Brexit: The Future of Financial Regulation and Supervision (European Union Committee Report)

Baroness Kramer Excerpts

Wednesday 6th June 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I start by congratulating the committee and my noble friend Lady Falkner on what is a very meaty report—I fully accept that. But I am afraid that I find myself in the camp of the noble Lords, Lord Davies, Lord Liddle and Lord Desai, and my noble friend Lord Bruce in this debate.

I start by trying to find at least a little bit of common ground. We can all agree that the financial services industry is absolutely crucial to this country. My noble friend Lord Bruce quoted the number of employees and the tax that it generates, and 30% of that is generated from an EU client base—the client base within the 27. A very significant part of the financial services industry that we have here and which underpins so much of our economy is essentially generated out of the 27. We access that, as others have described, through a very diverse set of regulations and directives, from direct passporting for the banking industry and much of the insurance industry, and rights of delegation for asset management. The reason why we can have the London Stock Exchange acting as the global foremost CCP which clears virtually all euro-denominated derivatives as well as many in other currencies is because of liquidity provided by the European Central Bank and underpinned by a location policy. Many of the fintechs that the noble Baroness, Lady Neville-Rolfe, talked about survive because they were pan-European from the day when they were born and function across borders through the e-commerce directive. Many of them have based their future plans and what they expect and hope for on the single digital market. So we are deeply embedded in this process.

There are two other big issues for our financial services industry. I am not going to address them here, but let me mention them by title. There is freedom of movement. So many of the staff—one-third of all those in our fintech operations, for example—come from continental Europe. They are not going to come here under visa terms, because why should they live with those restrictions when they can live without them elsewhere. Then there is the whole issue of data exchange.

I want to go back and pick up the point that the noble Lord, Lord Desai, made. The British-to-British conversation that takes place all the time, about how we manage to keep financial services thriving at the current level and growing in a post-Brexit world, comes without any recognition of where the European Union is coming from—and positions that we ourselves would take if we were in its position. I hear so often, “They need us more than we need them”. You hear that almost on a continuous basis. But there is a lack of capacity in the rest of Europe. Over the last 10 or 20 years, nearly all financial services capacity has been sucked into London. It has thrived in London and has come to this financial centre, particularly with regard to the wholesale markets. That is where things are today. If you are sitting in the EU, you recognise that as a reality, but it is a reality for now. Five years or 10 years from now, why should that continue to be so? Surely, you look for an arrangement, when the UK decides that it is going to step out of the club, leave the EU and become a third country, and you look for an opportunity to bring that business back into the EU, perhaps salami slice by salami slice, and build capacity gradually.

We often hear from the British the threat that, “If the business doesn’t thrive in London, it will move to New York”. That is just from one third country to another third country—perhaps a less attractive third country, and perhaps one where the time difference is more of a problem. But it is frankly not a major issue, if you are sitting within the EU and what you are looking to do is to over time build that capacity. To think that the EU 27, which by purchasing power is the second largest economic bloc on the globe, would allow its crucial financial centre to be outside its supervision and control, is fairly extraordinary. We would have to make an exceptional case to argue that that should happen. I do not think that any of that is recognised in the discussions that we constantly have about the solution that we would like.

That leads me to the issue of what is often called bespoke dynamic mutual recognition. We will have mechanisms where we recognise them as acceptable players and they recognise us as acceptable players, but when we dig beneath that we find that it requires fundamental change in the EU to achieve it. This is an organisation that lives in a rules-based society and has a legal framework structured through the ECJ, and all that would have to be reconfigured to meet the requirements of mutual recognition. New institutions would have to be created, staffed and funded, and the EU would fundamentally have to change how it operates. Why would it do that?

I am afraid that the very unsatisfactory third-country equivalence that is on offer—and I agree that it is very unsatisfactory—works perfectly well for the EU. Nobody in the UK is going to stop them coming to use London markets and say, “No, you can’t come here and have access, we’re going to take it away from you”. We need their business. It is perfectly acceptable for them to work on a basis whereby, essentially, on 29 days’ notice the European authorities can simply remove the business or set in place new requirements or new rules—and it works very well with that strategy of moving attractive pieces of business salami slice by salami slice back to continental Europe as the capacity develops and as it is capable. We delude ourselves in thinking that the EU is going to go through extraordinary contortions and change its fundamental way of working to accommodate a mutual recognition framework, even though we think that for us that would be ideal.

The same thing could be said of a free trade agreement. I would love to see a free trade agreement that contained services. I was at an event today at the City of London where the speaker said, “If the EU wishes to prove itself to be the leading free trader in the world, it would be an excellent opportunity to create the template to include financial services in a free trade agreement”. I just do not see that that is where the EU is at this moment in time. It is not on its priority list to identify itself as the leading free trader and start to create a framework that redefines global trade and WTO rules. If it does have that ambition, it is certainly not going to be doing it in the next 12 months or two years. That is the kind of thing that you might develop over five or 10 years. It would be long and tough and, obviously, it would have to be framed as an arrangement that has served not just an arrangement with the UK but with all the other various financial centres around the globe. So it is not something that is going to be immediately available, which drives us back to this very unsatisfactory arrangement of—I am now losing the terminology. What is the word that I want? It begins with “e”.

[Lord Bruce of Bennachie]

Equivalence.

[Baroness Kramer]

Equivalence. I do have this problem.

The other issue that I have heard discussed here and which bothers me hugely is the discussion about how, after we leave, we can reframe our rules to allow more risk-taking. To pick up exactly the point that the noble Lord, Lord Davies, picked up, if you were sitting in the European Union and looking at the UK in 2008, you saw a financial crisis to some significant degree attributable to light-touch regulation—and how we touted light-touch regulation and told everyone that it was the way to go. It is exactly a return to that language of light-touch regulation. We have mistrust within our own country—people mistrust the industry and the regulators, so it is wrong to suggest that in the European Union they are going to say, “No, no, no—these people have changed completely. When they talk about reducing regulation it will be in the context of being absolutely safe”. It is not—it is in order to create competitive advantage.

