedoms make that more difficult. The Government have sent out a clear message to the individual—“It’s your pot of cash. You saved it. You spend it as you like”—neglecting the contribution from tax relief and, in most cases, the employer. The now public focus on early access to cash from age 55 contradicts the more important messages of working and saving longer and drawing your pension later. Employers are integral to the success of workplace pensions, and a major influence on the level of contributions, but what is the Government’s message to the employer? “Pension pots are for people to do with as they like; they are no longer reserved for retirement income”. The premise on which employers were compelled into making a pension contribution under auto-enrolment no longer holds. How will that affect employer attitudes? They may be less disposed to increase their contribution and more politically resistant to an increase in the statutory 3%. Will a finance director want to pay more to a worker’s fund so they have freedom to purchase a Lamborghini?

Historically, employer and employee pension contributions were so tax advantaged because they supported a retirement income. I agree with the Pensions Minister that tax relief should be reformed to give a more efficient distribution, but if pension savings policy is now, “Spend it all as you like”, then the fundamental principles of the tax relief will inevitably be revisited. I would not want to see the incentive to save for the long term seriously reduced for the next generation of young savers because successive Chancellors claw back too heavily on tax relief, but I fear that is now where we may be heading. The Institute for Fiscal Studies has already questioned whether the contributions to a DC pension saving should continue to be so tax privileged if annuitisation is voluntary.

The new freedoms bring new risks and complexities and uncertainty as to how the risk of consumer detriment will be mitigated. The Government are dependent on the market to ensure the success of the new freedoms. The Pensions Minister, Steve Webb, has said he will watch the pensions industry “like a hawk”—not a statement of confidence. Antipathy to annuities has been driven by falling annuity rates and the behaviour of providers, who will continue to supply the retirement products—so it is new freedoms, same market.

The new FCA study, which examined how market conditions may evolve from April 2015, found that competition in the retirement income market is not working well for consumers and the introduction of greater choice and potentially more complex products will reduce consumer confidence and weaken the competitive pressures on providers to offer good value. The chair of the FCA in a recent speech made two key comments. He said the increase in regulatory rules has failed to prevent misconduct and does not,

“seem to prevent further problems arising”.

At some point, inevitably, the Government will have to place in statute a clear fiduciary duty on providers and asset managers to put consumers first. Meanwhile, some good providers will want to respond positively to the new freedoms, but how will the market be placed in April 2015? The Legal & General Assurance Society chief executive John Pollock said:

“The fact is we were given hardly any time and then expected to deliver a satisfactory solution”.

Many employers will find engaging with the new freedoms a step too far because they are too complex, too costly and they fear associating with the products and poor decision-making. We may see a greater switch from trust to contract, an accelerated move to default ex-employees out of company schemes and a greater reluctance to fund employee access to guidance and brokering services—employers do not want any liability come-back. Employers are not obliged to provide access to the new freedoms through their schemes and many will not. People will have to embrace the complexity and cost of transferring their savings to get that access. I suggest a further tip into cash.

As to savers, policy now relies on one set of behavioural assumptions when people are saving and another when accessing pensions. It is assumed that workers are prone to procrastination and behavioural biases, which prevent them from making active decisions to save, so they are auto-enrolled and defaulted into an investment fund. However, at the age of 55 they become engaged savers, making active complex choices and informed decisions about their income and risks in retirement. However, as the PPI confirms in its report, Transitions to Retirement, making informed decisions about accessing DC savings was the hardest of all pensions, retirement and other financial decisions.

The Government need to help people to manage these risks. We will have the guidance guarantee, which is welcome, and it needs to be a success. However, some consumer and industry players want the FCA to introduce a second line of defence, requiring providers actively to ask customers whether they have considered the most important risks. We have little clarity on the charges and quality standards on retirement products in future, and the annuity market still urgently has to be tackled.

The Pensions Minister, Steve Webb, and the DWP have been focused—desirably so, and I compliment them—on new approaches to risk sharing, defined ambition and collective DC being their proposition, so it is most surprising that these two Bills are now being run together because one directly undermines the other. The potential for collective DC has changed as a result of the new freedoms. Intergenerational risk sharing between members with the provision of retirement income becomes very difficult if people can crystallise the value of their fund and take their cash from age 55.

As others have said, collective DC schemes are designed to smooth out income. The individual does not have a well defined pot over which they have individual ownership. That the collective DC schemes are not really compatible with the freedoms in the Taxation of Pensions Bill is not just a technical point but a cultural one, too. The freedoms row back to taking cash and seizing the individual while collective DC and defined ambition culturally, emotionally and sentimentally move in favour of sharing risk. It is not a coherent framework.

The Pension Schemes Bill has a significant number of delegated powers, so there is much still to be understood. In order to be sustainable, collective DC needs scale, an assured flow of new members, excellent governance and full transparency. On governance, the Bill is largely silent, yet collective DC and defined ambition can be run by trustees or private providers. The Government have added a clause to enable regulations to impose a duty on managers of non-trust schemes to act in members’ best interests, but it is unclear whether this would place an unequivocal fiduciary duty on private providers. Neither the NAPF nor the ABI detect a current appetite for such schemes, as they confirmed to the Public Bill Committee, so defined ambition, collective DC and any collective risk-sharing future in pension schemes need to be driven if they are to take off. However, we have no visibility as to how the Government will do that. Rather, I fear that the work of the Pensions Minister and the DWP has been undermined by the freedoms that come with the taxation Bill.

--- Later in debate ---

[Lord Newby]

I also pay tribute, very briefly, to my right honourable friend Steve Webb, who, as Minister for Pensions, has taken the lead in driving these and many other pension reforms forward. Many said that a coalition Government would not be able to make long-term reforms of a fundamental nature. Well, when it comes to pensions, whatever you think about them, you cannot claim that the Government have shied away from looking at all the issues. Indeed, they are effecting major changes.

At first sight, you would have thought that there could be no issue about the fact that giving people more freedom to spend their money is a good thing; that is what these Bills do, and therefore there will be unalloyed pleasure at the prospect of doing it. However, as noble Lords have pointed out, there are two challenges with this. First, many individuals either lack the financial literacy to make much sense of their finances, which we know about, or are slothful when it comes to thinking about pensions—which I think the current system encourages in some cases, not least because of the way in which they are treated by their pension providers.

As we know, many pension providers have been untrustworthy in the past, and have misled people rather than encouraged them. In the majority of cases, even now, they provide information to their individual policyholders in a manner that the policyholders cannot understand. Pension providers know jolly well that they cannot understand it and they have almost wilfully refused to make information available in a manner that people can understand. One of the great attractions of what we are doing on the guidance front is that it will require a template to be completed by pension providers about what on earth it is that individual policies amount to.

We have a market that is not working as markets are supposed to work. The purchasers do not have the information that they need and the suppliers very often are not providing products in a way that is fair to the consumer. That is why the whole issue of guidance is at the heart of these Bills and the debate today. I start with that because every noble Lord who has spoken has talked about guidance. As we have explained, from April next year everyone who benefits from the new flexibilities will get free and impartial guidance. The Treasury will take overarching responsibility for the service that will be delivered, but it will actually be delivered by the Pensions Advisory Service and Citizens Advice. I assure noble Lords that they will be adequately resourced and will be able to, and by their very nature will, give impartial advice.

