Financial Services Bill Debate

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Department: Leader of the House
Lord Sikka Portrait Lord Sikka (Lab) [V]
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My Lords, I congratulate the noble Baronesses, Lady Bowles of Berkhamsted and Lady Kramer. I am delighted to support their suggestion for reform.

Last week, a number of proposals for arresting regulatory failures were put forward, each offering to help the regulator—what I call “acting as a guide dog for the watchdog”. This is another proposal which has considerable merit. It builds on the notion of an independent skilled person review, a practice that is already well established to some extent. However, in the details of the amendment, it differs from the conventional notion of a skilled person review in focusing on systemic factors rather than individual cases. These include matters relating to internal controls and operations, regulatory parameters, effectiveness, treatment of whistleblowers, public policy objectives and, more importantly, matters of public concern.

Although the amendment does not explicitly say so, I am sure that the noble Baronesses, Lady Bowles and Lady Kramer, would not be opposed to the independent skilled person review being conducted by a panel of retired judges; that could be feasible. The review in any case should be in the open, take evidence on oath and require the production of key documents from producers, consumers, intermediaries and other key parties in the finance industry. The panel could travel to different parts of the UK to take evidence and report within a specified period, like the Australian royal commission that we heard about earlier.

The main aim of the inquiry would be to focus on systemic problems, get to the bottom of the recurring and unresolved scandals in the industry, enable consumers to share their experiences with the industry and its regulators, and facilitate the legislative changes needed to secure confidence in the industry. The proposed review would be a necessary step to bring about a much-needed change in organisational culture and a sense of personal responsibility and accountability in the regulatory bodies, as well as the industry.

The proposed review and its specified headings of “regulatory perimeters”, “public concerns” and “effectiveness of relevant legislation” can also focus on neglected and emerging issues. A good example of issues totally neglected in the Bill, and by the FCA and PRA, are those about the impact of shadow banking. The shadow banking sector is intertwined with retail and investment banks, insurance companies, pension funds and others, and any crisis there is bound to have a huge impact on the rest of the economy. The sector could be worth nearly $117 trillion, far bigger than the world’s GDP; it is lightly regulated, and normal prudential rules do not apply to it. I remind the Committee that the 2007-08 financial crash was triggered not by mass withdrawals of bank deposits by savers but by the inability of Lehman Brothers and Bear Stearns, key players in the shadow banking system, to meet their contractual obligations arising out of speculative gambles. So there is an urgent need for an independent review; that is what we should be aiming for.

I want to reply to a couple of comments made earlier. The noble Viscount, Lord Trenchard, and the noble Baroness, Lady Noakes, referred to the issue of costs. As the noble Lord, Lord Desai, pointed out, the biggest cost is associated with the status quo, which has never been cost free. Over the months and years I have spoken to many victims of bank frauds who have lost their homes, businesses, savings, investments and pensions. All that any review panel or committee has to do is talk to them, and they will soon understand that there is a cost associated with the status quo.

The second point was the question of where on earth we would find these skilled persons. It is a sobering thought that it is not the skilled persons who told the world about any of the frauds or scandals. Journalists and ordinary people have been far more aware of what is wrong, and I am quite happy to trust their judgment to tell us what is wrong with the system, rather than having a very legalistic explanation.

I hope that in his response the Minister will now tell us how the Government have weighed up the evidence of systemic failures of the FCA and what assessment they have made of the impact of such failures on people’s lives. So far, Ministers have not supported any proposals for assisting the regulators or put forward any suggestions. Maybe the Government plan to appoint a royal commission or an independent public inquiry under the Inquiries Act 2005, or something else. It would be very helpful to know whether the Government are content or not content with the current state of affairs in the finance industry.

Baroness Fookes Portrait The Deputy Chairman of Committees (Baroness Fookes) (Con)
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I understand that the noble Baroness, Lady Neville-Rolfe, has withdrawn, so I now call the noble Lord, Lord Naseby.

Lord Naseby Portrait Lord Naseby (Con) [V]
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My Lords, I would like to thank the noble Baroness, Lady Bowles, for the second time this afternoon for an interesting new clause. I have in the back of my mind the concluding words of the Minister of State, my noble friend Lord Agnew, when he introduced this Bill. Colleagues will remember that he said the Bill

“will support economic prosperity across the country, ensure financial stability, market integrity and consumer protection. It will ensure that the UK remains a world-class financial centre.”—[Official Report, 28/1/21; col. 1814.]