As noble Lords know, Barney Reynolds is a great promoter of that particular approach. I took some quotes from the report that he submitted, where he talks about a “market-friendly” financial services framework. That sounds very good, if you believe that market forces are the answer, but not if you believe that market forces ran rampant and out of control in 2008. International competitiveness should be a “statutory objective” for all our UK financial service regulators—that is the kind of language. That is a race to the bottom. This is precisely the accusation that is being levied: international competitiveness means that you always have the least-regulated structure. We are seeing in the United States, again, that a lot of the regulation that was put in place following the 2008 crisis is now being pulled back. That creates an added level of discomfort with this kind of Anglo-Saxon approach and framework. I do not think that we should underestimate how much we are caught in that particular view.

I also have to say that, when I ask those at any financial services entity, “Where are you looking for a change in regulation?”—the noble Lord, Lord De Mauley, hit on it exactly—they say that it is on remuneration: lifting the cap on bankers’ bonuses. If ever there were an example that inspires mistrust and a sense that we are returning to the bad old days, it is that. It is always represented as the key and most important regulation that the financial service industry would like to see lifted.

I am desperate to keep the financial services industry here to the extent that we can, but I think we have to be realistic. A lot of it has already left. As my noble friend Lord Bruce said, this is not done with press releases and open discussion; no company wants to create concern among its customers, suppliers or regulators by saying, “We are at risk if we stay within the UK”, but these companies are very quietly moving and we are beginning to see a series of announcements. It was also an iconic moment when Lloyd’s of London dropped “London” from its title. It is now established in Brussels. It has 600 staff in London; 100 of them are moving to the Brussels office—it is just the beginning. Insurance companies, because of the reasons of contractual continuance that have been raised here, have all been moving over the last 24 months. I just say to the noble Baroness, Lady Neville-Rolfe, that the fintechs are moving as well. I have talked to so many of them that are applying or have applied for a licence in Dublin—but the real risk is Paris. She spoke about the innovative approach that we have to regulation of the fintech industry, and I agree, but it has spread rapidly and she perhaps does not know that the Paris equivalent has an MoU with the FCA to make sure that it takes an equivalent approach to regulation and sandbox to Paris. It is to Paris that a lot of the fintechs are moving; it is an attractive lifestyle and many of them are fans of Macron. They see a future there and there is real competition for that particular industry.

What do we do under these circumstances? I, like others, think that the only route we can take that leaves us with something other than this unsatisfactory third-country equivalence is, frankly, to stay within the single market one way or another. Without that, it seems to me that we will be on the outside. If we are going to be on the outside and trapped within just equivalence, our whole negotiation has to be focused on trying to make sure we have a voice at the table. I do not see the Government doing that; I see them going down the mutual recognition route, basically with pages of demands that require the European Union to restructure the way that it works, to change everything that it does, to shift its principles and to have 27 countries operate under a rules-based system and the 28th without that. If we can get the Government to pull back from that and to pursue an opportunity—I would prefer it to be in the single market but it has to be an equivalent to try to get us a voice at the table through some mechanism or other—we might have some possibility and some hope. The complexity around this industry more than illustrates the fact that there are only downsides to Brexit. One can find a few upsides but, my goodness, weigh them on the scale and they are very small.

Royal Bank of Scotland

Baroness Kramer Excerpts

Tuesday 5th June 2018 Lords Chamber

Asked by

[Baroness Kramer]

To ask Her Majesty’s Government why HM Treasury have sold a further tranche of shares in Royal Bank of Scotland, resulting in a loss of over £2 billion to the Exchequer.

[Baroness Kramer (LD)]

My Lords, I beg leave to ask a Question of which I have given private notice.

[The Minister of State, Department for International Development (Lord Bates) (Con)]

My Lords, last night the Government conducted a sale of shares in RBS, restarting the phased return of the bank to full private ownership. The Government sold 925 million shares overnight, raising £2.5 billion for the taxpayer. The transaction represents value for money for the taxpayer. RBS is a smaller, simpler and safer organisation than the one that the Government were forced to recapitalise in 2008, and the sale price reflects that reality.

[Baroness Kramer]

My Lords, why sell now, crystallising a loss that rises to in excess of £3 billion, when financing costs are included, when there is no pressure and when the Government claim to be positive about both RBS and the community? Are the Government concerned that, by acting now, they could be selling shares on an inaccurate prospectus, ignoring growing allegations about liabilities to those abused by RBS’s global restructuring group? We are beginning to hear, both in the UK and now in the US, Australia and across the EU, that those liabilities are inadequately quantified, not declared and not provided for in the accounts.

[Lord Bates]

I thank the noble Baroness for her questions. In response to the first one, it must be remembered that when the Government paid £5.02 per share for RBS in 2008 it was an essential injection of capital at a time of financial crisis. The bank whose shares we sold yesterday is a very different organisation. Its balance sheet is £1.5 trillion less. It is operating in nine countries instead of 38. Because we have changed the rules, its capital buffer is now 15.1%, which is greater than it was and well above the threshold required. The noble Baroness also touches on some other important factors. These had a bearing on UK Government Investments, which advised the Government about when to sell—we act on advice in these things. It pointed to the fact that, because a settlement of £3.6 billion with the Department of Justice in the United States, announced in early May, had now happened, it judged this to be a good time to exercise this sale. The Financial Conduct Authority rightly looked into the global restructuring group, where the circumstances are very concerning for the businesses affected. Its report recognised that a number of that group’s customers had been mistreated.

Cash Ratio Deposits (Value Bands and Ratios) Order 2018

Baroness Kramer Excerpts

Wednesday 16th May 2018 Grand Committee

[Baroness Kramer (LD)]

My Lords, I noticed that when the Bank of England consulted on this scheme it received only three responses. That highly recommends that I be brief in my response. Obviously, we as a party very much value the independence of the Bank of England. I am reminded that Vince Cable spoke of it in his maiden speech in 1997, so we have a long history of wanting to see that independence firm and strong. Obviously, that means that the Bank of England needs the required resources to be able to function.

That is provided for under this statutory instrument, which permits both increases in the amount and indexation, which means that the amount can be reset according to shifts in the gilts on a six-monthly basis. That presumably reduces both volatility and risk to the Bank. The amount of money we are talking about is not particularly large. In most banking institutions it is somewhere lost well to the right-hand side of the decimal point.

As one of those who made the effort to respond noted, there is no assurance in any of the paperwork that we have seen that this is genuinely value for money and that the Bank has looked carefully at its expenditure. There appears to be no particular accountability for the way the money is spent. Will the Minister comment on that?