To ensure that the service is in place in what is admittedly a tight timetable, an implementation team has been established within the Treasury to work with those providers. The Government have given the FCA responsibility for setting standards for guidance and monitoring compliance. This will, we believe, deal with the question asked by the noble Lord, Lord German, about whether the service will be of a high enough quality—we are confident that it will be. Further progress on how we intend to introduce and implement the guidance guarantee will be issued by the Government before Christmas.

Noble Lords asked whether there should be a second line of defence, so I should perhaps just explain what is already planned and what the FCA has already said. The FCA has made it clear that firms should not do anything to dissuade customers from getting guidance, but it accepts, and the Government accept, that not all individuals will seek to take up the offer of guidance. It is their choice to do so. In its new rules document, the FCA confirmed that pension providers must signpost individuals to the guidance service in wake-up packs. We have said that they should be issued four to six months ahead of an individual’s nominated retirement date. But I take the point made by a number of noble Lords that it might be advisable to think about giving earlier signposts to policyholders that they need to think about their pensions.

The FCA has reaffirmed the expectation that firms encourage consumers to shop around on the open market and that they should receive sufficient information about the consequences of their choices before signing up to a purchase. It is introducing a new requirement that, when communicating with customers about accessing their funds, firms are required to ask whether they have taken guidance or relevant financial advice. If not, they should encourage them to do so. As noted above, it has introduced a new requirement to recommend that consumers seek guidance or advice rather than simply signposting it.

Firms will be required to give a description of the tax implications of the option selected by the consumer and it has been made clear that firms can question the consumer’s decision when they feel that it is inconsistent with their circumstances without fear of overstepping the boundary into regulated advice. The FCA is considering whether it is appropriate to place further requirements on providers and, as noble Lords have mentioned, it is reviewing the rules in the first half of next year. The whole issue of what might constitute a second line of defence will be in its mind at that point.

Finally on the guidance, the noble Lord, Lord McKenzie, asked whether it would be one shot at getting the advice. I will say two things on that. First, the fact that the pension provider will have to provide details on the individual’s pension in a standard form will help to ensure that, when the person goes, they have the information that they need. One of my concerns is that people turn up without the key bit of information —I can imagine myself doing that. We hope that we are getting round that. At the very least, people who have had their advice will be able to go back to the website and access it to check further information that they then think they need.

I turn to individual noble Lords’ comments. The noble Lords, Lord Beecham and Lord Davies of Oldham, and others asked about the impact on the Exchequer. A number of noble Lords slightly implied that we were doing all this only to get a small amount of additional income. I can assure noble Lords that the public finances are not in such a bad way that we have completely to reorder the way we do pensions to get a short-term benefit. The Budget costings showed that the net additional income to the Exchequer from the scheme will be £320 million next year, rising to £1.22 billion in 2018, but then falling off after that because people will bring things forward. As I say, our motivation for doing that has nothing to do with something that is, though significant, a relatively modest figure in the overall context of the public finances.

The noble Lord, Lord Davies, set out the Opposition’s tests, which included guidance, which I have dealt with, fairness and cost. On fairness, we are ensuring that the generous tax reliefs available on pension savings are not used solely for tax planning, given the flexibility that the rules offer. Overall, we think that the rules promote fairness. On cost, and in particular the question of the impact of the changes on welfare and social care spending, that obviously will depend on how people choose to use their savings. However, the Government do not expect this impact to be significant in the context of the steps taken to improve the sustainability of pensions spending, such as the changes to the state pension age and reforms to public service pensions. I remind noble Lords that the estimated net impact of the Government’s key pension policies is a saving of about £17 billion in 2030 on today’s terms.

The noble Lord, Lord Davies, asked about the review. It has two elements. On reviewing the cost to the Exchequer, the Government are committed to keeping the policy under review through the monitoring of information collected on tax returns and tax records. Additionally, HMRC regularly publishes data on tax receipts, which will reflect any impacts on the Exchequer. Any such impacts will be reflected in forecasts made at future fiscal events. On the guidance, it obviously will be extremely important that we understand its outcomes. The Treasury will establish robust KPIs to measure consumer outcomes.

My noble friend Lord German asked about the publication of the FCA standards and when that would be. The FCA has stated that they will be produced before the new scheme comes in, which is hardly surprising. We hope that it will do that significantly earlier than that, we hope at Royal Assent. On his concern about regulators working together, I say that the DWP and HMRC work closely with the Pensions Regulator and the FCA to ensure that there are no gaps in regulation in this area. We have no reason to believe that there are any. He also asked about housing wealth. The guidance will make sure that consumers consider questions about their situation as a whole and will direct them to further sources of information as appropriate. However, one of the problems of housing wealth for many people is that they do not have any intention of accessing it as part of their pensions. Some people do, but very many do not. Given the practical problems of downsizing, which we discussed recently in your Lordships’ House, many people who in an ideal world might want to do that in fact do not.

The noble Baroness, Lady Greengross, asked about a possible extension of the levy beyond the number of firms currently planned. Until now, the Government have decided that those firms which are most likely to benefit from better informed and engaged consumers should help to fund the service, hence the levy on the current range of firms. Occupational pension schemes do not currently offer accumulation products, as membership of such schemes is linked to employment and they do not sell products into the market in the same way as financial services firms. It is possible, however, that schemes may wish to change this approach over time, and we will keep the levy under review.

The noble Baroness also asked about welfare and the impact of these changes on social care, as well as how the Government are treating the new pension arrangements. We are treating the options as similarly as possible for the current welfare means test purposes by applying a notional income of 100% rather than 150% of the income that an annuity would have provided. We want to make sure that the decisions people make about drawing down their pensions will not significantly affect how they are assessed for welfare and social care support.

A number of noble Lords, including the noble Lord, Lord Hutton, questioned the evidence that the pension flexibility as proposed will encourage or discourage saving. Of course, we will not know that definitively until we have the scheme up and running. However, the National Association of Pension Funds found in its spring workforce survey that 28% of workers say that they are now more likely to save into a pension. Young people are the most likely to say that, and lower-income respondents also said that they were more attracted to pension saving. While a number of noble Lords have been rather gloomy about how people will respond to these changes in terms of savings, one of the reasons people do not want to save for a pension at the moment is that they often think that an annuity is such appallingly bad value. That is definitely the case for young people, and indeed more generally.

[Baroness Drake]

Will the noble Lord accept that in terms of people not actively saving, the behavioural evidence shows that it has nothing to do with annuities, but with their own inertia about dealing with complex decisions? Any complex financial decision has the same effect.

[Lord Newby]

My Lords, I think that the strong take-up of auto-enrolment suggests that people are actually a bit more long-sighted than they are sometimes given credit for. Young people in their 20s and early 30s who are thinking about their pension savings are looking at what kind of value for money they can get from doing that as opposed to putting their money into alternative forms of saving. So I am not sure that I altogether agree with the noble Baroness.