So we all know that the Bill is absolutely key. This particular amendment is about the enhanced role of the FCA and the PRA and, in particular, those who lead them. It means, frankly, that they are ever more powerful and important.

The amendment calls for a review after five years, although the noble Baroness, Lady Bowles, made it clear that, according to her contacts in Australia, a shorter period would have been better. I am quite clear in my own mind that five years is far too long. A great many changes are happening all the time, and I am quite sure that the market will remain dynamic and there will be many opportunities; personally, I would suggest a period of three years. You could argue for two, and I understand why you might, but I think that three years is about right, because it is quite a challenge for those who are running these two organisations to be reviewed after two years, which in effect means 18 months.

Should it be just one person? No, it is far too big a challenge for just one person. I believe there should be a team of three, and it should be the responsibility of one of them to be the chairman of the review, with a casting vote if necessary. In my experience of 12 years on the Public Accounts Committee, quite often a small working group would be set up of just three of us to look at the spread and success or otherwise of our work, and it seems to me that that was a good test market. Secondly, I had the privilege of being chairman of a quoted investment trust for some 10 years on a fixed-term basis. We had a limited number of non-executives and we decided that there should be a review every two to three years of the strategy that the operational company was following.

I say to the noble Baroness: well done for putting this forward. In principle, it ought to find favour from Her Majesty’s Government, although I am sure that the review period should be shorter than five years.

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Baroness Bowles of Berkhamsted Portrait Baroness Bowles of Berkhamsted (LD) [V]
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My Lords, I am pleased to support the amendment from the noble Baroness, Lady Noakes, which, as she explained, was tabled before the benchmarks consultation was launched. I share her thoughts that something nevertheless has to be done quite quickly if there is to be an opportunity to ensure that one can look forward to stability of contracts, knowing that something will be done before the end of the year. Maybe we are again in the territory of Parliament giving a consultation response through the debate.

Switching from Libor reminds me just a little—it is complicated—of the problem that we had with gilts being indexed to RPI rather than CPI, when RPI was both wrong and not being maintained by the ONS. The Economic Affairs Committee covered this in a report; indeed, we were tempted by Mark Carney to try to get it sorted out. Though I paraphrase, I think the report’s message was to grasp the nettle. That is certainly where I stood. That is really what the noble Baroness, Lady Noakes, is saying with the amendments: there needs to be continuity of contract. We do not want lots of litigation, so there needs to be a safe harbour. It makes one reflect on how wise some of the fallback positions possibly were, but we are where we are; in many instances, nobody really expected them to be activated. They are sometimes maybe not fair between the parties.

The explanations given already are very good. It would be useful to have something in the Bill. It might even be crafted in such a way that it could apply as the general precedent if one came across such circumstances again, heaven forbid. Benchmarks do change from time to time: one discovers that something is flawed, therefore one has to correct it. That should not disturb what could be made into something that can operate with continuity, certainty and without disadvantaging either side. I would therefore like the Government to take something up, if that is possible in the timeframe they have given themselves now that they have launched a consultation.

Baroness Fookes Portrait The Deputy Chairman of Committees (Baroness Fookes) (Con)
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The next speaker is the noble Viscount, Lord Trenchard.

I believe the noble Viscount is muted. Would he be kind enough to unmute?

Viscount Trenchard Portrait Viscount Trenchard (Con) [V]
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[Inaudible]—Amendment 45 in the names of my noble friends Lady Noakes and Lord Holmes of Richmond, and of the noble Baroness, Lady Bowles of Berkhamsted. We are midway through the process of transitioning from the familiar Libor benchmarks, the replacements for which have become more necessary since banks’ funding patterns have changed following the financial crisis. My noble friend Lord Holmes already asked the Minister what he thinks about synthetic Libor. I would also be most interested to hear his reply on that.

The Investment Association welcomes the additional powers for the FCA in the Bill as it will be better able to manage the transition, which should help to mitigate the uncertainty for holders of derivative contracts. There is the additional uncertainty caused by the existence of only temporary equivalence between UK and EU benchmark regulations. It is to be hoped that the EU will soon adopt the European Council’s recommendation to extend the transitioning period for third-country benchmark administrators to the end of 2025.

My noble friend’s Amendments 44 and 45 would be helpful improvements to the Bill, by making it clear that changes to benchmarks made by the FCA will apply to contracts made under benchmarks being revised. Rightly, they offer a safe harbour protecting parties to such contracts from legal actions resulting from benchmark changes. It is encouraging, as I mentioned, that the Investment Association supports this part of the Bill and I welcome these powers being handed to the FCA. My noble friend’s amendments would improve and reduce the risks inherent in exercising these powers and I support them.