This also gives me the opportunity to raise a second level. Most of us here would agree that we are not really ready to see banks being let off the hook in terms of their contribution to the public purse. One could call this deposit scheme, in a strange way, a version of a hypothecated tax since it is a mechanism for providing funding to the Bank of England. I wonder whether the Government could provide clarity on their policy, because they are cutting the bank levy—a very significant amount of money—and raising this. Is there any relationship between the two? I hope that the Government will never pray in aid this particular increase as an argument that they are continuing to be tough on the banks.

I will make one last comment. This is exactly the kind of measure that should be dealt with through statutory instruments. It is exemplary. It is a relatively technical issue and relatively non-controversial. I hope that the Government will take on board that this is the kind of purpose for statutory instruments. They are not a mechanism for driving through policy, which we have seen in so many other areas.

[Lord Tunnicliffe (Lab)]

My Lords, I agree that this is clearly a measure that is appropriate for statutory instruments, but I wish that it had not landed on my desk. Of course, we will not oppose this. This will not be the one in 1,000 occasion this afternoon, I am sure the Minister will be pleased to hear. However, after I had taken the trouble to half understand the scheme, I could not believe its bizarre nature. I could not for the life of me see why there was not a straightforward fee-based scheme. The scheme is planned to raise £169 million per annum. Why does the Bank not simply send the banks a bill and raise the money directly? My real fear—which is rather the opposite of that expressed by the noble Baroness, Lady Kramer—is: what if this formula is wrong?

The functions covered by this income are absolutely vital. The austerity programme that this Government continue to pursue would be even more disastrous for the economy if it were not for the monetary measures taken by the Bank of England. This funding supports the MPC and the FPC, which are effectively seeking, through quantitative easing, the bank rate and the controls it puts on the banks, to control monetary policy and create an appropriate stimulus over this period of austerity. I see that the Bank has said that if the money is insufficient, it will reprioritise efficiency savings. I have worked long enough in the public sector to know what an efficiency saving is—it is called a cut in normal language. I cannot think of any area of the Bank’s activity, together with the resolution and recovery regime, that is more important. It is essential that it is properly funded.

The formula set out on page 5 of the Explanatory Memorandum has a number of components which I am afraid I do not understand. The first thing that it assumes is that the income required is fixed at £169 million for five years. Once again, I ask: what if that is wrong? The next factor in the formula is the aggregate eligible liabilities, which are fixed at £2.8 trillion—I hope that I have counted the number of noughts properly—yet the impact assessment assumes, from the various analyses that have been produced, that this figure will go up by 2.9% per annum. Why is it fixed if in fact the Government, in analysing the scheme, assume that it will increase?

In fact, the only real variable in the scheme is what is called on page 5 of the Explanatory Memorandum the “portfolio yield”—that is, the estimate of the yield from investments. It is made up of three parts: 55%, 42% and 3%. The 55%, labelled “a”, seems to be the only seriously variable one. It is a 13-year moving average. Why 55% and why 13 years? The second element, labelled “b” in the formula in paragraph 7.17(c), is calculated on a six-month average, but it is calculated only twice and is then fixed for the rest of the period of this notice. The 3% at the end of the formula is a six-month average calculated every six months. This is a ridiculously complex way to collect a modest amount of money. I believe that the whole system by which this money is collected needs to be reviewed. The fee-based approach would be simple to introduce. You could apportion the burden on eligible liabilities, which have to be calculated with this scheme. My biggest fear would then be coped with. A simple system could guarantee sufficient funds for this vital area.

Creditworthiness Assessment Bill [HL]

Baroness Kramer Excerpts

Committee: 1st sitting (Hansard): House of Lords
Friday 11th May 2018 Lords Chamber

[Baroness Thornton (Lab)]

My Lords, I supported the noble Lord, Lord Bird, on Second Reading. This Bill is a small but important public policy step to help bring creditworthiness equality to people who are good payers of rent and credit. The questions asked by my noble friend and the noble Lord, Lord Blencathra, are important.

First, this is not the silver bullet to solve the problems of creditworthiness; it is one thing that might assist. If the Bill passes and lenders are required to incorporate rental data, individuals can opt out of any system of rental payment data sharing. That is the first thing that needs to be put on the record. For most, the inclusion of such data is part of a positive journey to more equal access to affordable credit, although I agree that it is vital to be guided by those who are not as fortunate, including those let down in various ways.

Missed or late payments from a third party, including from the DWP, can already be noted on an individual’s credit file through what is known as a “notice of correction”. This principle is applied to any “notified payment” on an individual’s credit file, including a spousal dispute, incorrect calculation or late payment. Although I agree that it is right to be alive to the laws of unintended consequences, here, the consumer would be in control. That is very important. They can opt out and add notices to their credit file. As we will no doubt be looking into after the APPG inquiry, rental payments and electricity payments are normally the last things that an individual fails to pay. For people in this situation, any previous non-payment of non-essential items will already have affected their credit score, but if we can help these people, we should. I hope that the work being led by John Glen MP and HM Treasury with the noble Lord, Lord Bates—we had a very useful discussion about this—is taking this important consideration into account via the Rent Recognition Challenge. The noble Lord, Lord Bird, will raise this point later with the noble Lord, Lord Bates, and discussions are ongoing.

Reforming the consumer credit world is a big undertaking. Although we may not be able to immediately change someone’s circumstances through this measure, we may be able to better support them and prevent them getting further into the quagmire of problem debt. As the FCA put it to the noble Lord, Lord Bird, before Second Reading, it is important to know who is in trouble to,

“get our arms around them and help them”.

I thought that quote was very appropriate.

[Baroness Kramer (LD)]

My Lords, I am a real fan of the unamended version of the Bill. Some 40 years ago, when I was in my early 20s and trying to get credit for the first time, I remember the struggles—I think that most women will share them because of the era—of trying to establish any kind of credit history and demonstrate that I was reliable and could manage my finances and the stresses and strains of all of that. I had to go through the most convoluted routes to establish that history. In the Bill, the noble Lord, Lord Bird, has captured the opportunity for many people to use their reliability in making key payments—rent and council tax—to establish credit history. In some ways, the noble Lord, Lord Blencathra, gave the game away when he mentioned, very early, that part of the industry’s resistance is based simply on the cost of gathering this data. I really do not think that that should be an obstacle to so many people who demonstrate in their lives that they are capable of managing money being able to make the decision that they need to access credit and have a reasonable avenue to do so.