The noble Lord, Lord Hutton, said that the Government should strongly encourage partial annuitisation. We have always been clear that an annuity will remain the right choice for many at some point in their retirement because it can provide the security that they are looking for. He also asked about inheritance tax. I can say that the intention of the legislation is that the scheme administrator will retain some discretion over how death benefits are paid, ensuring that these benefits can remain outside the scope of inheritance tax.

[Lord Newby]

My Lords, I do not know, I am afraid, but I will write to the noble Lord as I am almost out of time. The House has rules that, as a Whip—although I know I am going to break them already—I can break only to a certain extent. I will write to the noble Lord in that respect. I might also write to him about the situation in Australia.

The noble Lord, Lord Freeman, asked whether the new flexibilities would put people at risk of poverty in the future. The basic principle here is that people must be trusted to make their own choices about how to use their savings to fund their retirement. We believe that the introduction of the new, simpler state pension in April 2016 will help minimise the impact on means-tested benefits as the full level of the new state pension will be above the level of the basic means test in personal credit, and we expect over 80% of those reaching state pension age in the mid-2030s to be receiving the full new state pension.

The noble Baroness, Lady Drake, took up the theme of the noble Lord, Lord Hutton, about the dangers of a revolution. She saw the dangers as being significantly more considerable, I think, than most noble Lords who spoke. Of course, some of the potential problems that she foresees are impossible to predict absolutely, but I did not recognise the gloomy landscape that she portrayed in a number of respects. She asked why we were still paying tax relief when people will spend all their money. Tax relief is designed to support and encourage people to save for their retirement.

[Baroness Drake]

I did not ask why we are still paying tax relief if people are going to spend all their money. I asked whether, if people did not have to have annuities, it was possible that, over time, successive Chancellors revisiting the consequences for the next generation might not have this generation’s generosity on tax relief.

[Lord Newby]

My Lords, I was just about to say that this Government certainly are not going to revisit it. It is impossible to know what future Governments will do about tax policy. One of the key points about tax relief is to encourage people to save and I think any future Government will want them to carry on doing that.

A number of noble Lords, including the noble Baroness, Lady Drake, talked about the possibility of people taking their pensions early at 55. There is that freedom but my personal view is that, particularly as people are working to a later age rather than retiring earlier, the number of people who will wish or think it sensible to take their pension at 55 will not be very great. For some people, particularly those with health conditions, taking an early pension is absolutely the logical thing to do.

The noble Lord, Lord Holmes of Richmond, asked whether trustees and scheme managers will be required to evaluate the appropriateness of the advice that individuals are given when moving from DB to DC. As we have set out in our consultation, we intend that trustees and managers will be required to check that advice has been received from an FCA-authorised person but they will not be required to evaluate the content of the advice or to check its quality. The detail of the process by which scheme managers will be required to check that the advice has been taken will be set out in regulations, which we will work closely with the industry to develop. I apologise for rushing through.

The noble Lord, Lord McKenzie, asked whether I would be happy to arrange a meeting with BALPA, and I would indeed.

The noble Lord, Lord Bradley, gave a strong explanation of the benefit of collective schemes. He touched on one of the key benefits of the changes. We do not know at this stage how many people will take them up; we cannot give detailed estimates of how many people will do any number of things at this point. We see strong practical reasons to believe that collective schemes will benefit many people and that the industry will move to develop them.

To sum up, as my noble friend Lord Bourne laid out at the beginning of our debate, these are radical changes that build on this Government’s previous reforms to the UK private pensions market. At the heart of the reforms is the Government’s intent to give people greater choice. That entails both greater choice for businesses regarding the type of pensions that they offer and greater choice for individuals in how they access their pension savings. These radical changes need to be made to reinvigorate the private pensions market and to ensure that it remains relevant for future generations of savers. I commend the Bills to the House.

Pensions Advice

Baroness Drake Excerpts

Wednesday 23rd July 2014 Lords Chamber

[Lord Newby]

My Lords, being married to a vicar, I could not possibly say that vicars are not always good sources of advice. The key challenge raised by the Question is that for many people pensions are a subject of complete bemusement. This reform, which I believe is very welcome, will give people much more choice over how they spend their money in retirement. However, they will be able to spend it wisely only if they are given proper guidance, and that is what the Government are committed to ensuring.

[Baroness Drake (Lab)]

My Lords, guidance to help people make choices about how to spend their pension funds is of course to be welcomed, but given that the Government expect the industry to respond to greater choice by providing new retirement income products, how will they ensure that these new products meet the interests of savers in terms of quality standards, transparency and level of charges, so avoiding new manifestations of consumer detriment occurring yet again in the pensions and investment industry?

[Lord Newby]

My Lords, this is why we have set up a new framework for regulation and why we established the Financial Conduct Authority. We have given the authority much greater powers than the FSA had to deal explicitly with these problems. We have to be sure that the new products which are coming forward meet the standards that the noble Baroness wishes to see. The FCA is tasked with that job and is absolutely determined to avoid the problems of mis-selling that we have seen in the past.

Families: Cost of Living

Baroness Drake Excerpts

Thursday 31st October 2013 Lords Chamber

[Baroness Drake (Lab)]

My Lords, I, too, thank my noble friend Lady Prosser for securing this debate. “Making work pay” in a world where,

“those who aspire to work hard and do the right thing are rewarded”,

is a challenging aspiration to achieve. Recent figures not only confirm the squeeze on living standards for low to middle-income households but also that it will be longer and deeper than previously projected. Despite job growth in the private sector, wages have fallen in real terms, many work fewer hours than they would like and the impact of changes to benefits and tax credits are all putting further downward pressure on those households. Although tax credits now make a smaller contribution to income for workers in the bottom half, it is still a significant contribution, and I speculate that deeper cuts to come in the welfare spend will be on in-work benefits.

To some extent, all families have been affected since the recession but households in work, on low and middle incomes, especially those with children, start with far less than the better-off, making the squeeze even harder to bear. They spend a greater proportion of their income on essentials such as food, fuel and transport, the costs of which have risen much faster than overall inflation, leaving them facing falling wages and an “inflation premium”. It is not surprising that calls to constrain energy bills have such resonance with the public. In addition, modest-income households are more prone to debt. According to the Resolution Foundation, among all households with some form of debt in the bottom half of the income distribution, 30% can be considered “debt-loaded”: their repayments account for more than a quarter of their gross household income.

The causes of the pressure on household budgets are both structural and cyclical, exacerbated no doubt by the events and policies of recent years. As my noble friend Lord Monks identified, it is also evident that many households benefited less from previous economic growth, when the wages of ordinary full-time workers barely grew and were negative for the lowest earners. Looking back even further, inequality increased at all points in the income distribution from 1979 to 1997.

The challenge for the Government is to ensure that the benefits of future growth are shared more equitably. To quote from the Commission on Living Standards’ Gaining from Growth report, only 12% of every £1 of UK GDP now goes to wages in the bottom half, down 25% in the past three decades. Polarisation of incomes is not unique to the UK but it is greater here than in most other developed countries, and so is the extent of low pay. To make up the ground left by the recession, wages for the low to middle-income groups have to grow by 1.1% a year in real terms over the next decade. That is without taking into account the reduced expenditure on tax credits and benefits. As my noble friend Lady Prosser said, that challenge has to make us consider how we can build on the current role of the Low Pay Commission and strengthen and broaden the contribution of the national minimum wage.