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Baroness Bennett of Manor Castle Portrait Baroness Bennett of Manor Castle (GP) [V]
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My Lords, it is a pleasure to follow the noble Lord, Lord Rooker. What we might label in shorthand “the Delaware danger” is very real. It was my pleasure to attach my name, as has the noble Lord, Lord Sikka, to Amendment 46 in the name of the right reverend Prelate the Bishop of St Albans. I also welcome Amendment 47 in the names of the noble Lords, Lord Tunnicliffe and Lord Eatwell. We heard from the noble Lord, Lord Eatwell, a clear and welcome outline of the peculiarities of the Gibraltar authorisation regime and the reason why we need to hear a lot more from the Minister about the justification for it and an explanation for some of the peculiarities that the noble Lord, Lord Rooker, just outlined.

I do not regard Amendment 46 as a probing amendment; I suggest that it is a modest amendment for improvement. It builds on an amendment from the noble Baroness, Lady Bowles of Berkhamsted, debated last week, which made broader country-by-country reporting proposals. Given that we have just seen the Government’s welcome incorporation into the Domestic Abuse Bill of a significant number of amendments proposed by noble Lords in that debate, we might hopefully see the same thing here before we get to the next stage of this Bill.

The noble Baroness, Lady Neville-Rolfe, suggested that this might be extraordinary, or be targeting Gibraltar in some way. As the noble Lord, Lord Eatwell, outlined, we are incorporating it in a truly extraordinary way within our system, so it is surely important that we have full transparency about what is happening. The noble Baroness, Lady Neville-Rolfe, said that we should not make it more difficult for Gibraltarian businesses. Whether it is motor insurance or the gambling industry, we are not talking here about the issue for Gibraltarian businesses; we are talking about businesses operating and making their profits in the UK, which should be paying their tax in the UK. On the Tax Justice Network corporate tax haven index—what might be called the ranking of infamy—I note that Gibraltar is ranked 28 on a scale where number 1 is the worst. While it is not the worst, given that there are scores of tax havens around the world, it is pretty well right up there.

It is estimated by the Tax Justice Network that the tax loss that Gibraltarian arrangements inflict on other nations is about US$4 billion. I do not have a breakdown of figures of where those losses are inflicted but, given what we have heard about both the motor insurance and the gambling industries, it is clear that a very significant portion of them will be in the UK. We also have to think about the nature of those industries; the gambling industry, in particular, inflicts significant major damage on individuals and communities in the UK and I believe that even the Government are looking to tighten controls on it.

Certainly, Amendment 46 offers a modest measure towards transparency, honesty and openness. If that should mean that certain industries pay tax on their profits in the UK, I do not see how that could be opposed. I ask the Government to comment on that.

Baroness Fookes Portrait The Deputy Chairman of Committees (Baroness Fookes) (Con)
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My Lords, I understand that the noble Baroness, Lady McIntosh of Pickering, has withdrawn, so I now call the noble Lord, Lord Sikka.

Lord Sikka Portrait Lord Sikka (Lab) [V]
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My Lords, I draw attention to my interests as set out in the register: I am an unpaid adviser to the Tax Justice Network. I strongly support Amendment 46 and congratulate the right reverend Prelate the Bishop of St Albans for providing the moral lead in securing tax justice and transparency.

As the noble Baroness, Lady Bennett, just pointed out, Gibraltar is one of the most secretive jurisdictions on this planet; indeed, it is among the top 30 most secretive, and inflicts tax losses on many nations including the UK. We all know that secrecy is an essential ingredient for tax avoidance and illicit financial flows. Over the years, Transparency International has reported that Gibraltar-based companies have been used to purchase properties in the UK, possibly with dirty money. Gibraltar has a population of around 33,000 but it has over 60,000 registered companies: that is, nearly two for every person living on the Rock. Many of these are just shell companies and little is really known about their authentic beneficial owners.

Gibraltar-based companies pop up in smuggling and bribery scandals all over the world. Unsurprisingly, a headline in the Guardian on 9 April 2017 said:

“Defend Gibraltar? Better Condemn it as a Dodgy Tax Haven”.

Little has changed. In February 2020, a report by the Council of Europe’s anti-money laundering body, MONEYVAL, called on Gibraltar to improve its efforts to combat, money-laundering and financing for terrorism.