[Baroness Grender (LD)]

My Lords, we on these Benches fully support the Bill as originally drafted and therefore oppose the amendments in group 1 for all the reasons set out so far by other Members. Renters are such a large part of the population now. They have every right to be full participants as consumers. I will give a very specific example: if you are a renter in social housing—78% of renters in social housing pay their rent in full and on time—and you go to buy a washing machine, currently, because you are described as high risk, you will pay between £300 and £1,000 more. Could somebody please explain to me how it is possible that someone can steer clear of arrears when they are in a scenario where, if they are not an owner-occupier, they pay between £300 and £1,000 more for a washing machine? We need to stand firm on the current wording in the Bill and not allow this probing amendment to be aired. A small change in the renting threshold would mean that an additional 4.8 million consumers would be more attracted to mainstream and lower-cost renting.

On arrears, while I understand that this is a point of concern, the whole point of this is to bring people who are renters into the sunlight with information about them. The FCA has also said that it would be good to know who these people are. The alternative is unscrupulous lenders. That is where we drive people to if they are not in the full sunlight of creditworthiness and there is data about them. For those very brief reasons, we urge noble Lords to reject these amendments and to understand that renters are increasing in number. Just today the BBC announced that the proportion of 35 to 54 year-olds who live as private tenants has nearly doubled in 10 years since 2006. The real problem is that the number of people who are renting is doubling but government policy is not keeping pace with this scenario. This very fine Bill tries to do so.

--- Later in debate ---

[Lord Bates]

I am very happy to take that back. It is an example of the innovative ideas that we can discuss as alternatives to the measures before us today in terms of legislation. As the noble Lord was speaking, I was thinking of the Libor fines. Those sums were significant —some £600 million or £700 million—but the then Chancellor designated that they would be given to the families of servicemen and the emergency services. There is an example there. My point is that I think there are solutions which would better achieve the effect that the noble Lord, Lord Bird, is rightly trying to achieve.

[Baroness Kramer]

My Lords, the Minister has been very generous with his time. The virtue of the Bill of the noble Lord, Lord Bird, is its sheer simplicity. So often Governments come up with incredibly fragmented, complex and convoluted attempts to solve a problem. The Minister pointed a moment ago to the cap on payday lending. He will remember that the Government resisted that right to the very last, with exactly the same kinds of arguments about fintech, alternative approaches, different ways of dealing with it, cost and trying to crack a nut with a hammer. But they now laud that cap on payday lending. My suspicion is that if they decided to support the Bill brought forward by the noble Lord, Lord Bird, they would very soon be lauding that solution, its simplicity and its universal application.

[Lord Bates]

I hear what the noble Baroness says but, as other Members have pointed out in the debate, there is the risk of some unintended consequences as a result of taking this approach. I have also outlined that we are not dismissing the problem, but are seeking an alternative route to solving it which we believe will be more effective and fairer, and avoid some of those unintended consequences. If that turns out not to be the case, of course we are always open to review our position vis-à-vis proposals such as this, and we will continue to act in that way because our first priority is to protect the most vulnerable and help them make a better future for themselves and their families by getting access to home ownership.

UK Convergence Programme

Baroness Kramer Excerpts

Monday 16th April 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, in a way this is a slightly poignant debate because, as the Minister has outlined, although the UK reports against the various economic benchmarks for the stability and growth pact, it is not required to take notice of any recommendations of the European Union that might follow from that but merely to promise that it will endeavour to avoid deficit. That is an example of one of the many ways in which the European Union accommodated the preferences of the UK and its desire to pursue some independence in certain areas, particularly the economic—greater than that enjoyed by other countries. It shows the mutual respect that framed the years in which we participated as a full and enthusiastic member of the European Union. When we consider how we have responded to the positive and creative ways of making sure that the most significant needs of the UK were always dealt with in a rational and reasonable way, it makes Brexit even sadder.

I just want to say a few words. Within the last few weeks we have had several debates on the economy, so rather than constantly repeat their content I want to make a couple of comments. The first is that I am concerned that the Government—weeks later—still have not recognised the significance of the very poor growth forecast for the UK that was presented by the OBR: 1.7% in this fiscal year, dropping to 1.5%. That is at a time when every one of our major export markets is absolutely going gangbusters, with growth in excess of 3%. Rather than take on board seriously the importance and relevance of responding to that issue, the Minister once again stands up and merely quotes reductions in deficit rather than dealing with the fundamental problems that we face.

Obviously some of those fundamental problems are around productivity. Again, the Government always cite the recent slight improvement in productivity. However, I remind the Government that, if they are minded to cite that again, it was caused by a drop in the number of hours worked—a very worrying warning sign—and not by improvements in output.

Today, again, we have reports on consumer spending, which continues to decline. Looking at the UK consumer spending index, I see that consumer spend declined by 2.1% year on year in March following a 1% year-on-year drop in February. Those are significant numbers, and they concern not just face-to-face spending—in other words, the high street retailers and shops. We know that there has been a shift from face-to-face spending to online spending, but now, for the first time, there is a significant fall in the online spending numbers as well. The Government have to take this very seriously, rather than simply assume that all is well and that the economy is in a positive state. We know from the many people we talk to that wage pressures are having a significant impact on individuals as they face inflation every time they go to the shops, and that the pressure on public spending has become completely intolerable.

Before I sit down, I will use this occasion to say once again that the Government have to tackle the lack of public spending in schools, in prisons and, above all, in the NHS and social care. This is the time to put in place a team to look at a dedicated tax to support the NHS and social care. If we do not start to do that soon, and to put in place the appropriate response to the needs of that critical service, we will find ourselves in a dire position.

Unfortunately, the Minister praised Brexit as the future for Britain, but we know from the Government’s own analysis—we have all gone and read it over in 100 Parliament Street and have heard it in other places —that the forecast is for the UK to function at a significantly lower level than it would have otherwise. We are looking at a dark economic situation, and for the Government to constantly present it as rosy takes away any confidence we can have that they will tackle these fundamental and underlying problems.

[Lord Tunnicliffe (Lab)]

My Lords, we are holding this debate today in the context of weeks of key Brexit debates ahead. It seems odd to be debating a Motion on the issue of convergence as we embark on weeks of debate about how we will leave the EU. I will not make this speech Brexit heavy but focus on what the Motion asks us to approve.