The factors contributing to low UK productivity are several and complex but they are neither new nor recent. Comparatively low labour productivity, low investment, lesser management skills and low company expenditure on training have been evident for decades, as has an institutional and cultural set-up that encourages many employers to seek low-paid low-skill routes to business success. Labour productivity has fallen further in the past three years.

A broad strategy to reduce the UK’s reliance on low pay must include a national minimum wage but setting that wage so as to avoid any perceived undue impact on employment and at a very modest level has not constrained growing income polarisation. There is a real danger that unless the national minimum wage is raised significantly, some firms will not need to be or become more innovative and more productive in absorbing higher wage costs. Those that are productive and could absorb the higher costs will simply continue to pay lower wages because they can.

Increased productivity is absolutely essential for sustainable rises in living standards but if we do not take a more radical approach to the national minimum wage and the role of the Low Pay Commission, we risk accepting that either the taxpayer must subsidise the wage bill of UK companies with low productivity with in-work benefits or, if in-work benefits are reduced, family budgets will become even more polarised. People who do the right thing will not be rewarded. Just over half of low to middle-income households have no savings at all, and two-thirds have less than a month’s income in savings. Yet the Government want people to save for their retirement and be less dependent on the state in so many ways. On the other side of that equation is that government must address the squeeze on living standards that is the reciprocal responsibility of government on a call to its citizens to accept that level of responsibility in return.

Time constrains my comments on employment levels and working hours as the driver of living standards, but I shall make a quick point. Yes, dual earnings act as an important source of protection for household budgets, but figures reveal that female employment has plateaued in recent years. Comparatively, the UK is distinguished by underperformance of women with children in their 30s and women over 50 due to the combination of intolerably high childcare costs, the lack of high-quality part-time work and the design of the tax and benefits system.

I refer to the point made by the noble Lord, Lord Horam, on the Gini coefficient, which is a measure of inequality, a statistical measure of which I am particularly fond, as it borrows my name. We need to be careful how we interpret statistics. If poverty is expressed as a percentage of earnings, and if earnings fall, there is a perception of there being a reduction in poverty, but the poor are still very poor. Although there has been a decline in the highest earnings, that will not be sustained, but the pressure on low to middle incomes will, because the fundamentals delivering income polarisation are still there—they are not the same as what comes to play in the rise of the highest levels of earnings.

The market alone will not address income polarisation. It requires intrusion by Governments with labour market policies. Economic policy that ensures not only steady growth but that those in the bottom half receive a fair share of the benefits of that growth will be one of the biggest challenges for all political parties and Governments in the following decade.

Financial Services Bill

Baroness Drake Excerpts

Wednesday 25th July 2012 Lords Chamber

[Lord Flight]

My Lords, the focus of the insurance objective is rightly on policyholder protection. I do not really understand why the drafting includes those who “may become policyholders”. If they do become policyholders, they will surely be covered automatically. If they do not become policyholders, they will not be covered. I am not aware of any other area of financial services where there is any focus on future potential customers. I have a very simple question: why does this include those who “may become policyholders”? What is the logic, if any, behind this inclusion?

[Baroness Drake]

My Lords, I shall speak to Amendment 141 in my name. The PRA is the prudential regulator of the insurance companies. It has an insurance objective, which will include a requirement to contribute to securing an appropriate degree of protection for policyholders, understandably reflecting the correlation in the insurance sector between the management of risk and the consumer outcome, especially in with-profits policies. The PRA has no explicit consumer protection remit. The FCA does.

The Treasury has, as far as I can see, recognised the need for the PRA to seek advice from the FCA in achieving the balance between the interest of the policyholder and the prudential strength of the company when it comes to with-profits policies. While I understand that the responsibility for that balance should remain with the PRA, it is intended that these matters will be covered by a memorandum of understanding between the PRA and the FCA. However, that memorandum of understanding has to be compatible with the PRA’s view of how to advance its prudential objective. That is where I remain concerned, because this leaves the PRA with a very wide discretion as to what is an appropriate degree of protection for with-profits policyholders.

Unless I am misinterpreting the government amendment in this group, which I will have to wait to hear, the effect of that amendment is to strengthen or give even greater clarity to the fact that it is the PRA which holds the ultimate authority for determining that balance between the prudential strength of the company and the interest of the policyholder. Given that, I believe that it would be desirable if these matters were not left to a memorandum of understanding alone, but that the Bill should guide the approach of the PRA with respect to the regulation of with-profits policies by providing a set of principles which this amendment seeks to set out. Perhaps I may set out my reasons.

The PRA’s focus will be on the prudential regulation of firms, and the stability of the financial system. It will not have the culture to proactively protect consumers who hold with-profits policies, and yet the regulatory framework of with-profits policies has been subject to sustained criticism from the Treasury Select Committee, observers, academics—large numbers of people. However, with-profits policies are still a significant consumer issue. There are around 25 million policies, worth about £330 billion. These policies typically state that the policyholder will share in the profits from the fund, which are distributed to the policyholder in the form of bonuses. The policyholder’s contract normally states that they receive 90% of the profits from the fund, and the shareholders receive 10%.

--- Later in debate ---

[Lord Sassoon]

My Lords, let me first speak to government Amendment 140E. When considering the regulation of discretionary payments in with-profits business there is no easy split between prudential and conduct issues. The Bill deals with this by giving the PRA sole responsibility for issues relating to discretionary payments. The FCA remains responsible for all other conduct regulation. However, under the Bill as drafted, use of “includes” in new Section 3F(1) could be interpreted to suggest that the PRA is responsible for other elements of conduct regulation as well. This amendment simply clarifies the drafting, by removing the implication that the PRA could be responsible for other conduct issues.

I turn to the non-government amendments in this group. Amendment 128BH would remove the reference to those “who may become policyholders” from the PRA’s insurance objectives. However, I can assure my noble friend that the inclusion of this reference to future policyholders is both deliberate and important. It is there for completely different reasons from those advanced by the noble Baroness, Lady Hayter, with whom I agree in rejecting the amendment but for much narrower and more technical reasons related to the nature of a with-profits fund.

Let me give an example of what we are thinking about here. If one considers the scenario where the PRA is considering whether a with-profits insurer should be permitted to make a very large distribution to its policyholders, and if the PRA is only required to consider the interests of current policyholders, it might be inclined to allow the distribution. However, that might leave insufficient assets in the fund to ensure that policyholders coming into the fund—if it is operating on a going-concern basis—obtain fair and adequate payments from the fund.

I should reassure my noble friend that the reference to those becoming policyholders does not require the PRA to go out in some proactive way to protect those who have no current plan to take out a contract of insurance, but who might at some point decide to do so. The PRA is only obliged to provide an appropriate degree of protection and what is appropriate will depend on the facts of the case. In this case, it is the needs of a person who is about to sign on the dotted line for a with-profits policy who needs to be assured by the regulator that the fund to which they are about to subscribe is appropriately strong according to the rules. This provision allows for that.