The right reverend Prelate the Bishop of St Albans has already drawn attention to the tax haven aspects of Gibraltar. Unsurprisingly, many UK insurance and gambling companies are headquartered there because it is considerably more profitable to run UK operations from there by dodging UK taxes and increasing profit-related executive pay.

Research by TaxWatch shows that Gibraltar is indeed a hub for tax-avoidance: some 55% of the remote gambling services provided to UK-based customers are provided by companies based in Gibraltar. Most of the big companies, including William Hill, Ladbrokes and Bet365, have links to the Rock. Unibet’s website states that its servers are based in Malta, Alderney and Gibraltar and that it is registered and licensed in Gibraltar. The company is also listed on the New York Stock Exchange. This organisational maze provides opacity and tax avoidance and obfuscates accountability and the regulators’ ability to investigate.

William Hill has six subsidiaries in Gibraltar and is expected to pay around 12% in corporation tax for 2020, compared with the headline rate of just 19%. One of Ladbrokes Coral’s two licences to operate in the UK is registered in Gibraltar. On 9 August 2019, the Daily Mail reported that 32Red, which is based in Gibraltar,

“paid just £812,000 in corporation tax over ten years—an effective tax rate of just three per cent.”

The company is obviously not in Gibraltar just for the sunshine and the good climate. On 7 August 2020, the Daily Mail reported:

“Over the past two years, Bet 365 paid an effective tax rate of 12.7 percent on profits of £1.4 billion.”

Bet365’s accounts for the period 2015-19 show that the company’s corporation tax bill was £176 million lower because it has various operations in tax havens, including Gibraltar. Adjusting for inflation, Bet365 avoided around £182 million of UK corporation tax for the period 2015-19.

Ministers continue to tell us that companies should be taxed where sales and profits are made, but then we have this Bill, which will enable companies to book their profits in Gibraltar, even though they will have their sales and profits in the UK. The Government’s briefings on the Bill have not stated how much of the profits made in the UK are booked in Gibraltar and what the effect the Financial Services Bill will have on that.

The Government have a legal and moral duty for the good governance of Gibraltar and other jurisdictions to ensure that they do not continue to be what I call the world’s fiddle factories. Through this Bill, the Government are showering more gifts upon Gibraltar but without any quid pro quo; what exactly is it that we are getting in return? Can the Minister explain how these gifts aid tax justice in the UK? I strongly support Amendment 46 because it provides the basis for tax justice and transparency.

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Lord True Portrait The Minister of State, Cabinet Office (Lord True) (Con)
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My Lords, this has been a very interesting brief debate. I will not follow the noble Lord, Lord Rooker, into speculating about Delaware because I am acutely conscious that the new President of the United States represented Delaware in the US Senate for 36 years. However, I appreciate what my noble friend Lady Neville-Rolfe and indeed the noble Baroness, Lady Kramer, said: I think that the people of Gibraltar merit sympathy and understanding.

Before I turn to the specific amendments tabled, it might be beneficial in the light of a number of the questions and comments to set out some of the intentions behind the introduction of the Gibraltar authorisation regime. As the right reverend Prelate said, the financial services industry plays an important role in Gibraltar’s economy, and Gibraltar-based firms have made extensive use of the existing market access arrangements between the UK and Gibraltar. It is true, as has been pointed out in this debate, that currently firms based in Gibraltar service a large retail consumer base in the United Kingdom, particularly in the insurance sector, where, as has been said, more than 20% of motor policies in the UK are written by Gibraltar-based insurers. The reasons for the concentration of motor insurance in Gibraltar are complex and obviously of a commercial nature, but it is natural that growth in a sector can lead to an agglomeration effect. Business attracts business, and that attracts people and talent.

I note the remarks that have been made in the debate on a range of companies. However, I remind noble Lords that the Bill is limited to financial services firms only. It will establish a new legal and institutional framework that provides for mutual market access and aligned standards in financial services between both jurisdictions. The United Kingdom and Gibraltar have a historic and unique relationship in financial services, and the UK has not had the same level of market access arrangements with any other jurisdiction. This regime will enable Gibraltar-based firms operating in the UK to continue to do so provided they meet certain standards. That way, the regime respects Gibraltar’s regulatory autonomy while ensuring high standards of supervision and consumer protection for UK customers.

On the amendments themselves, Amendment 46 would require any Gibraltar-based person carrying on authorised financial services activity in the UK to provide an annual statement to the Treasury of the profits it has made from those activities, and for the Treasury to report on this. This proposal cannot be supported by the Government because it does not reflect Gibraltar’s autonomy. As an overseas territory, Gibraltar is fiscally autonomous, and it has the right to set its own policy to support its economy within international standards and to determine its own tax rates. The scope of the GAR is focused on ensuring continued market access for Gibraltarian firms to the UK market based on the alignment of relevant law and practice. The GAR does not extend to taxation.