The Motion asks us to approve the Autumn Budget 2017 report and the most recent OBR economic and fiscal outlook for the purposes of Section 5 of the European Communities (Amendment) Act 1993. This is made difficult because we cannot be confident about what the economy will look like this time next year when, according to the Government’s Brexit timetable, we will no longer be a member of the EU—and presumably will no longer be holding this yearly debate. It is also made difficult by a number of other concerns.

I do not share the Chancellor’s view of light at the end of the tunnel, nor do the households for whom the squeeze on incomes and living standards is a daily pressure. The OBR forecasts from March are marginally better in the short term, but they have revised forecast growth down in both 2021 and 2022 since the Autumn Statement. Amid such uncertainty in the face of leaving the EU, how can we expect these to be revised up at any point? Last year, growth in our economy was the lowest in the G7 and the slowest since 2012. In the last quarter of 2017, GDP growth was just 0.4%. That means that Britain was the slowest-growing major economy across 2017, behind both Italy and Japan. OBR forecasts predict growth will fall below even the weak 1.7% level that the Chancellor spent most of the Spring Statement boasting about. So we are looking at having 1.5% growth in 2022, 15 years after the financial crisis, which is absolutely nothing to boast about.

This Government have missed every deficit target they have set themselves. Public sector borrowing is still higher than forecast a year ago, and debt is over £700 billion higher than when the Tories came to power. George Osborne’s target for a 2020 surplus is a distant memory. The Government may be quick to point to productivity growth. However, we know from the OBR outlook that stronger productivity has in fact reflected the fall in average hours worked in the second half of 2017, as the noble Baroness, Lady Kramer, said, rather than stronger output. The OBR forecasts in November actually revised down productivity and business investment every year for the next five years. We are lagging behind the rest of Europe, with the productivity gap between us and other G7 countries the widest it has been since 1991.

This Government are failing to support working people. We have an economy running on low pay and insecure employment. Some 60% of people in poverty in the UK live in households where someone is in work. Clearly something is wrong here. The Government say that the economy is growing, but the UK is the only major nation in which wages have fallen at the same time. Wages are still below their level in 2010 and wage growth is being outstripped by inflation. The IFS has said that real average earnings are expected to grow by just 3.5% over the next five years, meaning that their level in 2022-23 would be similar to 2007-08. The OBR has said that real earnings growth over the next five years is expected to remain subdued, averaging just 0.7% a year. Growth in real household disposable income per person is expected to average only 0.4% a year. The national living wage was once again revised down. It will not hit the £9 per hour that the Tories originally promised. In the Spring Statement, it was projected to be just £8.57.

The Government’s headline figures on the deficit exist only because debt is being pushed on to local councils, schools and hospitals. Our public services are suffering a government onslaught. National Health Service trusts will end this financial year £1 billion in deficit. Doctors and nurses are struggling and being asked to do more, while 100,000 NHS posts go unfilled. Recorded crime is rising, yet the Government have cut the number of police officers by 21,500 and the number of firefighters by more than 8,500. Our prison and probation services are in dangerous crisis, and yet another prison riot has been reported today.

This Government are responsible for the first real-terms per capita cut in school funding in 20 years and are today trying to deprive 1 million children of a decent school dinner. They have trebled student fees to £9,000 and abolished the maintenance grant, meaning that the average working class student leaves university heavily in debt. Local government will face a funding gap of £5.8 billion by 2020 and is drawing down more reserves. More children are being taken into care, yet children’s services alone are facing a £2 billion funding gap by 2020, while more than 1 million of our elderly people are living with their care needs unmet.

After eight years of failure on housing, from rising homelessness to falling home ownership, the Government have no plan to fix the housing crisis. Statistics released just before the Spring Statement reveal that housebuilding has still not recovered even to pre-crisis levels. The OBR was not able to adjust its forecast on housebuilding as a result of any policies in the Budget.

The Spring Statement missed an opportunity to prepare our economy for Brexit and was a missed opportunity to invest in the services that we as a country will rely on increasingly in the post-Brexit future. The Chancellor may have kept his promise of no new fiscal policies, but that means that struggling families with low pay facing benefit cuts to free school meals will have to wait until the autumn for any kind of relief. I am not sure that they can afford to wait that long.

Customs Clearance Arrangements at UK Ports

Baroness Kramer Excerpts

Monday 19th March 2018 Lords Chamber

[Lord Bates]

In response to the first question, what the Secretary of State for Transport described is pretty similar to what I said in the Answer to the Urgent Question about our desiring a frictionless border between ourselves and the European Union and a deep and ongoing partnership. Clearly, “frictionless” has connotations relating to particular checks which could be undertaken at roll-on, roll-off ferry terminals such as Dover, which are important to the economy.

On the second point, the noble Lord invites me to think about whether there are other examples which could be pointed to in this regard. But again, we are looking for something unique, innovative and different. We believe that it is possible; the fact that we are seeing agreement on the implementation period just today shows that it is possible with good will on both sides.

Finally, the noble Lord asked about HMRC and computer systems. That was one of the reasons why the Chancellor announced in his Autumn Budget that a total of £3 billion will be made available and, specifically, that £260 million will be made available to HMRC to prepare itself for the outcome. Therefore the resources are there. To touch on the point the noble Lord made about technology, that is interesting, because it is not as if at the moment the UK does not have any expertise in trading with the rest of the world. It does so quite frequently, and if you go down to Felixstowe or other places, you will see significant amounts of imports that come through and are dealt with in an incredibly efficient and effective way, using technology. We are seeking simply to take that technology and to give it wider usage so that it achieves our objective of a frictionless border that enhances both trade in the EU and for the UK.

[Baroness Kramer (LD)]

My Lords, does the Minister understand that even companies that have obtained trusted trader status—it is expensive—do not use it, because it is so complicated and expensive that they have found that it is not worth while? Secondly, he will know that in the container ports he cites, goods coming long distance are on ships for days and even weeks, which is why trusted trader status can be used in those situations; it takes so long that it cannot be used at an equivalent of Dover, where you have a roll-on, roll-off situation. Does the Minister also recognise that coming through the Dover port, and intermingled with the kinds of operations that could perhaps seek trusted trader status, are vans that have the accumulated goods for 12 small companies, Amazon delivery vans, and so on? The traffic is so completely mixed, and because there is no space at Dover or any capacity to pull out any of the trucks, the mechanism he describes is in effect one of turning a blind eye.