Amendment 141 would require the PRA to regulate with-profits funds on the basis that the fund should be managed for the purpose of distributing profits to policyholders, as opposed to any other purpose. This is an important issue and I welcome the opportunity to set out broadly how with-profits will be regulated under the new system. It might be worth just pointing out to the noble Baroness, Lady Drake, that new Section 3F—the “With-profits insurance policies” section on page 31 of the Bill—makes it quite clear that the PRA must secure an appropriate degree of protection for policyholders. That is very clear. It is different from the looser wording, to which she referred, about the insurance objective “contributing” to securing protection. It is clear that the language in new Section 3F for with-profits is stronger than in new Section 2C on the insurance objective. That is an important background to the consideration of this amendment, and a point to which the noble Baroness drew attention.

When regulating a with-profits firm, the regulator is concerned with ensuring that the firm recognises a proper balance between the different interests in the fund. These interests include one that is highlighted in this amendment—the interests of with-profits policyholders to the distribution of profits made by the fund. However, there are other legitimate interests in a with-profits fund. They include the interests of the members of the insurer in the case, for example, of a mutual. In a proprietary firm, the shareholders also have an interest in the profits to be distributed. There are also considerations to be balanced between different types of policyholder. I do not suggest for a minute that the noble Baroness seeks to disapply all these other interests in the with-profits fund. Maybe she does—no, I see that she does not. I am glad about that as we would be fundamentally rewriting the law. That would be the effect of the amendment.

I am grateful to the noble Baroness for bringing up this issue. I must say that a balance needs to be struck between the interests of current policyholders, who will be keen to see all available funds distributed, if they are distributed to them, and the interests of future policyholders, which we have discussed, who will pay the price of excessive generosity to previous generations of policyholders. There is also the overriding concern to ensure that the fund remains solvent and able to make distributions.

As I said, under the Bill, the PRA is required to secure an appropriate degree of protection for with-profits policyholders in new Section 3F, and it will have to take all of these factors into account. Although the factors to be taken into consideration are complex, in essence the objective of regulation remains the same for with-profits as for any other type of business. The objective fundamentally is to ensure the firm’s safety and soundness, while ensuring its proper conduct, including the fair treatment of consumers. In asking the Committee in due course to support the Government’s amendment, I ask my noble friend Lord Flight to withdraw his amendment.

[Baroness Drake]

There is an issue that I am not sure the Minister has addressed. The PRA will be focused on prudential regulation, so its approach on how discretion should be applied on with-profits policies could be influenced by a preoccupation with the prudential responsibility, and through that focus may become unfair in how it has balanced the consumer’s interests.

[Lord Sassoon]

My Lords, I do not believe that to be the case but it might be helpful if I write to the noble Baroness, copying in the Committee, with a fuller explanation of how that will be taken care of.

Financial Services Bill

Baroness Drake Excerpts

Wednesday 25th July 2012 Lords Chamber

Moved by

[Baroness Drake]

117: Clause 5, page 17, line 35, at end insert “, and
(e) the ease with which consumers can identify and obtain services which are appropriate to their needs and represent good value for money”

[Baroness Drake]

My Lords, the FCA’s objective to promote “effective competition” will deliver fully on the Government’s commitment to putting the consumer at the heart of the financial system only if there is no ambiguity about the FCA’s authority to tackle hidden and rip-off charges. The FCA can judge the effectiveness of competition only if it is explicitly required to take into account the ease with which consumers can identify and obtain services that are appropriate to their needs and represent good value for money. The amendment provides for that.

During the Commons Committee stage, the Financial Secretary argued that the FCA had,

“the powers and the mandate to intervene on matters of price and value for money, if the case to do so is made. It does not need bespoke powers”.—[Official Report, Commons, Financial Services Bill Committee, 1/3/12; col. 261.]

Unfortunately, experience does not reinforce such confidence. We are all too familiar with the industry’s willingness to mobilise its resources to mount a legal challenge to the regulator if ambiguity exists. When the OFT decided to investigate unauthorised overdraft charges, the banks challenged its ability to do so. Two years of uncertainty, nearly £1 million in legal fees and many other resources later for the OFT, the legal case eventually concluded with a ruling that the OFT could not assess the fairness of those charges. In respect of payment protection insurance, the banks put up a sustained legal fight before accepting that they had mis-sold a product to millions of people. The FCA ran up around £900,000 in legal fees when the industry asked for a judicial review into its judgment on PPI complaints. In the face of a powerful industry, the absence of bespoke powers may make the FCA reluctant to take action and could lead to successful challenges against the authority in the courts.

The FCA is not a price regulator but that must not be interpreted as a reluctance to act on charging structures. The FCA’s competition objective as drafted requires it to have regard to innovation, ease of entry to market, ease with which consumers can change providers and the consumers’ need for information to make an informed choice. As is so well documented, so many consumers struggle to process the information provided and there is a danger of too much reliance on disclosure and informed choice to protect the consumer, given the systemic imbalance in knowledge and understanding between consumer and provider—a view shared in Professor Kay’s recent report. Similarly, the financial needs of most people are probably pretty simple but the industry often sells the more complex products because they attract higher charges. This is not an argument against innovation but a recognition that more complex products give rise to the need to ensure that they represent good value for money.

The FCA’s authority will be strengthened by such an explicit reference in its competition objective. The public’s loss of trust following the litany of product mis-selling has to be addressed. Just look at some of those products. “Behind-the-scenes” prices reduce direct price competition as apparently low “headline” prices mask the true costs once ancillary charges, such as for unauthorised overdrafts or rejected transitions and default charges, are accounted for. Consumers need to be confident that once they have entered into a contract they will not be subject to any unexpected or nasty surprises. Which? recently published research which showed that banks’ fee structures are so complicated that even a maths PhD student found it virtually impossible to compare charges between banks and to calculate how much a bank charges for using an unauthorised overdraft. Some particularly toxic forms of payment protection insurance paid commission rates of 87% of the premium to the bank that sold the policy. That means that if a consumer pays out £10,000 on a PPI policy, £8,700 goes back to the bank in commission.

Some consumers who took out an equity release plan at the turn of the century now face substantial early repayment charges amounting to 25% of the outstanding loan. On an equity release loan of £200,000, the consumer could now face early repayment charges of over £50,000. More recently, in the sale of products to protect small firms taking out loans against rising interest rates, the FSA found a lack of clarity about the cost of stopping a product, failure to check whether a consumer understood the risk, and selling based on personal rewards rather than on the needs of those businesses. Time and time again we see products sold to consumers that are not value for money, do not meet their needs and take advantage of their lack of understanding.

Furthermore, consumer credit regulation is to transfer to the FCA, affecting a market for consumer and small business credit of about £270 billion, where vulnerability to high charges is a significant issue. The FCA’s competition objective will, I understand, apply to consumer credit products, which is another compelling reason for placing a requirement on the FCA to have regard to value for money.

Opacity and complexity in the pensions and savings market results in excessive charges, fuelled by the increasing subcontracting of investment activity to a lengthy chain of agents. Each has access to more information than the consumer, which helps them to maintain charges which deliver generous revenues for them and less real value to the customer. The recent plethora of reports on charges reiterates the evidence of a problem which we know has persisted for a long time and which the regulator has got to tackle.