As my noble friend Lady Neville-Rolfe said, Gibraltar is already committed to meeting international standards on illicit finance, tax transparency and anti-money laundering, including those set by the OECD and the Financial Action Task Force. Gibraltar shares confidential information on company beneficial ownership and tax information with UK law enforcement bodies in real time and has agreed to introduce publicly accessible registers of company beneficial ownership. The Government were satisfied that the Gibraltar authorisation regime is rigorous and includes the right safeguards to ensure consistent standards of law and supervisory practice. I therefore ask that the amendment is withdrawn.

Amendment 47, in the names of the noble Lords, Lord Tunnicliffe and Lord Eatwell, would require the Treasury to report on the regime, the current position regarding financial services market access enjoyed by the Crown dependencies and the case for extending the regime to the Crown dependencies. I suggest to noble Lords that the first part of this amendment would replicate provisions that already exist in the Bill. Clause 22(3) of the Bill, which inserts a new Section 32A into the Financial Services and Markets Act 2000, already imposes a duty on HM Treasury to lay a report to Parliament on the operation of the regime. This report will be presented to both Houses within two years of the regime coming into force, and every two years from then on. It will specifically include an assessment of whether the alignment condition between the UK and Gibraltar is satisfied before market access is granted for an approved activity.

Noble Lords have alluded to the frequency of reporting. It has been chosen considering a range of relevant factors, including the length of time required to undertake a meaningful assessment. In this context, the amendment would simply duplicate this requirement within 12 months of the Bill receiving Royal Assent, potentially demanding a statement before this is appropriate and before any assessment has been completed.

Turning to the second point raised in this amendment, it is important to note—and the noble Lord, Lord Eatwell, acknowledged this—that no other overseas territory or Crown dependency has the same market access arrangements with the UK as Gibraltar has today. The Gibraltar authorisation regime has been designed to deliver the Government’s commitment to Gibraltar in 2018 to maintain long-term market access for financial services between our jurisdictions, based on shared high standards of regulation and modern arrangements for information-sharing, transparency and co-operation. This commitment and the framework reflect the unique historic position of Gibraltar and the UK, specifically the passporting arrangements that were in place when we were both members of the EU single market, as has been said.

In our judgment, it would not be appropriate to extend the operation of the regime to other jurisdictions that do not have the same starting point of close alignment between our rules and supervisory practice. The Treasury remains committed to working with the Crown dependencies, and there are existing tools, including equivalence, that enable different degrees of access to the UK market and are more appropriate for the circumstances of the Crown dependencies. Having considered those points, I therefore ask noble Lords not to press this amendment.

Baroness Fookes Portrait The Deputy Chairman of Committees (Baroness Fookes) (Con)
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I have not received a request from anyone wishing to speak after the Minister, so I call the right reverend Prelate the Bishop of St Albans.

Lord Bishop of St Albans Portrait The Lord Bishop of St Albans
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My Lords, I am most grateful to the Minister for the points that he has made. I too want to underline my support for Gibraltar. In this new post-Brexit world, I want us as a nation and our neighbouring countries, as well as Gibraltar, to flourish. However, we are also in a time of huge financial stringency, and there are very important issues here about tax justice. As so often when I sit in a debate in your Lordships’ House, I find myself realising that I am in a seminar and learning far more than I am giving. I am grateful to my noble colleagues and friends here for some of their explanations.

I am still unclear how the GAR will be reciprocated in terms of why we are giving these extraordinary benefits. I need time to go away and think about what the Minister has said. I certainly still look at the situation with puzzlement. I was struck by the comment by the noble Lord, Lord Sikka, that there are two registered companies for every citizen on the Rock. It sounds as if there are some extraordinary benefits which to some of us do not look to be reciprocated justly.

I will probably return to this on Report, but in the light of the comments and some of the limitations of the amendment as it is currently drawn up, I beg leave to withdraw it.

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Baroness Scott of Bybrook Portrait Baroness Scott of Bybrook (Con)
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My Lords, this may be a convenient moment for the Committee to adjourn.

Baroness Fookes Portrait The Deputy Chairman of Committees (Baroness Fookes) (Con)
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The Committee stands adjourned, but in so doing I remind everyone to sanitise desks and everything else within sight.

Committee adjourned at 7.28 pm.