Picking up the Government proposals for dealing with the Irish border, where essentially small businesses, which account for 80% of cross-border traffic, would not be checked, that, again, is the blind-eye strategy. Does the noble Lord understand the implications for smuggling and for abuse of the system of what he is talking about? We already have extensive fuel smuggling at the Irish border and extensive abuse of the VAT tariff differential. He is now creating an opportunity in not just Ireland but at the UK ports, especially the ro-ros, for criminal activity on a scale which this country has fought deeply in the past.

[Lord Bates]

The noble Baroness takes a very pessimistic view of this matter. We believe that we are taking a realistic and optimistic view of the potential agreements. For example, we believe that it is in everybody’s interest to ensure that this process takes place. If we look at the balance of trade between ourselves and the EU, there is a deficit of £96 billion on trade in goods, which suggests that it is very much in the enlightened self-interest of our European friends to ensure that that border is as frictionless as possible so that this trade can take place.

The noble Baroness referred to the situation in Northern Ireland. Of course, there is a difference in duty on certain goods between the two countries, as she alluded to, and they have introduced mechanisms for dealing with that. They have a variety of means of doing so, not just technology. They use some physical checks, particularly to clamp down on the fuel element of that traffic, so I believe that where there is a political will, there is a way. We believe that a will to make this frictionless border happen has been demonstrated, and that is what we are working towards.

Money Laundering

Baroness Kramer Excerpts

Monday 19th March 2018 Lords Chamber

[Baroness Williams of Trafford]

My Lords, I can agree with the noble Lord on one thing: the impact of money laundering in the UK. However, in 2016, 1,435 people were convicted of money laundering in England and Wales. The Government established the joint money-laundering intelligence task force in 2015 to tackle the issue, and between May 2016 and March 2017 it contributed to more than 1,000 bank-led investigations into suspect customers, the closure of more than 450 suspicious bank accounts and the freezing of £7 million in suspected criminal funds.

The noble Lord talked about Labour putting forward the Magnitsky amendment. I certainly remember that, under the Criminal Finances Bill, it was the noble Baroness, Lady Stern, who put forward the Magnitsky amendment in this House and Labour did very little to tackle serious crime and corruption in this country, so I do not accept the charge he makes that we have done nothing to address this issue.

[Baroness Kramer (LD)]

My Lords, I have only three very quick points. First, will the Government speed up the process of getting a public register of overseas ownership of property in the UK? Transparency International estimates that some £4 billion-worth of property in London alone has been bought by suspicious wealth. Frankly, the programme the Government have laid out gives all the perpetrators plenty of opportunity to reorganise their finances. Will they please move?

Secondly, having listened—I hope—to calls from both the Minister’s own Benches as well as from the other Benches, will the Government institute a verification process at Companies House so that information on corporate ownership can be established with some clarity and accuracy as a mechanism for trying to counter laundering?

Lastly, I want to ask the Minister about a letter sent to me—I believe it was put in the Library—by her colleague the noble Lord, Lord Young of Cookham, who is in his place. It is on the freezing order applying to Andrei Lugovoi and Dmitry Kovtun. In the letter, the Minister referred to a comment he had made that the freezing order applied to overseas banks. He then said:

“I should more precisely have said that the freezing order applies to any UK incorporated banks overseas”.


Could she now give us an assurance that overseas banks that have money in the UK—whether it is through branch arrangements or any other—are covered by those freezing orders, because presumably, they will be very important in the next steps to be taken in the Salisbury poisoning case?

[Baroness Williams of Trafford]

I thank the noble Baroness for those questions. The Government will publish draft legislation on the creation of a register of the beneficial ownership of overseas companies that own property in the UK or bid for government contracts. This will mean that overseas countries that own or buy property or participate in central government procurement will be required to provide details of their ultimate owners. This will reduce the opportunities for criminals to use shell companies to launder their illicitly gained wealth in London properties, and it will make it easier for law enforcement to track and seize criminal funds. I can confirm the freezing order process for overseas banks so that criminals cannot hide their finances anywhere. Those freezing orders can be applied overseas as well.

The noble Baroness asked me a third question, but because of the noise in the Chamber, I did not quite hear what she said.

[Baroness Kramer]

Just to be helpful, this was a call for verification. As she will know, there is a public register at Companies House, which I greatly approve of, but there is no verification process. This has led to criticism from around the House.

[Baroness Williams of Trafford]

The noble Baroness makes a fair point. We are at a relatively early point with the public register and it is constantly being checked and reviewed to ensure that the information contained within is accurate.

Economy: Spring Statement

Baroness Kramer Excerpts

Thursday 15th March 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I join in the welcome to the right reverend Prelate the Bishop of Lincoln. He is obviously supported by the noble Lord, Lord Cormack, and my noble friend Lord Taverne, but when he mentioned that the doorkeepers largely hail from Lincoln, that is when I knew we had a real power to be reckoned with in this House. We know where genuine authority lies. We very much appreciate his speech. He focused very much on a divided society, and that issue was picked up by others in this debate—the noble Lord, Lord O’Neill, was talking about the north/south divide, although the right reverend Prelate the Bishop of Lincoln reminded us that it is not just geographic, as those who struggle can very well be located in the south as well. This is timely in the context of this particular Statement.

I join with others—the noble Lord, Lord O’Neill, seemed to have had the same reaction to the trailers that came ahead of the Spring Statement—in saying that I had thought we were going to get some really super growth figures. Frankly, that should not have been so unexpected, because if we look at the markets that we export to, they were on steroids in 2017: the euro area grew at 2.5% and the US at 2.3%. I was genuinely quite shocked when the Chancellor announced that growth in 2017 had slowed from 1.9% in 2016 down to 1.7%—not quite as bad as expected in the autumn, but in light of this great global growth pretty difficult to explain. A falling performance when the going is good is really pretty extraordinary, quite frankly. But the forecasts for the future are worse. The noble Lord, Lord Skidelsky, described a stagnant and becalmed economy. The OBR is forecasting growth for the UK in 2018 at 1.5% and it drops after that, while in contrast the OECD, which released its numbers on the same day as the Spring Statement, forecast growth in 2018 as 2.9% for the US and 2.3% for the euro area.