The mathematics of an annual management charge is too complex for most savers. That charge is not a true statement of the total expenses ratio, and even that ratio excludes other hidden costs. As the noble Lord, Lord Turner, said in his City speech yesterday, there is far greater potential in retail services than in other sectors for producers to rip off customers. I beg to move.

[Lord Peston]

My Lords, this is a very important amendment. It is important in its own right, but it also exposes what is fundamentally wrong with this Bill, which is that it is based on an economics model of the rationally informed consumer.

No one doubts that there are large numbers of rationally informed consumers out there, able to take optimal decisions, but a vast amount of research has been undertaken in recent years that shows that there are considerable numbers of consumers who are not best described as part of the rationally well informed model. Indeed, one can go further. I have seen research papers that show that even for what one might call brilliant consumers, the complexity of the instruments they are dealing with is so great that it would take them several years to do all the calculations required to make an informed decision. Therefore, what is wrong with this part of the Bill is its fundamental philosophy of the rationally informed consumer.

The other point to bear in mind is that the objective of the financial intermediaries that this applies to is not, in any sense, to be helpful to anybody. Their objective is to make money. What they are looking for are instruments, some of which are so complex—like CDOs, and so on—that you have to be a genius to understand what they amount to in the first place. There are several other examples of that that have got my head spinning.

What this leads us to is a matter that arose the last time that the Committee met and the subject of duty of care was raised. You will not find anything like that in this Bill or any of the philosophy behind it. What is required in the Bill is that everybody acting as a financial intermediary should be instructed that they have a duty of care. That duty of care should involve presenting information in a way that quite ordinary people can understand and pointing out the perils of all the mistakes that can be made.

I myself am not that rational a consumer in this regard. As for the idea that I would look at every bank and work out the optimal one that I should deal with, I take the view that there is more to life. If I end up paying rather more for any financial intermediation that I am involved with, I have to bear that cost because there are other things I want to do with my time. Then again, I am not badly off and I can afford to do that. But very poor consumers need something much more. I repeat that what needs to be in the Bill is the equivalent of a duty of care on the part of all financial intermediaries dealing with ordinary consumers and an acceptance of responsibility for what they are offering them.

--- Later in debate ---

[Lord Sassoon]

My Lords, all I can usefully say is that while I believe that this amendment is well meant, it is based on a legal construction that the Government do not accept. The FCA has all the powers that it needs and there are some dangers in putting this amendment in. That is what we are discussing.

[Baroness Drake]

My Lords, perhaps I might respond to some of the issues that have arisen in the debate and in the reply from the noble Lord, Lord Sassoon. The Minister is arguing that the FCA has a sufficient mandate through the competition and consumer objectives, as drafted, to tackle these matters. My problem is that I do not share that confidence in the absence of the amendment to the competition objective that I seek. I accept his point that the FCA’s powers are much broader than those of the OFT, but with the bank charges case I was trying to illustrate the disposition of the industry to mobilise quite effectively if there is ambiguity in the statutory or regulated provisions. Rather than arguing whose legal advice is better, I was seeking simply to nail this issue by saying clearly that effective competition means that consumers have to be able to identify whether services are appropriate to their needs and represent good value for money. The lawyers could then argue as much as they like, but that provision of what effective competition embraces would be laid out in the Bill.

The Minister made too much of my use of “must” in my speech, rather than “may” as it is in the Bill. I am seeking not to challenge the word “may” but to establish with clarity that competition cannot be effective without it being value for money for the consumer. My amendment does not seek to establish a long list but it seeks to give clarity on a very important issue, which goes to the heart of what effective competition is. I think that 20 million people out there are with me, based on their personal experiences of the financial services sector in recent times.

In response to the noble Baroness, Lady Noakes, in my own defence I have tabled amendments to both the consumer and competition objectives. My noble friend Lord Whitty very ably answered the question in part. However, I am seeking an amendment to the competition objective because on this occasion, at the risk of repetition, I am trying to give clarity to the definition of effective competition in terms of the matters that the FCA has to have regard to which, I reiterate, is the ability of consumers to identify what is appropriate to their needs and represents good value. At the heart of my argument is that the FCA cannot judge effective competition unless it has regard to those matters. I feel they are so fundamental to a judgment of effective competition that they are worthy of being spelt out in the Bill as a matter to which the FCA may have regard.

On the market integrity point, there is consistency in my amendment in terms of what I am arguing in respect of both market integrity and the competition objective. My argument would be that a key characteristic of well functioning markets is that they can provide consumers with products and services having value for money. The wording of the market integrity clause does not address or mitigate my concern, hence the amendment I have tabled.

--- Later in debate ---

[Lord Sassoon]

My Lords, I briefly draw my noble friend’s attention to a couple of things that I have already highlighted this morning. First, there are the additional product intervention powers that the FCA will have, as opposed to those which the FSA has had. Those go to the heart of his concerns, because we are certainly not giving those powers to the FCA, and it is not receiving them, without an intention to use them. Secondly, I drew attention to the consultation on the mortgage review, which indicates a developing line of thinking that goes precisely to his points. The evidence points in the direction that my noble friend is looking for.

[Baroness Drake]

My Lords, I had come to the point where I was reserving this for Report and begging leave to withdraw the amendment.

Amendment 117 withdrawn.

Financial Services Bill

Baroness Drake Excerpts

Wednesday 18th July 2012 Lords Chamber

[Baroness Drake]

My Lords, Amendment 107 is in my name. Bob Diamond said in November 2011 at the “Today” programme lecture:

“Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity.”

This amendment puts that principle in the Bill, by adding to the FCA’s consumer objective that it must have regard to the general principle that,

“where consumers properly repose trust in a firm’s discretion and are vulnerable to the exercise of that discretion, the firm has a duty to act in the consumer’s best interests”.

That is simply what millions of people want, and they will not understand if it is denied to them. The basic principle is simple: if you have discretion when looking after someone else’s money, the starting point should be that you act in that person’s or that client’s best interests.

I anticipate that the Minister will argue against the amendment, citing the fact that current FSA rules already say that firms must,

“pay due regard to the interests of its customers and treat them fairly”,

but paying due regard is not enough to rebuild trust in the industry, and experience shows us that it falls short of any kind of duty of care. Firms may not get every decision right on every occasion and risk will not go away, certainly in investments, but firms should at least be able to demonstrate that when they exercised their discretion and took a decision, they believed that they were acting in the client’s best interests. The Government have expressed a preference for the FSA rules to lay out a specific, clear, focused and transparent set of duties on firms, but rules are geared to achieving compliance rather than changing behaviours. There must be a guiding principle to inform the content of those rules—the duty to act in the consumer’s best interests. People in positions of trust in financial companies have to change their behaviour. We simply cannot carry on the way we are.

The FSA is attributed with the comment in FTfm on Monday 16 July that,

“fiduciary duties are more of an aspect of common law rather than something established by its rules and regulations”.

That basically amounts to the FSA confirming that under the existing proposals it does not see it as part of its remit to uphold the standard of protection that the amendment proposes. Hence, that is a very compelling argument precisely for this amendment. Others will argue that the amendment imposes a new obligation on firms and that it is not a reasonable standard to ask of a commercial entity. I am not sure that it imposes a new obligation but it certainly makes it explicit. In oral evidence to the Joint Committee Martin Wheatley, CEO-designate of the FCA, said that,

“firms … have responsibilities in terms of appropriateness, in terms of their conduct and in many cases they also have a fiduciary responsibility to clients”.

The wording of the amendment reflects legal principles in that the Law Commission’s summary of the characteristics of a fiduciary relationship are discretion, power to act and vulnerability.

The principle in this amendment is not inconsistent with a commercial entity’s desire to make a profit: what it prevents is unauthorised profit or profiteering at the expense of clients. Firms can continue to have and pursue their own interests, just not at the consumer’s expense. Conflicts of interest need to be properly managed. Again, some may argue that a duty to act in the consumer’s best interest is not the right standard to impose across the board between providers and consumers, but the amendment would not apply across the board. It would apply where consumers have a particular relationship with providers that relies on a firm’s exercise of discretion and they are vulnerable to it.

In their response to the Joint Committee report, the Government inserted the new principle in the Bill, to which the FCA must have regard, that,

“those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate”.

The amendment gives clarity to what is an appropriate level of care where trust and discretion are involved to set a higher standard of protection. A duty to act in the consumer's best interest is clearer in its requirements to avoid and manage conflicts of interest. Where a client reposes trust in the firm's discretion and is vulnerable to the exercise of that discretion it is not enough to balance competing interests. Rather, the firm must ensure that conflicts cannot damage clients.

Separating retail and wholesale banking is part of the solution to addressing financial stability and integrity, but it is not the whole answer. Millions of ordinary people are saving, directly or indirectly, through the capital markets and are vulnerable to the exercise of discretion by a long chain of intermediaries. Legislation must protect not only the integrity of retail banking but the interests of the savers in so-called casino banking. “Casino” may be appropriate for the behaviour of some intermediaries—the fund managers, traders and others—but it is not the underlying purpose of the investment market. As auto-enrolment into workplace pensions gets under way in October, millions more people will be added to those saving through these markets, many of them low and modestly paid workers. Even before auto-enrolment, which will bring billions more into these markets, £380 billion is invested in DC pension schemes in the UK. That excludes the billions in DB schemes, investment ISAs and other products and with-profits investments.

The Centre for Policy Studies has just published Michael Johnson's report Put the Saver First, which I have just read. Although I may not agree with all of his recommendations, it makes an excellent contribution to the debate as to why the financial services industry is mistrusted. It states that the financial services,

“industry would appear to have forgotten that customers are providing the scarce resource upon which the whole of the … industry relies: their savings capital … Essentially, the industry should put the customer at the centre of everything it does … It is clear that many people are investing in products they do not fully understand, which are governed by a jungle of complex rules and tax regimes that, collectively, almost nobody understands. Savers are therefore putting their trust in the industry, and they need to be protected in situations in which the industry has a knowledge advantage. For almost all investors, this excludes very little. A less subtle description is that regulation should protect investors from the industry’s self-interest, its inefficiencies and, in some cases, its predatory instincts”.

In an investment industry with a long chain of intermediaries, the saver exercises virtually no influence over many key decisions. Indeed, at the behest of the Government, Professor John Kay is examining the lengthy investment chain and the implications for efficient capital markets. There is no shortage of evidence of misalignment and conflicts of interest between the consumer and the providers. The interests of the end users of capital markets—the savers and investors and those seeking capital—need to be reasserted. That in turn will support UK economic interests.

The Bill should address the cultural issues by reasserting the appropriate nature of the relationship between provider and consumer, where the latter is vulnerable to the exercise of discretion by the former and where financial services have too often been seen as controlling the real economy rather than supporting it. The LIBOR and EURIBOR rate-fixing scandal made many organisations furious because it subverted the integrity of a pricing mechanism at the heart of the capital markets. Promoting consumer engagement and empowerment is of course welcome, but it cannot be a substitute for greater clarity about the roles and responsibilities of each player in the investment chain.

[Lord Stoneham of Droxford]

My Lords, I am pleased to speak in support of Amendment 107, which was spoken to so well by the noble Baroness, Lady Drake, and I also have sympathy with the other amendments in this group tabled by my noble friend Lord Sharkey.

My personal interest in the success of the coming revolution in pension policy through auto-enrolment makes me especially keen to support this group of amendments. We have to rebuild trust in the financial services sector, where culture is currently suspect, to encourage greater pension savings. An explicit “consumer’s best interest” principle in the Bill would be a powerful tool for the FCA to ensure consumer interests are protected. Fiduciary duty requires those entrusted with other people’s money to put those customers first and provide appropriate stewardship, not to exploit their position to make an unfair profit or to get involved in undue risk where it is inappropriate. If duties were properly observed and enforced, it would provide a sea change in the prevailing culture of the financial services industry and lead to a much better outcome for consumers.

The problem is to get the balance right between consumers and firms. Concern was expressed in pre-legislative scrutiny that the draft Bill was unbalanced, enshrining the principle that consumers are responsible for their decisions but not placing an equivalent responsibility on firms. The new principle, inserted by the Government, to which the FCA must have regard, is that,

“those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the … risk involved”,

and the consumers’ capabilities.

The question is whether we are prepared to leave this so vague and open to interpretation that it would provide very weak guidance. With respect, it leaves open the question that it was intended to resolve. For those managing long-term savings, the problem is precisely that there is confusion and misinformation about the appropriate level of care. Explicit confirmation that those managing other people’s money must act in their best interests would be a clear and effective way to get the balance right in the equivalent responsibility for consumers and firms.

When the Bill was considered in the other place, the Minister argued on this clause, as amendments were submitted for an explicit reference to fiduciary duty in the Bill, that:

“Customers should not have to dust down the old statute books and dig out their dictionaries … to identify what standards they can expect from providers”.

He said that it was better for the FCA to set out clear and specific standards via its rules. He also said that he was not convinced that fiduciary duty,

“is the right standard to impose across the board between providers and consumers”.—[Official Report, Commons, 1/3/12; cols. 271-72.]

Our Amendment 107 tries to address these objections. First, it does not rely on the term, “fiduciary duty”; it simply enshrines the common-sense principle that underpins these duties. Where consumers rely on a firm’s discretion, that discretion must be exercised in those consumers’ best interests. Secondly, it would not supersede or restrict the specific standards to be laid down in FCA rules, but rather provide an overreaching principle that the FCA should bear in mind when setting those rules. Thirdly, it would not apply across the board but only where appropriate, particularly where consumers have a relationship with providers that justifies a best-interests standard. I hope that the Minister will closely consider this matter and strengthen Clause 5 by accepting these amendments.

Financial Services Bill

Baroness Drake Excerpts

Tuesday 26th June 2012 Lords Chamber

[Baroness Kramer]

My Lords, I join with the comments made by the noble Lord, Lord McFall, and I have a couple of quick comments to make on this very substantial proposed new section. I have two queries on it, which I wonder whether the Minister can clarify. The oversight committee, as he conceives it, is to be chaired by the chair of the court. Am I correct in understanding that he expects this to be a non-executive chair? Although there is currently a non-executive chair of the court, the Minister will know that I have concerns about the Banking Act 2009. In Part 7 of that Act, Section 241 seems to be quite ambiguous about whether that is a requirement or merely in the gift of the Chancellor. If I am right, I hope that that can be corrected at some later stage of the Committee.