I recognise that we have a productivity problem and an investment problem, but I disagree with the noble Lord, Lord Skidelsky, in one area. He basically suggested that the fundamental problems we have are not in any way related to Brexit. But I join with others—we heard from the noble Lords, Lord Livermore and Lord Higgins—in saying that, if it were not for Brexit, the capacity to draw investment into the UK would enable us certainly to improve growth and productivity. Brexit has now become that kind of barrier. We have seen it in the numbers—particularly foreign investment numbers in the course of this year. To me that is very significant. If I may pick up the point that the noble Lords, Lord Hodgson and Lord Freeman, and others made, we are at a point where we are entering a fourth industrial revolution, where everything will change, thanks to AI and robotics. That makes it the most crucial time to draw in that kind of investment. If you do not ride the change, you are left behind. The last thing we should be doing for our young people—in the Box or otherwise—is to let ourselves get left behind at this absolutely critical point in time. So I am exceedingly concerned.

If we turn more broadly and look at our population at large—you would not have known it from the Chancellor’s words—people are feeling pain. The day before the Spring Statement, we got the February numbers for UK consumer spending. Consumer spending fell in February by 1.1% year on year, declining for the ninth time in 10 months. Wages are stagnant—we are all aware of that—and inflation is running at over 3%, and it is making life for ordinary people exceedingly difficult. Frankly, a lot of that sits at the door of Brexit. Yes, it is part of a longer-term pattern of modest economic growth, but the inflation rates that we have seen really are Brexit in origin. The impact on people’s lives is very significant.

The right reverend Prelate the Bishop of Portsmouth, the noble Viscount, Lord Chandos, and others talked about the general suffering of the population at large, but the Chancellor did not really address public spending pressures very much in his Statement. There was a bit of a sense of light at the end of the tunnel and maybe we would be able to lift our foot off the austerity pedal a little at some point in future, but it seems to me that is completely out of kilter with the reality that we are facing. I argue that the pressures to increase funding in the public sector have simply become unavoidable. Just last week, the NAO, in its report Financial Sustainability of Local Authorities 2018, warned that 66.2% of local councils with social care responsibilities have now eaten heavily into their reserves. Social care is struggling in many parts of the country. The NHS is not coping; indeed, routine operations were cancelled for a whole month this winter. Schools are asking parents for money; the noble Lord, Lord Young, talked about the struggles that his local primary has, and they are repeated nationwide. My noble friend Lord Taverne, the noble Viscount, Lord Chandos, and others talked about the welfare cuts that are still to bite. We simply cannot continue in this vein.

Even though the Chancellor now anticipates that day-to-day spending will come into balance in 2019, which is of course good news, it is very far from salvation. As the IFS said following the Chancellor’s speech, borrowing is only down to pre-crisis levels, at 2% of national income, but debt is twice its 2008 levels. Realistically, this is the time when we absolutely have to look at raising taxes. At the very least, we need to reverse the cuts since 2015 in corporation tax—which surely could have been left at 20%; I do not believe a penny below that has encouraged any company to put more money into any investment—and reverse the cuts in capital gains and inheritance tax, which would give us a bit of breathing space.

However, I argue that the NHS and social care are now such a funding challenge that they require a more radical solution. I very much regret that none of the many studies that the Chancellor announced this week included an assessment of a dedicated NHS and social care tax, which, frankly, looks like the only way to put these key services on a sound footing long term. Since a new structure takes time, my party is calling, as my noble friend Lord Taverne said, for a penny-in-the-pound increase on income tax to provide £6 billion this year to prevent another near-term crisis in the NHS and social care.

I also very much regret that the Government failed to consider giving local authorities the powers to become major builders of affordable and social homes. The Government are making some movement on housing but not at the scale required, certainly to deliver social and affordable housing, and again those pressures are becoming completely unsustainable. I believe it was the noble Viscount, Lord Chandos, who talked about the homeless problem that we have; we have all seen it develop. However, that is only a minor symptom of a much broader and deeper problem that has to be tackled. We know that, given those kinds of powers and the ability to go out and borrow, local authorities can deliver the kind of housing that we need because they have done so in the past. This is the time to take off the ideological cap, recognise that the housing market is fundamentally broken and empower local authorities to deliver the kinds of houses that we definitely need.

I join others in being glad that the Chancellor is looking once again at the apprenticeship levy. That is a really messed-up piece of policy, and I hope very much that we can read in the Chancellor’s words that he is going to sort out the nonsense. For small companies, and I talk to many of them, it has simply turned into a tax, not a mechanism to deliver either training or apprenticeships. In the same way, I join others in being glad that we are getting another look at late payments, but this time could we have a solution rather than another report?

I support the Government’s decision to find a more effective way to tax digital companies, perhaps on their revenues rather than their profits. It is an outrage to see large, successful companies essentially paying very little tax. However, I think the Chancellor’s proposal is too narrow. It really should be almost just a first step. Big brand companies such as Starbucks can outwit the tax system just as well as Google. A fundamental part of the problem is that we do not know how to deal with the value of things like brands and intellectual property, but that is the shape of so many companies of the future. We have to crack that problem now, or we will find ourselves without any effective tax base. I hope that the accounting profession will get wrapped into this, frankly. In the scandal of the collapse of Carillion, a big part was the completely inadequate pricing of the value of contracts and good will by the accounting firms, so that the company looked artificially healthy when it was crumbling. Others should investigate who should have known what and when, but it is all part of the same issue.

I also regret that the Chancellor did not take this, as he was doing so many studies, as an opportunity to look at intergenerational fairness. We really have a very unbalanced tax system. Each working person is now supporting 1.7 people and the number is rapidly headed to 1.9 people. That is unsustainable. The noble Lord, Lord Hodgson, talked as if we have too many people, but the problem is the shape of our demographics. We are desperately short of working-age people. That is one of the reasons why cutting back on immigration is particularly ironic at this time.

[Lord Hodgson of Astley Abbotts]

The issue is also that we are not prepared to employ older people. Once you are past 55, you are on the scrap-heap. A great deal more could be done. We have done a lot of work in other areas of prejudice, but ageism is a prejudice we have yet to tackle.

[Baroness Kramer]

My Lords, around this House we can see many people who might mistakenly be classed as older but who can demonstrate that they have a great deal to contribute. We may want to do it in a different way, with part-time work and different opportunities. I agree that employers are unimaginative. But it does not get us away from the problem; if we hit a dependency ratio of 1.9, we are not functional as an economy. I cannot see any way, without rational immigration, of doing it.