My second set of comments concern proposed new Section 3C(5), on performance reviews. When the cynics among us—I am afraid that I confess to being one—read a phrase that says:

“In the case of a performance review, the Committee must have regard to the desirability of ensuring that sufficient time has elapsed … for the review to be effective”,

the Minister will understand that there is an element of thought that that could mean the long grass, if we are not careful. Paragraph (b) of that proposed new subsection,

“to avoid the review having a material adverse effect on the exercise by the Bank of its functions”,

could be read as “no serious criticism required”. I would like some assurances from the Minister that that is not a possible reading.

The Minister will understand that some of those concerns are reinforced by widespread criticism of the delay, under the current banking structure, of the three reviews that were started in May this year. Seeing those reviews now in place, it seems an awfully long time since the financial crisis. There are also real questions about the scope of the reviews, particularly the review looking at the provision of emergency liquidity assistance in 2008-09. Many of us would have asked, “Why did this not start in 2007?”. Notwithstanding the fact that the Treasury Select Committee has looked at that, it is surely not a substitute for the Bank of England or the court doing the work itself. There are concerns in that area, and I look for reassurances from the Minister.

[Baroness Drake]

My Lords, perhaps I might ask the Minister a very brief question. Proposed new Section 3E(2) says:

“The Oversight Committee must … if or to the extent that the Bank accepts the recommendations, monitor the implementation of the recommendations”.

My question is very simple. If the Bank does not accept the recommendations, what then happens?

[Lord Burns]

My Lords, I, too, support the burden of this amendment. It is a subject that a lot of us spoke about during Second Reading, and this is an important part of strengthening the governance of the Bank of England, which we have been speaking about for much of the afternoon. The things set out here have the ability, over time, to change quite substantially the relationship between the non-executives and the executives at the Bank. I think we all agree that that will provide a better balance, given the wide-ranging powers that the Bank of England will have. The proposed new section sets out some of the important issues about making reviews of policy performance, which lie at the heart of this, and the engagement of the non-executive directors in what has been happening from a policy perspective within the Bank. The suggestions about publication and handling recommendations would also be extremely helpful.

The very same question raised by the noble Lords, Lord Flight and Lord Hodgson, also came to my mind. Why does one need a separate oversight committee for this, rather than handling it within the board itself? I have sat on a lot of boards by now and I have never found a problem with engaging with this kind of activity. Within a unitary board, people know the occasions when they must remain silent or absent themselves and who is in a position to do that. It is very much about commissioning reviews, as set out here. It is not as if one is suggesting that the directors themselves would be conducting the reviews, but they are going to be commissioning them, either from inside or outside the Bank.

It seems to me that the only argument arises from the scepticism that we have heard from many noble Lords about the entrenched position of the executives relative to the non-executives of today. Therefore I understand why the Government might think that this is a way of bringing confidence to this process. However, over the long term, I hope that it could be done within the remit of the board as a whole, because that gives confidence within a unitary board; confidence between the executives and non-executives that, together, they can review what has happened in the past and can learn the lessons of the past so that an attitude of confrontation does not develop between one set of people reviewing the performance of another set. However, I understand why it might be right at this point.

--- Later in debate ---

[Baroness Drake]

On that point, I am sure that it would leak or become obvious but what is laid before Parliament is not the report that the Treasury receives but the report that the Bank publishes. This provision allows for the Bank not to publish on the grounds of its view of a public interest issue.

[Lord Sassoon]

My Lords, it is generally accepted that carve-outs are needed, particularly in relation to the time-sensitivity of reports. As I have explained, this is very tightly circumscribed and the question of when it is appropriate to publish must be kept under review. The publication of the report, or any delay to that publication, can be achieved by the Bank only in those very circumscribed circumstances. They must keep publication under review. Therefore, there will be publication and appropriate challenge at the earliest appropriate time. It is difficult to see what the circumstances might be in which the Bank’s not agreeing with a recommendation would justify non-publication. There is proper but not excessive protection of the position here.

There was also a question from my noble friend Lord Hodgson about the Treasury’s possible ability to step in and in some way redact or hold back reports. The Treasury has no powers here. It merely receives a report. It is up to the Bank, again on public interest grounds, to hold back parts or the whole of a report. I should not say that I quite understand my noble friend’s cynicism about references to the Treasury because I certainly do not. However, I understand why he has properly raised the question.

I think I have already touched on this point but the noble Lord, Lord Eatwell, specifically referred to proposed new Section 3A and whether the government amendment allows the committee to consider the merits of the Bank’s action. Proposed new Section 3A provides that the committee is to keep,

“under review the Bank’s performance in relation to … the Bank’s objectives”.

I reiterate that the main concern here has been addressed.

On the broader question of what the Government have done not only in relation to the Treasury Committee but about the recommendations that the Bank made in January, there is nothing that I can add to what I said in my opening remarks, in which I attempted to be very clear on that point.

Banking Reform

Baroness Drake Excerpts

Thursday 14th June 2012 Lords Chamber

[Lord Sassoon]

My Lords, the noble Lord, Lord Jones of Birmingham, is always rightly concerned about the financing of British business, which is very important. Today’s measures are not principally about that. I could talk about the £21 billion national loan guarantee scheme or the fact that our 10-year sterling sovereign rate has been in the 1.5% to 1.7% range for the past few weeks, which is an unprecedented level. That all flows through. Here, we are significantly reducing the risk of another banking crisis. It was that crisis—the disruption and its aftermath—that caused such difficulty in the flow of loans to our businesses. Whatever we do here to minimise the chances of it happening again must be good for our businesses.

As for the UK being a competitive centre of banking, the Government are working incredibly hard. For example, only this morning I was at a very important meeting with businesses and authorities from the UK and Hong Kong, talking about how we would build the offshore RMB centre in London. That is an example of the forward-looking approach that we take to making sure that the UK and London continue to be the global financial centres of choice.

[Baroness Drake]

My Lords, I have only just had time to read the White Paper but I ask the Minister to elaborate on two issues. The Statement makes it clear that the strength of a country’s banking sector strengthens its stability and gives it a competitive advantage—a view that I endorse. However, that view clearly worried the European authorities, as evidenced by Mr Enria’s evidence to the Joint Committee on the Financial Services Bill. These are my words, not his, but he expressed the view that capital requirements for banks in Europe should have both a minimum and a maximum. However, the White Paper confirms that the Government support the ICB view that further buffers should be added to those of the Basel III international standards, and that the Government will, through the CRD4 negotiations, work to ensure that they can be implemented in accordance with EU law. Therefore, my first question is: how confident are the Government of securing the national regulatory freedom to impose the additional capital buffers that they would like to see?

Secondly, I am pleased to read in the White Paper that, for the first time, the position of pension funds in the ring-fencing will be important. The issue is to do with making sure that the regulatory framework for pension funding is not breached when dealing with the banking separation.

[Lord Sassoon]

In answer to the noble Baroness’s first point, we are confident, and we are absolutely on top of and watching her second point, which is important.