We have a sluggish economy with fundamental problems of productivity and investment. We have public services that are often on the brink of break-down. We lack key pieces of infrastructure, especially affordable and social housing. Our national debt remains high. Ordinary people are feeling the pinch of stagnant wages and high inflation, and our young people are carrying an unwarranted burden. Frankly, there could not be a worse time for Brexit, with all the additional costs that it places on businesses and a future in which the economy and our businesses have less access to both markets and talent.

I join those around the House who take the view that, until we make up our minds that we need to be in the single market and the customs union, we frankly do not have much of a hope of seeing a substantial reversal in the kind of economic patterns that were embedded in the OBR report. I was as astonished as others that the Chancellor felt that he must be “Tiggerish”. It made me think that life in Cabinet must be pretty dreadful if, when you present a report like this on an OBR statement, you find yourself happy.

National Debt

Baroness Kramer Excerpts

Wednesday 14th March 2018 Lords Chamber

[Lord Bates]

I wonder whether the noble Lord heard last week when we discussed the national infrastructure plan and announced the initiatives that we were taking to boost the housing market—some £43 billion over the spending period. We recognise that housing is a huge issue, not only of intergenerational fairness but also in terms of driving forward the economy. That is why we have announced the very substantial initiatives that we have to get that sector moving, including from the National Productivity Investment Fund, a large chunk of which is dedicated to housing.

[Baroness Kramer (LD)]

My Lords, do the Government recognise that borrowing that arises from excess day-to-day spending and borrowing that arises for investment in infrastructure and other capital projects are two entirely different issues? Any corporation treats them that way and this Government surely should. Would that not allow them to take the borrowing cap off local authorities, which could then invest in the social and affordable housing that no other programme is currently delivering and which would underpin economic growth in future?

[Lord Bates]

I again refer to the Statement, in which the Chancellor announced that in areas of high demand and low affordability local authorities would be given that additional flexibility, which is welcome.

Finance (No. 2) Bill

Baroness Kramer Excerpts

2nd reading (Hansard): House of Lords & 3rd reading (Hansard): House of Lords & Committee: 1st sitting (Hansard): House of Lords & Report stage (Hansard): House of Lords
Thursday 8th March 2018 Lords Chamber

[Baroness Kramer (LD)]

My Lords, I suspect that nearly everybody sitting in this House will struggle to recognise the extraordinarily rosy picture of the economy that the Minister just described. Just about every single one of the markets to which we export and to which our economy is usually tied are absolutely going gangbusters, with extraordinary levels of growth. Normally, even by doing nothing, we would be pulled forward into high growth numbers by that alone. Instead, we are struggling at around 1.7% to 1.8% growth, and if the Government are not worried by and anxious about that, then frankly I wonder where the captain has gone—he is certainly not on the deck.

Investment numbers in this country have fallen off a cliff. Obviously a large part of that is driven by Brexit uncertainty. We get the occasional investment that hits the headlines, but overall the numbers are down very significantly, and if the Government are not worried about that, I am even more concerned.

The OBR has readjusted its trend forecast for productivity down to 1.2%. That is extraordinarily bad news and reflects a set of very fundamental problems, which this finance Bill does not begin to tackle. I accept that it is an extremely deep-seated problem, but if the Government do not recognise the consequences of that for our economy at large, again I am very concerned. If the Minister thinks of this in terms of ordinary people and talks to them about the squeeze on their wages, which have remained stagnant as they see prices consistently increasingly, he will begin to understand that this is not an economy firing on all cylinders and racing ahead. In fact, it is almost inexplicably behind where anyone would have expected it to be in general global circumstances.

Obviously, a good part of this is about the ticking time bomb of potential Brexit. I also fully understand that, because of that, the Chancellor did not use this finance Bill to take major steps forward: it is not a visionary finance Bill but very much a tinkering at the edges finance Bill, because he knows he is sitting with an unexploded bomb and has absolutely no idea of when it might go off, how it might go off and which part of the economy it might hit first or second, and is therefore trying to give himself as much flexibility as possible to react spontaneously as all of those things begin to hit. I suspect that we will have much more extensive discussion of this next week in the debate on the Spring Statement, when we will also have some new figures from the OBR to underpin that discussion.

I will address just two things today, both very briefly. One is the absolutely core issue of funding for the NHS. The Minister will remember that, prior to last November’s Budget, the NHS basically came forward and said that it needed an additional £6 billion a year just to be able to sustain the system—£4 billion for the NHS and £2 billion for social services. Whichever way you add it up, the Government came forward with only £2 billion out of that needed £6 billion.

An amendment to this finance Bill proposed by my right honourable friend Sir Vince Cable asked the Government to task the OBR with looking at a hypothecated, dedicated tax to support the NHS—particularly around the issue of 1p in the pound on income tax that we, as a party, have proposed—to see what the yield would be. There is also a much more fundamental issue. We are running into a long-term crisis and this bullet cannot be dodged unless the Government are willing to take action. Will the Minister take on board and pursue this absolutely vital issue?

The second area is tax evasion. Yes, the Government have made some improvements and I am always pleased to hear that. But frankly, until the coach and horses of an absence of public registers of beneficial interests in our overseas territories is taken care of, we are allowing an avenue that constantly provides the transit route to money laundering in this country and therefore to tax evasion and all the other kinds of evils that go along with it. They are moving to central registers, but those are not going to be public. I hope that the Government will one day realise that they must bite the bullet on this issue, rather than looking the other way. I understand that they feel that there are constitutional problems in dealing with the overseas territories, but the consequence of that is that all the other measures are basically piffling by comparison.

This was a tinkering at the edges Budget. I know that the Government talked about significant changes to housing, but they are going to be very much at the margin and the edges. We know from previous stamp duty holidays that they do not change the pattern of buying in any way whatever. They may be popular but they do not change either supply or demand. In none of their programmes are the Government tackling the fundamental issue of the lack of affordable housing. If they do not allow local authorities to go ahead—whether alone or in partnership—and build the new, needed, affordable houses where they are required, we will not begin to see an end to this particular set of problems.

I look forward to the Spring Statement next week to see whether it makes some radical change that enables us to move forward significantly. This is a small Bill, making small, fringe changes in a set of circumstances where new vision and radical action are required.